Texas Court Says Hold 'Em When it Comes to ESG Investing | Good Things Come to Those Who Wait: DOL Expands Self-Correction Program to Cover Late Contributions | J&J Holds On as Plaintiffs' Standing Falls
The January Monthly Minute highlights a recent Texas court decision holding ESG investing violated ERISA and a new development in the J&J prescription drug case that found plaintiff lacked standing to sue, and also digs into the DOL's new self-correction program for late contributions and loan repayments.
Texas Court Says Hold 'Em When it Comes to ESG Investing
A Texas federal court recently decided a class action lawsuit that centered on whether defendants, American Airlines (AA) and the AA Employee Benefits Committee (EBC), breached their ERISA fiduciary duties when choosing investment funds for employees' retirement assets with an eye towards ESG objectives. On summary judgment, the court found that defendants wrongly padded the 401(k) plan investment lineup with funds managed by companies (specifically, BlackRock, Inc.) focused on ESG investing, which the court described as "a strategy that considers or pursues a non-pecuniary interest as an end itself rather than as a means to some financial end."
The court determined that plaintiffs compellingly demonstrated that defendants breached their fiduciary duty of loyalty by "failing to loyally act solely in the retirement plan's best financial interests by allowing their corporate interests, as well as BlackRock's ESG interests, to influence management of the plan." The court's lengthy opinion found that "BlackRock's proxy voting activism" was reflected in: (i) its active support of ESG proposals at major energy companies, (ii) its message to staff that it wanted to position itself as a leader of ESG investing, (iii) its CEO, Larry Fink, leading the charge with respect to climate change and outspoken activism, and (iv) BlackRock's opposition to management-recommended directors at many energy companies that had failed to meet desired climate goals and board diversification standards.
KMK Comment: Interestingly, the court declined to find that defendants breached ERISA's duty of prudence in connection with the selection and retention of investment managers and proxy voting oversight due to the fact that defendants practices did not fall short of prevailing industry standards. For this reason, while it is of utmost importance for plans to regularly review investment lineups, performance and plan investment policy standards to ensure that the plan's financial objectives are paramount, such review should be conducted with due consideration of industry standards.
Good Things Come to Those Who Wait: DOL Expands Self-Correction Program to Cover Late Contributions
Earlier this month, the Department of Labor updated the VFC Program (VFCP) to add a self-correction feature for delinquent transmittal of participant contributions and loan repayments under certain circumstances. As background, the VFCP is designed to encourage voluntary compliance with ERISA and allow those potentially liable for certain fiduciary breaches to voluntarily apply for relief, provided certain criteria are met. Adopted in 2002, the DOL revised the VFCP in 2005 and 2006. In 2022, the DOL proposed amending the VFCP once again, and not until earlier this month were these changes finalized. The new self-correction component (SCC) will apply to the transaction most frequently corrected under VFCP – the delinquent transmittal of participant contributions and loan repayments – as well as to certain participant loan failures.
Under the final amendments, relief for delinquent participant contributions and delinquent plan loan repayments is available in connection with any pension plan regardless of size or amount of plan assets, so long as the applicant is eligible for the VFCP and meets the required conditions. While self-correctors that satisfy the terms and conditions of the VFCP do not receive a no-action letter, they will avoid the imposition of civil monetary penalties or a civil enforcement action. Some important requirements of the new SCC are as follows:
- The amount of lost earnings on the delinquent participant contributions or loan repayments must be $1,000 or less.
- The delinquent participant contributions or loan repayments must have been remitted to the plan within 180 days from the date of withholding from participants' paychecks or receipt by the employer.
- An electronically filed SCC notice is required, in place of the generally applicable paper application requirements, which includes specific data element requirements as well as a SCC Retention Record Checklist.
KMK Comment: The DOL opted not to include a limit on the frequency with which a self-corrector may use the SCC. However, the DOL stated that it intends to monitor participation for frequent use and it may communicate with repeat users or open investigations to identify and correct systemic issues. Plan administrators should work with legal counsel and service providers to promptly identify and late contributions and loan repayments, and explore whether the new SCC provides an avenue for relief.
J&J Holds On as Plaintiffs' Standing Falls
As reported in the February 2024 Monthly Minute, almost a year ago a proposed class action out of New Jersey sought to hold J&J plan fiduciaries accountable for inflated drug pricing. In the Lewandowski v. Johnson & Johnson case, plaintiff alleged that the mismanagement of her plan's prescription drug benefits amounted to a breach of fiduciary duty and cost ERISA plans and employees millions of dollars. In support of her case, plaintiff cited jarring examples of the inflated cost of prescription drugs under the plan. In response, defendants claimed that plaintiff failed to allege she was improperly denied benefits under the plan – rather, she simply claimed that drug prices were too expensive.
Last week, the New Jersey court ruled that the named plaintiff lacked standing to sue. The court found that her allegations of harm flowing from higher prescription drug cost-sharing and lower wages were speculative and hypothetical. Additionally, the court found that her alleged injury was not redressable by the court because she had reached her prescription drug out-of-pocket cap, and any amount refunded by the court would be forwarded to the plan and applied to money it spent on other drugs after she hit her OOP that same year. However, the court did allow one remaining allegation -- regarding defendants failure to produce documents within 30 days as required under ERISA -- to survive.
KMK Comment: The J&J case was not alone in seeking to hold plan fiduciaries accountable for prescription drug spending, and the outcome of this suit may be a harbinger of things to come. Nevertheless, plan sponsors should continue to educate themselves as to their prescription drug plan pricing and network, carefully review contracts with counsel, and advocate for the best interests of plan participants and beneficiaries.
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