Fifth Third Bancorp and the Lack of a Historical Foundation for the Existence of a "Coach Class Trustee"
This is an interesting point, to me anyway, and a point that, for me, falls in that odd space between too short for a good blog post but too long for a tweet. I have written before that, because I seldom use blog posts to simply pass on others’ work and instead usually post substantive discussions, I created a twitter feed to have somewhere to pass along other people’s work when I am only going to briefly comment on it and not speak in depth on that work. This, of course, has left me in the position of not knowing exactly what to do when I have something to say about someone else’s writing that will take less than a couple of paragraphs to say but more than a hundred and forty characters. (Maybe someone needs to start a new micro-blogging app, say with 280 characters as the limit??).
Anyway, Chris Carosa has a wonderful essay out on the true and historic meaning of the term fiduciary, and the high level of care that its classic meaning imposes on someone serving in that role. The timing of the essay is interesting, coming as it does right after the Supreme Court heard argument on the Fifth Third Bancorp case, concerning whether there are limits on the fiduciary obligations of the trustee of an ESOP that might not exist in other circumstances. As this argument recap by Timothy Simeone of SCOTUS blog points out, at least some of the Justices seemed troubled by the idea that the fiduciary in that circumstance might have a lesser standard of care than he or she would in other circumstances, with Justice Kennedy quipping that the ESOP fiduciary, if that is the case, would then be some sort of a “coach class trustee.” And therein lies the point I wanted to make, one too long to make in my earlier retweeting of Chris’ essay: it is impossible to reconcile the existence of a “coach class trustee” with Chris’ presentation of the historical meaning of the term fiduciary. You just can’t do it.
Can You Avoid Being Investigated by the Department of Labor?
I think pretty highly of the Department of Labor when it comes to ERISA governed plans, and feel they do a pretty good job across the board. That doesn’t mean, though, that you want to be investigated by them if you are a plan sponsor. It’s a little like being audited by the IRS – even if you didn’t do anything wrong and you don’t owe anything, it’s an experience you would rather avoid.
When it comes to 401(k) plans, there are a number of things that plan sponsors can do to avoid being the target of an investigation, and even more things they can do to make sure that, if they are investigated, the results are benign. I talk about them in detail in this article I am quoted in, “DOL Cracks Down on Employer 401(k) Issues,” on BenefitsPro.com.
Ayres is Wrong, and Hecker is Wrong: Establishing a Fiduciary Breach Through Excessive Fees
A further thought on Ayres’ focus on what he calls dominated funds, namely funds with higher than necessary fees that nonetheless contain a disproportionate amount of a 401k plan’s assets, and whether their inclusion by a plan sponsor should be seen as a fiduciary breach. As I discussed in a recent post, it’s a viable theory, and a welcome antidote to the very low bar set by the Seventh Circuit in Hecker on the question of fees when it found that simply including lots of funds with fees set by the market as a whole represented a sufficient effort by fiduciaries when it came to protecting participants against unnecessarily high fees. However, as I also pointed out in my recent post, the Eighth Circuit, in Tussey, cabined that mistake by the Seventh Circuit, without needing to take the broader step urged by Ayres, which is to treat the excessive use in a plan of one fund with higher fees, in and of itself and without anything more, as a breach (as Ayres and a co-author argue for here). It is probably a bit much to say that this later circumstance, without more (such as the circumstance being caused by a mapping strategy that benefits a plan sponsor by driving down operational costs), should be enough to impose liability for breach of a fiduciary duty.
And why is that? Probably because such an approach applies a very paternalistic view to 401k plans, employees, and their employers (in the guise of plan sponsor and/or plan fiduciary). Ayres’ thesis presumes the existence of low cost – presumably index – funds within a plan, along with higher cost funds, and assumes that it is effectively a breach to allow funds to flow into the latter. It seems to me, though, that it places too low a burden on participants, and gives them too little credit. If there are a range of funds available in a plan, and mapping or other decisions are not driving employee withholdings into the higher priced funds, then it seems to me participants should be free to make their own call on what funds to hold. Further, unless one accepts the premise that no knowledgeable investor would ever use any fund other than the lowest cost funds (which requires living under a presumption that only index funds or similar passive investing funds can ever be an appropriate investment), then it is not legitimate to say that a prudent person in the position of the plan fiduciary could not make available higher cost funds along with lower costs funds. If that is the case, then it cannot be a breach of fiduciary duty to include such a range of funds in a plan – even if it results in some participants over investing in the higher cost funds.
