EMPLOYMENT CORNER

Several former employees (the “Employees”) of a large telecommunications provider brought this class action against the Plan’s administrator and the committee responsible for some of the Plan’s investment-related duties. The Employees alleged that the administrator of their benefit Plan failed to investigate and evaluate all the compensation that the Plan’s recordkeeper received from mutual funds through the recordkeepers brokerage account platform. The Employees alleged that (1) the administrators’ failure to consider this compensation rendered its contract with the recordkeeper a “prohibited transaction” under ERISA Section 406, (2) the administrator breached its fiduciary duty of prudence by failing to consider this compensation, and (3) the administrator breached its duty of candor by failing to disclose this compensation to the Department of Labor.

The lower court found in favor of the Plan administrator, holding that the prohibited transaction and duty of prudence claims failed because the administrator had no obligation to consider the compensation in dispute.  Therefore, the administrator was under no obligation to report this to the Department of Labor.  
 
The Ninth Circuit affirmed in part and reversed in part. The panel reversed the lower court’s ruling on the prohibited transaction claim. Relying on the statutory text, regulatory text, and the Department of Labor’s Employee Benefits Security Administration’s explanation for a regulatory amendment, the panel held that the broad scope of Section 406 encompasses arm’s-length transactions. Disagreeing with other circuit courts, the panel concluded that the Plan administrator, by amending its contract with the Plan recordkeeper to incorporate the services of the brokerage account platform entities, caused the Plan to engage in a prohibited transaction. The panel noted how the amendment to the recordkeeper’s contract had incorporated additional services from new vendors that allowed the recordkeeper to reap millions in additional compensation, which was allegedly not properly disclosed or considered by the Plan in violation of ERISA. The panel remanded the case back to the lower court to consider whether the administrator met the requirements for an exemption from the prohibited transaction bar

In a recent decision, female detention officers brought a disparate-treatment claim under Title VII against their employer for a sex-based scheduling policy that allowed only male officers to receive full weekends off. Prior to this decision, the jurisdiction “limited the universe of actionable adverse employment actions to so-called ‘ultimate employment decisions.’” Those decisions are related solely to hiring, firing, leave, or compensation. Based on this precedent, a panel determined the scheduling policy did not rise to the level of an “ultimate employment decision” and dismissed the complaint. The officers appealed.

The Fifth Circuit chose to go against decades of its own precedent and broaden actionable adverse employment actions to include not only discrimination in hiring, firing, leave, or compensation, but the terms, conditions, or privileges of employment as well. Therefore, the court found the policy of giving male officers full weekends off while denying the same to female officers, qualified as a plausible claim of discrimination. By opening the door to a wider range of Title VII claims, this decision will reverberate throughout the jurisdiction and likely lead to an increase in disparate-treatment claims.

For a second time, the district court dismissed a lawsuit brought by participants of 401k and profit-sharing plan (the “Plan”) against their employer. This case highlights that raising a “meaningful benchmark” defense or, in other words, arguing that employees failed to identify better alternatives could be a powerful defense in such ERISA litigation.

The employees alleged that the employer violated its fiduciary duty under the Employee Retirement Income Security Act of 1974 (“ERISA”) by allowing the Plan’s investment portfolio to include options with unreasonably high management fees and needlessly expensive share classes and allowing the Plan to retain and underperforming fund.

Even after amending the complaint, the employee had not met the pleading threshold of providing a “meaningful benchmark” that would serve as a sound basis for comparison and aid in the determination of whether the challenged funds were, in fact, excessive or underperforming.

Here, the court sided with the employer because the employees’ complaint failed on various levels. First, the amended complaint failed to allege facts that plausibly showed that the Plan’s recordkeeping fees were unreasonably high by failing to provide plausible comparisons. Such comparison must be prudent; thus, the court rejected the reference to a fund that allegedly underperformed a benchmark that did not exist until five years later.

Retirement plan participants, in seeking litigation against employers for mismanaging funds would have to set forth more facts and provide suitable comparisons to succeed. Courts are continuing to apply the “meaningful benchmark” analysis to aid in their decisions pertaining to ERISA breach-of-fiduciary-duty claims. Each plaintiff’s complaint must identify a sound basis for comparison—a meaningful benchmark—to sustain its allegations. Such benchmarks must be able to afford the court an opportunity to conduct a side-by-side comparison, with comparable sized numbers and similar factors.

Recently, two district courts issued conflicting decisions over alleged Employee Retirement Income Security Act of 1974 (“ERISA”) violations on the same day. Specifically, each claim dealt with allegations that Plan fiduciaries (the “Fiduciaries”) had violated ERISA by paying excessive fees for recordkeeping services and had breached their duties by failing to prudently manage each fiduciary’s 401(k) Plans.

The two courts differed in their analysis on what each former employee (the “Employees”) were required to pled in regard to the ERISA violations and what facts the court considered to be “sufficient” to lead to a plausible inference that Fiduciaries had paid excessive recordkeeping services fees.

In England, the court held that the Employees failed to plead sufficient facts that would have allowed the court to make a plausible inference that the recordkeeping fees charged were excessive relative to the services rendered. Further, the court stated the Employees had only presented conclusory allegations that all the services the Plans received were relatively similar. Thus, the Employees’ complaint was dismissed because the court ruled it failed to provide a context-specific comparison for such fees that would have led to a plausible inference that the Fiduciaries had paid excessive recordkeeping fees.

By contrast, the court in McDonald, held that Employees were not required to allege specific details pertaining to the actual services rendered by the Fiduciaries. The court reasoned that such “conclusory allegations” that were denounced by the court in England, were in fact sufficient for the Employees to properly plead their claim against the Fiduciaries. Unlike the complaint in England, the court upheld the claims asserted in McDonald and has allowed it to proceed into the discovery phase of litigation.