On December 21, 2021, the Department of Labor (DOL) issued additional guidance on the use of private equity investments in certain retirement plans, warning that most plan fiduciaries will not have enough experience to adequately evaluate such investments.
The DOL’s guidance relates to a June 3, 2020 “information letter” (which is a non-binding statement) issued by the Employee Benefits Security Administration of the DOL . In that information letter, the DOL addressed private equity investments in “designated investment alternatives” (or DIAs) offered to participants in individual account plans, like 401(k) plans, considered whether ERISA prohibits offering certain private equity investments to participants in individual account plans.
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On January 20, 2022, the United States District Court for the Southern District of Florida enforced a mandatory arbitration and class action-waiver provision (Arbitration Provision) in an ERISA-governed defined contribution plan, precluding a putative class of former and current plan participants from pursuing breach-of-fiduciary duty claims against plan fiduciaries in federal court. The plaintiffs in Holmes v. Baptist Health South Florida, Inc., 2022 WL 180638, argued that the plan’s Arbitration Provision was unenforceable as it both violated the “effective vindication” doctrine and was unenforceable because the participants did not knowingly agree to it. The court rejected both arguments.
Holmes adds to the flurry of recent decisions on the enforceability of mandatory arbitration and class action-waiver provisions in defined-contribution plans, which have yielded inconsistent results and are still working their way through courts of appeals. However, plan sponsors following this line of cases can glean several takeaways from the Holmes decision:
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On September 10, 2021, the Seventh Circuit decided Smith v. Board of Directors of Triad Manufacturing Inc., No. 20-2708, holding that benefit plans may require claimants to arbitrate claims under the Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1001, et seq. (ERISA), but may not preclude claimants from obtaining relief that ERISA provides.
Triad Manufacturing, acting through its board of directors, established an employee stock ownership plan (Plan) in December 2015, when several of Triad’s largest shareholders (Selling Shareholders) sold all of their stock to the Plan. The Plan was a defined-contribution employee retirement plan governed by ERISA. Triad, acting through the Board, was the Plan’s sponsor, GreatBanc served as the Plan’s trustee and James Smith was a former Triad employee and a participant in the Plan. When the value of Triad’s stock dropped significantly in the weeks following the ESOP transaction, the value of Smith’s interest in the Plan decreased commensurately, eventually prompting Smith to sue.
Continue reading “ERISA Litigation Roundup: Seventh Circuit Weighs in on Arbitration and Class Waiver Provisions in Defined-Contribution Plans”