ERISA Litigation Update - March 2011 March 30, 2011
In This Issue

Seventh Circuit Vacates Class Certification in Two 401(k) Excessive Fee Cases and Affirms Dismissal in a Consolidated 401(k) Stock Drop Case

On January 21, 2011, a panel of the U.S. Court of Appeals for the Seventh Circuit issued two important decisions, one in the current wave of 401(k) fee cases, and another in the long-standing genre of retirement plan stock drop cases. Each decision will likely impact future jurisprudence in these areas.

Class Decertification in Fee Cases

In one decision, the court addressed interlocutory appeals to decisions certifying classes in two excessive fee cases against large plan sponsors and the alleged fiduciaries of their 401(k) plans. One plan had over 70,000 participants, the other over 180,000. In each case, the district court had certified classes that included all current, former and future participants and beneficiaries of those plans (excluding any defendant). The court described the claims in each case similarly, that defendants:  (i) caused the plans to pay allegedly excessive fees, including revenue sharing payments; (ii) maintained allegedly imprudent investment options; and (iii) concealed material information from participants about the plans.

The Seventh Circuit began its class certification analysis explaining that “[t]he propriety of class treatment . . . will turn on the circumstances of each case.”  The court first addressed the temporal aspect of the certified classes, finding that it was “breathtaking in its scope” where “[a]nyone, in the history of Time, who was ever a participant in the Boeing Plan, or who in the future may become a participant in the Boeing Plan, is swept into the class.”  The court next focused on the plaintiffs’ allegations that certain funds made available to the plan were imprudent. It noted that many past participants and unknown future participants may have never held precisely the same funds as named plaintiffs. As such, the named plaintiffs could not meet the typicality and adequacy requirements for class certification under Federal Rule of Civil Procedure 23(a). The court explained: “it seems that a class representative in a defined-contribution case would at a minimum need to have invested in the same funds as the class members” because “there must be a congruence between the investments held by the named plaintiff and those held by members of the class he or she wishes to represent.”  In part, the lack of congruence creates an impermissible conflict, where “the alleged conduct harmed some participants and helped others.”

As such, the court vacated the decisions certifying these classes and remanded for further proceedings. The cases are Spano, et al v. The Boeing Co., et al, No. 09-3001 (7th Cir., Jan. 21, 2011) and Beesley, et al v. International Paper Co., et al, No. 09-3018 (7th Cir., Jan. 21, 2011).  

Dismissal in Stock Drop Cases

In its other decision, the court addressed final judgments in favor of defendants in two cases challenging the decision by a 401(k) plan sponsor and the alleged fiduciaries of its 401(k) plan to include a company stock fund as a plan investment option. In this litigation, the district court had granted a motion to dismiss as to one plaintiff’s claim, and summary judgment against the remaining plaintiffs, where participants challenged the decision to maintain a company stock fund. The price of the challenged stock declined over 50% during the roughly one-year class period, based largely on a single large transaction that, in the court’s words, “turned out very badly.”  Like many such stock drop suits, the plaintiffs alleged that the defendants (i) improperly allowed the stock fund to be offered to the plan; (ii) misrepresented or failed adequately to disclose the transaction at issue; and (iii) failed to appoint, monitor and provide adequate information to other plan fiduciaries.

The court first addressed an argument addressed to the dismissal of one plaintiff due to a release he signed which included a waiver of all ERISA claims, a release which expressly carved out “any claims for benefits” under the plans. The court held that this release barred all ERISA claims for breach of fiduciary duty, because the plaintiff received all “benefits that had already vested” when he signed the release.  

Turning to the merits of the claims brought by the non-releasing plaintiffs, the court began with an examination of the safe harbor created in ERISA Section 404(c), which relieves fiduciaries of liability where the loss results from a participant’s or beneficiary’s exercise of control. The court agreed with the position taken by the U.S. Department of Labor that the safe-harbor would not apply to the “core decision” as to which investments will be presented to participants. Instead, the court held that the safe harbor will apply to decisions over which the fiduciary has no control, such as participant allocation decisions.

