The explosion of defined contribution (DC) plan litigation in the United States is likely to continue, but Canada should not expect a similar trend anytime soon, according to legal experts.
Mark Zigler, managing partner of Koskie Minsky LLP, said that there are some major impediments to class-action suits in Canada that do not exist in the U.S., namely the “loser pays cost” system, in which the losing party is liable for some of their opponent’s legal costs. “That tends to be a detriment,” he said Tuesday at the CPBI Forum 2008 in Toronto. Zigler added that class-action suits are not possible under Canadian law in a unionized environment and require the filing of a grievance under a collective agreement.
Zigler said he could see litigation against DC plan sponsors and service providers in Canada in a case where a service provider charges above-market fees and makes inappropriate investment choices for plan members. “But I would call that more of a negligence case, where (plan sponsors) are deliberately hitting the DC members with excessive costs,” he said. Zigler pointed out that many of the current U.S. cases are contesting the fairness of the DC plan fee structure in general, and don’t always focus on any one case.
As to the likelihood of a surge of lawsuits against Canadian DC plan sponsors or service providers, he was dismissive. “There’s hardly anybody knocking down the doors to bring lawsuits against defined contribution plans generally, let alone about fees,” Zigler said. “Are we in a situation where a judge is going to get excited about the structure of mutual fund options given to DC plan members? I don’t think so, but I never underestimate the creativity of people who want to bring litigation.”
However, legal action against plan sponsors and service providers south of the border is trending upward, according to Carol Buckmann, counsel for Osler, Hoskin & Harcourt LLP. She explained that a recent U.S. Supreme Court decision in the case of LaRue vs. DeWolff, Boberg & Associates is predicted by some to fuel a further increase in lawsuits. The case is based on a plan participant’s attempt to make changes to his investment plan, and the plan sponsor’s failure to enact those changes, resulting in a purported loss of income for the participant. Under the Employee Retirement Income Security Act (ERISA), plan fiduciaries may be held personally responsible for losses.
Buckmann outlined several U.S. class-action lawsuits by 401(k) participants that have framed the issue thus far, and said that most 401(k) plans rely on long-standing ERISA “Safe Harbour” rules. The most significant of these cases, Hecker vs. John Deere & Company, in which four workers accused John Deere and Fidelity Investments of charging unreasonable fees to manage retirement savings, was thrown out by a judge but is currently on appeal.
According to Buckmann, lawsuits of this kind typically involve claims of sub-par investments, high fees, and in-house investments or “self-dealing”, and are difficult for plaintiffs to win due to a scarcity of case law, as they are usually settled out of court. However, she said the existence of these cases is slowly bringing about legislative changes.
“I think it’s fair to say that even if plaintiffs don’t win any of these cases, we’ve already had some permanent changes in our regulatory requirements and also in the behaviour of fiduciaries,” said Buckmann. She said efforts by the U.S. Department of Labor and the Congress are underway to enhance disclosure rules for fiduciaries of benefit plans regarding compensation paid to plan service providers.
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