Fred Reish has an excellent article out on the technical and substantive aspects of the executive – and soon to be regulatory – efforts to open 401(k) plans to alternative investments, with a particular focus on the targeting (pun intended) of target date funds as the channel for bringing them into the investment holdings of millions of American workers. I have written extensively about various concerns I have about doing so, including with regard to burying them within the range of assets held within a target date fund. I am skeptical, as I have written elsewhere, that this is in the best interest of plan participants; that all plan participants will even know they are holding such assets in their accounts; or that it won’t put plan sponsors and fiduciaries at significant liability risk. I am also skeptical, however, as I have also written elsewhere, that alternative investments won’t end up in target date funds, despite these issues.

One of the central substantive issues with adding alternative investments into 401(k) plans concerns the disjunct between sloganeering and the substantive purpose of 401(k) plans. Plans, and the accompanying costs to the taxpayer from deferral of taxes, do not exist – and ERISA was not enacted – to democratize investing, which seems to be the alleged rationale for the idea of opening plans to such investments. In the article, Fred goes to the question at the heart of whether the regulatory and financial industry push to add such investments to plans aligns with the purpose of such plans and the real justification for the cost to the Treasury of them – which is the goal of protecting and improving retirement outcomes for workers. Fred points out that the real question in the long run for fiduciaries, in deciding whether to grant entrance to plans to such assets, is whether doing so improves, or instead harms, the retirement readiness and outcomes for plan participants. He also points out that it involves far more than just consideration of the returns on the investment, but also numerous issues related to the propriety of the investment for the employee pool. All of this will go into any analysis of the question of whether it was a fiduciary breach for plan sponsors to allow, rather than seek to preclude, their addition into target date funds used in a given plan.

To me, there is one central and absolute starting point – where is the evidence, and what is the data, showing the potential improvement to investment outcomes, and at the cost of what extent of additional volatility, for plan participants? Without that, plan sponsors are just guessing and fiduciaries will never, if and when sued, be able to show that they fully investigated and properly understood the investment option when they approved it for plan participants. Even if and when that data is made available to plan sponsors and fiduciaries, as I have written elsewhere, most are not going to have the sophistication themselves or, within their companies, the internal expertise to interpret the data and information. As a result, plan sponsors are going to have to bring in outside experts with the ability to actually pierce any fog, deliberate or otherwise, created by the data and to project out the likely financial and risk ramifications of the change to the asset mix and the investments.

Anything less will make it impossible for plan fiduciaries to defend, other than on legal and technical grounds rather than on the merits of the decisions, future breach of fiduciary duty claims alleging losses to plan participants from the addition of alternative assets into plans, whether through inclusion in target date funds or otherwise.

Insurance coverage lawyer Geoffrey Fehling had a great LinkedIn post concerning a Massachusetts court dismissing class action claims against Liberty Mutual because of the failure of plaintiffs’ counsel to identify and then name the correct Liberty Mutual affiliated insurance companies as defendants. I wanted to add three points to it which, in their absence, could make the decision seem either picayune or as unnecessarily elevating form over function. That is not the case here and instead the ruling is consistent with both the history of the insurance industry and the approach of Massachusetts law and courts to interrelated, but legally distinct, defendants.

  1. It Isn’t Easy to Pierce the Corporate Veil or Otherwise Intermingle Corporate Defendants under Massachusetts law or in Massachusetts Courtrooms.

Massachusetts courts and Massachusetts law, in a variety of legal areas, tend to strictly maintain the legal separation between companies, even when they are part of the same corporate umbrella or otherwise interrelated, and can be very tough on efforts to pierce the corporate veil or otherwise hold individuals or other corporate entities financially liable for the responsibilities of a particular corporate entity. That is partly why it can be such a relative shock when, such as happened in the context of withdrawal liability for union employers under ERISA, a Massachusetts court breaks new ground in this area. I have litigated, including trying and handling on appeal, pierce the corporate veil cases in other jurisdictions, and they are often not as opposed to allowing it as are Massachusetts courts. That tendency to strictly enforce corporate niceties in Massachusetts and under Massachusetts law hung up the lawyers in this case.

  1. These Types of Corporate Distinctions Among Different Insurers and Claims Administration Companies Operating Under the Same Overall Corporate Umbrellas Aren’t Just Niceties.

As an insurance coverage and bad faith lawyer for decades, I have litigated plenty of cases where the proper defendant is one, but not other, insurers in a corporate family. Moreover, many of these corporate families actually have their own separate, free-standing claim administration companies within those families. This has been commonplace for many years and there are often regulatory, capital, and other corporate reasons for this type of segregation – it is not, as decisions like this one can sometimes suggest to readers, something that is random and shouldn’t be respected by courts.

I defended at trial the separate and free standing TPA operation of Liberty Mutual that administered claims covered by the captive insurer of a particular conglomerate when both entities were sued for bad faith in their handling of a multi-million dollar claim. There were a number of reasons that it was important for the two entities to be recognized and understood solely as separate corporations, even though their actions were interlinked. Otherwise, responsibility and legal liability of the two companies, if any (there was none, as the defendants prevailed at trial), could not have been properly assessed and allocated under Massachusetts law. The issue of allocating liability and responsibility in these types of situations in a fair and understandable manner tends to require respecting the corporate form and the legal separation of the various implicated companies.

