PLANSPONSOR - December/January 2021 - 38

ERISA EXAMINATION
Another Line
Of Defense
When following a prudent process does not defend a claim
O
ver the past 10 years or so, the number of fiduciary breach/
excessive fee litigation cases involving 401(k) plans and
403(b) plans has continued to rise. Over 65 of these cases
were filed in 2020 alone. And if the year wasn't bad enough, the
fiduciary breach/excessive fee class actions just kept coming.
As we've written in many of these columns, and as we
regularly advise plan committees, the best defense for these
cases is that the committee followed and documented a prudent
process. There is no requirement that a committee either pick
the cheapest service providers or funds or that it always pick the
best performing investment options. Rather, the important point
is to go through a regular prudent process in selecting and monitoring
service providers and investment options.
But is that enough? If a committee is the subject of fee litigation-and
we use this term generally to mean the fiduciary
breach/excessive fee/etc. class actions that are flooding the
retirement plan world-evidence of the committee's prudent
process is likely the best defense.
Unfortunately, the best defense is just that, a defense; it
doesn't necessarily prevent the claim in the first place. Even if
a committee has been doing everything a prudent committee
should do and that will eventually successfully defend the claim,
there are still costs and burdens associated with the legal process.
So what can a committee do?
Indemnification Provisions
First, many plans provide that the sponsor will indemnify the
plan fiduciaries-e.g., committee members-in the event of
litigation. Savvy individuals may even require such protection
before agreeing to join the committee. An indemnification
provision doesn't absolve a fiduciary of liability, provide
a defense to the claim, or mean there won't be litigation costs
in defending the claim. What it can mean is that the sponsor
rather than the individual committee members bears the
cost. However, the Employee Retirement Income Security Act
(ERISA) prohibits using plan assets to indemnify plan fiduciaries.
Additionally, ERISA does not allow plan fiduciaries to be
held harmless or to be relieved of their fiduciary obligations.
An indemnification provision that requires an indemnitor
to " defend, indemnify and hold harmless, " as many do, may
raise questions and run the risk of being unenforceable. It's a
good idea to review any plan indemnification provision to make
sure it will apply to the maximum extent possible. It is also
worth reviewing the provision to make sure common questions
and practical aspects related to the indemnification are clearly
addressed upfront rather than leaving open issues that need to be
resolved when the indemnification provision applies.
Fiduciary Liability Insurance
Second, plans may purchase ERISA fiduciary liability insurance.
This insurance can cover the costs of defending the fee
litigation. Keep in mind, though, that the insurance is often
different than general liability or directors and officers (D&O)
liability insurance. It's important to review the policy to make
sure fiduciary litigation is covered and to consider whether the
amount is sufficient-even if a claim is dismissed!
Mandatory Arbitration and
Class Action Waiver Provisions
Third, plans may be amended to include mandatory arbitration
and class action waiver provisions to require participants
to individually arbitrate disputes related to the plan. There
are pluses and minuses to arbitration. For example, while
individual arbitration is not without its own costs, it is generally
faster and less expensive than class action litigation and
provides confidential proceedings. On the other hand, arbitrators
are not bound by legal precedent, and there is generally no
right, except in very limited circumstances, to appeal an arbitrator's
decision. Nevertheless, given that at least one federal
appellate court has upheld a plan's mandatory requirement for
individual arbitration, committees looking for ways to minimize
class action fee litigation may want to consider adding
arbitration and class action waiver provisions to their plan.
A prudent process in making fiduciary decisions is the best
way to defend any fee litigation. Yet, even a successful defense can
be costly. Committees looking to minimize the costs and administrative
burdens should consider reviewing the plan's indemnity
provision and fiduciary liability insurance, as well as implementing
a mandatory individual arbitration provision.
Summer Conley is a partner in the Los Angeles office of
Faegre Drinker Biddle & Reath LLP. Michael Rosenbaum
is a partner in the firm's Chicago office. Litigation partner
Kim Jones contributed to this column.
38 PLANSPONSOR.COM December 2020 - January 2021 Art by Joseph Ciardiello
http://www.PLANSPONSOR.COM
PLANSPONSOR - December/January 2021

Table of Contents for the Digital Edition of PLANSPONSOR - December/January 2021
