Boston ERISA Law Blog

Posted By Stephen D. Rosenberg In Long Term Disability Benefits
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I don’t think there’s a better sportswriter working regularly right now than Sally Jenkins, whose sportswriter father, Dan Jenkins, is personally responsible for my decision, more than a quarter century ago, to attend law school: his sportswriting was so strong, so funny, that it made it obvious that I would have been out of my league if I had instead followed my interest in sports and gone into sports journalism. In this piece here, Jenkins – Sally, not Dan – thoroughly reviews the question of medical care for seriously injured football players, when the care is required decades after they stop playing professional football. What is most interesting to me is that the NFL is defending claims – using statute of limitations and other arguments – that threaten to force the costs of such medical care into the great empty space that lies in between disability coverage on the one hand, employer provided health insurance on the other hand, and workers compensation benefits on the third hand (I know that’s a weird, three-handed person, but if you think about it, the whole idea of a hugely profitable industry like the NFL leaving its employees to bear their own health care costs, when they stem from employment, is at least as bizarre and odd as that image). As Jenkins explains, the NFL denies the vast majority of disability benefit claims under its disability plan, and team owners and the NFL itself are aggressively disputing workers compensation claims filed by former players (i.e., former employees) alleging serious physical injuries from their playing days and accompanying massive medical bills. As Jenkins also explains, if there is no coverage for these medical bills through either of those systems, the only other place for those former employees to turn is Social Security disability or Medicare. And this isn’t just Jenkins talking, or the sales pitch of lawyers for the former players: “a 2008 congressional research report on NFL disability” backs up her reporting on this issue.

Whether people generally understand it or not, and whether the NFL and team lawyers and other representatives quoted in Jenkins’ article know it or not, most lawyers are aware of the general, historical basis for workers compensation schemes, and of the underlying tradeoff on which they are based: in exchange for abandoning the tort system as a means of remedying employment related injuries, employees are given an essentially assured, but limited, recovery for injuries caused by their employment. The NFL players discussed in Jenkins’ article thus either are entitled to workers compensation benefits (or should be, absent gamesmanship by the NFL of the type depicted in her article) for their injuries, or their injuries must be deemed to fall outside of the scope of the workers compensation system, with the former players allowed to seek recovery in the court system from the NFL and their former teams for the injuries from which they suffer. There really is no other appropriate understanding of the proper operation of the intersection of the judicial and workers compensation systems in this context, unless the NFL is going to step up to the plate (I know I am mixing my sports metaphors here) and accept responsibility for the medical care under its disability plan.
 

Posted By Stephen D. Rosenberg In ERISA Seminars and other Resources
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There have been many nice benefits to writing this blog for several years, ranging from the fun of writing it to the pleasure of meeting others with similar interests. For me professionally, though, probably the most important benefit has been the constant flow across my desk of key court decisions, articles and thought pieces on developments in ERISA law, which has helped (and sometimes forced) me to stay constantly up to date on the latest developments in my area of expertise. However, that benefit has come with a complication, which is that the steady stream of information on ERISA that crosses my desk each day includes far more useful information and material than I could ever hope to discuss, and pass along, on this blog. This is particularly the case because I have never been willing to use this blog as a place simply to post other people’s work, but instead typically only post when I believe I have something independently useful to say about someone else’s article or blog post, or about a court decision, or the like.

This has meant, however, that for years, large amounts of quality work discussing ERISA issues has sat on my desk, reviewed only by me and not passed along, despite the value of much of that work. It has always bothered me when an article or decision worth passing along has come in front of me, but that I would not be able to discuss in a blog post, either because I was posting on a different issue, or because of the crush of my real job (which is litigating these and other types of disputes).

Eventually, though, light dawned on Marblehead, and I realized I could solve the problem by using Twitter for one of its originally expressed purposes, as a microblogging tool, and tweet articles, comments, decisions and the like that I believed to be of value, but which I did not expect to discuss in a full blown blog post. I have been doing so for awhile now, and have taken to regularly passing along relevant ERISA news that will not make it onto the blog. You can follow me, and my running list of interesting ERISA information, at @SDRosenbergEsq.
 

Posted By Stephen D. Rosenberg In 401(k) Plans , Benefit Litigation , ERISA Statutory Provisions , Employee Benefit Plans , Equitable Relief , Fiduciaries , Summary Plan Descriptions
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For years, in speeches and articles, I have preached the gospel of what I have come to call “defensive plan building,” which is the process of systemically building out plan documents, procedures and operations in manners that will limit the likelihood of a plan sponsor or fiduciary being sued while increasing the likelihood that, if sued, they will win the case in the end. Over the past couple of years, doctrinal shifts related to remedies available to participants under ERISA have made defensive plan building even more important, for at least two reasons. First, these shifts have expanded the range of potential liabilities and exposure in offering, and running, a benefit plan. Second, these developments have, to a significant degree, given rise to an increased focus in ERISA litigation on the actual facts concerning the plan’s activities, as the lynchpin of the liability determination. The combination of expanding liability risks with an increased focus on plan actions makes it more important than ever to focus on the steps of defensive plan building, including by focusing on operational competence in running a benefit plan.

I discussed this concept in much greater detail in my recent article in the Journal of Pension Benefits, “Looking Closely at Operational Competence: ERISA Litigation Moves Away from Doctrine and Towards a Careful Review of Plan Performance.” The article discusses how the last several years of ERISA litigation, including in particular the Supreme Court’s recent activism in this realm, has created this phenomenon. You can find a much more fully realized presentation of these points in the article.
 

Posted By Stephen D. Rosenberg In ERISA Statutory Provisions , Employee Benefit Plans , Equitable Relief , Health Insurance
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I have often joked that, to seem intelligent at social events, a person really just has to have two things handy – the first, a Noam Chomsky reference, and the second, a Shakespeare quote, preferably from a lesser play. If you are good, you can find a way to fit one or the other into any subject of conversation. Personally, I rely on “there are more things in heaven and earth than are dreamt of in your philosophy” (which I also find is often an especially good rejoinder in court to legal arguments proffered by opposing counsel), and Chomsky’s media coverage study, when I am trapped in a conversation with no way out, but to each his own.

I was thinking of this when I read the Workplace Prof’s excellent and extensive blog post on the two latest developments at the Supreme Court concerning ERISA law, the first being the very recent decision in US Airways v. McCutchen, which I suspect will soon be reduced to the defense assertion that courts must always apply the plan terms as written, and the Court’s grant of cert in Heimeshoff v. Hartford, on the application of statute of limitations to benefit claims under ERISA. You don’t have to really study the source material on either of these cases to hold forth on them at this point, because you can just read the Prof’s post, and be all set to pontificate on them without a problem. Less tongue in cheek, it really is worth reading, if you want to understand, with a limited investment of time, what these two cases are about and why they matter.

I would also throw in, with regard to the opinion in McCutchen, two additional comments that you can borrow, if you really want to look erudite without doing any homework on your own first. One, it really is a well-written piece of work, taken simply as an example of the written form in the legal context, without regard to how one may feel about the merits of the decision. I would suggest it to connoisseurs of the form for a read, under any circumstances. Second, the case, although an ERISA decision, has an easy transition to the doctrines of insurance law, where subrogation and the impact of the common fund doctrine are in play on a routine basis; it adds additional support for any argument that the common fund doctrine should always apply in that circumstance. In this regard, feel free to drop a knowing reference to footnote 8, if you really want to appear in the know.
 

Posted By Stephen D. Rosenberg In 401(k) Plans , Benefit Litigation , Class Actions , Conflicts of Interest , ERISA Statutory Provisions , Fiduciaries
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A few more thoughts to round out my run of posts (you can find them here and here) on the Ninth Circuit’s opinion in Tibble. First of all, where does revenue sharing go as a theory of liability at this point? The Ninth Circuit essentially eviscerated that theory, and I doubt it has much staying power anymore, at least as a central claim in class action litigation. Revenue sharing hasn’t, generally speaking, had much traction in court, and I think it is because, at some level, judges understand that someone has to pay for the plan’s operations. That said, you should still expect to see it as a claim in cases against DC plans and their vendors, even if only as a tag along, with liability only likely to follow in cases where someone comes up with a smoking gun showing that the plan sponsor acted in ways harmful to participants specifically because of a desire to save money for the plan sponsor through its revenue sharing decisions. But revenue sharing in and of itself as an improper act or a fiduciary breach that can warrant damages? Probably not much of a future for such claims.

Second, there is a lot of talk about the expansion of litigation against DC plans and their providers, and has been for sometime now. How does that fit with the minimal recovery by the class in Tibble? To some extent, Tibble, although affirming a trial court award to the class, is not much of a victory, given that the class only recovered a few hundred thousand dollars. In fact, to call it a victory for the plaintiffs, while correct , reminds me of nothing so much as the comment of British General Henry Clinton after the Battle of Bunker Hill, when he noted, given the extent of British casualties, that “"a few more such victories would have surely put an end to British dominion in America." Likewise, a few more victories similar to this one for class plaintiffs in excessive fee cases will put an end to this area of litigation quicker than anything else could, as these types of cases simply would no longer be worth the costs and risks to the class action plaintiffs’ bar. However, it is important to remember that the dollar value of the recovery in Tibble was likely driven down substantially by the statute of limitations ruling, which took much of the time period of potential overcharging out of the case and with it, presumably much of the recovery. If participants bring suit over fees closer to the time that the investment menu that included the excessive fees was created, they will not face that barrier to recovery and the likely recovery could easily be high enough to justify the risks and costs of suit. This, interestingly, is where fee disclosure should come into play – participants, and thus the plaintiffs’ bar, should have enough information about fees to bring suit early enough to avoid the statute of limitations problem that impacted the plaintiffs in Tibble. As a result, there should be more than enough potential recovery in many possible excessive fee cases to motivate plaintiffs’ lawyers to pursue the claims.
 

Posted By Stephen D. Rosenberg In 401(k) Plans , ERISA Statutory Provisions , Fiduciaries
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Do they still teach administrative law in law school? I don’t know if they need to bother anymore, because the Ninth Circuit’s exposition of Chevron deference in Tibble, when discussing the 404(c) defense, pretty much sums up everything a practicing litigator needs to know about the subject. It is a first class explanation of the law of administrative deference, as well as a pitch perfect explanation of how one analyzes the issue.

Of import to ERISA, however, is a much narrower and more specific point, which is the Court’s cabining of the scope of the 404(c) defense so as to only encompass participant decisions that take place after the selection of the investment menu, on the basis that this reading matches the Department of Labor’s interpretation of 404(c). Based on this reasoning, the Ninth Circuit concluded that a fiduciary’s selection of investment options is not protected by 404(c). This is, at the end of the day, perhaps the most important aspect of the Court’s opinion, although in the immediate aftermath of the ruling it may well not be the aspect that garners the most comment and attention. However, it is really the one key part of the ruling that expands the scope of fiduciary liability and that adds to the arsenal for lawyers who represent plan participants, in that it clearly demarcates the selection of plan investments as an issue that falls outside of a 404(c) defense. Not only that, but the opinion does so in an articulate, well-reasoned manner, making it likely to have significant persuasive force when the issue is considered by other courts.
 

Posted By Stephen D. Rosenberg In 401(k) Plans , Benefit Litigation , Class Actions , Fiduciaries , Standard of Review
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Well, the United States Court of Appeals for the Ninth Circuit has affirmed the District Court’s well-crafted opinion in Tibble v. Edison. I discussed the District Court’s opinion in detail in my article on excessive fee claims, Retreat From the High Water Mark. From a precedential perspective, as well as from the point of view of what the opinion foretells about the future course of breach of fiduciary duty litigation in the defined contribution context, there is a lot to consider in the opinion. There is too much, in fact, for a single blog post to cover, or at least without the post turning into the length of a published paper. I try to avoid that with blog posts because otherwise, to misquote a poet, what’s a journal or law review for?

I plan instead, however, to run a series of posts, each tackling, in turn, a separate point that is worth taking away from the Ninth Circuit’s opinion. The first one, which I will discuss today, concerns ERISA’s six year statute of limitations for breach of fiduciary duty claims. The Court held that, in this context, ERISA’s six year statute of limitations starts running when a fiduciary breach is committed by choosing and including a particular imprudent plan investment. The Court held that the fact that it stayed in the investment mix did not mean that the breach continued, and the statute of limitations therefore did not start running, for so long as the investment remained in the plan.