  1. The Separate Corporate Forms Aren’t Nefarious – They Are Often Just Accidents of History.

In some pierce the veil type cases – such as with certain private equity transactions – there are tactical reasons for multiple corporate entities to exist and the distinctions among the entities were deliberately crafted right from the get go. But sometimes they can just be charming artifacts of a bygone era. Many of the different corporate names and forms contained within the overall umbrella of a larger insurance entity are remnants from the combining of different insurers into a larger entity. For instance, years ago, I tried a reinsurance case involving missing reinsurance certificates from the 1960s (I won’t explain here how we ended up in a state court trying the dispute when it is something that would have typically been arbitrated; it is real inside baseball stuff but if you are interested, message or email me and I will explain it). One of my key witnesses was the first General Manager of Lexington Insurance Company, who was put in charge after AIG formed the company – although much has changed since then, Lexington remains a separate insurer within the AIG umbrella many decades later.

This history can be part of the charm of working in the insurance industry or litigating insurance cases, particularly when you get old timers talking, as was the case in my reinsurance trial.

In earlier posts in my Plan Sponsor and Fiduciary 2.0 series I promised to provide a cheat sheet for fiduciaries confronting the push to add private equity and other alternative assets to 401(k) plans.  Here it is, with a focus on private equity assets, because that is where most of the initial action currently is and will be – although the same approach will provide protection with regard to other types of alternative assets as well.

I am not going to say in this cheat sheet whether plan sponsors and fiduciaries should or should not add such assets into their plans, nor am I going to tell them here what decisions to make. As the recent Intel case makes clear, there are circumstances in which a valid argument for adding private equity investments to a plan can be made – but that does not mean it is the right decision in all or even most cases.  And it continues to be my view that, first, the onus remains on the proponents of this idea to demonstrate that adding private equity investments to plans will decrease volatility and/or increase returns for participants, and, second, that in the absence of such proof, it is hard to see a valid reason for adding such assets to plans.

From a 30,000 foot level, there are two primary risks for plan sponsors, plan fiduciaries and plan participants from adding private equity or other alternative investment options into plans.  For the first two – sponsors and fiduciaries – it is the substantial risk of getting sued by the class action bar on the theory that it was imprudent to include such assets in plans.  For the remaining group – the plan participants – it is the risk of incurring losses that, absent such investments, they would not have incurred.  These risks obviously overlap, in that the greater any losses to plan participants, the greater the likelihood of class action litigation and, moreover, fiduciary liability.  Plan sponsors and fiduciaries who add private equity or other alternative investments into their plans will not be able to completely avoid these risks, but they can reduce the risks they face in this regard by following certain approaches in adding those assets into their plans.  

Here is my six step cheat sheet for plan sponsors and fiduciaries looking to reduce their future litigation risk and potential fiduciary exposure as private equity and other alternative assets are moved into plans.

1. Be Skeptical About Their Inclusion in Target Date Funds, Consider Pushing Back on It,  and Document Doing So

    First, plan fiduciaries should think about how private equity or other alternative investments would gain access to their plans.  The push to include private equity as part of asset allocation funds, such as target date funds, is not to the benefit of plan fiduciaries. It means that far more plan participants will end up holding the assets than would otherwise be the case if, for instance, plan participants were required to affirmatively elect a fund in the lineup that is solely offering such assets. It also increases the likelihood that a large number of plan participants will end up exposed to private equity risks without knowing it.  For these and other reasons, burying the private equity assets in target date funds is likely to increase the amount of potential losses and of potential fiduciary exposure, than would be the case if private equity assets were added to a plan only in their own capacity, rather than as a potential co-morbidity with other investments.

    I can see many reasons why including private equity assets in a target date fund would be in the best interest of sellers of financial products, but that doesn’t mean it is the best way for plan participants to access, or sponsors to add, that exposure in plans.  A plan sponsor or fiduciary should leave a documented trail of seeking to have them instead added only as a separate free standing investment option and excluded from any asset allocation funds in the plan – I am skeptical that any plan fiduciaries will succeed in such an effort, but the very nature of seeking that solution and documenting that it could not be done will go far towards demonstrating prudent and reasonable conduct if forced to defend against a breach of fiduciary duty class action.

    2. Watch Out for Private Equity Assets Being Back Doored Into Existing Fund Options

    Second, along the same lines, a big question to me continues to be whether private equity investments will simply be added into the mix of holdings in target date funds that are already in plans, thus entering plan holdings by sort of the back door and under the radar, instead of through the front door for all to see, with their arrival heralded to the fiduciaries and plan participants right at the outset. Personally, I am skeptical if, by the time regulatory rewrites on this issue have occurred, fund vendors are not free to unilaterally add private equity assets into the mix of investments in target date funds that are already in plan investment options and already held in vast amounts by plan participants. If those participants take losses because of the addition of these assets, which were added to their holdings without them affirmatively deciding to take on that risk, plan fiduciaries will be sued for allowing it to happen.

    Plan fiduciaries should keep a close eye on this issue and avoid allowing private equity investments to creep into their plans in this way without demonstrating an effort to avoid it.  Plan fiduciaries should document that they either affirmatively came to the conclusion that this occurring was a good thing for participants and thus affirmatively decided to allow it, or else should document that they engaged in industry appropriate efforts to avoid it.  A future defense against class action lawsuits related to this type of backdoor “asset creep” is going to require proof of one or the other.

    3. Focus on Exploiting the Upcoming Safe Harbor

    Third, there is absolutely no question that regulatory developments in this regard will add some form of a safe harbor for plan fiduciaries who add private equity assets into plans.  However, we have more than enough experience with safe harbors, including with litigating their scope, to know that they are not a perfect “get out of jail free” card in this context. Nonetheless, they are better than nothing and, depending on various factors, could be a lot more help than that in this circumstance.  As a result, plan sponsors and fiduciaries considering adding private equity assets to plans should look very closely at the nature of any regulatory safe harbor in this context and make sure that they approach adding private equity assets to plans in a manner that will maximize any protection that may be provided by such a safe harbor.  Equally importantly, they should document anything necessary to invoke that protection.

