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Plan sponsors looking to protect their retirement plans from the risk of costly ERISA litigation may want to consider adding a few key defensive plan provisions.
Plan sponsors are well aware of the rising liability risks of maintaining plans regulated by the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). ERISA litigation has exploded over the past couple of years—for example, 401(k) fee lawsuits jumped five-fold between 2019 and 2020. The potential exposure is broad, ranging from litigation over excessive fees, to actuarial assumptions, cybersecurity and COBRA notices.
Employers may wish to take advantage of relatively simple steps to mitigate risk through defensive plan drafting. Plan sponsors can redraft their plan documents to include certain defensive provisions that have the potential to meaningfully reduce a plan’s liability exposure. These defensive provisions, when properly drafted, can, subject to any issues in a particular jurisdiction regarding enforceability, provide the employer greater control over when, where and how litigation may arise in the future.
Plan sponsors may want to consider the following defensive provisions, with input from their ERISA counsel, to determine whether they would be appropriate additions to their plan documents:
1. Limitation Period Provisions: Internal plan document limitation periods can, subject to unresolved questions on enforceability in some jurisdictions, restrict the time period in which potential litigants may bring claims for plan benefits. A plan sponsor can draft its plan limitation period so that it commences when “proof of loss” is due under the plan, instead of waiting until an internal claim review process is exhausted. Restricting the limitation period is one of the biggest steps a plan can take to potentially reduce liability—shortening the limitation period can lead to a commensurate reduction in the number of potential pending lawsuits. In drafting a limitation period, particular attention should be paid to ERISA’s Claims procedure.
2. Venue Provisions: Choice of venue provisions allow the employer to dictate upfront where a future lawsuit must be based. Controlling the “where” of the lawsuit may deter future lawsuits from ever being filed—plaintiffs’ firms are often looking to file suit where their firm is headquartered, or in a certain venue that is particularly friendly to plaintiffs. At the very least, a venue selection provision increases the likelihood of a lawsuit landing in a forum that is convenient for or friendly to the plan sponsor.
3. Class Action Waivers: Class action waivers can reduce a plan’s liability exposure by restricting participants’ rights to bring a class or collective action. This can also discourage a plaintiff’s firm from coming after the plan, because restricting the number of claimants in a single action, if effective in a particular jurisdiction, limits the potential payout to plaintiff’s firms, which usually get paid a percentage of the amount recovered.
4. Mandatory Arbitration Clauses: Mandatory arbitration provisions decrease risks of an ERISA lawsuit by attempting to keep the complaint out of the court system entirely. However, of the four defensive provisions discussed here, the mandatory arbitration clause could be the most controversial and uncertain, given the developing nature of the law in this area.
Plan sponsors looking to include an arbitration clause in their plan documents should work with counsel to ensure the clause is written properly. While an arbitration clause can potentially mitigate liability risks by mandating the parties go to arbitration rather than court, they could also end up increasing the plan’s risk of litigating the enforceability of the arbitration clause. These types of clauses may be more appropriate for an employee population that is already used to using arbitration to settle other disputes, and for that reason would be less likely to litigate the enforceability of the arbitration clause.
Another risk of including an arbitration clause is that arbitrators are often less familiar with ERISA case law than federal judges, so mandating that a claim go to arbitration rather than federal court may lead to an outcome that is less favorable or more unpredictable. Additionally, there are more limited appeals available in arbitration and uncertainties regarding the nature of relief that an arbitrator might award. So these risks would need to be weighed against the potential advantages of the arbitration forum.
Plans incorporating any of these defensive provisions should also ensure they are prominently displayed in the summary plan description (SPD) so that plan participants have notice of the provisions. Additionally, adding any of the above provisions would be a sufficiently material amendment that would require a summary of material modification (SMM) notice be sent out to plan participants. Plan sponsors should consult with counsel to ensure these changes are properly drafted and incorporated so as to increase the likelihood enforceability.
By controlling the when, where and how of the litigation process, plan sponsors can manage liability risks upfront. In the face of increasing ERISA litigation, plan sponsors may want to consider adding some or all of the defensive plan provisions discussed above to help control liability risks.
For more information on Retirement Plan Services, please visit our website.
Main contributor: Rachel Mann
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