Andrew Taramykin | Determining the Burden of Proof in 401(k) Mismanagement Cases Under ERISA
Background
The Employment Retirement Income Security Act (ERISA) is a key U.S. labor law that sets minimum standards for the administration of private pension plans and creates causes of action for employee plan participants and beneficiaries. ERISA requires administrators to act solely in the interest of the participants and beneficiaries of the plan and establishes they must do so “with the care, skill, prudence, and diligence” of a prudent man under the circumstances. 29 U.S.C. § 1104(a)(1)(B). Furthermore, any fiduciary who breaches that duty may be held personally liable for the loss. Id. § 1109(a). Fiduciaries found liable for breach are subject to equitable remedial relief determined by the court, up to and including removal. Id. In an ERISA-based cause of action for the loss, there must be both a breach of fiduciary duty and a financial loss to the beneficiary.
In 2018, six current and former Home Depot employees—Jaime Pizarro, Craig Smith, Jerry Murphy, Randall Ideishi, Glenda Stone, and Marie Silver—who participated in Home Depot’s 401(k) plan, “FutureBuilder” filed a class action lawsuit against Home Depot, the Administrative Committee of the FutureBuilder plan, and the Investment Committee of the FutureBuilder plan. The plaintiffs had participated in the plan during the class period from 2012 to the present and alleged that during that time, Home Depot failed to 1) sufficiently monitor the fees charged by the plan’s financial advisor, and 2) prudently evaluate underperforming investment options. Because of these two breaches, participants claimed to have faced excessive fees and invested in subpar funds.
The Northern District of Georgia granted summary judgment on the matter, holding that on all but one claim there was an issue of material fact as to whether a breach of fiduciary duty even occurred and that on all claims the plaintiffs failed to demonstrate a loss causation. Pizarro v. Home Depot, Inc. 634 F.Supp.3d 1260 (N.D. Ga., 2022). The 401(k) investors appealed the case. Backed by an amicus curiae brief from the Department of Labor, they argued that a burden shifting rule should have been used to turn the burden of proof onto Home Depot to establish that loss was not caused by their breach. This rule was adopted from the Restatement of Trusts and is recognized by nearly half of circuit courts. The Eleventh Circuit, citing precedent and the statute itself, rejected the burden-shifting rule, adding to a complex circuit split regarding the burden of proof in § 1109(a) claims. Pizarro v. Home Depot, Inc., 111 F.4th 1170 (11th Cir. 2024).
Issue
When 401(k) investors allege mismanagement of their plan by a fiduciary, does the burden of proof shift to the defendant to prove that the loss was not caused by the breach of fiduciary duty, or must the plaintiff prove that they suffered loss because of the breach?
The Split
The burden-shifting rule was first established more than thirty years ago by the Eighth Circuit in 1992 and was subsequently embraced by the Fifth Circuit in 1995 and the Fourth Circuit in 2014. The current split did not emerge until 2017, when the Tenth Circuit rejected the burden shifting rule. One year later in 2018, the First Circuit joined those accepting the burden-shifting rule. The Eleventh Circuit now joins the Tenth in maintaining that the burden of proof lies squarely on the plaintiff in establishing when 401(k) mismanagement caused loss.
The First, Fourth, Fifth, and Eighth Circuits
The burden-shifting rule first appeared in 1992 in Martin v. Feilen, 965 F.2d 660 (8th Cir. 1992). The Eighth Circuit, citing the Second Restatement of Trusts, held that if the plaintiff proves a breach of fiduciary and either a loss to the plan or wrongful profit to the fiduciary, “the burden of persuasion shifts to the fiduciary to prove that the loss was not caused by, or his profit was not attributable, the breach of duty.” Id. at 671.
Three years later, the Fifth Circuit joined in recognizing the burden-shifting rule, although it did so in a case where the plaintiff was not seeking to sue under ERISA in the first place. In McDonald v. Provident Indemnity Life Insurance Company, 60 F.3d 234 (5th Cir. 1995), the insurer successfully moved for summary judgment against the appellants on the grounds that the plan was covered by ERISA and therefore preempted from state law claims. The Fifth Circuit affirmed, but in doing so, recognized the burden-shifting rule and cited an Eighth Circuit ruling that came after Martin. Id. (citing Roth v. Sawyer-Cleator Lumber Co., 16 F.3d 917 (8th Cir. 1994)).