Beware future arguments over this holding. You can expect defendants to regularly argue that this case stands for the proposition that the six years always runs from the day an investment option was first introduced, and that any breach of fiduciary duty claims involving that investment that are filed later than six years after that date are untimely. You can also expect defendants to argue to expand this idea into other contexts, and to ask courts to rule that anytime the first part of a breach began more then six years before suit was filed, the statute of limitations has passed. This would not be correct. The opinion only finds this to be the case where there were no further, later in time events that, as a factual matter, should have caused the fiduciaries to act, or which, under the circumstances of those events, constituted a breach of fiduciary duty in its own right; if there were, then those are independent breaches of fiduciary duty from which an additional six year period will run. Those independent, later in time breaches would presumably be their own piece of litigation, evaluated independent (to some extent) of the original breach.
 

Posted By Stephen D. Rosenberg In Fiduciaries
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I joked in a tweet the other day that I could be busy for the rest of my professional career if I could just represent all the company officers and officials out there who don’t know they are ERISA fiduciaries until after they are sued for breach of fiduciary duty. The joke was in response to a comment by Chris Carosa of the highly valuable Fiduciary News website about the expanding liability exposure of these officers, whom he dubbed “accidental fiduciaries.”

And it is true that company officers who play roles in company benefit plans – often simply as an adjunct to their usual list of job responsibilities – are sitting ducks for fiduciary exposure. I have spent years extracting company officers, whose real job focus was elsewhere (marketing, or sales, or operations, or the like) from suits against them for breach of fiduciary duty related to company benefit plans that they were involved with simply as a sideline to their “real” responsibilities. At the end of the day, though, what such officers have to understand is that they face potentially significant, and substantial, personal liability under ERISA for problems in the operations of such plans and therefore, if for no other reason than self-preservation, they need to treat this part of their responsibilities as also part of their “real” responsibilities. It can cost them too much money if they don’t.

I was prompted to write about this today by this interview with Samuel Rosenthal, the author of a deskbook on the potential legal liabilities of directors and officers. There isn’t much doubt that the significant risk of ERISA exposure, and the details of how to avoid that risk, need to be in any such book. There are standards of conduct that officers can follow that will avoid liability in this area; actions in contemporaneously documenting that conduct that can mean the difference between winning and losing lawsuits against them over company benefit plans; and issues with insulating themselves prospectively from potential liability for breach of fiduciary duty under ERISA, such as through insurance or indemnification agreements.
 

Posted By Stephen D. Rosenberg In Preemption
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Longtime readers of this blog know that I don’t comment on my own on-going cases, but that I will pass along interesting decisions from my cases, without much comment or analysis, when I think they provide some value to readers. In that vein, attached is a recent 22 page opinion in favor of one of my clients dismissing seven of eight claims in an ERISA case. I think it provides a very comprehensive examination of the current law of preemption in the First Circuit, including concerning state law claims of misrepresentation, which is a very hot topic right now.

Posted By Stephen D. Rosenberg In Pensions , Retirement Benefits
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When you approach the Moakley federal courthouse in Boston from the direction of Boston proper, your eye is invariably drawn to a series of quotes engraved on the courthouse wall. I have walked to that courthouse an untold number of times, and still, each time, I read the quotes as I go by as though I have never seen them before. One of the quotes is Holmes’ famous comment that law is the “witness and external deposit of our moral life.” I thought of this after reading this Washington Post article which tries to give a moral dimension to a fact of which ERISA lawyers – both those who represent plans and those who represent participants – are well aware, which is that retirement funding is woefully inadequate in comparison to most people’s retirement goals. As most of us know and as I have discussed in this blog numerous times, pension funding is a substantial problem, to the extent that pensions are the dinosaurs of the retirement plan world, while underfunding of defined contribution plans by participants is the new normal.

For most ERISA lawyers, including myself, the response to this typically falls in the category of yup, what else is new, followed by a shrug and an assertion that plan requirements, funding issues, age limitations and other retirement plan issues have to be managed in a way that recognizes and accepts this reality. The Washington Post article, however, points out that there is a moral element to this evaluation, which is that a correlation exists (or appears to exist, as I am always skeptical of any statistical claims unless and until I am satisfied about the underlying data, as per my discussion here) between wealth at retirement age and life expectancy. I highly doubt that there is much that ERISA really has to say or can do about this phenomenon: the reality is that plans are only required to provide what the plans say they are required to provide, and ERISA basically (and very generally speaking) requires only that. But to the extent this correlation truly exists, then perhaps ERISA, and how it is interpreted and applied by courts, has a role to play, at least at the margins, when it comes to this problem, in the sense that it warrants courts holding plans and their authors to high standards of excellence and competence. This is probably the least, and may well be the most, that ERISA can bring to the table in addressing this issue.
 

Posted By Stephen D. Rosenberg In ESOP , Fiduciaries
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Chris Rylands and Lisa Van Fleet's recent, very pithy summary of the Department of Labor’s enforcement initiatives with regard to ESOPs has been rattling around in my head for a couple of weeks now. The more I think about it, the more impressed I am by their ability to set out, in a couple of paragraphs, pretty much a cheat sheet of everything that really matters in running an ESOP. Focusing on the use of valuations by outside appraisers, they explained that, in the view of the DOL:

[ESOP] trustees . . . have a duty to prudently select . . .appraisers and that, even if the appraiser is prudently selected, the trustee still has an obligation to make sure the assumptions on which the valuation is based are reasonable under the circumstances. [The DOL] also said that trustees should be wary of a seller’s role in selecting the appraiser [and that] trustees should also read the appraisal.

The authors then captured what the DOL identified as key failings in appraisals that can make a valuation suspect:

•No discount applied for lack of marketability;
•Failure to take into account the risk associated with having only a single supplier or customer;
•Inflated projections;
•Inconsistencies between the narrative of the valuation and the math in the appendices;
•Use of out of date financial information;
•Improper discount rates;
•Incomparable comparable companies – for example using a large public company as a comparable to a small private company; and
•Failure to test the underlying assumptions.

What is most interesting to me about this is that, although the authors were focusing on valuation and appraisal issues that risk drawing the attention of the DOL, they have also captured the fundamental issues in breach of fiduciary duty litigation arising out of ESOPs. These types of mistakes by ESOP plan fiduciaries in using and relying on appraisals will support breach of fiduciary duty litigation by ESOP participants, and if such mistakes caused a loss to the plan, will be sufficient to impose liability on the fiduciaries. In contrast, avoiding all of these potential traps is likely enough to insulate fiduciaries of ESOP plans from liability for breach of fiduciary duty.

The takeaway for ESOP fiduciaries? Pay attention to each one of these points in the handling of valuations, and you may prevent not just DOL enforcement action, but being named as a defendant in breach of fiduciary duty litigation instituted by plan participants.
 

Posted By Stephen D. Rosenberg In Long Term Disability Benefits
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This is interesting, right on the heels of all the discussion about the Second Circuit, in Kirkendall, not requiring a participant to exhaust administrative remedies by appealing a benefit determination before filing suit. As I noted in my discussion the other day about Kirkendall, the Court did not require an appeal because the plan did not clearly impose such an obligation. But what if the plan did, in clear language, provide a right and obligation to appeal? Well, the Eighth Circuit has just reminded us that, in that case, an appeal is necessary, and the failure to do so precludes filing suit. The case is Reindl v. Hartford Life and Accident Insurance Co., discussed in this excellent post by the entertainingly named (and entertainingly written) Boom blog.

Posted By Stephen D. Rosenberg In Benefit Litigation , Class Actions , Employee Benefit Plans , Fiduciaries
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I have passed along on Twitter (https://twitter.com/SDRosenbergEsq) some of the better reviews that have crossed my desk of the Second Circuit’s recent decision in Kirkendall v. Halliburton, Inc., in which the Court held that a plan participant did not have to exhaust administrative remedies in an ERISA plan where the plan document itself was unclear in imposing such an obligation. Frankly, I wasn’t sure the case itself warranted any more extensive discussion, because I don’t find the Court’s conclusion particularly unusual or controversial in any manner. That said, though, the amount of commentary the case has generated reminds me that, at the end of the day, the Second Circuit is like E.F. Hutton: when they talk, people listen. So to expand on my Twitter thoughts about the case, here are some more expansive thoughts, ones that require more than 140 letters to communicate.

The most important way of viewing the decision, in my thinking, is to remember that exhaustion of administrative remedies in this scenario is not a statutory requirement, and is instead a judge-made doctrine that is based on certain assumptions about ERISA plans and certain premises that are thought to be implicit in the statute. In practice, the imposition of an exhaustion of administrative remedies standard on ERISA claims has generally not been a problem, has worked well, and has been effective in effectuating many of the goals for the statute, such as cost efficiency, limited litigation, and encouraging employers to create benefit plans. That said, however, there is certainly no clear cut basis in the statute for believing that, if a plan sponsor doesn’t clearly communicate the need to appeal within the plan, a plan participant should be required to do so or be shown the courthouse door for having failed to do so. This is essentially all that the Second Circuit concluded: if the plan sponsor doesn’t make it clear to the participant in the relevant documents that certain internal administrative appeals are required, along with explaining how to do that, an obligation to do so cannot be imposed on a plan participant.

This is not a new issue, although the decision in Kirkendall may be the most significant authority to date for this proposition. I have litigated this issue in the past, but most often you see it in one-offs like top-hat plans (or virtual one-offs, like SERPs for just a few executives), where a custom document is created for certain employees to address compensation-related issues, and the ERISA procedural component of doing so is not front and center in the authoring attorney’s mind. Usually, the outcome of any dispute over administrative exhaustion in those situations ends up the same as the ruling by the Second Circuit in Kirkendall for all intents and purposes, but getting to that result is harder than just citing a leading decision from a prominent appellate bench; you instead had to rely on a collection of lower court decisions finding exhaustion to not be required for a multiple of different reasons. Certainly, at the end of the day, Kirkendall will make it easier for lawyers for plan participants faced with this scenario to support their arguments that they can prosecute a claim in court without first exhausting internal administrative appeals, but I don’t think it will much change the outcome from what would have occurred without that decision.
 

Posted By Stephen D. Rosenberg In Long Term Disability Benefits
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There are limits, though vast, to the degree to which words, even in the hands of the most careful draftsperson, can accurately capture concepts, particularly when those concepts concern future events and possibilities. There are likewise limits, though vast, to the degree to which people can anticipate future events. I have written more than once about the impact of these limits of both language and foresight on insurance policies. Because of these fundamental realities, no matter how much effort is put into drafting an insurance policy and anticipating the scope of potential exposures, there will inevitably be losses that either were never anticipated when the policy language was written or that, even if anticipated, were not accurately captured within the chosen wording. It is this phenomenon that constitutes the source of much insurance coverage litigation: either an event occurs that neither the policyholder nor the insurer anticipated and included within the policy language, or one party or the other thinks it bought coverage for or excluded a particular future possibility, only to find out later that the words they chose to use didn’t capture it.

This is true for plan documents, LTD policies, and essentially any contract – words and anticipation aren’t always enough to create a document that fully provides for everything that might happen in the future, leaving the parties to dispute how the document applies when a novel event eventually occurs. This has never been so evident as in this new decision from the First Circuit Court of Appeals, in which the issue arose as to whether the future risk of a relapse by an anesthesiologist who had been diagnosed with addiction rendered the physician disabled for purposes of an LTD policy. The case itself is fascinating, as is, to some extent, the question at its heart: if the currently disabling event has passed, but the participant may become again disabled, is the participant still disabled for purposes of the policy? The question itself sounds like a Zen koan and, phrased as I just have, almost as unanswerable. Almost, but not quite, because the First Circuit found an answer, rooted in the limitations on language and foresight I noted above. The Court found that the risk of relapse rendered the participant still disabled, because the LTD policy did not specifically exclude this risk. So there you have it: if you don’t want to cover the currently rehabilitated participant whose risk of relapse means he can’t go back to work, you better write that down somewhere in the plan or the policy.

