Inherent Murkiness of ERISA Litigation Prevents Progress

There has actually been relatively little helpful legal insight published by the courts, due to the fact that many ERISA cases end with settlements, while others are dismissed early on for pleading deficiencies.

During a conference call with retirement industry analysts and reporters, Mayer Brown attorneys Nancy Ross and Brian Netter dove into the labyrinth of Employee Retirement Income Security Act (ERISA) lawsuits.

Netter is a partner in the Washington, D.C., office of Mayer Brown’s litigation and dispute resolution practice and co-chair of the ERISA Litigation practice. Ross is a partner in Mayer Brown’s Chicago office and also co-chair of the ERISA Litigation practice.

According to the pair, there is an ongoing proliferation of lawsuits that continue to be filed under ERISA—about fees being too high, about inappropriate investment options being offered by plans, and about conflicts of interests alleged to exist between plans and their service providers. Plaintiffs in the cases have named as defendants both individuals and different types of institutional entities—from employers to recordkeepers to mutual fund companies.

“To date, there has actually been little direction or guidance published in these cases by the courts,” Ross suggests. “This is because the majority of these cases have settled, while others are dismissed very early on for pleading deficiencies. That’s the general pattern we have seen. Those cases which are not dismissed go into an expensive discovery process, which often means settlement talks begin in earnest.”

In Ross’ estimate, one negative outcome of all the litigation is that plan sponsors feel they cannot embrace innovative plan designs or investment options without fear of litigation. One positive consequence, she says, is that fiduciaries running these plans have come to better understand their risks and responsibilities.

“A recent development in this long-running litigation trend is the proliferation of plaintiffs’ lawyers pursuing these types of claims,” Netter says. “When these lawsuits first became popular, it was only a few law firms active in the space. Today, more and more firms are trying to get in on the action, attracted by the large settlements. Their playbook is the same: survive a motion to dismiss and subject the defendant to a very expensive discovery process. It creates incentive to enter into a large settlement.”

Ross and Netter suggest that, for ERISA litigation defendants, the dismissal stage is very significant, yet it is very unpredictable. This is because courts across the U.S. differ in their willingness to dismiss cases outright. Judges for the most part are also wary of seeing their dismissals appealed and overturned, so they more often allow repleading or even full discovery on claims that, in the opinion of defense attorneys, are wholly meritless.

Netter says judges appear particularly adverse to dismissing ERISA cases that allege not just imprudence by plan fiduciaries but actual disloyalty and/or self-dealing.

Looking away from the defined contribution plan side of the marketplace, Netter adds, there are numerous pension-focused lawsuits as well. “Most companies have frozen their legacy pension plans, but there is still a lot of money in those plans waiting to be distributed,” he explains. “For the most part, the issues raised in these cases have to do with the actuarial assumptions associated with disbursement.”

In simple terms, when an individual in a pension plan approaches retirement, he will have some choices in terms of taking the money. Those might be a lump sum, a single life annuity that will pay monthly for life, or a joint/surviver annuity that will make payments until the last spouse dies. Under ERISA, there are rules for converting amounts among these options, with the goal of ensuring the different payment options are “actuarially equivalent.” The two primary assumptions going into this analysis are, first, the interest rates today and projected into the future, and second, the mortality assumptions in terms of how long the payments are expected to last.

“In the last 50 years, the mortality tables have gotten longer, and so these lawsuits allege that the plan sponsors of pensions are purposefully and improperly using outdated mortality tables that improperly assume the participants will receive fewer annuity payments in the course of doing one of these conversions,” Netter explains. “If the plaintiffs begin to see some success in these sorts of lawsuits, the same sorts of theories can be directed against dozens or hundreds of pension plan sponsors.”

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