In essence, while the Seventh Circuit – as I have often said and written – was wrong to believe that the inclusion of many funds is enough to preclude a breach of fiduciary duty by the inclusion of investment options with excessive fees, so too is the premise that simply having an excessive amount of assets invested in a higher price product that is included among many funds with varying fee structures is enough to constitute a breach. The truth, as with most things, lies somewhere in between – you need more than simply excessive investing in a higher priced fund, and less than simply inclusion of many fund choices, to have a fiduciary breach based on the costs of the investment options in a 401k plan.
Tussey v. ABB - Opening Up New Avenues for Excessive Fee Litigation and Putting the Final Nail in the Coffin of Hecker v. Deere
This Forbes opinion piece by Yale Professor Ian Ayres is interesting for two things, one of broader relevance and one of interest perhaps to me alone. In it, he argues that our analysis of excessive fees as a potential fiduciary breach should not be based solely on fees in general, but also on an analysis of whether excessive amounts of plan assets are being placed into the one or two investment options in a plan that have particularly high fees, rather than in the many other investment options in a plan that have lower fees; those lower fee options give a plan the image of having reasonable fees, by balancing out the fees charged in the more expensive options. He suggests that Tussey v. ABB should be thought of and analyzed as a case concerning this type of a fiduciary breach, where the problem with the fiduciary’s conduct was the decision to map plan assets into higher fee funds for the benefit, in the longer run, of the plan sponsor. This broader argument for rethinking how we analyze fiduciary prudence in the context of fees opens up new avenues for prosecuting fee claims, but also raises a red flag that prudent and conscientious plan sponsors need to pay attention to; namely, is the overall structure of plan choices optimal for the participants, rather than just whether there are some low cost choices open to the participants who are sophisticated enough to want to avoid the higher cost options. In essence, it is an argument that plan sponsors who want to do a good job for their participants need to see the forest, not just the trees, in structuring a plan.
And this is important because, jaded and cynical as I may be after litigating ERISA disputes for decades, I still think most plan sponsors are truly motivated to put together a strong plan for their employees, and are not motivated – at least not knowingly and consciously – by nefarious purposes. (Before people start bombarding me with emails and comments about their own experiences or particular cases they have been involved with that are to the opposite, note that I said “most,” not “all,” and that I made the word choice deliberately). Diligent plan sponsors who want to create the best possible plan would do well to keep Professor Ayres’ thesis in mind in formulating a plan structure and selecting its investment options.
I also said that the article was interesting to me, as well, on another level, one that may be of interest only to me. A few years back, right after the Seventh Circuit had decided Hecker v. Deere, I took the decision to task in an article,”Retreat from the High Water Mark: Breach of Fiduciary Duty Claims Involving Excessive Fees after Tibble v. Edison International.” In it, I argued that the Court was wrong to believe that having a range of fee options spread among many investment options was enough to defeat an excessive fee claim. Ayres likewise takes exception to the Seventh Circuit’s analysis in this regard, finding that it was not consistent with plan reality. To me, one of the most important parts of the holding in Tussey v ABB was not the float issue, heavily focused on by most reports, but the Eighth Circuit’s ringing rejection of the thesis, pressed by the Seventh Circuit in Hecker, that it was enough to defeat an excessive fee claim that a plan provided a range of investment options with a range of fees; the Eighth Circuit, in my thinking, put a well-deserved end to that line of argument, when the Court explained:
The ABB fiduciaries contend the fact the Plan offered a wide “range of investment options from which participants could select low-priced funds bars the claim of unreasonable recordkeeping fees.” In support, the ABB fiduciaries rely on Hecker v. Deere & Co. (Hecker I ), 556 F.3d 575, 586 (7th Cir.2009), Loomis v. Exelon Corp., 658 F.3d 667 (7th Cir.2011), and Renfro v. Unisys Corp., 671 F.3d 314, 327 (3d Cir.2011), which the ABB fiduciaries propose “collectively hold that plan fiduciaries cannot be liable for excessive fees where, as here, participants in a self-directed 401(k) retirement savings plan that offers many different investment options with a broad array of fees can direct their contributions across different cost options as they see fit.” The ABB fiduciaries' reliance on Hecker I and its progeny is misplaced. Such cases are inevitably fact intensive, and the courts in the cited cases carefully limited their decisions to the facts presented.
I have always thought that Hecker was wrongly decided with regard to this issue, and that one of the reasons for the mistake was that the Court did not fully develop and analyze the factual context before reaching a decision. As a result, I don’t necessarily agree with the Eighth Circuit that Hecker is limited to its own circumstances by its own facts; I think it is limited to its own circumstances by its poor reasoning in this regard. Nonetheless, I can live with the Eighth Circuit approach, which I think all other courts are likely to follow as well, that Hecker’s erroneous analysis in this regard cannot control other cases because of the fact-intensive nature of the inquiry.
