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Adding an arbitration provision to an ERISA-compliant retirement plan

When you see the word “arbitration,” you might think of a business dispute, divorce proceeding or perhaps a big-league ballplayer at odds with his team about that season’s salary.

But retirement plans that must comply with the Employee Retirement Income Security Act (ERISA) might also be subject to arbitration — if they include an enforceable provision for this purpose. A recent court case, Holmes v. Baptist Health South Florida, provides some insight.

Participants’ allegations

In Holmes, former and current participants in a 403(b) plan filed a lawsuit claiming that the plan’s fiduciaries violated their ERISA fiduciary duties in selecting and reviewing the plan’s investment funds.

In response, the fiduciaries asked the court to require that the dispute be arbitrated — pointing to a plan provision requiring that plan-related claims be resolved exclusively by binding arbitration. The provision also prohibited arbitrations on a representative or class basis, as well as any remedial or equitable relief providing additional benefits or monetary relief to anyone other than the claimant.

The participants asserted that the arbitration provision violated the “effective vindication” doctrine, and that they hadn’t agreed to its addition to the plan by amendment in 2020.

Court’s response

The court acknowledged that an arbitration provision may be unenforceable under the effective vindication doctrine if the provision operates as a prospective waiver of a right to pursue a statutory remedy.

In this case, however, the participants’ request for plan-wide nonmonetary relief — that is, removal and replacement of the current fiduciaries — wasn’t barred by the plan’s arbitration provision. Thus, the court held that the effective vindication doctrine didn’t apply.

The court went on to say that the provision’s bar against plan-wide monetary relief was permissible because such relief was available only for claims brought on a class basis, and waivers of class-based claims have been held enforceable under applicable circuit precedent.

Turning to the question of consent, the court acknowledged that it was “unseemly” for the participants to be bound by a provision they’d never agreed to. However, the fact that they hadn’t agreed to it — and that one of the participants had terminated employment and received a distribution of her entire account before it was adopted — was irrelevant.

The fiduciary breach claims were brought on behalf of the plan, so what mattered was whether the plan had agreed to arbitrate. On this issue, the court held that the plan had agreed to the amendment because the plan document expressly permitted unilateral amendment by the plan sponsor.

It’s in the details

Courts appear to broadly agree that ERISA cases are generally subject to arbitration. However, whether a particular binding arbitration provision is enforceable will likely depend on subtle differences in the facts, claims made and the provision’s wording. Many plan sponsors and their participants might be surprised to learn that an arbitration provision can be added to a plan simply by permitting unilateral amendments.

Your attorney can help you better understand the details and potential exposures of your ERISA-compliant plan. Meanwhile, feel free to contact our firm for help assessing the advantages, risks and costs of your retirement plan or any other employee benefit.

Holmes v. Baptist Health South Florida, No. 21-22986-Civ-Scola, Jan. 20, 2022 (U.S. District Court for the Southern District of Florida)

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