Two 401(k) pension plan participants have filed a class action lawsuit against the National Rural Electric Cooperative Association (NRECA) in a Virginia district court. They allege ongoing Employee Retirement Income Security Act (ERISA) violations, including breaches of fiduciary duties, such as financial mismanagement, self-dealing, and excessive fees. The plaintiffs claim that NRECA's violations have cost approximately 77,000 plan participants millions of dollars over several years.
According to the plaintiffs' complaint, NRECA has disregarded previous warnings regarding its fiduciary duties, including two multimillion-dollar settlements stemming from similar ERISA violations. NRECA has reportedly worsened its practices by continuing to charge plan participants excessive fees and improperly using plan assets for its general operations. Furthermore, the plaintiffs claim that NRECA shifted its cost-sharing structure to disproportionately burden its 401(k) pension plan and reduce costs to its other benefit programs. As a result, the plaintiffs are seeking repayment of their losses, including excessive administrative fees and misused plan assets, as well as reformation of plan policies and ongoing judicial oversight to prevent future fiduciary breaches.
The current lawsuit is NRECA's third major legal challenge in the past 15 years. In 2012, the Department of Labor's Employee Benefits Security Administration (EBSA) identified ERISA violations, leading to a $27.3 million settlement. A separate 2019 class action resulted in a $10 million payment to the plan.
This lawsuit is indicative of a larger movement toward the Court aggressively enforcing fiduciary duties under ERISA, particularly in cases involving excessive fees and the misappropriation of forfeited assets belonging to the plan. For instance, UnitedHealth Group recently agreed to a $69 million settlement in an ERISA case involving allegations of mismanaging investments in the company's 401(k) plan. Likewise, in Cunningham v. Cornell University, the Court ruled that when accused of engaging in a prohibited transaction under ERISA, fiduciaries must affirmatively prove that a statutory exemption applies. As a result of this decision, more excessive-fee and fiduciary-breach litigation under ERISA has arisen.
Furthermore, the outcome of this case could have consequences for internal cost-allocation policies in the non-profit retirement plan industry. A ruling favoring the plaintiffs could release a deluge of litigation involving similar cost-shifting arrangements to those used by NRECA.
Overall, the Court's decision in this case has the potential to lead to reform of plan design, particularly regarding cost-sharing frameworks and the payment of administrative fees. Plan sponsors that utilize internal subsidiaries to provide services to the plan must ensure that no conflicts of interest exist and refrain from shifting excessive costs to participants. ERISA fiduciaries relying on internal service arrangements should consult independent fiduciaries to ensure that plan provisions remain reasonable and defensible.
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