Health insurance and hospital employees are filing more lawsuits against their employers over alleged failures to effectively manage their retirement accounts.
Workers have filed 25 complaints against their employers this year, with at least 11 targeting the healthcare industry, including companies like Centene Corp., DaVita Inc. and Boston Children's Hospital, according to the U.S. Chamber of Commerce.
The total has already exceeded the nine retirement benefits cases workers filed against healthcare companies in 2021, and is poised to beat 2020's record of 33 cases filed against healthcare industry employers, said Chantel Sheaks, the chamber's vice president of retirement policy. "It's not if, it's when," she said.
The chamber has ramped up its legal campaign against these cases, and filed amicus briefs in support of Commonspirit Health in Chicago, Humana and the American Red Cross, asserting that a small group of law firms are filing copycat lawsuits seeking class-action status and cherry-picking market data in pursuit of major settlements. Law firms for the plaintiffs, meanwhile, say the settlements are responsible for lowering workers' retirement benefit fees, and ensuring robust and transparent management of their investment portfolios.
The success by plaintiffs in negotiating settlements with healthcare employers could set a dangerous legal precedent for the industry, said William Sweeney, practice chair of Polsinelli's benefits practice, which represents employers.
"These most recent cookie-cutter complaints have not been about the level of review as to what actually took place," Sweeney said. "It's really just trying to assert that the investment performance rules the day, and if it didn't perform as well, then there's damages to be paid."
The father of the 401(k) case
The administration of employee retirement plans is governed by the Employee Retirement Income Security Act of 1974, which states that fiduciaries must act prudently, charge reasonable fees and cannot guarantee investment performance. The Department of Labor has tended to regulate through enforcement, with most actions alleging excess fees, improper investments and fiduciary conflict of interest, according to research from Boston College's Center for Retirement Research.
The first suits were filed by lawyer Jerry Schlichter, who is largely credited with developing the body of law around ERISA. One federal judge, who heard a 2013 case filed by Schlichter against insurer Cigna, praised him and the firm in court filings for acting as "a private attorney general" in enforcing ERISA, while "risking breathtaking amounts of time and money while overcoming many obstacles for the benefit of employees and retirees." U.S. District Judge Harold Baker of the Central District of Illinois awarded $35 million to Cigna workers, $12.7 million to Schlichter's firm, and ordered Cigna to update its record-keeping and fee services.
By focusing on "jumbo plans" made up of a large number of employees, Schlichter and other law firms were able to collect jumbo settlements, Sheaks said.
Schlichter's firm represents workers in a number of pending cases, including suits against Novant Health in North Carolina and New York University's Langone Medical Center.
"We're very, very proud of what has been accomplished," Schlichter said.
A decision by the U.S. Supreme Court in late January in an ERISA case where Schlichter represented workers against Northwestern University—including its medical school—has the potential to reinforce the legal liability of employers, including healthcare organizations, Sweeney said. The court ruled the availability of multiple lower-cost retirement investment options to employees did not excuse mismanagement of the plans that charged excessive fees. The case was sent back and is pending in the U.S. Court of Appeals for the Seventh Circuit.
"[Plaintiffs lawyers] are simply looking at the negative end result, and almost taking that leap, or making the assumption that it has to be the result of a fiduciary breach," Sweeney said. "I think that is a dangerous standard because these plan fiduciaries and committees that companies have put together don't have a crystal ball."
Such cases have inspired a drop in participant investment fees, increased transparency from employers around rates charged, and a decline in conflict-of-interest cases among fiduciaries recommending clients invest in their products, according to research from Boston College's Center for Retirement Research. The researchers also noted the rising legal threat has led to more passive investments by employers and a fear of litigation that could hamper innovation among plan sponsors.
Who's next?
The next employer targets of the 401(k) legal frenzy? Smaller healthcare companies that offer employee retirement plans, Sheaks said, pointing to the case filed at the end of last month against Molina Healthcare as an example. Seven former employers filed a lawsuit against the insurer seeking class-action status, alleging the company's fiduciaries charged excessive fees and improperly managed the $740.9 million plan.
She said she also expects multiple employer plans sponsored by state hospital associations to become targets, as well as pooled plans from service providers like Aon Hewitt.
Companies can protect themselves by thoroughly documenting their process for choosing investments and fiduciaries, policies and procedures for evaluating their investments and their benchmark targets, Sheaks said.
"ERISA does not require a particular outcome," she said. "It does not say you have to have the best investment, or the cheapest service provider. You just have to have a prudent path."
Finding companies to target can be easy since every retirement plan must file information with the Department of Labor about the plan's assets, number of participants, investment vendors, independent audits and more. The reports are published annually on the department's website and can be downloaded for free.
The healthcare industry is a natural target for these cases, since healthcare makes up such a large portion of the economy and its organizations tend to be larger than most businesses, said James Miller, a partner at law firm Miller Shah.
Miller's firm represents workers in approximately 2,000 ERISA cases nationwide, with about 35% of them against healthcare companies, including Yale New Haven Health System in Connecticut, Beth Israel Deaconess Medical Center in Boston and Prime Healthcare in California.
"Healthcare is obviously a very significant part of the economy," he said. "Participants are more likely, by virtue of math, to pursue a claim."