That said, the court held that by offering at various times three or eight other investment options, the defendants allowed the plan to be adequately diversified such that “no participant’s retirement portfolio could be held hostage” to the fortunes of the company stock fund. It also held that the stock drop at issue was not so significant as to demonstrate that the company was facing “imminent collapse” or that the stock was “so risky or worthless” that it had to be immediately withdrawn from the plan menu. As such, regardless of the Section 404(c) defense, the court held that the lower court correctly dismissed the imprudence claims.     

The court then addressed the disclosure and monitoring claims. As to disclosure, it held that allegations of a negligent misrepresentation were insufficient to make out a claim. In the absence of an intentionally misleading statement or a material omission where silence may be construed as misleading, no claim is established. The court explained that omitting information about an allegedly bad business decision is not enough to state a violation of ERISA. As to the monitoring claim, the court explained that every board member is not required “to review all business decisions of Plan administrators,” and that the appointing fiduciaries did not breach any duties as they were not shown to have “pass[ed] the buck to another person and then turn[ed] a blind eye.”   

As such, the court affirmed judgment for the defendants. The cases are Howell v. Motorola, Inc., et al, No. 07-3837 (7th Cir., Jan. 21, 2011) and Lingis, et al v. Dorazil, et al, No. 09-2796 (7th Cir., Jan. 21, 2011).  

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The above article originally appeared in Goodwin Procter’s February 1, 2011 Financial Services Alert.

Sixth Circuit Holds That Service Provider’s Business Decisions Are Not Subject to ERISA Fiduciary Duties

Recently, a divided panel of the U.S. Court of Appeals for the Sixth Circuit held that a company that provided services to an ERISA plan did not act in a fiduciary capacity when it negotiated with third parties to establish and modify services arrangements in a manner which increased benefit costs for the plan. See DeLuca v. Blue Cross and Blue Shield of Michigan, 628 F.3d 743 (6th Cir. 2010), reh’g and reh’g en banc denied, No. 08-1085 (6th Cir. Feb. 17, 2011).


In DeLuca, Blue Cross and Blue Shield of Michigan (“BCBSM”) provided claims processing and other administrative services to an ERISA-covered, self-insured medical plan sponsored by Flagstar Bank. BCBSM’s agreement regarding the Flagstar plan stated that BCBSM also was responsible for establishing, arranging and maintaining networks through contractual arrangements with healthcare providers. In this regard, as part of its business, BCBSM negotiated separate payment rates with healthcare providers for medical services under the three different types of coverage options it offered to customers – i.e., HMOs, preferred provider organizations (“PPOs”) and traditional plans like the Flagstar plan. Beginning in 2004, to make its HMO line of business more competitive, BCBSM negotiated with a number of healthcare providers to decrease rates charged to its HMOs while at the same time increasing the rates payable by PPOs and traditional plans (so that the changes would be budget-neutral from the perspective of the healthcare providers). In some cases, the rate changes were retroactive to the beginning of the year. These rate changes increased the costs of medical benefits for PPOs and traditional plans that utilized the BCBSM network, including the Flagstar plan.

A beneficiary of the Flagstar plan sued BCBSM, asserting that, in negotiating the rate changes, BCBSM had breached the fiduciary duty of loyalty under ERISA Section 404(a)(1) and had engaged in a prohibited transaction under ERISA Section 406(b)(2) by acting on behalf of a party with interests adverse to the plan in a transaction involving plan assets. The district court granted summary judgment for BCBSM, concluding that BCBSM was not acting as a fiduciary of the Flagstar plan when it negotiated the rate changes.

Sixth Circuit Analysis

In affirming the district court’s judgment, the majority of the Sixth Circuit panel held that BCBSM “was not acting as a fiduciary when it negotiated the challenged rate changes, principally because those business dealings were not directly associated with the benefits plan at issue [in DeLuca] but were generally applicable to a broad range of health care consumers.” 

