August 21, 2019

The Ninth Circuit's decision allowing Charles Schwab Corp. to send a 401(k) plan mismanagement lawsuit to arbitration broke new ground in Employee Retirement Income Security Act law. 

The ruling on Tuesday marked the first time an appellate court has said that suits accusing plan managers of failing to properly steward benefit plans can be resolved through arbitration, according to Schlichter Bogard & Denton LLP founding partner Jerry Schlichter, who has watched these suits closely.

But the opinion's impact is uncertain, in part because the court released a key portion as an unpublished, and thus nonprecedential, memorandum. The decision will also likely be appealed, attorneys said.

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Will Plans Start Adding Arbitration Provisions?

The Dorman v. Schwab ruling lays out a road map for corporations interested in keeping fiduciary-breach claims out of court. Whether companies follow that map will depend on how much they can limit their liability by adding a forced arbitration component to the plan, Porter said.

In other words, if the Ninth Circuit's interpretation of LaRue is found to be wrong, corporations probably won't write consent-to-arbitration language into their 401(k) plans.

"Employers won't put in arbitration agreements unless they can limit the damage to individual accounts," Porter said.

If companies can't limit the damage to individual accounts, the court is likely the best venue for a 502(a)(2) claim, because the ruling will be binding, attorneys said.

"The advantage of a class action to the fiduciary is that you bind the entire class to the result. With arbitration, what if 50 different plan participants challenged the same fiduciary activity and obtain 50 different decisions?" said Karen Handorf, the chair of Cohen Milstein Sellers & Toll PLLC's employee benefits practice group. "Seems like a nightmare for a plan fiduciary."

Litigating a 502(a)(2) claim in court also gives employers the ability to appeal rulings, whereas decisions of arbitrators are sometimes final.

The complete article can be viewed here.