    4. Overcommunicate with Participants

    Fourth,  fiduciaries must demand broad disclosure of relevant financial information concerning private equity investments, including costs, volatility, fees, past performance, etc., and thoroughly vet that information, including using outside experts to do so if necessary.  They must then provide that information in an understandable format to plan participants.  Nothing will look worse for plan fiduciaries in class action litigation than the argument that not only did plan participants suffer losses from adding private equity investments into plans, but they also weren’t even told enough information to make educated decisions about whether or not to hold the asset in their accounts.

    5. Fully Investigate the New Investment Assets

    Fifth, and this is related to the one above but distinct from it, fiduciaries should conduct a thorough and detailed investigation of the finances of the investment option and the case for inclusion in the plan.  This really does need to be a searching inquiry, and not simply a review of vendor representations of past performance and predictions of future performance (particularly given the caveats with regard to each that will almost certainly be provided to plan sponsors and fiduciaries). In my experience, few but the most sophisticated plan sponsors will have the internal expertise to sufficiently conduct this examination, so most plan fiduciaries should retain excellent outside experts to review and report to them on these issues.  Plan fiduciaries should be careful about who they hire for this purpose, as well – just hiring anyone to do it won’t be enough, as it will open plan fiduciaries up to the charge in class action litigation that they may have sought outside expertise but they failed to properly select and utilize experts, which is almost as bad as being charged with having brought no expertise to bear on the issue at all.

    6. Make it a Settlor, Not Fiduciary, Decision

    Sixth and finally, whatever a fiduciary decides to do about this – including excluding private equity from plan assets – they should put it in the plan document.  One of the more interesting defense theories – and proactive tactics for preparing for possible future class action suits – that is currently in vogue is the idea of protecting plan fiduciaries by transforming decisions into plan settlor, rather than fiduciary, decisions, through the tool of making them part of the design of the plan, outside of the discretionary decision making of the plan’s fiduciaries.  This is a perfect place for that tactic.  Sponsors and fiduciaries should fully examine the question of whether to allow private equity investments into plans, but then should have the plan amended one way or the other on this question.  They need to remember, though, not to deviate from the treatment of this option as written into the plan itself – doing so will bring its own host of litigation problems.

    Many commentators are suggesting that the recent executive order and the directive for regulatory action towards adding private equity and other alternative assets to 401(k) plans does not mean that those assets are destined to end up in 401(k) plans. But personally, I think that belief is almost certainly naïve – particularly with regard to private equity investments, which already have a head start in the financial industry’s land rush towards 401(k) assets. As a result, plan sponsors and fiduciaries need to start thinking about how they are going to process the push to add private equity investments to plans in a way that protects them from potential litigation and fiduciary liability.

    And the answer is that we are headed back to the future. It wasn’t that long ago – maybe ten or fifteen years ago – that lawyers for plan sponsors emphasized process and laying out a factual record of reasonable conduct as the best preventative to the risk of being sued for breach of fiduciary duty. My slide decks from presentations on fiduciary duty under ERISA from the mid-2010s, for instance, always had a slide in them to the effect that, as they say in football, the best offense was a good defense – in other words, that plan fiduciaries’ best defense against future breach of fiduciary duty lawsuits would be to document a course of reasonable fact finding and decision making, which could be used in the future to prove prudent behavior by the fiduciaries.

    Over time, though, this fact based approach to protecting against fiduciary liability, to planning for the risks posed by fiduciary decisions and to defending against breach of fiduciary duty claims fell out of favor, in deference to legal strategies intended to resolve breach of fiduciary duty cases without ever getting to a factual testing of the prudence of the decision making at issue. The current focus on disputing standing at the motion to dismiss stage, for instance, is but the latest in a long line of legal defenses posed in breach of fiduciary duty litigation with the hope, for the defendant and its counsel at least, of never getting to a point where the merit of the fiduciary’s decision itself is tested.

    There have been good reasons for this. For starters, merit based defenses concerning the fiduciary’s process of decision making can typically only be addressed in the first instance at summary judgment and at the second instance, at trial. By then, discovery and motion practice costs – not to mention trial preparation, expert and trial costs – will have been substantial, making it completely rational for a defendant (or its insurer) to favor legal arguments that can end a case earlier over fact based defenses that cannot be ruled upon until much later in a case. Moreover, the potential judgment against a fiduciary, if at summary judgment or trial the court rejects the fact based defense, can be so great that instead pursuing legal arguments only, followed by settlement if necessary, can be the rational approach for this reason as well.

    Lately, though, we have seen more and more instances of merit based arguments, rather than legal arguments, carrying the day, including after trial (which tends to be the ultimate test of whether a defendant and its counsel were right to select a fact based defense premised on the prudence of the fiduciary’s decision making over early legal arguments followed by settlement if needed). Fiduciaries who have to make decisions about whether to allow, and if so in what guise, private equity investments into 401(k) plans would be wise to take note of the trend and to make their decisions regarding private equity assets in plans accordingly. This means that they should approach the issue in ways that will allow them to defend against future class action lawsuits by demonstrating a prudent course of decision making in this regard even where the financial outcome to participants from having added the asset class in a particular plan is poor.