 

Posted By Stephen D. Rosenberg In Conflicts of Interest , ESOP , Fiduciaries , Long Term Disability Benefits
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Many, but probably not all of you, know the story of Alex Smith, the San Francisco 49ers quarterback. Long derided in the early part of his career, he came into his own over the past two seasons, succeeding especially well this past season, according to mathematical standards widely accepted among the football loving public as fair measurements of performance by quarterbacks (I would point out that since these measurements don’t demonstrate that the best quarterback in Sunday’s game – Baltimore’s Joe Flacco – is in fact the best quarterback in Sunday’s game, that they are deeply flawed measuring rods, but that is a story for a different day). It turned out though, that for Mr. Smith, all that statistical success is worth, for now, a grande cup of coffee at Starbucks, assuming he also has two bucks and eight cents on him. This is because he lost his starting job to his backup after an injury, and despite returning healthy within a short time, was never able to regain his job.

Has he pouted, caused trouble for the new quarterback, gone to twitter to rant, or tossed a hissy fit? No, no, no and no, according to all published reports. In fact, again according to all published reports, he has been helping the new quarterback – his former backup and the man who took his job from him – succeed, and has focused on helping the team win the championship.

I am sure Mr. Smith will get another starting job soon as a professional quarterback, but when his football career is over, I have the perfect job for him: ERISA plan fiduciary. I joke somewhat, but the reality is that his story, sketched in outline form above, is a perfect metaphor for the role of a fiduciary. Smith put the team ahead of his own interest, including financial (there’s a lot more money to be made as a starting quarterback, particularly one with a Super Bowl ring on his hand, than as a backup), and has focused on helping his teammates and employer succeed.

Isn’t that exactly what a plan fiduciary is supposed to do? A plan fiduciary is supposed to act prudently in the best interests of the plan participants and on behalf of the plan sponsor, who has placed him or her in that role. It requires, legally speaking, prudent decision making that is in the best interest of the fiduciary’s team – namely the participants and the plan – without regard to whether or not it is beneficial to the fiduciary. In fact, what could be a more accurate description of the prohibited transaction rules, than to say that they preclude a fiduciary from engaging in transactions to his or her own benefit, as opposed to transactions that benefit the plan and the participants? This is essentially the same thing as what Alex Smith has done in his workplace, which is avoid acting in ways that might benefit him at the expense of his teammates (such as undermining the new quarterback), conduct which would likely be seen as prohibited in the culture of his workplace.

Similarly, one can understand the structural conflict of interest rules in deciding claims for benefits as simply a codification of the idea that a plan or its fiduciary must not put its interests ahead of those of plan participants when deciding claims for benefits. Alex Smith, in the context of his work environment, has likewise elected to not favor his interests over those of his teammates, despite the fact that the interests of each conflict. He has, in essence, subjugated his interests – financial and otherwise – in being “the man” to his team’s conflicting interest in having him be a team player as they prepare for the biggest game of the year and, for many of his teammates, of their careers.

Smith has, in effect, demonstrated the exact obligation of putting others first, ahead of his own interest, that the law – both statutory and judicial – imposes on plan fiduciaries. One can also view it in reverse, as well. Imagine the chaos that would erupt in preparing for Sunday’s game if Smith instead took umbrage, undermined his coach or the starting quarterback, or otherwise acted out while his team tried to prepare for the Super Bowl. Not a good situation, one can be sure. Is this any different than the impact a fiduciary has when he puts his interests ahead of those of the plan’s participants? Think, for instance, of the circumstance where the fiduciaries of an ESOP are company officers, who, by dint of that role, may benefit from certain corporate actions that would not benefit, or might harm, employees participating in the ESOP. Acting in their own best interest and in disregard of the interest of the fiduciary’s team, namely the plan participants, would likewise create chaos, in the form of losses to plan participants and inevitable breach of fiduciary duty litigation. At the end of the day, both Smith in his realm and the fiduciary in his realm can make only one correct decision, which is to put the team, in the first instance, or the plan, in the second, first; anything else is a disaster waiting to happen.

So yes, Alex Smith – plan fiduciary. I like it.
 

Posted By Stephen D. Rosenberg In Pensions
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These are two oddly complimentary stories, that tie closely to topics I have discussed regularly on this blog, including, among others, the difficulty faced by smaller shops of running a pension or other benefit plan, and the fact that no one at all wants to run a pension anymore. The first story is about a law firm in Detroit which is in the process of turning its pension plan over to the PBGC. What’s interesting about it is the sheer impracticality running a pension plan is for even a decent sized – but not massive – professional services firm. As the article notes, the coming and goings of partners, and the length of pension obligations, resulted in a plan in which “"you have people in the firm who aren't in the plan and people in the plan who aren't in the firm." Think about that for a minute. A law firm or other service entity isn’t really in the position of predicting out its obligations and future work force in the same way that a company with a large unionized or otherwise reasonably predictable workforce is; partners come, partners go, and you end up with the ones who stay funding a pension plan for the ones who have left. Heck, the routine collapses of law firms these days, even the biggest ones, make clear the folly of predicting that firms whose sole real assets are their intellectual capacity will be around long enough for a pension plan to survive and thrive.

And of course, as I have discussed in numerous posts, things aren’t much different even for companies with hard assets, most of whom have either gotten out of the pension business already or are now looking to do so by means of de-risking, which is the process of pursuing “options for transferring some or all of a sponsor's plan risk” to third-parties. This is a broad, deep and complicated topic that touches on a wide range of issues and disciplines, from finance to litigation risks to fiduciary prudence to ERISA. One of the best descriptions in a nutshell I have seen on this topic can be found in the second story I wanted to pass along today, which is Susan Mangiero’s excellent post on this subject on her blog, Pension Risk Matters. I highly recommend it as a starting point for understanding this topic.
 

Posted By Stephen D. Rosenberg In ERISA Statutory Provisions
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We – meaning lawyers who do civil side work involving ERISA plans – mostly think about the rules against prohibited transactions from two perspectives. The first concerns whether clients can structure certain transactions or engage in specific plan actions without running afoul of the prohibited transaction rules. The second arises in litigation, where we either challenge certain plan actions as prohibited transactions or defend plan fiduciaries against claims that they engaged in prohibited transactions. What we don’t normally think of, though, is the idea that if a fiduciary goes just way too far over the line between prohibited and appropriate actions, a whole heck of a lot of hurt is coming down the pike; this isn’t typically on our radar screens because most plans and fiduciaries not only don’t want to get into the kind of trouble that would come from taking such a step, but also because most plans and fiduciaries, in my opinion (even if they are ones I am suing, rather than ones I am defending), have an overall bias towards generally trying to do the right thing. Here’s a very good story illustrating what happens when that dynamic isn’t in play, though, and a fiduciary invokes significant DOL action over prohibited transactions.

Posted By Stephen D. Rosenberg In Benefit Litigation , Long Term Disability Benefits
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What do these two stories have in common, the first about a claims administrator not being allowed to change the basis for a denial of benefits during the internal appeal and the second about an administrator not being allowed to deny benefits based on factual investigation during litigation? They both highlight the importance, for the parties on both sides of the “v” in any denial of benefits case, of the administrative claim process. Under the court decisions discussed in both stories, the record, and the grounds for denying benefits, were effectively frozen thereafter. In one of the two cases, in fact, the administrator was not even allowed to shift the grounds for denial during the processing of the appeal of its initial denial of claim, before the case even moved to litigation, and was forced to stand on the basis for denial contained in its original, initial denial.

From a practical perspective, there are lessons to be learned here about the need to stake out your position, and back it up, very early on in the claim process in an ERISA denial of benefits dispute. From a more philosophical perspective, the cases raise a serious question, about what the rule should be if, in fact, there is new evidence or analysis that would invoke a new plan term limiting coverage or otherwise affect the outcome of a claim, that is learned by the natural course of the claim’s progression. For instance, it may well be that an administrator denies a claim on one ground under the plan, but evidence submitted during an appeal of the initial denial taken by the participant demonstrates the applicability of another plan term as a basis for denial. Should the plan or the administrator be frozen out of raising that plan term as a ground for denial on the final decision, after the appeal of the initial decision, just because it wasn’t raised in the initial denial of benefits?
 

Posted By Stephen D. Rosenberg In Directors and Officers , Fiduciaries , Percentage Players Die Broke Too: Notes on Litigation and Trial Tactics
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One of the interesting aspects of litigating ERISA cases is the extent to which, for me anyway, it is part and parcel of a broader practice of representing directors and officers in litigation. From top hat agreements they have entered into, to being targeted in breach of fiduciary duty cases for decisions they participated in related to the management of an ERISA governed plan, directors and officers of all size companies spend a lot of their working life operating – in terms of legal issues – under the rubric of ERISA. In some ways, this is even more true of officers of entrepreneurial, emerging or smaller companies; due to the relative lack of hierarchy or distinct departments, in comparison to the largest corporations, officers of these types of companies often find themselves involved to one degree or another in almost every aspect of the company’s business, including retirement and other benefits that are likely to be governed by ERISA.

For me, one of the more interesting aspects of representing officers and directors in litigation is the question of when, if ever, they can be reached personally for actions that one would otherwise expect to be the responsibility of the company itself. Although lawyers are all taught in law school about the sanctity of the corporate form and the protection against liability it grants to company officers, lawyers quickly learn that, in practice, that is a principle more often honored in the breach. Both common and statutory law offer plaintiffs various ways around the protection of the corporate form, including, when it comes to retirement or benefit plans, breach of fiduciary duty claims under ERISA. The theories of piercing the corporate veil and participation in torts can also be exploited to avoid the shield against liability granted by the corporate form in many types of cases, although those can be difficult avenues to use to impose liability on a corporate officer.

All of these issues have one thing in common, which is a question of line drawing, consisting of determining exactly where the line should rest between the protection of the corporate form and the ability to impose liability on a company’s officers. One aspect of this line drawing that has always held great interest for me is the economic loss doctrine, which holds that contractual liabilities cannot be used as the basis for prosecuting tort claims. In the context of defending officers and directors against claims for personal liability based on a company’s actions, it serves as a strong defensive line against imposing tort liability on a corporate officer for the contractual liabilities and undertakings of the company itself. You can find a good example of this defense tactic in this summary judgment opinion issued by the business court in Philadelphia last week in one of my cases, in which I defended a corporate officer in exactly that type of case.

Posted By Stephen D. Rosenberg In Equitable Relief
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I don’t know how many of you have had a chance to read, or have any interest in reading, the transcript of the argument yesterday in McCutchen, but its actually fairly entertaining. For one thing, it is clear that everyone – litigants, the justices, you name it – are a little flummoxed by the need to go back to “days of the divided bench” to figure out how to handle equitable relief claims under ERISA. The cases cited by the parties are, by definition, archaic, and do not perfectly fit the scenarios arising today. Further, as the argument makes clear, it puts way too much value on treatises, which often – particularly in the insurance context, such as the Couch treatise referenced in the argument – reflect the analysis and synthesis of the authors more than anything else. Questioning from the bench and discussion from the lawyers makes clear that everyone recognizes the effect all of this has on deciding cases. At least two justices, in fact, make what I take to be mocking references to the need to reason and decide as though it was centuries earlier, with Justice Breyer placing a hypothetical in the 15th century and another justice referencing the need to act as though it is the beginning of the 20th century.

This is no way to run a ballclub, pretending that we can figure out in 2012 what a judge, educated only on the legal principles and aware only of the factual scenarios that existed hundreds of years ago, would do with the complex fact patterns and contracts that arise out of a statute that wasn’t enacted until 1974. I have written elsewhere that I highly doubt that the statute’s drafters were deliberately and knowingly incorporating the 19th century into the statute, including when they drafted the remedial procedures. One has to ask then, in that circumstance, how it can make any sense to retreat to the 19th century to decide how to apply that statute. Wouldn’t it make more sense, as a matter of statutory construction and simple commonsense, to ask what equity rule would have applied in 1974 to decide an issue like this and then, if there was no rule governing it at that time, say so and then choose one based on all of the competing factors that the Court normally considers in deciding an open question involving statutory interpretation?
 

Posted By Stephen D. Rosenberg In 401(k) Plans
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I was somewhat stunned – and frankly, to some extent angered - by this article yesterday in Slate, in which a business school professor asserts that, if research from Holland does not support the idea that tax breaks motivate savings, one should do away with the 401(k). This completely misses the point that, in a country where the 401(k) is now effectively the only private sector retirement plan available to most employees, the tax break in question is a necessary element of increasing employees’ retirement assets, and is thus a retirement subsidy, not a savings incentive. As a result, the proper frame of reference for debating whether or not to maintain the 401(k) tax preference is that of retirement policy, in terms of considering whether or not it is the proper approach to creating retirement income for the American public; the proper frame of reference for debate is not the tax code, and the preference’s relationship to the deficit.

