Third Circuit Allows Participants to Pursue 401(k) Fees Lawsuits Without Pre-Suit Demand and Joinder of Plan Trustees
On April 16, 2012, the Third Circuit allowed three participants to pursue their excessive 401(k) fees lawsuit directly against John Hancock Life Insurance Company and its affiliates (collectively, John Hancock). The Third Circuit panel vacated the District Court’s dismissal of the lawsuit based on the participants’ failure to make a pre-suit demand on the plan trustees and join the trustees as parties. In vacating the District Court’s decision, the Third Circuit held that neither pre-suit demand nor joinder of the plan trustees is a prerequisite to participant lawsuits under ERISA § 502(a). Plaintiffs also sued under the Investment Company Act of 1940 (“ICA”), 15 U.S.C. § 80a-1 et seq. The Third Circuit affirmed the District Court’s dismissal of the ICA claims because the participants were no longer investors in the funds at the time of suit.
In Santomenno v. John Hancock Life Insurance Company, the plaintiff participants brought claims under ERISA §§ 502(a)(2) and (a)(3), alleging that John Hancock charged excessive fees in providing investment services for the administration of their employer-sponsored 401(k) benefit plans.
The District Court granted John Hancock’s motion to dismiss under Fed. R. Civ. P. 12(b)(6), finding that the claims under ERISA were derivative and thus required pre-suit demand on the plan trustees (or allegations that demand would be futile) and joinder of the plan trustees in the lawsuit. In reaching its decision, the District Court relied on the common law of trusts. Santomenno ex rel. v. John Hancock Trust v. John Hancock Life Ins. Co. (U.S.A.), No. 2-10-cv-01655, 2011 WL 2038769 (D.N.J. May 23, 2011).
In vacating the District Court’s dismissal of the ERISA claims, the Third Circuit looked to the statutory test and legislative history of ERISA § 502(a). First, the Court found it significant that the statute is silent as to a requirement of pre-suit demand and/or mandatory joinder of trustees. It cited the Supreme Court’s opinion in Harris Trust & Savings Bank v. Salomon Smith Barney, Inc., 530 U.S. 238, 239 (2000) for the proposition that § 502(a) places no limit on “the universe of possible defendants.” Thus, the Third Circuit found that joinder of the trustees was not required for the participants’ excessive 401(k) fees lawsuit.
In analyzing whether ERISA § 502(a) imposes a pre-suit demand requirement, the Third Circuit noted that no Court of Appeals has required a pre-suit demand for actions under §§ 502(a)(2) or (a)(3). [We note, however, that the Eleventh Circuit does require exhaustion of administrative remedies before permitting suits under §§ 502(a)(2) or (a)(3). E.g., Bickley v. Caremark Rx, Inc., 461 F.3d 1325 (11th Cir. 2006). Although technically somewhat different than a pre-suit demand as typically required in the context of derivative actions, exhaustion would accomplish the same result of permitting the plan’s fiduciaries an opportunity to address the claims before litigation.]
The Third Circuit looked to the legislative history of ERISA in concluding that, “the protective purposes of ERISA would be subverted if the section covering fiduciary breach required beneficiaries to ask trustees to sue themselves” and “Congress did not intend to impose obstacles” to suits under § 502(a).
Given its history, the Third Circuit’s opinion is not particularly surprising, but it does clear a potential obstacle to similar lawsuits in that jurisdiction, which may lead to an uptick in such actions in the Third Circuit. Other Circuits may have a different view, as it seems that the Third Circuit’s primary criticisms of such a demand requirement would apply equally in the normal corporate derivative context, yet such requirements are well-established in such suits. Another noteworthy takeaway from this opinion is the Third Circuit’s discussion of the incorporation of trust law into ERISA. In holding that the District Court’s reliance on the common law of trusts was misplaced, the Third Circuit noted that trust law “is not incorporated en masse into ERISA. On the contrary, ‘trust law will offer only a starting point, after which courts must go on to ask whether, or to what extent, the language of the statute, its structure, or its purposes require departing from common-law trust requirements.’” (quoting Varity Corp. v. Howe, 516 U.S. 489, 497 (1996)). Thus, this opinion may be used to argue against the incorporation of other concepts borrowed from the common law of trusts.
The case is Santomenno, et al. v. John Hancock Life Ins. Co. (U.S.A.), et al., No. 11-2520 (3d Cir.)