The First Circuit's Wary Relationship to the Moench Presumption
By the way, speaking of Fifth Third Bancorp, I take exception at the assertion (see here, for instance) that every circuit to consider the issue has effectively adopted the Moench presumption, although with some dispute over how and when to apply it. The First Circuit, which tends to favor fact specific resolutions of complex ERISA disputes over sweeping doctrinal approaches to resolving them, rejected a variation on the presumption in 2009 in Bunch v. W.R.Grace. The Court explained:
Appellants seek to induce us to reject State Street's actions by having us apply a presumption of prudence which is afforded fiduciaries when they decide to retain an employer's stock in falling markets, first articulated in Kuper v. Iovenko, 66 F.3d 1447, 1459 (6th Cir.1995) and Moench, 62 F.3d at 571–72. The presumption favoring retention in a “stock drop” case serves as a shield for a prudent fiduciary. If applied verbatim in a case such as our own, the purpose of the presumption is controverted and the standard transforms into a sword to be used against the prudent fiduciary. This presumption has not been so applied, and we decline to do so here, as it would effectively lead us to judge a fiduciary's actions in hindsight. Although hindsight is 20/20, as we have already stated, that is not the lens by which we view a fiduciary's actions under ERISA. DiFelice, 497 F.3d at 424; Roth, 16 F.3d at 917–18. Rather, given the situation which faced it, based on the facts then known, State Street made an assessment after appropriate and thorough investigation of Grace's condition. Katsaros v. Cody, 744 F.2d 270, 279 (2d Cir.1984). This assessment led it to find that there was a real possibility that this stock could very well become of little value or even worthless to the Plan. It is this prudent assessment, and not a presumption of retention, applicable in another context entirely, which controls the disposition of this case. See also LaLonde v. Textron, Inc., 369 F.3d 1, 6–7 (1st Cir.2004) (expressing hesitance to apply a “hard-and-fast rule” in an ERISA fiduciary duty cases, and instead noting the importance of record development of the facts).
This came five years after the Court refused to accept and apply the Moench presumption in LaLonde v. Textron, where the Court explained:
As an initial matter, we share the parties' concerns about the court's distillation of the breach of fiduciary standard into the more specific decisional principle extracted from Moench, Kuper, and Wright and applied to plaintiffs' pleading. Because the important and complex area of law implicated by plaintiffs' claims is neither mature nor uniform, we believe that we would run a very high risk of error were we to lay down a hard-and-fast rule (or to endorse the district court's rule) based only on the statute's text and history, the sparse pleadings, and the few and discordant judicial decisions discussing the issue we face. Under the circumstances, further record development—and particularly input from those with expertise in the arcane area of the law where ERISA's ESOP provisions intersect with its fiduciary duty requirements—seems to us essential to a reasoned elaboration of that which constitutes a breach of fiduciary duty in this context.
At the end of the day, once the Supreme Court has ruled in Fifth Third Bancorp, these decisions may be rendered little more than a historical oddity and an interesting backdrop to the development of the presumption of prudence in the case law. For now, though, they constitute an interesting footnote to the discussion about how the various circuits have, to date, applied the Moench presumption.
One Judge's Vote on the Likely Outcome of Fifth Third Bancorp
Wow, what a great piece by Rob Hoskins summing up the law throughout the circuits on the Moench presumption, by means of a review of a new decision by the Eastern District of Missouri on the issue. I highly suggest reading at least Rob’s “Moench Presumption for Dummies” if you want to have a solid understanding of the issues raised by the use of the presumption, or the decision itself for more detail. One of the things that is interesting about the decision itself, by the way, is the court’s handling of the pending Supreme Court review of the Moench presumption issues. The Court ruled on the motions pending before it, finding that the Moench “'presumption of prudence' is appropriately applied at the motion to dismiss stage," but noted that:
The Court is cognizant that this issue is currently pending before the United States
Supreme Court. See Fifth Third Bancorp v. Dudenhoeffer, No 12-751, cert. granted December 13, 2013. Consistent with the majority of courts construing the applicability of the presumption, the Court will apply it with respect to the pending Motion. In the event that the Supreme Court determines the presumption is inapplicable in the 12(b)(6) analysis, the Court will entertain a motion to reconsider.
Doesn’t this mean, effectively, that the District Court is making a prediction of where the Supreme Court will end up on this issue? I suspect the judge wouldn’t have ruled right now to the opposite of what the judge believed was likely to be the outcome of the Supreme Court case.
