Authors: Anthony A. Dreyspool Darin Hoffner
Introduction and background
The Employee Retirement Income Security Act of 1974 (ERISA), as amended, requires fiduciaries of ERISA-covered retirement and welfare benefit plans to carry out their fiduciary functions free of self-dealing and conflicts of interests. ERISA Section 406(a) also prohibits plan fiduciaries and other "parties in interest" to the plan from engaging in transactions involving the plan. The employer-sponsor of an ERISA benefit plan is a party in interest to the plan and is almost always a plan fiduciary. Thus, without an exemption issued by the US Department of Labor (DOL), transactions between the plan and the employer-sponsor are prohibited.
Many lawsuits have been commenced over the years by plan participants who have sued the sponsor of the ERISA-covered plan on behalf of themselves and the affected plan participants, alleging that the plan sponsor and other plan fiduciaries breached their ERISA duties to the plan. Those allegations fall into certain categories. Formerly, plan fiduciaries were sued because they were thought to be in possession of material adverse non-public information about the company. In such cases, the fiduciaries permitted plan participants to continue to invest in employer stock as an investment option under the plan when the fiduciaries were alleged to know that disclosure of the inside information would cause the employer stock to substantially decrease in value. The disclosure occurred, and the stock price dropped. The complaints in these cases states that the plan fiduciaries should have taken appropriate action, such as freezing the employer stock fund to new investment, to protect plan participants from loss.
More recent lawsuits by plan participants against plan fiduciaries have alleged, among other things, that the fiduciaries allowed the plan to pay excessive recordkeeping and other expenses, invest in classes of mutual fund shares that charged too high administrative fees and invest in proprietary funds offered by the plan sponsor.
Although these class action lawsuits occasionally go to trial, almost all of them are settled by the parties to avoid the expense and delay of a trial and subsequent appeals. Settlement of the lawsuit creates a potential for self-dealing or conflict of interest on the part of the plan fiduciary defendants. They may accept a settlement offer that doesn't adequately compensate the plan and its participants for their losses. Plaintiffs' class counsel may be willing to settle the case for an inadequate amount in order to obtain its contingent fee from the settlement fund.
To provide a conflict-free settlement process, the DOL issued a prohibited transaction class exemption, PTE 2003-39, last amended in 2010. The key provisions of this exemption are that the settlement is authorized by an independent plan fiduciary who has no relationship to, or interest in, any of the parties involved in the litigation; and that the independent fiduciary determines that the settlement terms are reasonable and are no less favorable to the plan as comparable arm's-length terms would be if they were agreed to by unrelated parties under similar circumstances. If the conditions of the exemption are met, the settlement can proceed to a judicial review.
Gallagher's role as independent plan fiduciary
Gallagher has been hired on many occasions to serve as the independent fiduciary under class exemption PTE 2003-39.* The lawsuit settlements we review include claims brought on behalf of the plan under ERISA, federal and state securities laws and other laws. We decide whether the plan involved in the lawsuit, usually a defined contribution plan, should participate in the settlement or should reject it and further pursue the plan's claims in the litigation.
Gallagher uses its internal fiduciary and investment management resources, with assistance from outside counsel as needed, to evaluate the terms of a particular settlement. We begin by reviewing the pleadings, key motion papers, substantive court decisions and other litigation materials, as well as plan documents. We look into the scope of insurance coverage available and the status of any coverage disputes between the defendants and their carriers. Another key document we will consider is the formal Settlement Agreement, including the scope of the release that the defendants are seeking from the plan. We supplement this document review with in-depth interviews with the parties' litigators. If the case has been mediated, we also seek input from the mediator if the parties will permit us to do so.
We then use the information we have gathered to make the required judgments. While each case is different, we typically focus on the process by which the settlement was reached; the substantive strengths and weaknesses of the parties' legal and factual positions; the size of the plan's losses; the recovery the plan may achieve from the settlement; and the scope of the release which the plan will be called upon to give pursuant to the settlement agreement. When the case is a class action, we also review the size of the expected attorneys' fees award and the proposed plan for allocation of the settlement.
Our work culminates in a notice and direction to the plan's sponsor, trustee or other authorized service provider consistent with our conclusion as to whether the plan should participate in the settlement and may also include the filing of objections if in our judgment it's in the plan's interest to do so and the procedural posture of the case so permits. We accompany our approval decisions with a memorandum demonstrating the settlement's compliance with the conditions of PTE 2003-39.
This rigorous review process ensures compliance with the class exemption. After we approve a settlement, the parties submit our decision to the court that ultimately must approve the settlement.
For more information about Gallagher Fiduciary Advisors, LLC, and the services it provides as an independent fiduciary to review and approve your class action settlement involving your ERISA-covered plan, please call Area Senior Vice President and Area Counsel Darin Hoffner directly at (212) 918-9662.