    There are ways to do this, and ways to document it for purposes of potential future litigation. Plan fiduciaries should be aware of this and act upon it, as the rush towards adding alternative assets to plans picks up steam. Doing so will lead to two long term effects that will favor them. First, it will make them less likely to be sued when the class action bar turns its attention, as it will, to breach of fiduciary duty suits built on the inclusion of private equity investments in plans. As time goes on, fiduciaries who follow this approach today will win more of these types of cases in the future than those who didn’t, and, as inevitably as night follows day, other fiduciaries who follow this approach will then find that, as a result, they are less likely to be sued than are fiduciaries who did not do so. After all, class action lawyers are looking to cull the herd, not looking to tangle with the best defended animals in the fiduciary forest.

    Second, if they are sued, it will make them more likely to win. How do we know this? We see it already in the Ninth Circuit’s recent decision in Intel, in which the court upheld the dismissal of breach of fiduciary duty claims based on the inclusion of private equity and other alternative investment options in a 401(k) plan. The Court essentially ruled that using such assets was not per se a breach of fiduciary duty, but that instead, if used thoughtfully and prudently, it could be consistent with fiduciary obligations. What this teaches us going forward is that, if a fiduciary contemporaneously documents a proper factual basis for including private equity assets in a plan, then that fiduciary can sleep at night, safe in the knowledge that he or she probably did not commit a fiduciary breach in adding that asset class to the plan.

    In a subsequent post, as part of my Plan Sponsor and Fiduciary 2.0 series, I will provide a cheat sheet (or cheat code or life hack, or whatever is the preferred current cliché), for how to create – and document- exactly that course of decision making, so as to support this type of a defense in the future.

    For now, though, paying close attention to the commentary and discussions about the Intel decision is worthwhile. I am partial to this detailed discussion of the case on the Fid Guru blog. You can find the decision itself here, as well.

    This is the third in my series of posts called Plan Sponsor and Fiduciary 2.0, which addresses how fiduciaries and plan sponsors should now be conducting themselves in light of operational changes, legal developments, and liability risks that have developed over the past ten to fifteen years. You can find the origin story behind this series here, as well as prior posts on handling vendor contracts here and on relying on litigation expertise here. The focus of this series is on steps that plan sponsors and fiduciaries should take to update their practices for the current environment in which they operate.

    The importance to plan sponsors and fiduciaries of insuring their liability risks in running benefit plans, particularly 401(k) or other retirement directed plans, in the modern era (namely, the time after the class action bar started coming after ERISA plan fiduciaries regularly) cannot be overstated. In this post, I address both the increased importance of a properly constructed insurance program for plan sponsors and fiduciaries, as well as the need in current times for plan sponsors to fully understand that program and to best use it to their advantage.

    Historically, in my view, fiduciary liability insurance – which provides coverage for liability risks of fiduciaries in running ERISA plans – was a tag along coverage, often, in my experience, purchased almost as an afterthought to D&O insurance, which was where the focus in setting up the insurance program was typically centered. There was a good reason for this, which was that the director and officer exposures were of more concern to all involved, from the insurer to the risk manager to the broker to the Board. Over time, as the fiduciary liability risks and exposures in running ERISA plans have expanded, fiduciary liability insurance has taken on its own status and importance, often co-equal to D&O coverage in setting up an insurance program. In today’s world, if fiduciary liability insurance isn’t treated with as much importance as insuring a plan sponsor’s other risks, it should be.

    That’s point number one for plan sponsors – take fiduciary liability insurance very seriously, and don’t treat it like just another part of the corporate insurance program. Litigation costs and settlement exposures from ERISA litigation, particularly class action litigation claims, are too high and the coverage can be a lifesaver in that regard.

    Point number two for plan sponsors is to pro-actively understand the coverage. More and more often, I am asked to do a preemptive review of coverage and address for plan sponsors and fiduciaries where the gaps may be in coverage and whether they have the right protection in place. As the title of my blog – Boston ERISA and Insurance Litigation – highlights, my expertise overlaps both insurance coverage and ERISA, making this type of review a natural fit for my experience. Regardless of who does it, though, plan sponsors should conduct this type of a review of the coverage for their benefit plans regularly, perhaps as part of policy renewal.

    Plan fiduciaries – who often will be corporate executives charged with overseeing a company’s benefit plans – should insist on this type of review, if the risk management department or, in smaller companies, the Board, isn’t doing it on their own as a matter of good governance. Plan fiduciaries obviously face potential personal liability exposure under ERISA, so they are the ones most at risk if the insurance program is insufficiently robust (I could tell you some war stories about this by the way, but this isn’t the place for them).

    Point number three for plan sponsors and fiduciaries is to consider how much control of lawsuits against them that they want to have under their fiduciary liability insurance policies. Many such policies do not allow plan sponsors to use their usual outside counsel to defend such cases and limit plan sponsors and fiduciaries to the insurer’s panel counsel or other counsel selected by the insurer. Let me be clear – there is nothing inherently wrong with that. I have prevailed in a number of cases for plan sponsors and fiduciaries where I was the defense lawyer selected by the insurer, so I am not here to suggest that there is anything wrong with this approach.

    However, ERISA litigation poses risks for plan sponsors and fiduciaries that are very different from those posed by other types of insured exposures. These include in particular the risk of personal exposure to executives, as well as the reputational harm of being painted – possibly entirely unfairly – as poor stewards of the benefits of the plan sponsor’s own employees. ERISA litigation can also trigger extensive disruption for plan sponsors, partly because the issues being litigated often have a history that runs back many years and, moreover, can touch on numerous events and involve multiple parties.

