Economic Analysis in ERISA Litigation over Fiduciary Duties
1 September 2011
By Dr. John Montgomery
In the past decade, numerous lawsuits have been brought under ERISA against the fiduciaries and sponsors of 401(k) and other defined contribution retirement plans. Many of these lawsuits have been pled as class actions on behalf of all or many participants of the plan. The most common lawsuits have involved declines in the value of employer stock offered in the plans and allegations that decisions to maintain employer stock in the plans were imprudent. There have also been some lawsuits over other investment options, as well as lawsuits over the management of collateral from securities lending programs run by plan trustees. Another substantial category of litigation has involved allegations of excessive fees. Many of these cases, both investments and fees, have also involved allegedly inadequate disclosure of information to plan participants. Economic analysis plays an important role in many of these cases. In this NERA paper, Senior Vice President Dr. John Montgomery discusses some of the important economic issues that arise in ERISA litigation, both in establishing liability and in calculating damages.
Dr. Montgomery begins by discussing the basic structure of the theory of investment decisions within financial economics—based on portfolio theory and the efficient markets hypothesis; this can be viewed as a theory about what investors should do. He then discusses empirical challenges to this theory, constructed around work on behavioral finance, which introduces psychological insights on what investors actually do. The paper continues with a discussion of the implications of both of these approaches to litigation on fiduciary duties within defined contribution (DC) retirement plans. Dr. Montgomery then reviews the implications of financial economics for the administration of DC plans, including issues related to litigation over allegations of excessive fees. The paper concludes with a discussion of damages issues in litigation related to price drops in employer stock within DC plans, addressing both the issue of the appropriate alternative investment return for calculating losses and the question of whether initial plan holdings of employer stock should be included in damage calculations.
This paper was published as a three-part series in the Employment Law Strategist, July-September 2011.
