- Breach of fiduciary duty claims that "arise out of" and "relate to" a 401(k) plan—including those brought on behalf of the plan itself—are bound by the plan's arbitration provisions.
- With its ruling, the court overruled the 1984 Ninth Circuit case, Amaro v. Continental Can Co., which held that claims under ERISA could not be arbitrated.
On August 29, 2019, in what was a significant development in the intersection of the Employee Retirement Income Security Act (ERISA) and arbitration law, the Ninth Circuit Court of Appeals ruled in Dorman v. The Charles Schwab Corp. that Charles Schwab Corp. could send a 401(k) plan mismanagement lawsuit to arbitration rather than face a proposed class-action lawsuit.
Breach of Fiduciary Claim Under ERISA
There has been a slew of cases where retirement plan participants have sued their employers for mismanaging their retirement plan under ERISA Section 502(a)(2). These claims generally assert that employers acting as plan administrators engage in self-dealing and/or other practices that violate ERISA's fiduciary standards, such as imprudently selecting investment options and administrative services, or selecting funds that earn high fees for the plan sponsor while performing worse than other competitors.
ERISA Section 502(a)(2) states that when employees sue their employers for a breach of fiduciary duty in connection with plan mismanagement, they are suing on behalf of the plan. With respect to 401(k) and other types of defined contribution plans, the U.S. Supreme Court has recognized in LaRue v. DeWolff Boberg & Assocs. Inc. that individual participants could bring an ERISA Section 502(a)(2) claim pertaining to their own account and seek relief for losses limited to that account.
In combating these claims, employers have attempted to enforce various arbitration clauses or agreements that plan participants have executed. In 2018, the Ninth Circuit said in Munro v. University of Southern California that claims of retirement plan mismanagement against the university could not be arbitrated because such claims fell outside the scope of arbitration agreements signed by the employees. The employees had consented to arbitrate claims brought on their own behalf. Because breach of fiduciary claims are brought on behalf of the plan, the arbitration agreements did not extend to such claims, even though the losses pertained to each employee's individual account. The court said the benefits from winning the claim for breach of fiduciary duty would still belong to the plan and not individual participants.
Now, though, the same Ninth Circuit in Dorman ruled that a potential class-action breach of fiduciary claim against Charles Schwab could be sent to arbitration. Here, a former employee alleged that Charles Schwab breached its fiduciary duties by including in the 401(k) plan some Charles Schwab-affiliated funds that charged higher fees and performed worse than other investments on the market, and that did not examine whether there were other prudent choices or better options.
Because breach of fiduciary duty claims belonged to the plan and not the individual, the case hinged on whether the plan agreed to arbitrate the claims. The court pointed to the 401(k) plan's language, which included a provision stating that "[a]ny claim, dispute or breach arising out of or in any way related to the [p]lan shall be settled by binding arbitration..." and requires that the arbitration be on an individual basis, which in essence prohibited participants from bringing class-action proceedings.
The court ruled that because the breach of fiduciary duty claims are ERISA claims, they "arise out of" and "relate to" the plan, so the plan's arbitration provision controls. Furthermore, the court ordered that the employee could only recover losses to his own account resulting in the alleged fiduciary breaches in arbitration, citing LaRue. With this decision, the court overruled a 1984 Ninth Circuit case (Amaro v. Continental Can Co., 724 F.2d 747 (9th Cir. 1984)), which previously held that claims under ERISA could not be arbitrated, stating that Amaro cannot be reconciled with the U.S. Supreme Court decision in American Express Co. v, Italian Colors Restaurant, 570 U.S. 228 (2013), that federal statutory claims are generally arbitrable.
What Does This Mean for Plan Sponsors?
Plan sponsors who want to send potential ERISA Section 502(a)(2) breach of fiduciary claims to individual arbitration may want to insert a provision in their plan documents that requires arbitration on an individual basis for all claims against or on behalf of the plan. Nevertheless, plan sponsors should carefully consider what type of breach of fiduciary duty claims might be brought on behalf of the plan in an arbitration under the circumstances. In the defined contribution context, under Dorman and LaRue, only the individual participant's plan account would be at issue and therefore limiting class-action treatment would necessarily narrow the exposure in any particular case. However, in the defined benefit context, the entire plan could well be at issue even absent a class action, thereby exposing plan fiduciaries to the mostly unappealable decision of an arbitrator without the benefit of the more limited exposure otherwise available with individual arbitration.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.