DWC’s Adam Pozek has a great post on his blog explaining exactly why the tax preference should not put the 401(k) in the crosshairs of budget cutters and revenue raisers, right here.
 

Posted By Stephen D. Rosenberg In Equitable Relief
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US Airways, Inc. v. McCutchen is scheduled to be argued at the Supreme Court tomorrow, the next round in the on-going investigation by the Court of the scope of equitable relief available under ERISA. In this instance, the Court must consider the extent to which traditional limitations on equitable remedies are incorporated into ERISA. For those of you needing some background, I thought this was a good discussion of the case. For what its worth, I think everything from the Court’s selection of this case, to the recent Court opinions on equitable issues in ERISA litigation, to the language of the statute, point firmly towards the Court upholding and agreeing with the Third Circuit’s take on this issue. I think at the end of the day, the more interesting question is not going to be whether the Court agreed with the Third Circuit on the narrow points at issue in the case, but instead how many various Pandora’s boxes the Court’s discussion of equitable relief in its opinion will inevitably open up, which litigants and lower courts will have to resolve in the future. When the Court has delved recently into the proper scope of equitable remedies under ERISA, it has tended to answer one question while simultaneously opening up many more issues that must be resolved; McCutchen itself, as the Third Circuit’s opinion reflects, is the outcome of just that dynamic.

Posted By Stephen D. Rosenberg In Employee Benefit Plans , Fiduciaries , Pensions
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Nobody wants to be in the pension business anymore (other than, I guess, vendors who provide defined benefit plan services, annuities, etc. to plans and their sponsors). The Washington Post had an interesting article recently on the vanishing pension, and of course everyone who works in this field has long known that plan sponsors have been aggressively moving from defined benefit plans to defined contribution plans for years. In fact, as I have discussed in other posts and address again in an upcoming feature article in the Journal of Pension Benefits, the most important aspect of the Supreme Court’s watershed decision a few years back in LaRue may very well not turn out to be the express grant to defined contribution plan participants of the right to sue for fiduciary breaches based only on harm to their own accounts, but the Court’s express recognition that the legal rules established over decades governing pension plans should not automatically be applied to defined contribution plans. All of this sturm und drang - and much more -is part and parcel of the death of the pension, at least in the private sector; economics are almost certain to eventually kill them in the public sector as well, given enough time.

But getting rid of pensions and out of the pension business, if you are the fiduciary of a pension plan, is not easy and not without legal risk, including of being sued for breach of fiduciary duty for taking that step. One of my favorite commentators on pension governance issues, Susan Mangiero, and ERISA litigator Nancy Ross provide an excellent overview of this point in this article on CFO.com. This subject has come up a lot recently in discussions with clients, potential clients, and other ERISA lawyers, and this article is a terrific introduction to the subject.
 

Posted By Stephen D. Rosenberg In ERISA Seminars and other Resources , ERISA Statutory Provisions , ESOP , Fiduciaries , Preemption , Summary Plan Descriptions
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Here’s a neat special edition of the John Marshall Law Review, covering Supreme Court Jurisprudence in advance of an employee benefits symposium at the law school. Several of the articles in particular jump out at me as a practitioner as being right on point with key issues playing out in the courtroom; I think it is notable in this regard, and possibly causally related, that several of the authors are practicing lawyers who focus on ERISA litigation.

One article addresses fiduciary obligations with regards to holding employer stock in a plan, or what the rest of us commonly refer to, by shorthand, as the Moench presumption. As I discussed in this post, the courts are in the process of working out the application of these obligations and the presumption under the real time circumstances of actual cases. Another focuses on the development and application of equitable remedies after Amara, and one other speaks to the role of SPDs after Amara. The two are linked, in that the communications contained in SPDs are central to the prosecution of the types of equitable relief claims opened up by Amara. And finally, one other article addresses the restricted scope of remedies available to plan participants as a result of the Supreme Court’s historically narrow reading of ERISA remedies in conjunction with its historically broad reading of ERISA preemption. Interestingly, and as I have written elsewhere, the expansion of equitable remedies by means of surcharge and other types of relief recognized by the Court in Amara is likely to serve as a curative to that problem, by creating an avenue to use the equitable relief prong of ERISA to provide relief to participants in circumstances in which, previously, the combination of ERISA’s limited list of remedies with its broad preemptive effect would have precluded relief being granted to the participant.
 

Posted By Stephen D. Rosenberg In ESOP , Fiduciaries
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I have written at different times about the likely expansion, as we move forward, of fiduciary liability in ERISA litigation, despite the existence of a number of decisions and doctrines – such as the Moench presumption and the numerous decisions applying it – that seem to pose significant barriers to such liability being imposed. I have argued that, over time, lawyers for participants will develop effective tactics to get around those types of barriers, and will become more astute in their analysis of plan conduct and fiduciary behavior, which will have the effect of expanding fiduciary liability. I have also written, both here and elsewhere, that fiduciary exposure is going to increase dramatically once participants become more effective at avoiding these types of legal barriers that tend to defeat claims at the motion stage, and are instead able to move their claims into the fact intensive stages of summary judgment practice and trial. This is because court decisions over the past few years are suggesting that, once courts look under the hood at the actual operation of plans, they tend to find problems sufficient to allow the imposition of fiduciary liability. It is important to understand, in this regard, that the long running trend, which may now be turning, in favor of fiduciaries in high-stakes ERISA class action litigation was based more on legal rulings at the motion to dismiss stage, than on fact intensive inquiries by courts. In the excessive fee cases, for instance, fiduciaries made out quite well when the cases never made it out of motion practice, but have not made out as well when such cases have been tried.

The same phenomenon may be occurring in stock drop litigation under ERISA, given United States District Court Judge Paul Crotty’s decision this week denying, for the most part, the defendants’ motions to dismiss in the Fannie Mae ERISA stock drop action, which concerned the overwhelming collapse in the stock price of company shares held in an ESOP, along with a corresponding massive collapse in the value of the assets of the ESOP. The Court applied the Moench presumption, and found that, on the facts pled by the plaintiffs, it did not bar the claims. In essence, the Court found that the detailed facts pled by the plaintiff went far beyond the simple collapse in stock price that past cases, applying the presumption, have found is insufficient to sustain a stock drop case of this nature, and instead was sufficient to overcome the presumption of prudence that would have otherwise attached to the defendants’ decision to continue to hold company stock in the ESOP. In this, you see plaintiffs who have learned the lessons of the stock drop litigation to date and who now understand how to sustain such claims past the motion to dismiss stage, despite the power of the Moench presumption. You also see something else in the Court’s decision, which is a recognition of the key role that the actual facts will and should play in a stock drop case in deciding whether or not fiduciary liability exists, in contrast to allowing the presumption itself to dictate the outcome at the motion stage. The Court found that the detailed knowledge of the defendants pled by the plaintiffs would, as opposed to the allegations in cases that have failed to overcome the Moench presumption, be sufficient to maintain the action and overcome the presumption, stating that “if [Fannie Mae’s] alleged situation . . . is not sufficiently ‘dire’ to state a claim, it is not clear what would be sufficient.”

You can find an excellent article on the ruling here, and the decision itself right here.
 

Posted By Stephen D. Rosenberg In 401(k) Plans , Employee Benefit Plans
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I like this piece here on the question of whether investment and financial advisors who foul up their initial efforts to comply with the fee disclosure regulations should be given a mulligan, and allowed to effectively self-report and correct without penalty. The proposal is to have the Department of Labor essentially run yet another type of voluntary correction procedure, which would then insulate advisors who have erred in complying with the new rules. While I am not in favor of a complete free pass for mistakes, certainly the middle ground on the idea staked out by one commentator, Craig Watanabe of California’s Penniall & Associates, who favors amnesty for honest mistakes but not for those that rise (or – I guess more accurately – fall) to the level of negligence, has merit.. Why? Because its not the easiest thing to implement and comply with a new regulatory regime of this nature, and it seems fair to allow the regulated a chance to fix early, honest mistakes that occur in trying to properly comply; the same can’t be said for efforts to comply that are so lax, so without real intent to satisfy the new rules, and so poorly executed that they should be deemed negligent. I would also note that, since the justification given for the idea is the difficulty of early compliance, that the amnesty program, if created, ought to vanish after a year or so. If someone cannot get it right by then, they shouldn’t be trusted with all of the other complexities involved in handling and protecting workers’ retirements.

Posted By Stephen D. Rosenberg In ESOP , Fiduciaries
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This is an interesting story on a number of levels. The article tells the tale of the Department of Labor suing the fiduciaries of an ESOP for failing to properly scrutinize and challenge an appraiser’s report valuing company stock, which was used to support the price paid by the plan for company stock. The article illustrates a significant problem in ESOPs that hold private company stock, which is the need to have appraisers set the price of the stock for purposes of the ESOP’s operations. This becomes a closed circle in valuation, consisting of the plan fiduciaries and the appraiser; no one else really plays a role or is involved. This absence of sunlight creates an environment in which, if the plan and/or the fiduciaries have a motivation to do so, the valuation of the ESOP holdings – i.e., of the portion of the company owned by the employees – can be distorted. Even in the absence of a motivation to do so, this closed process, in which there is no competing public market valuing the holdings or other outside check on the valuation, can result in a distorted valuation out of sheer error. The only check on that potential problem are the fiduciary obligations of the ESOP’s fiduciaries, and the enforcement tools, whether of the DOL or participants, provided by breach of fiduciary duty litigation, which allows participants and/or the DOL to pursue fiduciaries for problems that crop up in this process.

One of the most important takeaways from the article, as well as from my own experience in ESOP litigation, is the fact that the fiduciaries of ESOP plans should not assume they can simply obtain a valuation, treat it is correct, rely on it, and be safe from potential personal liability for a fiduciary breach. As the article points out, the fiduciaries, even when they rely on an appraisal report, can violate their fiduciary obligations, and be liable for doing so, if they do not properly analyze and vet the appraisal. ESOP plan fiduciaries should not simply receive an appraisal, use the numbers in it to run the plan, and put the report in a drawer; they need to analyze it, quiz the appraiser, and test its numbers. Only these later steps – and only when done well - will give those fiduciaries any real protection from breach of fiduciary duty litigation involving the valuation of ESOP assets.
 

Posted By Stephen D. Rosenberg In ERISA Statutory Provisions , Employee Benefit Plans , Retirement Benefits
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An upcoming article of mine in the Journal of Pension Benefits argues that ERISA litigation and potential exposures are moving away from strict constructionism and technical legal arguments to fact based inquiries into potential harms to participants, and traces how we came to that place. This is a more significant change than it may appear to any of you who do not spend your time litigating ERISA disputes. This shift is going to make ERISA litigation more like other litigation, with a focus on factual development and discovery, and less on doctrinal argument. The Seventh Circuit’s recent ruling in George v. Junior Achievement of Central Indiana, Inc., discussed in this excellent synopsis here, is a perfect example of this phenomenon, with the Court rejecting a technical, statutory basis for rejecting a retaliation claim under ERISA in favor of a broader reading of the relevant statutory language, one that can allow for a fact-based inquiry into whether or not the participant actually was retaliated against. You can expect more and more of this kind of shift in the future, across the range of issues impacting ERISA plans, particularly with regard to retirement benefits, whether provided under defined contribution or instead defined benefit plans.

Posted By Stephen D. Rosenberg In Pensions
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Here’s an interesting juxtaposition of two stories from over the weekend (if you consider a Monday morning story about football over the weekend to qualify temporally), the first this one from Saturday’s Wall Street Journal about the massive underfunding of state public employee pensions. If these were private pensions, the fiduciaries of the plans would have been under much more pressure to avoid falling into this level of a sinkhole. Forget the Department of Labor, the IRS and the PBGC, and focus just on the extent to which this scenario would be soundly characterized as a failure of fiduciary prudence, putting the fiduciaries at risk of personal liability. I have said it before and I am sure I will say it again after today, but the private attorney general nature of ERISA litigation, with its attendant potential personal liability of fiduciaries charged with making decisions for a plan, creates powerful incentives to not screw up as badly as those running public pension plans have over the past few years.