The majority concluded that BCBSM’s conduct in negotiating its rates did not constitute any of the types of activities that would be considered fiduciary functions within the meaning of ERISA Section 3(21)(A), the statute’s definition of fiduciary. The court reasoned that rate negotiation did not amount to management or administration of the Flagstar plan (which are fiduciary functions under Section 3(21)(A)), because BCBSM’s actions in connection with the rate changes were business decisions that applied not just to the Flagstar plan but to a broad range of BCBSM’s customers. The court emphasized that making business decisions is not a fiduciary function, even where those decisions have an effect on an ERISA plan. Accordingly, the majority held that because BCBSM was not acting as a fiduciary in negotiating rates, BCBSM had not breached its ERISA fiduciary duties or engaged in prohibited transactions.

The majority opinion also discussed some possible policy ramifications that could result from a contrary holding. In the court’s view, if BCBSM were subject to fiduciary duties in negotiating rates, it would be required to negotiate with healthcare providers on behalf of the Flagstar plan separately, rather than as part of a negotiation on behalf of numerous plans and other customers in the aggregate. The court reasoned that such a result could ultimately harm the Flagstar plan, because in negotiating on behalf of a single plan, BCBSM would lose the leverage made possible in negotiating on an aggregated basis.


Judge Kethledge dissented, asserting that the majority seemed to be more concerned about BCBSM’s business model than the services BCBSM was responsible for under its agreement with the Flagstar plan and ERISA’s definition of fiduciary. The dissent took the position that the case should have moved forward to trial to determine whether BCBSM’s negotiation activities were fiduciary in nature, given that they were “highly discretionary and [had] a direct impact on the Flagstar plan’s bottom line.”  Judge Kethledge also expressed the view that imposition of fiduciary duties on BCBSM’s rate negotiation activities would not have required BCBSM to negotiate rates on behalf of the Flagstar plan separately from other plans and arrangements.

District Court Allows Claim Against Financial Advisor to Go to Trial

The U.S. District Court for the Eastern District of Pennsylvania allowed claims of breach of fiduciary duty to proceed to trial later this spring against a defined benefit plan trustee, the plan’s sponsor and the plan’s financial advisor. Nagy v. DeWese, No. 09-3995-WY (E.D. Pa. Feb. 23, 2011).  

The factual setting is straightforward. The plan’s trustee instructed the financial advisor to send him checks drawn from the plan account. The trustee used the funds to pay corporate obligations of the plan sponsor, and to make loans to a separate corporation in which the trustee had a personal interest. Its assets so depleted, the plan became unable to pay promised benefits, and one aggrieved participant sued.   

The court first addressed the plaintiff’s motion for summary judgment against the trustee. The court held that the trustee’s actions violated a number of ERISA provisions:  the fiduciary duties to act prudently and solely in the interests of plan participants; the prohibition against transactions benefitting a party in interest; and the bar against plan assets inuring to the benefit of an employer. As such, judgment as to liability was granted against the trustee. However, because the plaintiff pointed to no evidence as to why the plan sponsor should be considered a fiduciary, the court denied the plaintiff’s motion for summary judgment as to the plan’s sponsor. Similarly, because the plaintiff pointed to no evidence of “particular funds or property in the defendants’ possession” belonging to the plaintiff, the court denied the plaintiff’s motion for restitution brought under ERISA Section 502(a)(3). These issues, as well as damages, were reserved for trial.

The court then spent the majority of its analysis focused on the motion for summary judgment brought by the financial advisor. It held that because the advisor could only transfer plan assets “pursuant to explicit instructions from the trustee,” the advisor was not acting in a fiduciary capacity with respect to those transfers. The court therefore held that the advisor could not be directly liable for such transfers and that the advisor had no duty to disclose such transfers to the plan or its participants.

