ERISA Litigation Update April 06, 2022
Welcome to Goodwin’s ERISA Litigation Update. Litigation involving ERISA-governed benefits plans has exploded in recent years. Lawyers in our award-winning ERISA Litigation practice have extensive experience litigating these cases across the country, as well as representing clients in U.S. Department of Labor investigations. The ERISA Litigation Update will gather notable developments in this space, including important court decisions and appeals as well as regulatory guidance, and provide information regarding those developments on a quarterly basis.
In This Issue

The Aftermath of Hughes v. Northwestern University: How Litigants and Courts Are Reacting to the Decision

Key Takeaway: As lower courts consider the U.S. Supreme Court’s recent decision in Hughes v. Northwestern University, the impact of the decision remains unclear. Although a handful of motions to dismiss have been denied in cases alleging excessive fees and/or underperformance since Hughes was decided, only one decision has substantively relied on Hughes and dozens more motions to dismiss are still pending.

On January 24, 2022, the U.S. Supreme Court issued its highly-anticipated opinion in Hughes v. Northwestern University, which reversed a Seventh Circuit decision that had affirmed the district court’s dismissal of the plaintiffs’ claims. Goodwin’s analysis of the Hughes decision can be found here.
 
In the months leading up to the Supreme Court’s Hughes decision, more than 20 district court cases were stayed pending the Court’s ruling. The majority of district court stays were granted in cases at the early stages of litigation — either before responses to complaints were filed or before motions to dismiss were decided. Two appellate cases concerning motions to dismiss were also stayed. Since the Hughes decision, stays have been lifted in nearly all of these cases and the parties have generally either resumed briefing motions to dismiss or filed notices of supplemental authorities explaining the impact of the decision. In those cases, members of the defense bar and plaintiffs’ bar have generally claimed that Hughes supports their side — or does not apply at all to the specific facts at issue in a given case. For example, many in the defense bar have argued that Hughes supports the proposition that fiduciary defendants are entitled to latitude in their decision-making processes, given the Supreme Court’s recognition that there is a “range of reasonable judgments [that] a fiduciary may take” regarding investment selection, and that ERISA fiduciaries must make context-specific decisions involving “difficult tradeoffs.” Not surprisingly, many in the plaintiffs’ bar disagree, arguing that this language is non-binding dicta which, at best, should be considered at the summary judgment stage. Further, some plaintiffs’ counsel have pointed to similarities between the Hughes case and their own allegations and argued that, given the Supreme Court’s decision for the Hughes plaintiffs, it is improper to decide their claims at the motion to dismiss stage.
 
To date, only the Lauderdale v. NFP Retirement, Inc. decision substantively relied on Hughes in denying a motion to dismiss. See No. 21-301 (C.D. Cal. Feb. 8, 2022), here. In Lauderdale, the Court denied the defendants’ motion to dismiss a claim that the defendants did not have a prudent process to select and retain certain plan investments. In so doing, the Court noted Hughes’s direction to “evaluate the allegations as a whole,” and found that the plaintiffs’ allegations that the defendants did not engage in a prudent process in retaining specific investments and the plan’s recordkeeper — combined with the totality of the plaintiffs’ other allegations — were sufficient to state a claim (though the Court also cited the Hughes “difficult tradeoffs” language and noted that, at a later stage of the litigation, the evidence might later show that the defendants had a prudent process in place). The Court also allowed the plaintiffs’ claim that the defendants failed to monitor and remove certain investments to proceed, relying on Hughes for the proposition that “[i]f the fiduciaries fail to remove an imprudent investment from the plan within a reasonable time, they breach their duty.” 
 

Investment Manager’s Motion to Dismiss Granted

Key Takeaway: The defendant, an insurance company and manager of target date separate account portfolios, successfully argued that it was not a fiduciary with respect to the fees it set for the separate accounts and the underlying investments in them because the plan sponsor had agreed to each during the party’s negotiations.

On March 28, 2022, the U.S. District Court for the Southern District of Iowa granted Principal Life Insurance Co.’s motion to dismiss in a case alleging that Principal breached ERISA fiduciary duties of prudence and loyalty by selecting and retaining underlying proprietary investments for the suite of target date separate account portfolios offered through the retirement plan in which plaintiffs participated. Specifically, plaintiffs alleged that Principal was motivated by its own pecuniary interested when it chose its own index funds as underlying investments for the investments, and did so even though the index funds charged higher fees and had larger tracking errors than market alternatives.
 
The Court granted Principal’s motion to dismiss, seemingly interpreting the plaintiffs’ core challenge as being one to the total fees charged by the investments and then finding that Principal was not acting as a fiduciary when setting those fees. In so doing, the Court relied on case law that has established that a plan service provider does not act as a fiduciary when negotiating the terms of its services and fees with the plan’s sponsor, so long as the service provider does not later exercise authority to increase its fees. Although the plaintiff argued that its challenge was not only to fees, but to the underlying investments in the target date funds as well, the Court similarly dismissed this challenge, reasoning that Principal was not a fiduciary with respect to the selection of investment options because which investment options would be offered had also been agreed to by the plan sponsor during its negotiations with Principal.
 
Th case is Kirk, et al. v. Principal Life Insurance Co., et al., No. 4:21-cv-00134, in the Southern District of Iowa. The decision is available here.
 