What Rochow Teaches Us About Amara Remedies, and What It Doesn't
You know, I have been wanting to sit down for weeks – at least – to write about Rochow v. Life Insurance Company of America, initially with regard to the extraordinary remedy initially imposed by the court and then later with regard to the Sixth Circuit’s decision to return to the issue by hearing the case en banc, but I just plain haven’t had the time to write in detail on something that raises so many issues. Beyond that, I am not convinced that the problems raised by Rochow, and the issues it requires observers to consider, are well-suited to the form of a blog post, as there is simply a lot of ground to cover to be able to talk intelligently about the case. This latter problem, though, was solved for me by Alston & Bird’s Elizabeth Wilson Vaughan, who somehow summed up the entire history of the case and the issues it places in play in one simultaneously concise yet in-depth treatment, which you can find here. I highly recommend it to anyone who wants to understand the case, and what the hoo-ha is about, in advance of the en banc return to the issues by the Sixth Circuit.
I have long been on record with the view that the Amara addition of equitable remedies fills in a glaring hole in ERISA, and particularly with regard to ERISA remedies, by, if not solving, at least significantly reducing the problem in ERISA litigation of “harms without a remedy.” We all know those cases, in which a plaintiff makes a compelling presentation of harm, but the remedial structure does not provide for a clear right of recovery; most typically, benefits aren’t due in light of the circumstances at play, and thus a denial of benefits by the administrator was correct and must be upheld, but other issues – most typically a problem in communications with the participant – led to financial losses. We all know, as well, that many judges reluctantly accept that this occurs in ERISA litigation, and rule accordingly, although often expressing unhappiness about doing so – if not in their opinions, then in comments from the bench during hearings. The Amara equitable remedies framework provided a structure for resolving the most meritorious of those claims, by allowing equitable remedies such as estoppel and surcharge to fill in that hole.
The original Rochow disgorgement ruling – widely perceived, including by me, as excessive – falls outside of this framework, by going far beyond simply the proper use of Amara remedies to fix that problem, and is flawed for this reason alone. I have little doubt that the Sixth Circuit will fix this in its next opinion in the case. But for now, it is important, I think, to remember that this is an outlier decision, one that should not be seen as demonstrating some type of inherent flaw in the Amara equitable remedies rubric which, properly used and confined by judicial development of case law to the purpose of solving the “harms without a remedy” problem, is instead a valid and appropriate judicial interpretation of ERISA’s grant of equitable relief. Rochow, in the end, is best thought of, in its rulings to date, as the McDonald’s coffee cup case of ERISA remedies: an example of the need for judicial control over remedies, but not an indictment of the idea of having them.
If an Appeal is Filed and Nobody Knows It, Is it an Appeal?
There are many variations on the old question that, if a tree falls in the woods and no one is there to hear it, did it really fall. I am sure, like me, you have heard many versions of that question that are not fit to be reprinted in a PG-13 rated blog.
But I couldn’t help thinking of that line when I read a recent decision from the United States District Court for the District of Massachusetts. In Morgan v. Reliance Standard, an LTD insurer terminated benefits, and the participant responded in, literally, “dismay,” writing a letter to the company expressing that sentiment. The carrier treated it as an appeal of the original termination, although apparently with some trepidation as to whether an appeal was really being filed. The insurer processed it as an appeal, in standard – and from the looks of the decision, appropriate – form, assigning it to an appropriate medical expert for a record review, eventually resulting in a decision upholding the denial on appeal.
Of course, that begged the existential question of whether there was an appeal at all, or, in other words, whether there can be an appeal if the participant, who must file the appeal, doesn’t mean to file one and doesn’t think he filed one. While one might think that someone must actually file an appeal to have an appeal, you would be wrong. The Court found that the participant could not complain of the insurer’s crediting him with an appeal he didn’t file, unless he was prejudiced by it, because under the law in the First Circuit, procedural errors in handling a benefit claim do not give rise to a remedy unless the participant was prejudiced by the error. The Court found that the course of communications between the insurer and the participant caused the participant to have essentially the same protections in the processing of his claim as he would have had if he had, in fact, filed an appeal, and that the participant therefore suffered no prejudice from the fact that his claim was treated as though appealed. The Court then proceeded to decide the case on its merits.
I am not certain whether this case really teaches us anything new about ERISA litigation, since it is very fact specific and certainly concerns a situation that is unlikely to repeat itself very often. It does, though, appear to provide an answer to the question of whether a tree actually falls in the forest if no one is there to hear it: the answer is clearly yes, at least if a court in the First Circuit is deciding the answer.