    For many insured plan sponsors, these risks and disruptions can be reduced by having their usual, long running outside ERISA counsel and litigators defend them against claims covered under their policies. My recommendation to my own clients in this regard is to ask to have the right to use their own counsel, usually by identifying their existing counsel as the choice, written into an endorsement in the policy. My own contacts in the insurance industry have recommended this approach to me, and I always pass this along to my own clients whenever I can.

    For more on this last idea, insurance coverage lawyer Bradley Dlatt, who represents policyholders in coverage disputes, has an excellent post on LinkedIn on this point that, by sheer coincidence, he posted while I was working on this latest entry in my Plan Sponsor and Fiduciary 2.0 series. You can find it here, and it does a nice job of providing an overview of the issues of, and reasons for, seeking to endorse policies in this way.

    The big story in retirement investing is now the Trump administration’s push to have private equity investments added into 401(k) plans. This isn’t really a new story, as I have been writing about it since at least last November, but the intensity – as well as the media coverage – has now ramped up.

    If you are new to the story and want to catch up quickly, I have listed below some resources on the issue (most of them my own blog posts and articles on the subject) that should bring you up to speed quickly.

    It is important to remember that the executive order represents little more than an early volley in this debate and on this subject. Don’t be fooled by articles suggesting, however, that it is the first step in the process of opening up plans to these types of investments. It is not even close to the first, as financial industry efforts in this regard have been on-going for some time.

    It’s also not the last step, though, and there is a lot more to come. I can tell you already, though, where this is going to end up – with private equity investments in plans, likely within target date funds. That is coming and is how this will end – so plan sponsors should start now on the subject of how they are going to best protect themselves against the potential exposures and almost certain litigation risks that will come along with it.

    I have a cheat code in mind for how plan sponsors should do that, which I will cover in a later post. For now, though, here is plenty of reading to get started with:

    Overview of the issue:

    https://lnkd.in/eHSpHmJR

    Bloomberg overview on the executive order:

    Your Employer Will Decide the Fate of Private-Market 401(k)s

    The original idea and why it may not be a good one for plan sponsors, employers and employees:

    https://lnkd.in/eZuyCDxz

    An ERISA litigator’s view:

    https://lnkd.in/eXhkagRi

    Best approach to it for plan sponsors/employers:

    https://lnkd.in/ebjk8pHZ

    Demands on plan sponsors/employers:

    https://lnkd.in/erHN3aqQ

    How plan sponsors/employers should handle the issue:

    https://lnkd.in/eqfcDxYA

    One of the themes I have returned to time and again with regard to excessive fee and other class action litigation under ERISA is that the traditional litigation approach deployed for years by the plan sponsor community needs to be updated. With some variation, it has followed the traditional defense model typically used in class action defense, but in the context of ERISA class action cases, it has too often resulted in a motion to dismiss, followed by amended complaints, followed by more motions to dismiss, followed eventually by a version of an amended complaint that passes muster, followed by very expensive and broad discovery, followed by summary judgment practice that resolves only part but not all of the case, eventually followed by settlement after defendants and their insurers have already spent a fortune on discovery and motion practice. This pattern, and whether it is effective, took central stage in much of the discussion of the summary judgment ruling a year or so ago in the excessive fee class action filed against Boston College, as I discussed here and here.

    My own concern about this model started over a decade ago, when it took me three motions to dismiss, each targeted at a new and amended version of the complaint, to finally obtain dismissal with prejudice of what I considered from the outset to be a meritless class action case, one that after discovery – if the case wasn’t dismissed – would inevitably be won by the defendants at summary judgment. However, it was crucial to prevail early, at the motion to dismiss stage, because the costs of discovery before getting to summary judgment would have been onerous. Even more than other types of litigation that I have handled, including IP litigation and multi-million dollar insurance disputes, there is something about ERISA cases that makes discovery broader and more expensive than in most other types of cases.

    One of the topics I have talked a lot about recently with insurers and plan sponsors, as well as written about, is the idea that the Supreme Court’s recent decision in Cunningham v. Cornell contained an open invitation for defendants and their lawyers to break away from this model in ERISA class action litigation, by using the tools available to them under federal practice to ask district courts to assert more control over these types of class action cases at various points in their lifecycle and by focusing district courts on specific opportunities to decide outcome determinative issues early in a case, rather than later at summary judgment after extensive, expensive and often irrelevant discovery has been conducted.

    I have been advocating for defense lawyers, their clients and their clients’ insurers to take advantage of this opportunity to seek reordering of the standard and accepted norms for litigating ERISA class actions, and to affirmatively try to find opportunities to have courts decide outcome determinative issues at as early a moment as possible, often long before summary judgment on the case as a whole could be pursued and, with any luck, even long before extensive discovery has been undertaken.

    Most ERISA class actions, and in fact most ERISA cases, have a few outcome determinative issues in them that will determine liability – whether that be standing, statute of limitations, the role of ESG in investment decisions, the underlying rationale for including certain investments in a plan’s menu, causation or other issues that are likewise similarly discrete. There is no reason, if a case can’t be resolved right off the bat under the traditional plausibility test for deciding a motion to dismiss, to litigate all of the other issues in that type of a case all the way through discovery and to summary judgment motions before that discrete issue – one that might moot everything else – is decided. Whether it is seeking bifurcation so that only the single discrete, outcome determinative issue is litigated before discovery or motion practice occurs with regard to any other aspect of the case, or transforming the motion to dismiss into a partial summary judgment proceeding targeted at that one key issue, or another tactical move, plan fiduciaries and their lawyers should affirmatively and constantly pursue these types of opportunities to reduce the scale of the litigation to solely the outcome determinative issues that they have identified, before the case is ever allowed to expand into broad discovery and litigation of the remainder of the case.