Second Motion to Dismiss Granted in Class Action Challenging Intel Defined Contribution Plan

Key Takeaway: The district court granted a motion to dismiss where plaintiffs had compared the at-issue funds to so-called “common benchmarks,” but had not alleged that those benchmarks shared similar aims, risks and rewards at the at-issue funds. The decision furthers a trend of California federal district courts closely scrutinizing allegations on motions to dismiss in ERISA cases.

On January 8, 2022, the U.S. District Court for the Northern District of California granted, with prejudice, Intel’s motion to dismiss a class action complaint filed by former employees of Intel who participated in two Intel defined contribution plans. We previously reported on this case when, after the Supreme Court earlier affirmed the Ninth Circuit’s demand, in January 2021, the district court granted, with leave to amend, Intel’s motion to dismiss a complaint challenging the investment options made available to the two plans at issue. The plaintiffs subsequently amended their complaint and Intel moved to dismiss again. In their amended complaint, the plaintiffs principally alleged that the defendants breached ERISA’s duty of loyalty and prudence in selecting, monitoring and managing the investments made available in the plans, which the plaintiffs had alleged improperly included target date portfolios that invested in significant amounts in hedge funds, private equity investments and commodities. The plaintiffs also alleged that the administrative committee failed to provide material and accurate disclosures, and additionally brought claims for failure to monitor and co-fiduciary liability.

The district court found that the plaintiffs’ claims failed because the plaintiffs still had not pled sufficient factual allegations to establish that the plaintiffs had compared the at-issue funds to appropriate benchmarks. The plaintiffs had added to their amended complaint allegations that the at-issue funds underperformed indices, Morningstar peer groups and specific peer alternatives, and alleged that these were appropriate benchmarks for the at-issue funds because they were “common” benchmarks. The Court found that allegations that benchmarks were “common” failed to plausibly plead that the performance comparisons were meaningful ones, in the absence of allegations that the benchmarks had similar aims, risks and rewards as the at-issue funds.

Further, the district court noted that certain challenged funds outperformed 80% of the largest funds chosen by the plaintiffs as benchmarks, which further demonstrated to the Court the plaintiffs’ failure to state a claim for breach of the duty of prudence. Finally, the district court also dismissed the plaintiffs’ claim for breach of duty of loyalty, holding that the plaintiffs had failed to provide any factual allegations to support their claim that the plan’s investment committee had improper aims when investing in private equity and hedge funds, and had pleaded only a potential for conflict of interest without anything more. After this order, one count remains in the case regarding a failure to provide plan documents to the plaintiff; defendants have moved for judgment on the pleadings on that count. 

The case is Anderson v. Intel Corp. Inv. Policy Comm., No. 19-4618, in the Northern District of California. The decision is available here.

Plan Sponsor Prevails on Summary Judgment in Case Challenging Actuarial Assumptions

Key Takeaway: A defined benefit plan sponsor recently prevailed on summary judgment against a claim that it provided joint and survivor annuities that were not actuarially equivalent to single-life annuities. The Court’s ruling read ERISA’s provisions narrowly and therefore may provide some support to litigants who wish courts to do the same in other contexts.

On March 4, 2022, the U.S. District Court for the District of Massachusetts granted summary judgment for defendant Partners Healthcare Systems, Inc. in connection with claims regarding a defined benefit plan sponsored by Partners. The plaintiff, a participant in the plan, retired early and elected to receive his benefits in the form of a joint and survivor annuity rather than a single-life annuity. ERISA requires that a joint and survivor annuity paid beginning at an early retirement age must be the “actuarial equivalent” of a single-life annuity paid beginning at a normal retirement age. The plaintiff alleged that his benefit was not the actuarial equivalent of such a single-life annuity because Partners calculated it using an outdated interest rate and mortality table. On January 24, 2020, the district court granted Partners’ motion to dismiss in part. The plaintiff later amended his complaint, Partners moved to dismiss again, and the Court converted that motion into a motion for summary judgment after asking the parties to submit expert evidence on the established meaning of the term “actuarial equivalence” given that the term was not defined in the statute.
 
The district court ruled that the plaintiff’s claims failed because, although ERISA requires that benefits be actuarially equivalent to one another, it does not require that the actuarial assumptions used to calculate equivalency be reasonable ones. It reasoned that the relevant ERISA provision does not use the term “reasonable” and that such an omission should be assumed to be deliberate where other ERISA provisions do use that term. Further, it found persuasive that the plan’s governing plan document required the use of the challenged interest rate and mortality table, and that the plaintiff’s experts had testified that it was reasonable to follow plan terms when making actuarial calculations. Although the district court anticipated that its ruling could be called “irrational or unfair,” it wrote in language that could apply beyond this fact pattern that ERISA plans “are private arrangements, not part of a government social welfare program,” and “not generally required to provide protection against various forms of economic or social change.” This is one of several lawsuits filed regarding the provision of ERISA requiring that benefits under a defined benefit plan be actuarially equivalent to single-life annuities paid at normal retirement age, and courts have generally split on what that provision requires.
 
The case is Belknap v. Partners Healthcare System, Inc., No. 19-11437, in the United States District Court for the District of Massachusetts, and the decision is available here. The plaintiff is appealing the order to the First Circuit Court of Appeals.

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