The real solution to this mess going forward (although it won’t clean up the massive underfunding to date)  will likely be moving public employees towards a defined contribution type system, rather than a defined benefit system, with a boost in pay that allows them to make appropriate retirement investments. This isn’t so much a solution targeted at a problem with the employees themselves, but rather at the tendency of the managers of these plans to overpromise pension benefits in contract negotiations and under-deliver by pushing the costs of those benefits off into the future as liabilities of the taxpayers. A move to a defined contribution system would push the costs into the present, requiring that the retirement costs be paid out during the employee’s work life.

And in this story about locked out NFL referees, who are fighting with the NFL over the league’s attempt to move them from a pension plan to a 401(k) plan, you see the underlying problem. As Peter King wrote in an on-line column today on Sports Illustrated:

Many of you think for 120 part-time officials to get an average of $38,250 per year in pension contributions is excessive. But the regular officials are simply trying to keep a benefit they've had for the last several years. The league contributed $5.3 million to officials' pensions last year and propose to contribute $2 million this year; the cut, the league says, is in keeping with pension plans around the country going to a 401k pension plan, subject to the whims of the stock market, rather than guaranteeing retirees a fixed return on their investments. What's $3 million to the NFL? That's only partially the point. The league has made many full-time employees take the lesser pension, so how can they give part-timers a better deal?

But here’s the thing about the NFL’s complaint that they have moved their other, full-time employees to defined contribution plans, and that there is no reason for the referees to not be moved as well. The difference is that the referees, unlike most of the full-time NFL employees who have been transitioned to defined contribution plans – and indeed unlike almost every private sector employee who has been forced to give up a pension in this way – don’t need the job, have other economic resources beyond just their work for the employer (in this instance the NFL) seeking to end their pensions, and have a vigorous union. They, unlike the other NFL employees who have already suffered this fate, are in a position to fight that change, and they are and will do that. No employee in America has willingly accepted this change, but the referees are some of the few in a position to fight back against it. That is what makes them different than the other NFL employees who have given up their pensions, and why the league’s argument that the referees should be treated like all other NFL employees in this regard is pure sophistry; if the other employees had been in a position to fight it, like the referees, they would have done so too.

And this, oddly enough, circles us right back around to the problem with municipal and state pensions. These are highly unionized employees who have the political power to fight back against efforts to eliminate pensions, and as such are some of the few employees left in this country who both have a pension and have the ability to push back against changes to their pensions. This sentence could just as easily describe the NFL’s referees.

There are many lessons that one can draw from the juxtaposition of these two stories, and I will leave you free to draw your own. I already know what mine are.
 

Posted By Stephen D. Rosenberg In Benefit Litigation , Conflicts of Interest , Employee Benefit Plans , Fiduciaries , Standard of Review
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Tidal Wave! Landslide! Look out below!

Pick out the metaphor of your choice, because Unum just got taken out behind the woodshed by the Ninth Circuit and spanked hard. Frankly, the Ninth Circuit’s opinion is a rout in favor of the participant, and participants in general. In many ways, the case presented a perfect storm for such an overwhelming opinion against a long term disability carrier. The case involved: a very sympathetic plaintiff who suffered a horrible, fluke injury that most readers could sympathize with; a lot of money; and a long term disability carrier with a documented history of claim disputes that the court could point to in further support of its ruling. I have to tell you that the facts painted by the Ninth Circuit in this opinion, related to both the claim and the carrier, are clearly of an outlier event, one not representative of the handling of most claims by most long term disability carriers, or of most long term disability carriers at all, for that matter. Twenty years of experience tell me most attorneys representing participants would, even if only off the record, agree with that assessment.

Frankly, despite Unum’s own documented history with regard to claims handling, cited by the Ninth Circuit to support its opinion, I am not sure that the depiction of the carrier in this opinion is even representative of that carrier at this point in time, but I don’t know enough to comment knowingly in that regard.

More importantly though, and moving away from the overflowing kettle of clichés with which I deliberately chose to fill the first couple paragraphs of this post, it would be a shame if courts, participants, companies and their lawyers allowed the unusual nature of the case to become the focus of their attention. This is because there are several key takeaways from this case, some specific to long term disability cases and others, even more important, to ERISA litigation in general.

With regard to these types of benefit claims, one should look closely at the Court’s handling of the structural conflict of interest issue. The Court not only points toward significant discovery and even a possible bench trial over this issue, but also demonstrates how to use the contents of an administrative record in support of proving the impact of such a conflict. This is all strong stuff, and for many who thought the Supreme Court’s structural conflict of interest ruling in Glenn opened up a Pandora’s box or put us all on a slippery slope towards ever expansive, and more expensive, benefits litigation, here is the proof for that hypothesis.

To me, the most worrisome aspect of the decision, and one that sponsors and companies need to pay very careful attention to in terms of planning their benefit operations and obtaining legal services, is the Court’s very broad application of the fiduciary exception to the attorney-client privilege. The issue here isn’t so much the conclusion that the exception makes internal legal discussions related to a claim subject to disclosure, but the line drawing it demonstrates with regard to when legal advice is, and is not, subject to disclosure. In short, plan administration – including benefit determination issues – are subject to disclosure and not protected. At the same time, though, what is protected is advice related to the protection of fiduciaries against personal liability, civil or criminal, when that advice is clearly distinct from the handling of claims under a plan and the administration of a plan.

Now the interesting thing about that distinction is that, as anyone who litigates breach of fiduciary duty or other ERISA cases knows, there is clearly some overlap between the two types of legal advice and there is not always a clear separation between the two. Certainly a fiduciary sued for misconduct is being sued because of events involving a claim and a plan’s administration, and thus legal advice rendered to the fiduciary falls somewhere in the middle of those two extremes. Further complicating this issue is a fact that the Ninth Circuit points out, which is that plan sponsors and plan fiduciaries often rely on the same lawyers and law firm for advice on all aspects of their plans, from formation to termination and everything in between, including the handling of claims and the representation of officers sued as fiduciaries.

In that latter instance of breach of fiduciary duty litigation against officers, it is crucially important for numerous reasons, as every litigator knows, to have a safe, secure and fully privileged attorney-client relationship. The standards enunciated by the Ninth Circuit, however, place that privilege at some risk in instances in which the same firm that has represented the plan in general is also representing fiduciaries or other company officers with regard to their personal potential liability. The best answer, for numerous reasons, to protecting those fiduciaries and officers, and maintaining the attorney-client privilege that is crucial to their protection, is going to be separating out the representation of such individuals from the routine legal work related to the plan’s formation, operation, administration and claims handling, and using independent, distinct counsel for the representation of such individuals. By segregating out and using separate, independent counsel for any issues related to their potential exposures, you make clear that the legal advice at issue involves privileged issues concerning the potential liability of officers and fiduciaries, which should still be privileged after the Ninth Circuit’s ruling, and is not intermingled with or otherwise part of the broad range of legal services typically required by a plan, which the Ninth Circuit’s opinion holds is likely to be subject to disclosure.

In short, the pragmatic solution is to continue to use one firm for the overall handling of a plan’s various needs, but separate, independent counsel for any and all needs – whether involving litigation or only the potential risk of litigation or exposure – of a plan’s fiduciaries or the officers of the company sponsoring the plan.

That’s my two cents for now. The case is Stephan v. Unum, and you can find it here.
 

Posted By Stephen D. Rosenberg In Benefit Litigation , ERISA Statutory Provisions , Employee Benefit Plans , Equitable Relief , Fiduciaries
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Here is a great fact pattern that illustrates a number of recurring problems in ERISA litigation. In this case (Tocker v. Kraft Foods North America, Inc. Retirement Plan), decided by the Second Circuit last week, a mid-level benefits manager worked on accommodating the needs of a terminally ill plan participant, by working out an arrangement by which the participant could first receive long term disability benefits and then receive workforce reduction payments, rather than having to choose one or the other. Naturally, of course, since it turned into litigation, the arrangement did not work out without a hiccup, as it affected the participant’s pension credits. The participant sought to remedy that problem by use of a breach of fiduciary duty claim. The breach of fiduciary duty claim failed, however, because the benefits manager was found to have only been engaged in ministerial duties, and not fiduciary duties, and thus a breach of fiduciary duty action was not viable.

The case nicely illustrates and establishes the dividing line between fiduciary and non-fiduciary acts by executives of a company involved in running a company’s benefit plan, and the opinion’s first and best use will be in cases where that point must be established, particularly cases where one side or the other needs to prove that someone was, or was not, a fiduciary for purposes of a particular dispute. The decision is particularly on point with regard to the question of when does the provision of information about benefits render someone a fiduciary (the answer according to this decision is, effectively, never, although I am engaged in a purposeful bit of overstatement there).

However, it also illustrates a point I discuss in detail in an upcoming article in the Journal of Pension Benefits, which is the difficulty, under ERISA, of redressing problems in plan administration that are not merely denials of benefits clearly owed under a plan (and thus can be remedied under the denial of benefits prong of ERISA) and cannot be shown to involve fiduciary conduct. The dispute at issue in Tocker was exactly that type, and the plaintiff, despite having possibly been harmed by an operational misstep in implementing the agreed upon arrangement to coordinate the participant’s disability benefits and workforce reduction award, was unable to construct a viable cause of action under ERISA to address that problem and possible loss. The statute’s remedial rigidity had long been a problem in ERISA litigation over the years, impacting the ability of participants to address these types of problems. As I discuss in my upcoming article, this problem has likely been solved by the surcharge remedy recognized by the Supreme Court in its recent decision in Cigna v. Amara: the best approach open to the plaintiff in Tocker today would have been to structure his claim as one for equitable relief based on the surcharge remedy, rather than as a breach of fiduciary duty claim. When his case began, though, well before the decision in Amara, this option would not have been open to him.
 

Posted By Stephen D. Rosenberg In Benefit Litigation , Long Term Disability Benefits
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Here’s a handy-dandy, one shot, easily referenced statement of the law in the First Circuit governing the statute of limitations applicable to LTD claims, and thus, by extension, all denial of benefit claims. It comes from the First Circuit’s decision last week in Santaliz-Rios v. Metropolitan Life Insurance:

Congress has not established a limitations period for ERISA claims brought pursuant to 29 U.S.C. § 1132(a)(1)(B). Island View Residential Treatment Ctr. v. Blue Cross Blue Shield of Mass., Inc., 548 F.3d 24, 27 (1st Cir.2008). Therefore, in adjudicating ERISA claims, federal courts borrow the most closely analogous statute of limitations in the forum state. Id. (citing Edes v. Verizon Commc'n, Inc., 417 F.3d 133, 138 (1st Cir.2005)). In Puerto Rico, the default limitations period applicable to contract claims is fifteen years. P.R. Laws Ann. tit. 31, § 5294; Caribbean Mushroom Co. v. Gov't Dev. Bank for P.R., 102 F.3d 1307, 1312 (1st Cir.1996) (“[C]ontract claims that are covered by the Commerce Code but are not designated for special prescriptive treatment automatically fall under the Civil Code's fifteen-year catch-all provision.”). This period has been applied to ERISA claims where no alternative limitations period was agreed upon by the parties. See Nazario Martinez v. Johnson & Johnson Baby Prods. ., Inc., 184 F.Supp.2d 157, 159–62 (D.P.R.2002).

However, where the contract at issue itself provides a shorter limitations period, that period will govern as long as it is reasonable. See Island View, 548 F.3d at 27 (applying a contractually agreed-upon limitations period to ERISA claim); Rios–Coriano v. Hartford Life & Accident Ins. Co., 642 F.Supp.2d 80, 83 (D.P.R.2009) (“Choosing which state statute to borrow is unnecessary, however, where the parties have contractually agreed upon a limitations period, provided the limitations period is reasonable.”)

The plaintiff was barred by the contractual limitations period, as the court gave little weight to the plaintiff’s attempts to argue around the contractual limitations period, which were basically limited to tolling arguments made, apparently, without significant factual support. Attacks on statute of limitations bars need to be well-grounded in factual support to have any traction in this circuit, in my view, and that clearly didn’t occur in this instance. I can picture fact patterns involving contractual limitations periods, however, that could more readily sustain an assault on their application.
 