    A perfect example of this crossed my desk last week in two different pieces of reporting on the same case. Both Bloomberg News and Kantor & Kantor have reported on the federal district court in Maryland’s decision to certify for interlocutory appeal the potentially outcome determinative issue in an ERISA class action of whether the putative plaintiffs had standing in light of the Supreme Court’s decision in Thole, after denying defendant’s motion to dismiss. The interlocutory appeal, if resolved in favor of the defense, may end the case at that point, without the need for discovery, summary judgment practice and trial to occur before the case is resolved on the merits. This is exactly the type of strategy by defendants, and proactive management of ERISA class action litigation by the bench, that I am talking about when I say that defense lawyers and judges should look for opportunities to resolve the outcome determinative but disputed issues in ERISA class actions early, rather than only after full discovery and comprehensive summary judgment practice. This is exactly one way to do it – to send the open legal issue that could resolve the entire action up for appellate review, instead of having it reviewed only after the entire case has been litigated.

    There is no more overused word in the English language these days than disruption – in fact, whenever I hear it, I often think of the line from The Princess Bride that “I do not think it means what you think it means.” But the Supreme Court has literally invited the defense bar to pursue approaches to more efficiently litigate class action ERISA cases. It is an open invitation to lawyers to disrupt the way these types of cases have been litigated for decades, and lawyers for plan sponsors and fiduciaries should think constantly about how best to do so. The interlocutory appeal approach taken by the Court in Maryland is exactly one way to do it.

    This is a very nice, well-balanced article by Kellie Mejdrich of Law360 on the question of adding private equity investments into 401(k) plans. I am quoted in it not so much as a naysayer on the idea, but more on the need for a little bit of skepticism and caution on the idea. To be clear, I don’t think the case has been made yet for fiduciaries to sign off on adding private equity investments, particularly in the form of a holding within a target date fund, to the 401(k) plans for which they are legally liable. Fiduciaries – and I to be less skeptical– need to see models, math and projections that show doing so will improve returns for participants even after accounting for cost issues. This is not what we have been seeing to date, which has instead basically been sloganeering about democratizing the financial markets. Unless I missed that part of the statute, ERISA doesn’t consider that to be part of the fiduciary obligation of plan sponsors, administrators, named fiduciaries and deemed fiduciaries.

    I am not against adding private equity investments into plans, and, if anything, I am impressed by the work done by ERISA and fund lawyers to figure out how to do it. I am also wildly in favor of anything that actually improves outcomes for plan participants.

    But any changes to plans that don’t improve outcomes, or instead make them worse, is a recipe for class action litigation against plan fiduciaries who sign off on those changes. Moreover, I am, by nature, education, training and 35 years in courtrooms, an evidence-based skeptic, and I need to see a factual basis for believing that adding private equity into the investment mix of 401(k) plans – in whatever form that addition takes – will lead to improved investment results for participants. In its absence, adding private equity investments into plans risks putting fiduciaries and their insurers at risk of looking up in a few years and finding they are facing a whole new wave of breach of fiduciary duty class actions, this time based on decisions to open 401(k) plans to private equity options.

    When it comes to this change, I would caution plan sponsors and fiduciaries to “measure twice, cut once,” as the saying goes. Make sure the evidence backs up any changes they make in this regard – and don’t act until you have the evidence in hand to make a thoughtful decision.

    Walk softly and carry a big stick. Trust but verify. Never bring a knife to a gunfight.

    People who know me, have read my blog regularly, heard me speak on ERISA issues, or been on a jury in a case I have tried, know that I am very fond of analogies, metaphors, short examples, and good stories. To me, they are like the old saying that a picture is worth a thousand words – they boil down complex ideas that I am trying to communicate to judges, fact finders, witnesses, clients, readers, and anyone else in a way that makes the idea easier to grasp. For experienced courtroom lawyers, this is a significant tactical concern: how do you take decades of experience and knowledge on a particular topic and communicate it, quickly and succinctly, to a judge who may be a generalist and may have only seen the particular issue a few times, or to jury members who have never heard of the issue before. You don’t have time to teach a seminar on it, and stories, analogies and examples are the tools that let you explain the issue both accurately and quickly.

    The three sayings (or possibly cliches at this point) with which I opened this post are all meant to capture the value and importance to plan sponsors and fiduciaries of relying in the current world order on an experienced courtroom advocate, preferably a trial lawyer and if at all possible, one with deep knowledge of ERISA. When I say this, I don’t mean just calling one when a dispute arises or service of a complaint is received, but instead relying on one in the day in, day out course of running a plan.

    As some of you know, I have begun a new series of posts on this blog, captured in a new category topic, called Plan Sponsor and Fiduciary 2.0. The idea behind the series is that developments in running an ERISA governed plan have, at this point, come so fast and furious that it no longer makes any sense for sponsors and fiduciaries to continue to operate just as they did in the olden days, such as a few years ago. We have learned too many lessons about risks and liabilities in offering plans, and are watching too many things change, to not update the best practices for plan sponsors and fiduciaries.

    In my most recent, and first, post on this topic, I discussed the need for plan sponsors and fiduciaries to start paying far closer attention to their contracts with vendors. Today, I want to talk about the importance for plan sponsors and fiduciaries of having a veteran ERISA litigator watching their backs.

