In a prior post, we commented on the growing trend of fiduciaries making non-monetary concessions to settle ERISA fee litigation cases. We observed that certain “onerus” non-monetary settlement features – such as obligating fiduciaries to provide plaintiffs’ counsel with customized reports on plan operations and performance during a years-long “monitoring” period — are significant and intrusive and that they are sowing the seeds of potential future disputes.
Well, the trend continues. In recent months ERISA class action settlements were announced involving MIT and Duke University. Most of the headlines focused on the fact that, MIT and Duke agreed to pay $18.1 million and $10.65 million, respectively, to settle those cases. That’s definitely noteworthy.
But that’s just the tip of the iceberg. As with Johns Hopkins and others, MIT and Duke also agreed to “substantial non-monetary terms,” which the parties claimed materially added to the total value of their settlements.
MIT’s Non-Monetary Concessions
In addition to paying $18.1 million (up to one-third of which may go to plaintiffs’ counsel), MIT agreed to the following terms:
- Training. MIT shall provide training to Plan fiduciaries on how to discharge their duties under ERISA. (Thus converting a best practice into a contractual obligation.)
- RFP’s. MIT agreed to submit RFP’s to at least three qualified recordkeepers, requesting that the proposed fees be expressed on a per-participant basis, not on a percentage of plan assets basis. After reviewing the RFP’s, MIT may keep its current recordkeeper or select a new one. The final bid amounts shall be provided to class counsel on a confidential, no-names basis as to those not selected. (Nothing in ERISA specifically requires RFP’s on a regular basis, but now MIT has obligated itself to conduct them.)
- Revenue Sharing. Here is how the revenue sharing provision is described in the court filings: “Any revenue sharing related to Plan investments will be deposited in the Plan trust and, to the extent not seasonably used to defray lawful Plan expenses, be returned to Plan participants according to a method of allocation approved by Plan Fiduciaries and permitted by ERISA not less frequently than on an annual basis.”
- Allocation of Expenses. The plan fiduciaries will determine a method of allocating recordkeeping and administrative expenses that it determines is fair, equitable, and appropriate for plan participants “separate from the flat fee negotiated with the recordkeeper and based on the number of plan participants.”
- No Cross-Selling. MIT and the plan fiduciaries agreed to allow the plan’s recordkeeper to communicate with participants only at the direction or with the authorization of plan officials, and agreed to prohibit “any communications to Plan participants (in their capacities as such) concerning non-Plan products and services.” In other words, no cross-marketing of non-Plan services by the recordkeeper. (No court has found cross-selling to be an ERISA violation, but MIT has agreed to prohibit it.)
- Independent Investment Consultant. MIT agreed to continue its practice of using an independent investment consultant. (So what the fiduciary once voluntarily chose to do, it is now obligated to continue doing.)
- Costs. MIT and plaintiffs agreed that the costs relating to the use of an independent consultant and the costs of conducting an RFP are expenses properly paid by the plan under applicable law.
Duke’s Non-Monetary Concessions
In addition to paying $10.65 million, Duke agreed to the following “non-monetary terms”:
- Disclosures to Class Counsel. For two years Duke will provide to Class Counsel a list of the Plan’s investment options and fees, and a copy of the Plan’s Investment Policy Statement.
- Disclosures to Participants. Duke will communicate in writing to current participants and inform them of the investment options available in a new lineup, and provide a link to a web page containing fees and performance information for the new investment options, as well as contact information to facilitate funds transfers out of a frozen annuity account.
- Possible RFP. During the third year of the settlement, the fiduciaries shall retain an independent consultant to provide a recommendation on whether they should conduct a request for proposal for recordkeeping and administrative services.
- Factors to Consider in Investments. In considering Plan investment options during the Settlement Period, the fiduciaries agreed to “consider” various enumerated factors, such as costs and availability of rebates.
- No Use of Plan Assets. During the Settlement Period, Duke shall not cause Plan assets to be used to pay salaries, benefits and expenses incurred by Duke for services performed by Duke employees.
Differing Terms; Same Recipe for Future Disputes?
Johns Hopkins, MIT and Duke each agreed to substantial non-monetary settlement terms, but those terms differed for each university (as did the amount of their cash payments). This indicates that the parties are separately negotiating the non-monetary terms of their respective settlements, and are not treating them as boilerplate. Nevertheless, there is some overlap in the non-monetary terms agreed to by all three universities. For example, all three agreed to conduct or consider RFP’s on an agreed timetable, to report certain information to plaintiff’s counsel on an agreed timetable, and to utilize independent investment consultants. Two of the three, Johns Hopkins and MIT, agreed to forbid cross-selling by their service providers, but Duke’s settlement does not include such a prohibition.
These obligations carrying into the future are mostly, if not completely, one-sided — running from the fiduciaries to the participants and/or class counsel. For example, Johns Hopkins agreed to provide customized “reporting” to plaintiffs’ counsel and to subject itself to “monitoring” by plaintiffs’ counsel for a three-year period. MIT did not agree to those, but it did agree to provide fiduciary training (which is a best practice in any event) and to have its revenue sharing deposited in the plan and shared with plan participants to the extent not used to defray lawful plan expenses. MIT also agreed to determine a method of allocating recordkeeping and administrative expenses among participants separate from a per participant flat fee. Duke agreed to “consider” certain enumerated factors when making investment decisions.
In agreeing to a particular course of conduct going forward, these fiduciaries are, essentially, taking general standards under ERISA, like prudence or reasonableness, and agreeing to convert them into more specific rules. For example, nothing in ERISA requires a fiduciary to conduct RFP’s on a regular basis, but by agreeing to do so going forward, a new market standard is perhaps being shaped through litigation.
This seems like fertile ground for future disputes. What happens if the fiduciaries don’t comply with their ongoing non-monetary obligations? Or fail to document their compliance? Plaintiffs’ counsel have already sued these fiduciaries once. Are these future entanglements with plaintiffs’ counsel worth the risk?
Strategic Change: Good or Bad?
The trend of plaintiffs’ counsel extracting concessions from fiduciaries regarding operational changes in the administration of defined contribution plans continues. Whether this is good for participants, fiduciaries, and plans as a whole remains to be seen. But it is doubtful that regulation through litigation is the most efficient way to set standards of conduct in a multi-billion dollar industry.