By: Ian Morrison and Violet Borowski

We have noticed a growing trend:  lawsuits filed by (or on behalf of) ERISA plans (sometimes class actions) against investment providers for charging excessive fees or otherwise gleaning improper profits from investments used in ERISA plans.  There is nothing unusual about the topic of the suit — for several years, ERISA plan fiduciaries have been defending class actions on the same topic.  What is unusual about the trend is that the while the suits are purportedly filed by the plans, the plans’ fiduciaries often have no involvement with bringing suit against their service providers.  When faced with such a case, every court of appeals to have considered the issue (the Second, Third, and Fourth Circuits) has held that the participant plaintiffs do not have to make a pre-suit demand on the plan’s fiduciaries to take action and do not need to join the fiduciaries as parties to the action.  Instead, the participants can unilaterally commence litigation on behalf of the plan without consulting, much less obtaining the consent of, the plan fiduciaries. 

At first blush this seems a laudable trend from the fiduciary’s perspective.  The plan can pursue a claim but incurs no cost in doing so.  Perhaps if the plaintiffs’ lawyers are able to prove their case then all plan participants will benefit.  In time, however, these suits may turn against the plan fiduciaries themselves.  Among other possibilities, if the participant plaintiffs are able to obtain discovery in their suits against the service providers suggesting that the plan fiduciaries knew about the challenged practice but took no action to correct it, they may seek to join the fiduciaries to the suit in the hope of finding more pockets (and fiduciary insurance policies) to fund a settlement. 

Moreover, these participant driven lawsuits put the plan fiduciaries in a difficult position.  Do they join with the service provider on the theory that a common defense is the best defense?  Should they join the participant plaintiffs in attacking the provider and at the same time potentially implicating themselves?  Or, should they remain on the sidelines, potentially risking being sued for taking no post-litigation action to recover for the provider’s alleged breach?

While plan fiduciaries may not be able to avoid being placed in this difficult position, they are well advised to closely monitor any cases filed on behalf of their plans or involving their service providers so they can investigate and make an informed decision about how to act.  Fiduciaries can find litigation involving their service providers by using Google or by signing up for litigation alerts with various providers.  Fiduciaries should also be on the lookout for warning signs that the tables may turn on them — ERISA Section 104(b) document requests focused on specific practices of providers, for example — and be prepared to investigate the practices of their service providers when they arise.