    And why do they need that, now more than ever? Because the ever-expanding range of risks that plan sponsors and fiduciaries are facing, and the rapidly evolving decisions they have to make, call for a litigator’s advice, and preferably not any litigator, but one with both significant courtroom experience and deep substantive knowledge of ERISA.

    There are many reasons for this, all rooted in the realpolitik of running a plan in the current economic, regulatory and litigation environments, but today I will give you three examples that should be sufficient to make the point.

    The first concerns the effort to open up 401(k) plans to private equity assets. I guarantee you there isn’t a fiduciary of any defined contribution plan of any size at this point who isn’t being bombarded with pressure to open up the plan to private equity investments. If they are not getting it directly already from vendors or some participants, they are hearing about it internally from other company executives or they are seeing it constantly in the media. But there is a great deal of homework that plan fiduciaries are going to have to do before they can safely greenlight opening up their plans to private equity investments, and part of that involves thinking critically about the investment option at the center of current efforts to add private equity investments to plans –target date funds.

    The idea, I think obviously, is that including private equity investments within the overall mix captured within such a fund solves the liquidity problem in opening up plans to such investments, and will likely give some room for arguing that the accompanying fees are reasonable, when considered in the context of the overall mix of costs and investments in such a fund.

    But a trial lawyer who knows his or her way around ERISA will tell you right off the bat that this idea may be good for those selling private equity investments to plans, but it is going to be a terrible look for plan fiduciaries caught in the crosshairs of a breach of fiduciary duty class action alleging that a plan’s performance was too volatile or, over time, too poor because one part of the fund’s investment mix consisted of private equity holdings. Plan fiduciaries and sponsors should assume that, unless somehow no fund holding such assets ever underperforms, class actions making such claims will be the inevitable outcome of adding private equity into plans, including within the confines of target date funds.

    And when that happens, plaintiffs’ counsel, in his opening at trial, is going to characterize the inclusion of private equity assets in target date funds not as having been a way to solve technical ERISA problems of liquidity and expenses, but as a way to hide private equity investments with volatility, risk and expense problems from participants. And that is going to be a very poor way to start a trial, if you are a plan sponsor or plan fiduciary, particularly if insurance isn’t going to cover every penny of any settlement during trial or of a potential verdict.

    An experienced trial lawyer, particularly and maybe only one who knows his or her way around ERISA, is the one who can see down the road to that day when the class action lawyers come knocking at the door about the decision to include in the plan target date funds with private equity assets in them, and is almost certainly the only one who can tell a plan fiduciary in advance just how poorly that is likely to play in a courtroom at trial. I am not saying plan sponsors or fiduciaries cannot properly decide to include such assets in a plan, but they aren’t doing it with full knowledge and awareness if they haven’t – before making that decision – sought out the advice of a veteran ERISA litigator who can predict some of the future for them.

    Here’s a second example of why a plan fiduciary or sponsor needs a sharp ERISA litigator in the tool kit at all times these days. I have long been an advocate of plan sponsors, fiduciaries, insurers and the ERISA defense bar taking more breach of fiduciary duty cases, particularly class actions, to trial. The record, as more (although only a few) are tried, is proving the worth of this advice. For instance, here is a nice write up from Kantor & Kantor on a very recent trial win for plan fiduciaries on a breach of fiduciary duty case. What’s particularly noteworthy about it is that the court found that the case was not black and white, but instead shades of gray, as to whether a breach had occurred, meaning that it was almost certainly never a clear and obvious choice for the defendants to try the action. Anyone can and will try a case when the evidence for the defense is flawless, but it’s a different calculus all together when you have to steel your nerves to make that choice with a debatable defense case.

    I have little doubt, particularly as the class action ERISA bar turns its sights increasingly on high value targets in the health and welfare space, using ever more novel theories, that taking cases to trial will become more and more the right call. But the issue with doing so is that plan sponsors and fiduciaries have to take the right cases to trial, and a lot goes into evaluating whether to try any one, particular case. It would take pages to list those types of considerations, and I won’t do it here.

    But at the end of the day, only someone who has tried enough cases to understand the subtleties of trial, and of how particular pieces of evidence or particular witnesses will be viewed by the bench or a jury, can be counted on to make a good call on whether to take a particular case to trial. And in the context of ERISA cases, that almost certainly also requires a veteran courtroom lawyer who, in addition, knows enough about ERISA to make the right tactical calls in this regard.

    The third reason for keeping an experienced ERISA litigator close at hand rests in the subtext of the Supreme Court’s recent decision in Cunningham v. Cornell. Much of what someone else called the ERISA commentariat has coalesced around the idea that the Court through that case should, but did not, have made it harder for the class action bar to bring excessive fee cases. The Court certainly did not do so in its decision. But the Court clearly, at the same time, sent the message that, with regard to the plan sponsor, plan fiduciary and defense bar community, it is time for the doctors to heal themselves – in other words, for the ERISA defense bar to stop seeking some sort of deus ex machina event where the Court puts an end to excessive class action litigation against plans in one fell swoop, and to instead start using all the tools of the federal rules and courts to push back against cases that overreach on their facts or their theories.

    All the tools necessary to do so are already there, resting in a court’s power to control the cases before it, in bifurcation orders, in the discovery rules, in Daubert and in a dozen other places. But only an experienced ERISA litigator is going to be able to tell a plan sponsor or fiduciary how to use them to do that, and in what cases.

    So at the end of the day, what is the lesson, in these modern and risky times, for plan sponsors and fiduciaries about ERISA litigators and trial lawyers? Very simple – don’t leave home without one.

