The coronavirus could spark a new type of claim against 401(k) retirement plans.
Companies dealing with pandemic-related disruptions like remote work and staff furloughs are at risk of getting sued if those disruptions impact investment decisions regarding the company’s retirement plan, and as a result, how well the plan performs, benefits attorneys say.
Retirement plans have been an active area of litigation in recent years with a flood of cases, many of which were successful, challenging high plan fees. Attorneys, now bracing for the next wave to hit, say an already active plaintiff’s bar could come out of the crisis with new breach of fiduciary duty claims to pursue under the Employee Retirement Income Security Act.
The fiduciary duties imposed under ERISA are fairly straight forward. The law requires those managing plans to act prudently and in the best interest of participants. However, it’s not prescriptive in how they do it. Whether a plan fiduciary has met its responsibilities is heavily based on how the investment decisions were made, said Josh Lichtenstein, an ERISA and benefits partner at Ropes & Gray LLP.
“Those determinations are heavily process based, and a moment like this inherently disrupts a lot of processes, so it’s important for fiduciaries to be careful,” he said.
The stock market has been volatile as a result of the coronavirus, which in turn has caused 401(k) plans to suffer. Market downturn has led the average 401(k) balance to drop by 19% to $91,400 in the first quarter of 2020, from a high of $112,300 in the fourth quarter of 2019, according to an analysis from Fidelity.
“I think we’ll see some folks who are going to target plans because investments have taken a hit during this period,” said Ian Morrison, a partner at Seyfarth Shaw LLP, who co-chairs the firm’s ERISA and employee benefits practice group. “That’s sort of an inevitable consequence of a market downturn.”
Attorneys for plan participants and beneficiaries say disruptions resulting from the pandemic are no excuse for a fiduciary’s failure to act prudently and evaluate the plan’s investment options.
“In times like this, it’s probably more imperative that fiduciaries be on top of the investment choices and options for participants,” said Karen Handorf, a partner at Cohen Milstein Sellers & Toll PLLC and chair of the firm’s Employee Benefits/ERISA practice group.
Changes in how the meetings are run, investments are evaluated, and information is distributed due to Covid-19 could all be fodder for potential litigation, but the claims would hinge on how decisions are made and implemented.
A lawsuit filed June 8 in the U.S. District Court for the District of Rhode Island against construction company Behan Bros. Inc., its retirement plan, and sponsors, appears to be the first filed against a 401(k) plan for a decision made in response to the pandemic, according to benefits attorneys tracking disputes.
Three former Behan Bros. employees participating in the plan allege the fiduciaries failed to produce timely year-end valuations and preemptively declared a special valuation as a result of the “the unprecedented and extraordinary change in the market valuation due to the Coronavirus pandemic” to reduce their 401(k) account distributions.
“That’s a case where it was perhaps a violation not to give you the information you needed when you should have gotten it,” Handorf said.
Behan Bros. didn’t respond to a request for comment. Catherine Shaghalian, counsel for the plan participants and a trial attorney at Orson and Brusini Ltd., also didn’t respond to a request for comment.
Fiduciaries can be held liable for breaching their duties under ERISA for not properly managing a retirement plan. But they can’t be held liable for plan losses alone, and claiming a fiduciary breached their duty to act prudently may be difficult to prove. Participants rarely have access to process information, Handorf said.
“ERISA doesn’t judge fiduciary activity by results. That’s beyond their control, but if after a series of months participants want an option that feels safer and the plan is not responding by giving them that option, I think they could have a fiduciary breach case,” she said.
Attorneys recommend fiduciaries protect themselves by documenting the steps they took to carry out their duties under ERISA.
“It’s important to make sure as plan sponsors you have good records of what you did to show not only were you paying attention but you had a good process in place,” Lichtenstein said.
Some attorneys are curious to see if companies will start offering a defined benefit plan like a pension plan as opposed to a 401(k).
The Supreme Court has now made it very, very hard for participants to sue defined benefit plan fiduciaries for investment-related issues, Morrison said. “It may be impossible if the plan is adequately funded,” he said.
The Supreme Court in May said participants in defined-benefit pension plans can’t challenge how corporate pension plans are run if they’re still receiving the same amount in benefits each month. The decision left participants with no way to recoup losses to a plan until it impacts the amount they’re getting.
“If you provide the benefit that way maybe you avoid this litigation risk and expense, the insurance premiums and so on,” Morrison said. “It might actually make more sense.”