The burden-shifting rule would not be expressly adopted by another circuit until nearly twenty years later. The Fourth Circuit affirmed the part of a district court judgment from the Middle District of North Carolina that enforced the burden shifting rule against R.J. Reynolds Tobacco Company and its holding company (collectively RJR). In that case, the district court maintained that the burden of proof shifted to RJR, and that RJR met that burden by proving “a reasonable and prudent fiduciary could have made [the same decision].” Tatum v. RJR Pension Inv. Comm., 761 F.3d at 351 (4th Cir. 2014) (citing Tatum v. R.J. Reynolds Tobacco Co., 926 F.Supp.2d 648, 651 (M.D.N.C. 2013)). The Fourth Circuit upheld the district court’s use of the burden-shifting rule but reversed and remanded its conclusion. Id.
Most recently, the First Circuit came to the same conclusion regarding burden-shifting in a class action brought by employees of an investment company that primarily offered its own mutual funds to 401(k) investors, regardless of whether they were the soundest investment options. Vacating in part and remanding a decision from the District of Massachusetts, the First Circuit held that the fiduciaries would have to prove that loss would have occurred even if they acted prudently. Brotherston v. Putnam Invs., LLC, 907 F.3d at 35 (1st Cir. 2018).
The Sixth, Ninth, Tenth and Eleventh Circuits
In 2004, the Ninth Circuit held that the burden falls on the plaintiff to show a causal link between a breach of duty and a harm suffered by the plan. Wright v. Or. Metallurgical Corp., 360 F.3d 1099 (9th Cir. 2004) (citing Kuper v. Iovenko, 66 F.3d 1459 (6th Cir. 1995)). In that case, the Ninth Circuit upheld a district court decision to dismiss the plaintiff’s complaint for failing to establish that causal link and because the plan type was exempt from diversification.
Similarly, in 2017, the Sixth Circuit maintained its position that the burden of proof lay with the plaintiff by mirroring the Ninth Circuit’s language on the plaintiff’s burden to “show a causal link” and also citing to Kuper. Saumer v. Cliffs Natural Res., Inc., 853 F.3d 963 (6th Cir. 2017).
Notably, each of the previous cases only lightly touches on the matter of burden of proof, by upholding the traditional assumption that it lies with the plaintiff. However, in 2017 the Tenth Circuit addressed the burden-shifting rule head-on in its rejection. The court holds that “there is nothing in the language of § 1109(a) or in its legislative history that indicates a Congressional intent to shift the burden.” Pioneer Centres Holding Co. Emp. Stock Ownership Plan & Tr. v. Alerus Fin., 858 F.3d 1336 (10th Cir. 2017). The Tenth Circuit also explicitly notes that, while common law principles on trusts may inform ERISA, they do not “determine the outcome” in such cases either. Id. at 1337 (citing Varity Corp. v. Howe, 516 U.S. 489, 497 (1996)).
This culminated in the recent holding by the Eleventh Circuit in Pizarro. The court cites a previous Eleventh Circuit decision, Willet v. Blue Cross & Blue Shield, 953 F.2d 1343 (11th Cir. 1992), which mentions in its conclusory paragraph that the burden of proof in establishing cause will fall on the plaintiffs. However, Willet was heard before such a divisive split had emerged between federal circuits and did not expressly reject the burden-shifting rule. Pizzaro does, as the Eleventh Circuit points to both Willet and to the text of the statute itself. ERISA does not specifically mention burden of proof, which the Eleventh Circuit argues is evidence that the common law default rule, wherein the party seeking relief must prove causation, should be presumed. Pizarro v. Home Depot, 11 F.4th 1174 (11th Cir. 2024).
Looking Forward
With so many circuits now on both sides of the issue, the question of burden-shifting under ERISA may seem ripe for picking by the Supreme Court. However, the Court has not granted certiorari to an ERISA case since they heard three in 2022. Additionally, the Court invited the Solicitor General to file briefs regarding the views of the United States in 2019, 2018, and 2015 related to the decisions of the First, Tenth, and Fourth Circuits respectively. However, in all three cases, certiorari was not granted. Although aware of the matter, the Supreme Court seems reluctant to confront the burden-shifting rule so far. The most recent action on Pizarro was the denial of a petition for rehearing en banc in September. It remains to be seen whether the plaintiffs will appeal their case to the Supreme Court, but if they do, it is unclear whether the Court would feel compelled to hear this case when it has already dismissed other similar questions recently.
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