ERISA Class Actions Protect Retirement Plans Hit Hard By the Financial Crisis

The recent financial crisis has wreaked havoc with millions of Americans’ retirement investment plans. The US House Education and Labor Committee Chairman estimated 401(k) plans have lost more than $500 billion over the past 12 months. Statutory protections,however, provide an avenue for relief for those workers whose employers shirked their duty to keep a wary eye on the quality of investments they were offering in employee retirement and 401(k) plans.
Most employee retirement plans are governed by the Employee Retirement Income Security Act, known as ERISA, which establishes minimum standards for employee retirement plans in private industry. Enacted in 1974, ERISA protects the interests of employee benefit plan participants and their beneficiaries by requiring that plan sponsors provide participants with specific information about retirement plan features and funding. Importantly, ERISA also establishes certain fiduciary responsibilities for those who manage retirement plans, requiring managers to act with care, skill, prudence and diligence in carrying out their duties and to act solely in the interest of plan participants and their beneficiaries. One would expect that, even in the absence of ERISA, it would behoove companies to comport with these principles. Recent years, however, have seen a dramatic increase in class action lawsuits asserting claims against unscrupulous – or simply indifferent – retirement plan managers under ERISA.
ERISA class actions involving employee investments are often similar to securities class action lawsuits alleging fraud on the open market. Such actions are often brought on behalf of a company’s retirement plan participants who purchased or held company stock during a period of alleged wrongdoing – referred to in the lawsuit as a “Class Period.” Plan fiduciaries and a company’s directors – also as retirement plan fiduciaries – are named as defendants in ERISA retirement plan-based actions.
In ERISA class actions, retirement plan participants commonly allege that the defendants breached their fiduciary duties because they failed to make prudent investment decisions. Courts have found fiduciaries made imprudent investments when they have failed to adequately diversify a retirement plans’ holdings — which may include overinvestment in the company’s stock — and when they have allowed the plan to invest in company stock despite knowing about fraudulent activity within the company that has artificially increased the price of the stock. Courts have required that fiduciaries who know certain material facts must affirmatively disclose them to participants. Information is considered “material” if it would induce reasonable reliance on the information by the participant, or if there is a substantial likelihood that it would mislead a reasonable employee in making an adequately informed decision. Importantly, included in the duty to affirmatively disclose is the duty not to provide incomplete information.
The structure of ERISA is sufficiently flexible to address a wide variety of pension plan mismanagement. For this reason, a significant amount of ERISA litigation has been sparked by the financial crisis. Under ERISA, once an investment is made, the plan fiduciary has an ongoing duty to monitor investments with reasonable diligence and remove plan assets from improper investments. A growing number of cases are surfacing where plaintiffs assert that the fiduciaries of their company plans mis-managed plan funds through investments in subprime mortgage-backed securities. Many of these ERISA lawsuits are class actions by employees who invested in their employers’ stock, however, several have also been brought on behalf of the plans against outside investment managers.
A recent trend in ERISA involves situations where the plan fiduciaries breached their duties to the plan by failing to disclose excessive management fees diverted from employee contributions to complex “fund of funds,” or multi-manager investment plans. Experts are predicting that additional types of ERISA class action lawsuits will emerge in the coming years. For example, considering the substantial number of mutual funds whose values have dropped precipitously in the wake of the financial crisis,onenew approachplaintiffsmay pursue is litigating the question of whether, under ERISA, company fiduciaries should have pulled those funds from the plan long before they racked up significant losses. Another example of potential future litigation involves questioning the prudence of highrisk securities lending practices of pension funds.
In passing ERISA, Congress intended to protect the funds of employee retirement plan participants and their beneficiaries. Today, ERISA class actions are on the forefront of litigation addressing the current financial implosion. Employee benefits law is a complex and evolving area and ERISA has proven to be adaptable to the complexity of modern employee retirement plans and the challenging financial times. 


newsletter nov2008.jpg Source : Scott+Scott November 2008 Newsletter