Cohen & Buckmann, P.C.
Cohen & Buckmann, P.C.



Can Arbitration Shield You From 401(k) Class Actions?

Can Arbitration Shield You From 401(k) Class Actions?

                                    By Carol Buckmann                                   

ERISA class action lawsuits are expensive to defend even if you win.  Given that 401(k) (and other) plan litigation isn’t going away, it is no surprise that many fiduciaries wish there were a magic shield to protect them against class action lawsuits by participants.  A recent U. S. Supreme Court decision in Epic Systems Corp. v. Lewis upheld the enforcability of class action waivers in the labor law context, holding that they did not violate the National Labor Relations Act.  

But is mandatory arbitration consistent with ERISA?  ERISA is silent on arbitration. The jury is still out on the extent to which EPIC applies to ERISA claims, and that issue may yet go up to the Supreme Court.

The Ninth Circuit Weighs In.

Since Epic, the Ninth Circuit Court of Appeals in a case involving the University of Southern California has ruled that class action waivers do not apply to fiduciary breach claims under Section 409 of ERISA, which are maintained on behalf of the plan, not individual participants. That does not mean all other courts will follow this precedent, which doesn’t apply in other circuits, and it does not mean that courts would reach the same conclusion if participants were suing for benefits owed them under different provisions of Section 502 of ERISA.  However, plan sponsors cannot count on courts automatically upholding employment agreements imposing mandatory arbitration of ERISA claims.

What Else Can Plan Sponsors Do?

The appeals court looked at the relevant employment agreements and determined that they required arbitration only of employee claims against the University and its affiliates. Fiduciary breach claims didn’t come within that language.  To increase their chances of prevailing, plan sponsors could put mandatory arbitration language in their plan documents and clearly communicate those provisions in their summary plan description booklets.  They could also specifically refer to these ERISA claims in their employment agreements.  However, a court might still conclude that such provisions were not enforceable because ERISA has its own claims and appeals procedures and no specific mention of arbitration.   A district court in Dorman v. Charles Schwab determined that plan provisions drafted by fiduciaries don’t bar litigation against them, and that decision is up on appeal before that same Ninth Circuit court. We may soon have an appellate decision on that issue.

Arbitration vs. Litigation

In addition to understanding the legal uncertainty, employers interested in enforcing employment agreement provisions waiving the right to pursue class actions need to understand the pros and cons.

Plan sponsors who favor arbitration usually do so because it is considered to be less expensive and faster than litigation.  Some also feel that arbitrators are more likely to rule in favor of sponsors.

However, arbitrators’ decisions may not reach the same result a court would reach, as the arbitrator is not bound to follow judicial precedent or to issue an opinion setting forth the specific legal rationale for the decision.  Arbitrators tend to try to split things down the middle, which is typically not the way to resolve ERISA claims.  A plan either does or doesn’t provide benefits in specific situations. There may be no right to appeal a wrong arbitration decision involving a 401(k) plan.  

Other Open Issues

Will it matter if the typical plan participant can understand what rights are being waived? What procedures to select arbitrators will be fair to participants, if ERISA waivers are enforceable? Can the plan sponsor unilaterally designate an arbitrator and venue? Courts may be dealing with all of these questions in the future.