Changes in ERISA Liability and the Role of ADR

What is the Employee Retirement Income Security Act (ERISA) of 1974?

When employees choose to allocate a portion of their wages to a retirement account, they do so with the expectation that their funds will be invested wisely, safely, and profitably. The first two expectations are well-established legal obligations: A fund administrator is personally liable for any harm to the fund that can be traced back to misuse of the account for personal gain. Whether investors have a legal right to a profitable retirement account is more ambiguous and is emerging on multiple fronts as a source of litigation. Discover more about the Employee Retirement Income Security Act of 1974 (ERISA) and the latest developments in pension plan disputes.

Contrasting Views: Do Investors Have a Right to Profitable Accounts?

Private pension plans, like 401(k)s, are governed by the Employee Retirement Income Security Act of 1974 (ERISA). This law requires private sector plan administrators to act “with the care, skill, prudence, and diligence under the circumstances” that a reasonable administrator would use in the same situation.

Fund administrators are trained accountants, investors, and other financial professionals. The substantial financial resources at their disposal allow for significant returns on safe investments like bonds, whereas for individual investors, these returns would be minuscule. Given their advantageous position, some pensioners have assumed that a failure to provide reasonable returns suggests a lack of prudence for which the administrators, rather than the investors, should be liable.

In June of 2023 administrative decision, the Department of Labor (DOL) has adopted this line of thought, holding that a fund administrator’s duty of care extends to fund performance. Since the DOL is the primary enforcer of ERISA claims, this administrative decision is especially significant for fiduciaries planning new investments or companies setting up new corporate investment funds.

However, clarifying ERISA interpretation is a matter of judicial interpretation rather than administrative fiat, and the DOL’s interpretation of the law is not unanimously accepted. Notably, the Ninth Circuit ruled in Bafford v. Northrop Grumman Corp. that fiduciary agents, like accountants, cannot be held liable for good-faith miscalculations that harm clients. The court found that benefits calculations were a “ministerial,” rather than a fiduciary, function and that returns on investment were too speculative to be subject to a duty requirement.

This decision is one of several circuit court decisions on this topic. The First and Fourth Circuits have aligned with the Ninth Circuit’s decision, while the Second Circuit agrees with the Department of Labor that fund performance may be a fiduciary duty. The rest of the Federal Courts remain undecided, and the issue has yet to reach the US Supreme Court. Until it does, the uncertainty hanging over fund administrators, many of whom govern funds that cross jurisdictional boundaries, is likely to add to the costs associated with fund administration.

Investor Activism and Other Sources of Increased Costs

As administrators struggle to calculate the costs of potential litigation against this unsettled precedent, a wave of new litigation related to 401(k) fund distributions has made their positions even more precarious. A report by Norton Rose Fulbright, for example, identified Environmental, Social, and Governance (ESG) litigation as a practice area that would receive increased focus in 2023. While traditional pension litigation may question the prudence of a fund manager’s decisions, ESG litigation adds another complication by placing fund administrators between activist investors seeking to direct the funds to certain social ends and others focused solely on financial return.

ERISA and Arbitration

Alternative dispute resolution (ADR) has been promoted as a method to keep costs down for all kinds of litigation, and many ERISA-governed pensions include arbitration clauses in their contracts. The Third, Eighth, and Tenth Circuits have all found that enforcing these clauses is not against public policy and is therefore permissible.

Arbitration clauses are intended to reduce costs and ensure that these disputes are decided by Neutral parties with significant subject-matter experience. Since pension-related issues involve highly complex mathematical formulas and fact patterns that can only be understood in the context of a company’s history, deferring to a more specialized forum seems reasonable. However, the actual experience of pension arbitration suggests that traditional forums for dispute resolution do little to promote efficiency or just resolutions. This frustration has reached Congress, where a bill that would prevent the arbitration of many disputes arising from ERISA-governed pensions that passed the House of Representatives.

Proponents argue that the complex nature of pension plans, the potential for fraud, and the challenges in securing knowledgeable, independent counsel make court intervention preferable. They also contest the perceived benefits of nonjudicial resolution, such as efficiency and cost reduction, pointing to the significant costs and imposed settlements often resulting from traditional ADR.

New Era ADR Can Mitigate the Costs of Uncertainty

Regardless of how their duties are defined, fund administrators will look for every opportunity to reduce contingent costs that may weigh on their fund’s performance. Disputes in these areas are inevitable, and when they do happen, they will be costly. New Era ADR leverages modern technology, streamlined rules, and well-established expertise to provide a forum where parties can meet online in front of experienced, vetted Neutrals. By bypassing the costs of travel and the onerous fees that make traditional arbitrations untenable, and by working with some of the best and most respected Neutrals in the industry, we provide a world-class forum for dispute resolution of all kinds. Our focus on efficiency ensures that your disputes will be as painless as possible and will cost no more than is needed.

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