Thanks, incidentally, is due to Rob Hoskins’ baby, the ERISA Board, for catching this odd little fact pattern, and giving me an excuse to discuss trees, forests, and what they have to do with ERISA.
Reinsurance, Arbitrations and the Ever Increasing Authority of the Arbitrator
There has been a literal rush of interesting decisions out of the First Circuit and the Massachusetts District Court in the last few weeks, and I am going to try to catch up and comment on them over the next few days. One that jumped out at me, for various reasons, is a decision on whether an arbitrator or instead a federal court decides the collateral estoppel effect of a preceding reinsurance arbitration between an insurer and its reinsurers. In Employers Ins. Co. of Wausau v. OneBeacon American Insurance, the First Circuit concluded that it was an issue for the arbitrator to decide, and not for the court. There were several things that jumped out at me about this decision that made me want to note it and comment on it.
First off, I tried a reinsurance case in the Massachusetts state court’s business session years ago, which was fascinating, as much as anything, for the fact that it was in court at all. As the Employers Ins. opinion reflects, reinsurance disputes are almost always subject to arbitration. In my case, the dispute concerned money owed under a missing reinsurance contract from the 1960s, and no one could establish either its existence or, if it existed, its relevant terms, including whether it required arbitration. As a result, the case became one of the rare reinsurance cases to be tried, requiring first a ruling over the existence and terms of the reinsurance certificate and then one over the amount owed under it. The opinion in Employers Ins. really is, in some ways, about the vacuum-sealed nature of the reinsurance industry and disputes within it, in the sense of they are always, with extraordinarily rare exceptions, kept locked up tight within a system of arbitrations. It is nearly a purely private dispute resolution mechanism that controls that area of business, and the opinion in Employers Ins. reinforces that point, by the degree to which it emphasizes that the plaintiff could not avoid the arbitration system and move its dispute into court.
Second, the case reflects the simple fact that once a business commits to an arbitration regime, they are not getting out of it. The standards for attacking an arbitration ruling in federal court make it nearly impossible to overturn a ruling and, as the Employers Ins. decision makes clear, even the most creative attempts to get around arbitrating a dispute after a company has agreed to that path are likely to be rejected out of hand by the courts. When it comes to arbitration, companies need to understand that the old rule of in for a dime, in for a dollar governs things: if you agree to an arbitration approach, you are stuck with it and are very unlikely to ever be able to get out from under that approach.
Excessive Fee Litigation Remains a Hot Topic
There’s a nice overview from Bloomberg BNA on plan fee litigation, and its status in the courts at this point in time. The article opens up by setting the stage:
Plan fee litigation had a big year in 2013, with divisive appellate court decisions affecting standards of judicial review, statutes of limitations and functional fiduciary status that may open the door for increased and novel litigation, employee benefits attorneys said during a conference panel presentation.
Its interesting to read the rest of the article, which summarizes the current status of cases such as Tibble and Leimkuehler, and discusses the totally conflicting views of the defense bar and the plaintiffs’ bar over these cases. If there were ever a case of two sides not being able to agree on whether it is day or night, it is the two sides of the bar arguing over the propriety of judicial decisions over ERISA liability, particularly with regard to excessive fee litigation. I thought there was a divide bordering on the ecumenical decades ago, in my earlier life as an insurance coverage litigator (which I still sometimes am, when not busy with ERISA fiduciary problems or other types of litigation) between policyholder and insurer lawyers over oddities like the asbestosis exclusion, the meaning of the words “expected or intended,” or what the words “sudden and accidental” actually mean, but they had nothing on the current divide between the plaintiff and defense bars when it comes to high stakes ERISA litigation (a division I wrote about at length here).
Substantively, though, the best takeaway from the article comes in its last line, in a quote from someone with the Department of Labor, who notes on one particular issue raised by the fee cases that it is “an interesting issue, and I don't think we've heard the last of it.” One can say that across the board about all of the excessive fee litigation, and its spin off of other types of cases all targeting the question of whether plan participants are paying more than they should for plan benefits. Tibble itself is a wonderful example of the extent to which excessive fee litigation is a gift that keeps on giving, of a sort, for everyone from the lawyers involved, to plan participants (in those instances where they either obtain a recovery as part of a class or receive the incidental benefit of having lower plan expenses because sponsors are responding to the threat, real or perceived, of excessive fee litigation), and, yes, commentators. I wrote substantially about Tibble way back at the trial court level, in 2011, and here we still are, these many years later, writing and talking about the further history of that case.