PLANSPONSOR - February - March 2022 - 38

FIDUCIARY FORUM
Legal Relief?
School is in session, but class actions may be 'out'
W
e continue to see fee litigation plaguing fiduciaries
of 401(k) and 403(b) plans. One even reached the
Supreme Court this year. As we've explained in
prior columns, the best defense to these cases generally involves
engaging in a prudent decisionmaking process.
But maybe there's a way to minimize the costs and hassle
of these lawsuits altogether. Recently, we've seen plan sponsors
amending their retirement plans to add mandatory arbitration
and class action waiver provisions. These provisions require
participants to individually arbitrate disputes related to the plan
and may allow for dismissal of class actions alleging breaches of
fiduciary duty related to plan management.
... we've seen more and
more fiduciaries decide
the chance to avoid class
action litigation is worth
these negatives.
This process may not be quite as easy as it sounds because
plaintiffs challenge the enforceability of these provisions, and,
despite the pros, there are some cons associated with arbitration.
But if you can get a class action dismissed right off the bat, trying
this approach may just be worth it.
Let's consider the pros of these arbitration/class action
waiver provisions. For starters, the fiduciaries can avoid class
action litigation-which is just as expensive and as much of
a headache as it sounds. Second, arbitration proceedings are
private and confidential. They also tend to be much faster than
federal court class action litigation. Finally, while arbitration still
involves legal and administrative costs, it is generally less expensive
than defending class action litigation.
The cons, of course, need to be considered, as well. For
example, as a general rule there is no right to appeal an arbitrator's
decision. This may be a pro or a con, depending on the
decision! Arbitrators are not bound by legal precedent, which
means similar arbitration cases may have inconsistent results or
results that don't track Employee Retirement Income Security
38 PLANSPONSOR.COM February - March 2022
Act rules. Additionally, while not likely, plaintiffs' attorneys may
file numerous individual arbitration claims all at once. Each
separate claim would be subject to its own arbitration and costs,
as opposed to resolving all class member claims in connection
with one class action litigation.
While arbitration generally costs less than litigation, there are
costs associated, and, if there are multiple individual arbitrations,
this could further increase expenses. Arbitrators have discretion
in managing the proceedings and may still allow significant and
costly discovery. Finally, the rules of ERISA are not everyone's
expertise, and it may be difficult to find a qualified arbitrator.
On balance, we've seen more and more fiduciaries decide the
chance to avoid class action litigation is worth these negatives.
Once fiduciaries decide it's worth the try, the next question
is how to make the change. First and foremost, the plan
document will need to be amended. Although the enforceability
of mandatory arbitration and class action waiver provisions
in defined contribution plans is being challenged-and is
currently on appeal in some circuits-the 9th and 7th Circuits
have upheld it if the provision is part of the plan document and
does not require waiver of substantive rights under ERISA. One
court that held that an ERISA plan may require arbitration found
the entire provision unenforceable because it prohibited a type of
relief permitted under ERISA.
In light of these decisions, careful drafting of the provision will
be key to its success. Further, the provision should be in the plan
document not in an employment agreement. Communicating the
provision-e.g., in the summary plan description or a summary
of material modifications-will also be helpful.
We expect the arbitration challenges to continue just as
401(k)/403(b) fee litigation continues. As different circuits
consider the arbitration and class action waiver challenges and
reach different results, the issue may, at some point, make its
way to the Supreme Court. In the meantime, plan fiduciaries
looking for ways to mitigate their risk of fiduciary litigation-
both the costs and hassle-may want to consider taking a chance
on adopting an arbitration and class action waiver 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. Kim Jones, also a partner in the
Chicago office, contributed to this column.
Art by Joseph Ciardiello
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