    I have long been inordinately fond of the Dickens’ line “It was the best of times, it was the worst of times.” It is applicable to many things at many times, and I have used it in briefs, slide decks, presentations, and conversations. But at this point in time, for plan sponsors and plan fiduciaries, as well as for corporate executives, in-house lawyers and others with financial, professional or legal responsibility for the operation of benefit plans – especially but not only 401(k) plans – it feels to me like the more accurate quote would be “It was the worst of times, it was the worst of times.”

    And what makes this ironic is that you don’t have to go back too many years to find a time when taking on responsibility for pension or defined contribution plans in corporate life was something of a step up in rank and responsibility, and represented the climbing of another rung on the corporate ladder. In the early days of excessive fee class action litigation and the rise of fiduciary exposure that accompanied those developments, I wrote about how often targeted plans were run by appointed committees, which often did not include the CFO (for many, many reasons, including workload and the need to prioritize responsibilities) and instead typically included a younger, mid-level or above finance executive, for whom the role was a plum assignment that both increased internal visibility and simultaneously reflected it. Now though, I would say that the risks of personal liability as a fiduciary (or at least the need to ensure that, through corporate indemnification and insurance, that risk is only a paper risk and not a real one), the litigation environment, the expanding scope of potential bases for a lawsuit against a plan, and the substantial likelihood of ending up in the witness seat at a deposition – among other factors – have taken a lot of the sheen off such an assignment.

    That change is mirrored on the corporate level itself, at the plan sponsor level. Providing employee benefits is a necessary task and – these days – risk; among many other things, doing it well is essential to any company that relies on a talented and motivated workforce to succeed (and every company today does, to one degree or another, even in the era of AI). But for plan sponsors, doing it well is becoming exponentially harder and riskier in myriad ways – and the pace of that change has ratcheted up dramatically in recent times, as class action lawyers have explored new theories of liability against a range of different types of benefits, regulatory guidance has opened up new worlds for plan sponsors and fiduciaries to master, and marketplace pressures on those who provide plans have only increased.

    It has reached the point where I think it is time for a redefinition of the role of plan fiduciary and in how companies and individuals understand, as well as perform, this role. Historically, companies – as well as the lawyers and executives assigned to the tasks undertaken by a fiduciary – relied on (to reframe a tired metaphor) a multi-legged stool in performing this role, that consisted of conventional wisdom, the advice and recommendations of outside administrators and other contracted vendors, often excellent analysis of the latest legal developments provided by lawyers, the current state of regulatory guidance, and the comfort traditionally provided in all walks of life by insuring the risks.

    Conversation after conversation with plan sponsors and fiduciaries, as well as with plan participants, has convinced me that this stool is wobbling, and that this approach just doesn’t work well anymore. Heck, as a litigator, I am not even sure that having relied on all of those traditional supports would be enough in a courtroom to convince anyone anymore that the plan sponsor and fiduciaries had acted prudently, which would not have been the case ten years ago. In fact, a decade or so ago I was using slide decks in presentations on fiduciary liability that pushed plan fiduciaries to increase both their use of these tools and the documentation of their use of these tools in operating plans, because in that era doing both was the best defense they could purchase against the possibility of being sued and, even more so, the risk of possible liability. That would not be enough now, and the new environment in which plan sponsors and fiduciaries have to thrive calls for a new approach.

    Maybe we should call it Plan Sponsor and Fiduciary 2.0? I am open to suggestions on what to call it, but I am more interested at this point in time in sketching out what the new approach that should be taken by plan sponsors and plan fiduciaries should look like. In a new section of this blog, titled Plan Sponsor and Fiduciary 2.0, I plan to address various issues that plan sponsors and fiduciaries should consider in running their plans in the new world that we are moving into.

    For starters, I wanted to address certain questions about vendor contracts entered into by plan sponsors and fiduciaries. For many years, reliance on well-qualified vendors was a good way of demonstrating reasonable fiduciary conduct if and when sued over the plan’s operations. However, as some plan vendors become more and more invested in pushing new changes to the operations of plans, as well as new investment options such as crypto and private equity, plan sponsors and fiduciaries need to be more careful than they have been in the past about the terms of their agreements with vendors.

    Over the years, I have litigated a number of disputes, and negotiated resolutions of others, where a vendor’s contract with a plan sponsor or fiduciary did not provide the type of protection against errors by the vendor that the sponsor or fiduciary expected (or worse yet, assumed would be in the contract without having anyone confirm). Instead, when problems with the plan’s operations occurred, plan sponsors and fiduciaries would discover that various contractual terms limited both the amount of potential recovery and the level of performance – or poor performance, more accurately – that would be sufficient to trigger liability on the part of the vendor. Even worse, many plan sponsors discovered only after engaging litigation counsel that, horror of horrors and contrary to their assumptions, the vendor was not a fiduciary and had not, in fact, accepted delegation of fiduciary duties in the contract.

    With more and more change and risk coming to plans and to those running them, particularly with regard to what the investment menu is going to begin to look like in many plans, plan sponsors and fiduciaries can no longer afford that approach, and have to end the blind eye they often used to take with regard to the details of their vendor contracts or the terms in those contracts. Not only that, but they should now have experienced counsel review the contracts before they are executed to make sure that, first, the plan sponsor or fiduciary’s understanding and expectation of the relationship are a match for the contract’s terms, and second, that there are no terms limiting damages or the performance obligations of the vendor in the event they err. As the current evolution of plans, and particularly of the financial exposures of fiduciaries, continues along (likely for the worse, in my view, when viewed from the perspective of the plan sponsor or fiduciary), the cost for not proactively taking this action will become much too high.