Posted By Stephen D. Rosenberg In 401(k) Plans , Employee Benefit Plans , Fiduciaries
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I often think of the story of the cobbler’s kids having no shoes when I read about problems in a law firm’s benefit plan; lawyers spend their time fixing other people’s business problems, often to the exclusion of paying attention to their own business issues. Festering problems in a law firm’s 401(k) or other benefit plans fit this rubric well. This story, about a small Philadelphia law firm sued by the Department of Labor for operational problems in its 401(k) plan, illustrates the point nicely. As the story makes clear, the law firm does not seem to have engaged in any nefarious conduct, but to instead have dropped the ball on various technical, operational aspects of running a defined contribution plan, such as segregation of assets, timing of deposits, and the like. I have represented smaller and mid-sized law firms in disputes over their defined contribution plans, and I can tell you that, as this story likewise reflects, smaller law firms face the same burdens and problems in running profit sharing and 401(k) plans as do most other mid-sized and small businesses: the technicalities, the time demands and the complexity of doing it correctly are often beyond their internal capacities, and certainly outside of their core competencies. I have preached many times that the key to not getting sued, whether by the Department of Labor or plan participants, is an obsessive focus on compliance in plan operations; for many smaller businesses, as this story about the Philadelphia law firm reflects, this can only be accomplished by outsourcing to a competent vendor.

Posted By Stephen D. Rosenberg In Fiduciaries
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It is actually amazing, if you really step back and think it through, the amount of energy and analysis that goes into the question of determining who is, and who is not, a fiduciary under ERISA in various scenarios. There is a reason for this, though, and it is that acquiring – or being assigned – the status of fiduciary when the assets or operations of an ERISA governed plan are at issue can be highly fact dependent, and someone who is a fiduciary in one context may not be one in another. The Department of Labor has tried, through rulemaking, to simultaneously expand and make more consistent who is a fiduciary and when, a project I have expressed some doubts about both in speaking engagements and in a recent article in the Journal of Pension benefits. The issue becomes even more complicated, though, if and when you try to coordinate that issue under ERISA with similar, but not identical, obligations imposed by the SEC, a point addressed in detail in this article here, which emphasizes that the different roles and obligations of advisors and consultants operating in one sphere as opposed to those operating in the other argue against trying to create one consistent, overriding fiduciary definition applicable in both spheres. As a wit once noted, a foolish consistency is the hobgoblin of little minds, and I am not sure that isn’t the case here: rather than trying to shoehorn two different regulatory and legal regimes into one supposedly consistent fiduciary definition, it may make at least as much sense to allow different fiduciary standards to apply to different statutory bodies of law.

Posted By Stephen D. Rosenberg In 401(k) Plans , Employee Benefit Plans , Fiduciaries , Pensions , Third Party Administrators
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I used to be a fan, back in the old days when The New Republic was actually meaningful and influential, of its zeitgeist table, as it really did, in a glance, sum up what people were thinking and talking about, albeit in a humorous way. I couldn’t help but think of that this morning when I read Chris Carosa’s “FiduciaryNews Trending Topics for ERISA Plan Sponsors: Week Ending 7/27/12.” Its like a college survey course on one page of what everyone in the retirement industry either is or should be thinking about right now, from the costs of plans to fee disclosure to the coming tax wallop you are going to suffer to fix the public pension system to the misinformation, non-disclosure and outright confusion rampant in the knowledge base of plan sponsors and participants.

Posted By Stephen D. Rosenberg In Benefit Litigation , Fiduciaries , Preemption
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Looks like everybody knows a good story when they see it. Here’s a nice CCH piece on the same Sixth Circuit decision I discussed in my last post, concerning the fiduciary status of a depository institution under ERISA.

Interestingly, the whole deconstructionist/critical legal studies movement (I know I am dating myself by at least decades here by this reference; what’s next for me, a link to an article about Bruce Springsteen, or the 1980 Olympics?) had at its heart the idea that if you trace back a thought to its earliest formulation you can learn a lot about how the current conception came to be, and whether the current conception should be accepted at face value. I bring this up because I have done enough work on the fiduciary status of commercial banks to know the judicial history of the assumption – and of the case law to the effect – that they should not normally qualify as fiduciaries for purposes of ERISA. If you trace the history back far enough, you find that what is, in essence, a prevailing presumption against finding such entities to be functional fiduciaries isn’t all that well-founded.
 

Posted By Stephen D. Rosenberg In Employee Benefit Plans , Fiduciaries , Preemption , Third Party Administrators
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All right now, its time to get back up on the horse – the blogging horse, that is. I didn’t actually go on vacation for the last month, believe it or not – I had a major brief concerning a piercing the corporate veil case against a corporate officer due not long after the July 4th holiday, followed almost immediately by briefing concerning the First Amendment rights of internet posters. Fun stuff, but it hasn’t left much, if any, time for blogging.

So I am now going to try to catch up on a number of items that I spotted – but was never able to find the time to post on – over the past month. I am going to start today with this story right here, about the Sixth Circuit ruling that ERISA claims against a bank failed on the ground that the bank did not qualify as a fiduciary, while the state law claims against the bank could not go forward because they were preempted.

Speaking last month at an MCLE seminar on the subject of litigating top-hat and other compensation disputes, I discussed one of my favorite conceptual points, which is the theoretical possibility in certain cases of prevailing, as a defendant, by showing that the ERISA claims fail on technical grounds while state law claims are preempted at the same time because the underlying fact pattern – whether or not capable of supporting successful claims under ERISA– turn on the terms of an ERISA governed plan. The end result is that a plaintiff would not be able to recover at all – or even have any viable causes of action – against the defendant. I discussed it, in fact, right here in this PowerPoint slide in my presentation, which referenced a case, Aubuchon v. Benefirst, in which I pursued that defense strategy. As my fellow panelists at the seminar and I discussed, it is a conceptually elegant and perfectly logical argument, but one that courts generally don’t like, finding that, much as the dissent did in the Sixth Circuit case referenced in the article, the circumstances either cannot or should not be interpreted in a manner that would leave the plaintiff with no viable cause of action under ERISA itself while simultaneously eliminating any state law rights by operation of preemption.

Here, though, the Sixth Circuit accepted that argument and found the plaintiff to have no viable claims, for this reason, against a defendant. It is interesting to note, though, that the defendant who benefited from that here is a bank. For whatever reason, banks – traditional, old-fashioned depository/lending institution type banks – make out very well in ERISA litigation when a party tries to bring them in, as happened in this case, as a functional or deemed fiduciary, based on the bank’s role in handling and distributing a plan asset; there is a long history of cases, although perhaps relatively few in number, placing such an institution outside of the role of fiduciary for purposes of ERISA litigation, when the bank is serving in a traditional banking role as a depository or lending institution. Add in the impact of preemption, and a bank that is merely holding the plan assets or lending against them (or supposedly only doing that, as the facts alleged in the case before the Sixth Circuit, as is often true in similar cases, could be construed as involving much more than that on the part of the bank in question) is in a very privileged position when it comes to defending litigation over its involvement with an ERISA governed plan.

The decision is McLemore v. EFS, and you can find it here.
 

Posted By Stephen D. Rosenberg In Benefit Litigation , Percentage Players Die Broke Too: Notes on Litigation and Trial Tactics
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Is there a more hot button topic in the world, just as a general principle, than compensation, especially of the executive kind? From Salary.com to the outrage of politicians over financial industry pay, the subject is never far from your internet browser. In fact, just for amusement’s sake, I just googled executive compensation, and the first page of results had no less than three links claiming to tell me what executives throughout the country earn.

Of more interest to me professionally than what executives earn, though, is what happens when they end up litigating disputes with their employers over their compensation. ERISA often gets dragged into such disputes, although there are an increasing number of judicial decisions – though still few – questioning whether individual agreements with executives to set compensation should fall within ERISA, rather than being handled as pure breach of contract cases under state law. The forum, venue, nature of defenses, potential damages, and strategy in such disputes can all be greatly affected by whether the dispute should be governed by ERISA or is instead simply an old fashioned state law dispute.

I will be talking about this and more next week when I address the details of litigating executive compensation disputes in this MCLE seminar. Two other excellent speakers, Marcia Wagner and Philip Gordon, will be discussing various aspects of crafting and negotiating executive compensation agreements – I will then weigh in on what happens when that work, as it sometimes does, leads to the parties suing each other.

You can find registration information for the seminar itself and for the webcast here.
 

Posted By Stephen D. Rosenberg In Pensions
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This is an interesting story on a number of levels, about the GM pension plan, its size, GM’s efforts to reduce the size of its liabilities, and the company’s decision to transfer administration and future costs to a certain extent to a large insurer. GM and its pension plan have continued to be one of the few public stories of a well-run pension plan that has largely stayed out of trouble and largely – at least from public view – maintained the company’s retirement compact with its salaried, non-union employees. That hasn’t stopped, however, the size, cost and complexity of the pension plan from impacting and taking attention away from GM’s actual reason for existing, which is to compete successfully as a car company. It is also worth noting how few well-run, well-regarded large private pension plans continue to exist out there. The combination of all three of these things – the rarity of such an example, the impact on a company of continuing to be such an example, and the desire of that example to get the heck out of the pension business – is as good a death knell for the private pension system as you can find.

Posted By Stephen D. Rosenberg In 401(k) Plans , ERISA Statutory Provisions , Employee Benefit Plans , Fiduciaries
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Here’s a very nice piece on fee disclosure, as mandated by the Department of Labor, and the idea that it is to everyone’s benefit. I have long maintained that fee disclosure of the type at issue falls squarely in the ballpark of the old saying that sunshine is the best disinfectant, and that running from fee disclosure – whether as a plan sponsor or a service provider – is the intellectual equivalent of running from the bogeyman; there is, in fact, nothing to fear from it, for well-run plans and above-board advisors, and for those who aren’t yet those but aspire to be.

Why is that? Well, let’s run through the list of players in the 401(k) rubric. Plan participants obviously benefit from knowing what their funds costs, and from the opportunity to use that information to demand proper attention to fees from their plan’s sponsors, administrators and fiduciaries. Where is the downside to them? I can’t see one. And then there are plan fiduciaries. Plan fiduciaries should be avoiding fees that are higher than needed, both to protect themselves from fiduciary liability and to best serve participants. Now this doesn’t mean they are required to, and nothing in fee disclosure or the law governing fees requires them to, chase the lowest possible cost investment options. What it does mean, though, and which cases like Tibble make clear, is that they have to investigate and follow a prudent process directed at using the right investment option at the right price. The more information they have, the better they are able to do this; likewise, the more they are pressed by participants to do this, the more likely they are to install a good process to review these aspects of their plans and, correspondingly, the less likely they are to fall below their fiduciary duties in this regard. This all make them less likely to be sued for, or found liable for, excessive fee claims, and thus protects them from financial risk in running the plan. These outcomes flow naturally from the public disclosure of the fees inherent in a plan. And finally there are the investment advisors and other service providers. More than one such provider has told me that they already make this information available or have changed their business models to build around the open disclosure of this information, and that they believe their ability to compete both on transparency of and attention to controlling expenses is a competitive advantage for them. I have long believed that transparency works to the business advantage of the best players in this area, and aren’t those the ones who should be winning business? Just another side benefit of fee disclosure, and one more reason why, when it comes to fee disclosure, there is, to quote a former president who knew a thing or two about creating a retirement plan, nothing to fear but fear itself.
 

Posted By Stephen D. Rosenberg In Attorney Fee Awards , Employee Benefit Plans , Fiduciaries
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Here is a neat little story that illustrates a bigger point. The article describes the resolution of a Department of Labor lawsuit brought against a small company to recover approximately $100,000 of participant holdings in a profit sharing plan that was diverted to other uses. Its own moral is clear – plan sponsors need to remember that plan assets belong to the plan, not them – but one that is too often forgotten in closely held, smaller companies. The bigger story, though, is the one this case illustrates. I have written before about the idea that ERISA is really a private attorney general statute, one that uses the awarding of legal fees to a prevailing participant as a means of allowing individual participants to retain counsel and enforce fiduciary discipline, even in cases where the amount at risk – such as the one hundred thousand at issue in the article – wouldn’t otherwise justify either a participant paying out of pocket to hire counsel or a lawyer taking the case on contingency. And yet, as this case shows, there are real breaches, real problems, and real losses in many plans that require legal redress; this remains true even when the amounts at issue aren’t particularly large, as the losses are still significant to the participants who incur them. The Department of Labor itself does not have the litigation resources, relative to the number of plans out there, to litigate each and every such case, and has to pick and choose. Allowing recovery of attorneys fees allows those participants whose cases are not pressed by the Department of Labor to still bring breach of fiduciary duty actions and thereby enforces a level of legal oversight on plan sponsors that might otherwise not exist. The ERISA structure is, to a certain extent, dependent upon – and assumes the existence of – such private enforcement actions; they impose a level of discipline on fiduciary conduct that would otherwise be absent.