Nonetheless, the court held that the advisor was an ERISA fiduciary over the investment of the plan’s assets because the advisor provided investment advice as to the investment of plan assets within the meaning of the regulations establishing whether providing investment advice for a fee is ERISA fiduciary conduct. The court also held that that advisor conceded that it knew that the trustee “was channeling the Plan’s money into a private investment.”  As such, the court found that genuine issues of material fact existed as to (i) whether the advisor knew that the trustee was breaching its duties to the plan by the trustee’s conduct and, (ii) if it so knew, whether it failed to make reasonable efforts under the circumstances to remedy the breach. Accordingly, the court allowed the claim against the advisor to proceed to trial on a theory of co-fiduciary liability under ERISA Section 405(a) relating to the previously adjudicated breach of duty by the trustee.

Regulatory Update – DOL Initiatives Potentially Affecting ERISA Litigation

A number of regulatory initiatives undertaken by the Department of Labor (“DOL”) which are or may go into effect later this year have potential significance for future ERISA litigation. These developments, summarized below, are described in greater detail through the links provided to Goodwin Procter LLP’s Financial Services Alert.

Proposed Expansion of ERISA Fiduciary Status

The DOL has proposed a new regulatory provision describing when a person becomes a fiduciary as a result of providing investment advice for a fee. The current regulatory definition of an investment advice fiduciary under ERISA Section 3(21)(A)(ii) establishes a five-part test, including that the advice is provided on a regular basis, the advice is a primary basis for investment decisions and that it be individualized to the needs of the particular plan. See 29 C.F.R. Section 2510.3-21(c). The DOL proposed regulation would eliminate this five-part test, thereby expanding the universe of plan service providers who may be considered investment advice fiduciaries under ERISA. For more information about the proposed investment advice regulation, click here.

Hearings were held on the proposal on March 1 and 2, 2011. On March 28, 2011, the DOL released the transcripts of those hearings and announced that it would accept further comments through April 12, 2011.

Increased Fee, Investment and Service Disclosures

Two other DOL initiatives seek to increase the amount of disclosure of fees, investments and services related to certain ERISA-governed retirement savings and pension plans.

The first initiative is in the form of a now-final regulation that applies for plan years beginning on or after November 1, 2011. Under this regulation, plan administrators of plans allowing participant direction of investments are required to provide participants with detailed information about designated investment alternatives – both performance and fee information – as well as administrative fees assessed against plans. For more information, click here.

The second initiative is in the form of an interim final regulation that the DOL expects to finalize later this year. In its current form, the interim final regulation requires certain service providers of retirement plans to provide written disclosures to the responsible plan fiduciary describing, among other things, the services to be rendered to the plan and the direct and indirect compensation to be received from the plan and, in certain cases, plan assets investment vehicles. For a more complete description of this interim final regulation, click here.

Publications and Upcoming Conferences


A Litigation Perspective on the DOL Proposal to Expand the Fiduciary Definition
BNA Pension & Benefits Daily
February 28, 2011
Authors: James O. Fleckner, Lisa M. LoGerfo

Upcoming Conferences

16th Annual ALI-ABA Advanced Conference on Insurance and Financial Services Litigation
May 5-6, 2011
Washington, D.C.

Jamie Fleckner  will present at this ALI-ABA conference on ERISA litigation. This conference covers the latest developments and trends in litigation involving the insurance and financial services industries. A faculty of experts focuses on changes affecting the marketing, sale and administration of financial and insurance products, including annuities, life insurance, variable products, retirement plan contracts, mutual funds, health insurance, disability insurance, long term care, and other consumer and commercial financial and insurance products.

Collective Trusts in Retirement Plans 
May 31, 2011

Jamie Fleckner Tom LaFond and Scott Webster will serve as faculty members for this Strafford Publications teleconference, which will focus on the legal requirements and regulatory landscape for collective investment trusts and the impact of recent ERISA litigation on collective investment trusts.

2011 Plan Sponsor National Conference
June 14-16, 2011
Chicago, IL

Jamie Fleckner  will present at this annual conference  covering a variety of topics focused on helping companies build a better retirement plans. Jamie will speak on the “So Sue Me” panel, which will discuss litigation trends affecting the retirement industry.