The Checksmart lawsuit garnered attention because it involved a more modestly sized retirement plan, with less than 2,000 participants and roughly $25 million in assets. (Photo: Shutterstock)

In July 2016, Enrique Bernaola filed a putative class-action lawsuit against his employer, Checksmart Financial, LLC., and others, under the Employee Retirement Income Security Act (ERISA). Mr. Bernaola, who participated in Checksmart's retirement plan for its employees, sued the defendants, alleging that they violated their fiduciary duties under ERISA by failing to provide the appropriate amount of passively managed mutual funds as investment options under the plan, resulting in excessively high investment fees being charged to the plan and its participants.

Related: Quiz: How well do you know ERISA rules?

The lawsuit's allegations were similar in kind to those of many other lawsuits that have been brought over the last few years. Indeed, these lawsuits are renowned for their cookie-cutter allegations, and, have been driven in large part by the success plaintiffs' firms have had in negotiating large multi-million-dollar settlements from some of the nation's largest companies.

Nonetheless, the Checksmart lawsuit garnered attention because, unlike most of those other suits, this one involved a more modestly sized retirement plan, with less than 2,000 participants and roughly $25 million in assets. The question on everyone's mind was whether this lawsuit portended a new trend in ERISA class action lawsuits against small and mid-size employers? Should the suit meet with success, there was legitimate fear that the plaintiffs' bar would deem the small and mid-size market as an attractive new pool of potential defendants, and that a slew of similar lawsuits might follow.

Against this backdrop, there was a collective sigh of relief earlier this summer, when the United States District Court for the Southern District of Ohio dismissed Mr. Bernaola's lawsuit, holding that ERISA's statute of limitations barred his claims. The court's decision was comforting to employers worried about copy-cat lawsuits. However, that relief may be tempered by the fact that the plaintiff has subsequently appealed the court's decision to the Sixth Circuit, especially given that parts of the court's holding are in tension with decisions from other courts.

Assuming the case does not settle, it will likely be months before the Sixth Circuit rules on the appeal. In the meantime, the district court litigation provides certain lessons for small and mid-sized businesses hoping to protect themselves from being the target of an ERISA class action lawsuit.

Lesson 1: Disclose

The first lesson the Checksmart decision yields is the importance of timely disclosures to plan participants. As noted above, the district court's ruling was premised on its conclusion that the plaintiff's claims were time barred under ERISA's statute of limitations, which in turn flowed from the defendant's disclosure practices. Where a plaintiff has “actual knowledge” of an alleged breach, ERISA imposes a three-year statute of limitation, based on the earliest date that the plaintiff could be deemed to have had knowledge of the underlying conduct.

Here, limited discovery showed that the defendants had disclosed to plan participants how much each investment option charged in fees in 2012, putting the 2016 lawsuit outside of the three-year statute of limitations. By making consistent disclosures of material facts related to investment fees and expenses, a fiduciary can, potentially, mitigate the potential liability associated with investment decisions by limiting the time-period of the inquiry to a three-year period. This not only potentially limits the fiduciary's liability, but also the litigation's potential value to a plaintiffs' firm, meaning the company is that much less attractive as a litigation target.

Lesson 2: Review, benchmark and disclose

A second lesson from the Checksmart litigation is the prophylactic value of having a documented process for periodically reviewing and benchmarking investment decisions. In Checksmart, the plaintiff argued that ERISA's three-year statute of limitations did not bar his claims, because, inter alia, his claim really challenged defendants' process in evaluating, monitoring, and selecting the investment options offered by the plan, which was not disclosed, and further that the defendants had an ongoing duty to monitor a plan's investments and remove imprudent ones.

In support of the first argument, the plaintiff cited the Seventh Circuit's decision in Fish v. Great-Banc Tr. Co., 749 F.3d 671, (7th Cir. 2014), and the Supreme Court's decision in Tibble v. Edison Int'l, 135 S. Ct. 1823 (2015) in support of the second argument. While the district court found both cases distinguishable, the Sixth Circuit has yet to weigh in. Moreover, these process and monitoring type claims invariably find their way into class action lawsuits, and by documenting and disclosing its procedures for investment benchmarking (both as a matter of initial selection and as a matter of periodic review) a company potentially can diminish further its attractiveness as a litigation target.

Of course, the comments above are not meant to be exhaustive, but rather illustrative. It is always a good idea to periodically review with your ERISA counsel not only your fiduciary practices and procedures, but also the language in your relevant plan documents, keeping in mind your individual facts and circumstances.

Read more:

• Plan sponsors tell all
• Participants' claims on behalf of ERISA plan not covered by arbitration clause
• Top 10 ERISA class-action settlements in 2017

Michael Khalil is vice chair of the employee benefits department at Miller & Chevalier. His practice focuses on the litigation of claims arising under the Employee Retirement Income Security Act (ERISA) and the Patient Protection and Affordable Care Act (ACA) in federal trial and appellate courts.