Posted By Stephen D. Rosenberg In 401(k) Plans , ESOP , Employee Benefit Plans , Fiduciaries
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Often when I chat with middle and upper level managers of mid-size and larger companies who have been assigned the job of administering their employer’s 401(k), ESOP or other benefit plans, I wonder if they are fully cognizant of the risks of personal liability they are taking on, and whether they have made sure that, through insurance or otherwise, they are protected against breach of fiduciary duty lawsuits. I particularly wonder this in those cases in which it appears that, while they are taking on the role, they are simultaneously not high enough up the corporate food chain to clearly have enough power to control for and avoid potential problems in the plans they have been charged with administering. This leaves those administrators in the situation of being exposed as fiduciaries to personal liability for problems in the plan, while not having enough power to avoid or cure the problems. As fiduciaries, of course, they risk personal liability for the plan’s losses, and, as this excellent piece here explains in detail, it’s a liability they will have trouble ever shaking, even if their employer goes belly up and leaves them sitting there holding the bag.

Posted By Stephen D. Rosenberg In Class Actions , ERISA Statutory Provisions , ESOP , Fiduciaries
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If you like an extended metaphor – and anyone who has read this blog for awhile knows I do – you should enjoy the Eleventh Circuit’s decision this week in Lanfear v Home Depot, adopting the Moench presumption and explaining exactly how it is to be applied in that circuit. What’s a better analogy than the hard working ant who stores food up for winter, to stand in for plan participants?

But the decision has other things going for it that are much more useful than a nice analogy. In particular, it nicely synthesizes the current state of the case law among those circuits that apply the presumption, and explains exactly how, under its synthesis, a stock drop case needs to be analyzed. In so doing, it also explains how to plead one if you want to get around the barriers that the Moench line of cases has created. Its as good and workable an explanation of a standard as any of the cases offer, and one that, frankly, seems to grant participants as fair a shot at recovering on a stock drop claim as they are likely to see. In my view, it nicely balances the conflicting interests and obligations that come into play when you allow, as occurs in stock drop cases, corporate insiders, securities laws and ERISA to intersect.
 

Posted By Stephen D. Rosenberg In Benefit Litigation , Fiduciaries , Percentage Players Die Broke Too: Notes on Litigation and Trial Tactics
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Well, as if there weren’t enough barriers to successfully prosecuting breach of fiduciary duty actions under ERISA, it turns out that you also can’t do it if the fiduciary’s errors consisted of wrongfully withholding benefits and turning them over to the IRS as tax payments. A participant, according to this opinion fresh off the presses of the Northern District of Illinois, can only remedy that mistake by getting the IRS to refund the money to them.

Defense lawyers are always fond at trial of having an empty seat – i.e., a missing potentially culpable party – to point to while saying my client didn’t do it, the person that should be sitting in that other chair at the defense table did. For those of you old enough to remember it, this defense theory is similar to, but not exactly the same as, the famous “Plan B” of noted fictional defense lawyers Donnell, Young, Dole, & Frutt, who somehow always managed to make that strategy work. For a plan fiduciary charged with fiduciary breaches or other errors related to tax aspects of a plan, pointing to the IRS and saying the participant’s only recourse is to seek a refund from the IRS is an extraordinarily potent variation of this defense. It also, as the decision in Mejia v Verizon et al appears to make clear, has a sound foundation in the federal code.
 

Posted By Stephen D. Rosenberg In Benefit Litigation , Employee Benefit Plans , Long Term Disability Benefits
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I spent some time thinking about whether to even post on this subject today, not wanting to feel on any level that I might be either rushing to judgment too quickly, or even worse, exploiting a tragedy in any way to make a point. But the suicide of retired football star Junior Seau perfectly captures a point that I have been thinking through for years, as the concussion/head trauma issues have played themselves out in the NFL and the media. Way back in 2006, I wrote about the ERISA case brought by former Pittsburgh Steeler great Mike Webster, and the Fourth Circuit’s decision to overturn, as arbitrary and capricious, the decision of the plan administrator for the NFL’s retirement plan to award Webster “the lesser of two possible disability benefit awards available under the league’s retirement plan,” due to brain damage he apparently suffered as a player. At the time, the Fourth Circuit reviewed extensive evidence in the administrative record that soundly refuted the administrator’s determination, and concluded that the administrator’s determination was not supported by substantial evidence.

I have often thought about the Webster case and that blog post in the interim, because in many ways the actions of the administrator, at least in the snapshot provided by the Court, seem so questionable that it makes one wonder how the administrator could have reached the conclusion that it did. The evidence from the administrative record, although debatable in terms of how to interpret it, focused on by the Court ran strongly towards attributing the player’s mental incapacity to head injuries from playing and to have begun close to, if not during, his playing days, thus qualifying him for the benefits he sought. Yet, even under those circumstances, the plan administrator ruled against him.

Among the possible explanations for how this came to pass is one – incompetence by the plan administrator – that I have always ruled out. The second is a corporate decision by the plan and its administrator to hold the line against brain damage type claims, which is at least certainly possible, even if doing so on a broad level instead of simply testing the facts of each particular claim against the plan terms would be a clear cut violation of fiduciary obligations.

The third possible explanation that has rattled around in my head for the last few years, as more and more research has been done linking diminished mental capacity to the repetitive head trauma suffered by football players, has come to me to seem the most likely explanation. This is the idea that a decade and more ago, when the events at issue in the Webster case occurred, there was scant, if any, medical literature soundly tying post-playing mental impairment to playing-derived head trauma. That is not the case anymore, as Andy Staple’s piece here on Junior Seau’s suicide discusses, but it was then. Plan administrators are often faced, in many contexts, with disability claims in which there is little if any significant medical research that would allow a firm conclusion on causation with regard to the disability at issue. In those instances, it can be very difficult for a plan administrator to make a call on whether or not the plan terms governing disability benefits are satisfied. When one compares what we know now about the effect of repetitive head trauma in football – a knowledge level that is still limited – with the state of the research a decade and more ago, you can easily imagine the NFL plan’s administrator being trapped by the conundrum, and being unwilling to credit the evidence of impairment submitted by Webster because the medical literature lacked support for linking it to his playing days in the manner needed to award him the benefits sought by him. This, to me, is both the most benign and the most likely explanation for the long ago ruling against Webster, which it took an appeal all the way to the Fourth Circuit to set right. The state of medical knowledge though, as Staple’s current piece and many others in the past few years have made clear, no longer allows for that same possible mistake by a plan administrator.
 

Posted By Stephen D. Rosenberg In 401(k) Plans , Class Actions , ESOP , Fiduciaries
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An astute and clearly knowledgeable reader passed along the point that the recent Sixth Circuit decision in Pfeil v. State Street Bank implicitly rejected the structural barriers to bringing class actions over fiduciary breaches that had been created by the developing case law in other circuits and which were discussed in my recent article, Structural Impediments to Breach of Fiduciary Duty Claims. The Pfeil decision, in allowing the putative class action to proceed past the stage of motion practice, refused to allow a stock drop type case to be ended, prior to the full development of the facts needed for the plaintiffs’ case, by the early application of lowered – or merely altered and fact specific, depending on your point of view - fiduciary standards with regard to employer stock holdings in defined contribution plans, in circumstances in which the plaintiffs could not have, at the outset of the case, full and complete information about the fiduciary breaches at issue. In this way, the Sixth Circuit, deliberately or not, mitigated the difficulties for plaintiffs, identified in my article, that are caused by the intersection of the Iqbal and Twombly pleading standards with the limited information available to plaintiffs at the outset of the case.

Pfeil is interesting for a couple of other reasons as well. One is that, in some ways, it is not a pure stock drop claim, because the plan documents imposed an obligation on the fiduciary to divest under certain circumstances, and the question is whether the fiduciaries failed to comply with those plan terms, rather than simply being the question of whether the holding of the stock under the stock drop scenario in and of itself constituted a breach. Second, I have always felt that the stock drop case law reflected an attempt, implicitly at least and perhaps even subconsciously, to balance the obligations of a company under the securities laws and under ERISA when it comes to stock held in employee plans; Pfeil, by focusing on the liability of an outside fiduciary, does not have that dynamic. Three, I have written before about the evolutionary nature of plaintiffs’ class actions in ERISA, with the idea being that, over time and in response to early defeats – such as Hecker or the stock drop cases – the plaintiffs’ bar will craft more sophisticated and carefully targeted theories of liability, that will eventually pass muster. You see that here in Pfeil, in which a more nuanced approach to a fiduciary breach involving employer stock is able to leap a hurdle – a motion to dismiss – that earlier, less nuanced stock drop theories were not able to clear.
 

Posted By Stephen D. Rosenberg In 401(k) Plans , Class Actions , Employee Benefit Plans , Equitable Relief , Fiduciaries
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Tussey v ABB, Inc., an excessive fee and revenue sharing case decided on the last day of March after a full trial before the United States District Court for the District of Western Missouri, is a remarkable decision, imposing extensive liability for acts involving the costs of and revenue sharing for a major plan, on the basis of extensive and detailed fact finding. It is hard to sum up in a quick blurb, and I recommend reading it in full. However, Mark Griffith of Asset Strategy Consultants has a terrific write up of its its import here on his blog, and here is a nice case summary from Dorsey. Beyond that, I would highlight a few key points about the case, viewed from 30,000 feet (the case itself is going to provide grist for tree level, finding by finding analysis for some time to come).

First, and to me most interesting, is that it confirms several conclusions about excessive fee litigation that I have come to in the past and written on extensively, including my insistence that the pro-defense ruling in Hecker was not the last word on this issue (despite the desire of much of the defense bar to believe it was) but was instead the high water mark in defending against such claims. I argued in the past, with regard to the Seventh Circuit’s handling of this issue in Hecker, that the entire issue of fees and revenue sharing would look different than it did to the court in Hecker once courts began hearing evidence and conducting trials on the issues in question, rather than making decisions on the papers, and this ruling bears that out. Like the trial court decision in Tibble, another key early excessive fee case to actually reach trial, the taking of evidence by the court on how fees were set and revenue shared has, in Tussey, resulted in a finding of fiduciary breach in this regard. Tibble and Tussey reflect a central truth: when courts start hearing evidence on what really went on, it becomes apparent to them that plan participants were not fully protected when it comes to the setting and sharing of fees in the design and operation of the plans in question. To deliberately mix my metaphors, what Tussey reflects is that when courts start looking under the hood of how plans are run, they are not liking how the sausage was made. They quickly (relatively speaking, of course, since it takes a long time to get a case from filing through to a trial verdict) conclude that the fees were set and shared in ways that did not properly benefit the participants.

This particular aspect of Tussey is very important. Tussey involved a major plan and a market making investment manager and recordkeeper, applying what the court characterized as standard industry practices in some instances. It is therefore unlikely that the scenarios found by the court in Tussey to be problematic are unique to that case. Other excessive fee and revenue sharing cases that, like Tibble and Tussey, get past motions to dismiss and into the merits are therefore likely to uncover factual scenarios and problems similar to those identified by the court in Tussey.

What also jumps out at me about Tussey is the extent to which revenue sharing, which has often been characterized in the professional literature as harmless in theory, is strongly depicted as problematic as practiced with regard to the particular plan and by the sponsor and service providers at issue. I would have real question, going forward as a plan sponsor, as to whether it makes any sense at all to continue with revenue sharing. Better to just pay a fixed cost, than to risk extensive liability for engaging in revenue sharing. Absent that choice, the treatment of revenue sharing in Tussey makes clear the need for extensive, on-going, documented analysis by the plan’s fiduciaries of whether the level of compensation generated by the revenue sharing was, and remained at all times, appropriate.

Other aspects of Tussey worth noting include these two. First, the opinion provides as good an explanation, in detail, of what revenue sharing really is and how it works as you are going to find. If you want to understand what all the hullabaloo about revenue sharing is about, this opinion is as good a place to start as any.

Second, the opinion contains a nice analysis of one of the most misunderstood issues in ERISA breach of fiduciary duty litigation, namely the six year statute of limitations and how it applies to the implementation of a fiduciary’s decisions related to plan investments. A decision to change a plan investment takes time, starting with an analysis of whether to do so, followed by the steps needed to effectuate it, and eventually resulting in the final steps needed to permanently conclude the change. As the court explained in Tussey, the statute of limitations in that scenario does not start to run – for any of the losses related to that event – until the last act in that run of conduct occurred.
 

Posted By Stephen D. Rosenberg In 401(k) Plans , Class Actions , ESOP , Fiduciaries
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As many of you know, I write a regular column on ERISA litigation for Aspen’s Journal of Pension Benefits, usually focused on whatever issue has my attention at the moment, although I try to balance that against what readers might have an interest in as well. When it came time to write my article for the publication’s winter issue, I was musing on what seemed to me to be a contradiction in a webinar I had listened in on, in which two prominent experts – who shall remain nameless to protect the innocent – discussed liabilities arising out of the operation of defined benefit and defined contribution plans. The contradiction resided in the fact that they discussed the range of problems and difficulties facing such plans, and the seemingly incongruous fact that, nonetheless, plan sponsors and fiduciaries were unlikely to face liability in a courtroom for their handling of such problems and difficulties. How could that be, I wondered? So I fleshed out an answer, which became this article, titled Structural Impediments to Breach of Fiduciary Duty Claims.

Although I didn’t spell it out explicitly, the article focuses on the barriers to prosecuting such claims as class actions, because that is the forum in which these issues and impediments really manifest themselves, although the issues apply as well to breach of fiduciary duty claims brought by individuals solely on their own behalf. I also used ESOP class actions as an exemplar, for several reasons, running from my own experience with litigation over them to my somewhat morbid fascination – as a lover of newspapers - with the legal morass that the ESOP of the Chicago Tribune (and other affiliated papers) tumbled into.
 

Posted By Stephen D. Rosenberg In Pensions
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All I can think of is the cliche from Casablanca: I am shocked, shocked. The whole story, if you don’t want to use up one of your free articles on the NY Times website, is summed up on the front page of the website and the paper today:

Pensions Find Riskier Funds Fail to Pay Off
By JULIE CRESWELL
Pension funds that have increased expensive investments in private equity, real estate and hedge funds have been outperformed by stocks and bonds in the last five years.

Think about that. The article is about public pension plans, but probably only because of the size, relative ease of access to information, and public impact. What if we assume though, as is likely the case, that the story holds true across the private sector as well? What would that mean for the named fiduciaries of those plans, who were responsible for operating the pensions like a prudent expert? They would have clearly paid more than was necessary to invest a plan’s assets, depressing returns and reducing the asset base, raising real questions of whether they lived up to this standard.

If that is the case, did they take steps to protect themselves, and by extension the plan participants, from this outcome, at the time they pursued these investments? For instance, did they make sure that the advisors who put them into those investments were also fiduciaries? Did they have them sign on the bottom line expressly as fiduciaries? If not, did the advisors act as one or instead sufficiently insulate themselves from that status? If they are not fiduciaries, then they are unlikely to be the targets (or at least not successful targets) of breach of fiduciary duty suits over the effect on pension plans of these investment strategies, leaving only the named fiduciaries (and any others at the sponsor who acted as functional fiduciaries) as likely targets for such suits.

If the advisors were not fiduciaries, then what did the named fiduciaries do to protect themselves and the plan participants from this type of an outcome from the investment advice that they were being given? Did the management agreements they reached with the advisors who put them into these investments give the named fiduciaries a contractual ability to hold them accountable and, if so, are they going to do so? If the answer to either of those questions is no, the named fiduciaries may be the ones left holding the bag, as the ones responsible for the error, if breach of fiduciary duty lawsuits are pressed over this outcome.

You know it’s a funny thing, in a way. Investors always talk about an exit strategy – maybe fiduciaries, at the time of investment decisions, ought to be looking ahead as to what their exit strategy is going to be if the investment is a dud, and who is going to be responsible for that outcome. In my mind, if ERISA’s fiduciary duties themselves don’t impose an obligation of this nature on the named fiduciary (and perhaps they do), simple self-preservation alone ought to invoke that approach.
 

Posted By Stephen D. Rosenberg In Benefit Litigation , Conflicts of Interest , ERISA Statutory Provisions
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Sorry, I couldn't resist that relatively timely, but already essentially clichéd headline. That said, its still an interesting way to consider the question of top-hat plans, and their status under ERISA. In particular, there is an open question in most jurisdictions with regard to whether a claim for benefits owed under such a plan proceeds in much the same way, and with the same protections for the participants, as does any other claim for benefits under any other type of ERISA governed plan (i.e., one that, unlike a top-hat plan, does not provide significant deferred compensation for senior executives). There is a significant argument that, as a general rule, the same obligations that ERISA and the Department of Labor impose on administrators in any other circumstance also apply in the circumstance of top-hat plans, with the only exception being areas where the statute or the Department’s regulations expressly exempt top-hat plans.

In this regard, I wanted to pass along this very good synopsis of a recent decision from the United States District Court for the District of Massachusetts in which the court took that exact approach. You can find the case itself here. When the decision was issued in December, I decided not to comment on it because I was litigating a similar top-hat plan dispute at that time, and felt the decision was a little too on-point to a case I was handling for me to comment on, for a number of reasons, running from not wanting to tip my hand to the other side to being a little too close to the issue to be completely objective on the ruling. That case has since resolved, so I thought I would now use the opportunity of the publication of the synopsis to pass it along.

There is also an important trap for the unwary lawyer reflected in the decision and the synopsis, which is the impact of ERISA rights and remedies, as well as procedures and procedural protections, on what are in essence employment agreements, if they are deemed ERISA governed top-hat plans. If a particular agreement might be a top-hat plan, it is important to recognize that at the outset and litigate any dispute over it accordingly. As the synopsis and the decision show, the application of ERISA based rules will dictate the outcome, and failing to know that a particular agreement is a top-hat plan and will be governed by such rules at the outset of handling a dispute is a recipe for disaster, or at least for losing; one has to be aware right at the outset that the dispute cannot be litigated as a traditional contract or employment dispute, but instead as an ERISA dispute. Otherwise, you are bringing a knife to a gunfight, to borrow a favored cliché.

The court's decision itself, by the way, is a terrific road map through the current state of the law on benefit litigation under ERISA, particularly in the First Circuit, for both top-hat and regular old employee benefit claims.

Posted By Stephen D. Rosenberg In ERISA Statutory Provisions , Fiduciaries
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I spoke last week at the New England Employee Benefits Council on the Department of Labor’s efforts to redefine the word fiduciary by regulation, so as to capture within that rubric more of the vendors, providers and advisors involved in the retirement industry. Overall, my sense is the regulatory effort is over-expansive, and risks divorcing the regulatory definition of fiduciary from the statutory provision that creates fiduciary status under ERISA. My comments when I spoke ran in this direction. I also have an article in for publication in the Journal of Pension Benefits to the same effect.

That said, though, there are clear problems that the regulatory effort is directed at, and it is fair to say that, at a minimum, the Department’s heart is in the right place, as this interview with Phyllis Borzi makes clear. It is important to remember both of those things, even in criticizing particular redrafts of the relevant regulations. I mention this now partly because the issue is not going away, and the Department of Labor will be coming back later this year with a new, revised proposed rewrite of the regulatory definition of fiduciary, as explained here.
 

Posted By Stephen D. Rosenberg In 401(k) Plans , Benefit Litigation , Employee Benefit Plans , Pensions , Retirement Benefits
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This is not, at this point, a novel idea, but I do take credit for being one of the first to blog regularly on the thesis that we are approaching, if haven’t by now already hit, a perfect storm when it comes to retirement benefits and ERISA. The perfect storm consists of a series of elements all coming together in the same place and time, which in this instance consists of the following. First, a move from pensions to 401(k) plans, with the corresponding shift of two key risks – investment performance and capital accumulation – from plan sponsors to participants, a change which most people paid little attention to for a long time, because pensioners were still the majority of people accessing retirement benefits, while the vast numbers who would have to instead rely on defined contribution accounts to fund retirements were still working; this kept both the impact of, and the fear of the impact of, that change relatively hidden for quite some time. Second, the impending boom (pun intended) in retirements of a generation whose retirements will be funded – or, actually, more often than not won’t be funded, if you believe the numbers – solely by 401(k) plans. Third, the swooning of the stock market contemporaneously with these events. Add it all up and you end up with a retirement crisis.

For ERISA litigation, you are already seeing some of the changes that this storm is rendering, and will continue to render, as legal rulings and regulatory initiatives occur that are making it and will continue to make it, roughly speaking, easier to sue for breach of fiduciary duty under ERISA and to recover under ERISA if you are a plan participant. Doctrinal development of case law does not happen in a vacuum, and the easing of the restrictions against suing and recovering in ERISA cases is not happening in a vacuum either, but is instead being firmly influenced by the changes in the retirement industry and environment that are causing this perfect storm.

This occurs in a number of influential but indirect ways, which includes more cases being filed, often by more sophisticated lawyers, providing more opportunities for the legal principles at issue to evolve. One manner in which you see this is the shifting, sometimes almost glacially, of principles created in the case law during the days of pensions, when – in my view – courts paid less analytical attention to certain issues because most disputes concerned problems between sponsors and outsiders to the system, such as vendors or lenders, and did not directly affect the ability of participants to be paid their pensions; this is because, absent outright collapse of the sponsor, the obligation remained to pay those benefits regardless of the dispute at issue. The same, of course, cannot be said with regard to defined contribution plans, and thus courts are looking more closely at disputes in this environment than they did when confronted with similar, pension based cases 20 years ago. Indeed, we have clear direction from the Supreme Court that lower courts should reconsider doctrines established back in the long ago days of pensions when they arise in the context of defined contribution plans. Another manner in which this occurs is regulatory change – clearly, the Department of Labor’s flurry of regulatory initiatives related to fee disclosure and fiduciary status concern the need to tighten up the legal structure with regard to defined contribution plans in a manner that was not needed back when pensions walked the earth, as they increasingly no longer do. Each of these regulatory changes, in turn, opens up greater avenues for litigation and fiduciary liability, further changing the legal environment concerning 401(k) plans and ERISA itself. In this way, the perfect storm comes to affect ERISA litigation and liabilities.

Now here is a new wrinkle to add to the perfect storm, one that if true will just add to the impetus towards change described above: the possibility that the impending boom in 401(k) funded retirements will in and of itself depress stock prices. This will in turn simply accelerate the cycle, described above, by increasing the investment risk and capital accumulation risks that the systemic changeover from pensions to defined contribution plans has transferred to participants. The more risk of this nature passed to participants, and the more they suffer as a result of the outcome of those risks running against them, the more litigation, the more recoveries, and the more doctrinal changes you will see.

Put this one in a blog time capsule, and come back and see me in 20 years. I bet I will be right on this one.
 

Posted By Stephen D. Rosenberg In 401(k) Plans , ERISA Seminars and other Resources , Employee Benefit Plans , Fiduciaries
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Susan Mangiero of FTI Consulting, who blogs at Pension Risk Matters (as well as at Good Risk Governance Pays) and is one of my favorite sources of information concerning the investment and risk management realities that lie behind the façade of ERISA governed plans, is, along with a few other worthies, presenting a webinar on Wednesday, March 7, on “The ERISA and Securities Litigation Snapshot: Things You Can Do Now to Minimize CFO and Board Liability.”

The webinar is scheduled to cover:

•Why ERISA litigation claims against top executives and board members continue to grow
•How securities litigation and ERISA filings are related and what it means for corporate directors and officers
•What ERISA liability insurance underwriters want clients to demonstrate in terms of best practices
•What steps the Board and top executives can take to minimize their liability
•When to Get the CFO and board members involved

My quick thoughts on each of these topics, and why they mean this webinar is worth a listen if you have any responsibility for the financial and liability risks generated by ERISA governed plans? Lets go in order.

Why do ERISA litigation claims against top executives and board members continue to grow? There a number of reasons, but here are three quick ones in a nutshell. First, the market losses suffered over the past few years by participants has highlighted the investment risks faced by participants, and made them look closely at others’ possible responsibility for those losses. Second, decisions such as LaRue and Amara, while not opening a floodgate, have nonetheless created an environment in which it is easier to structure and prosecute claims against fiduciaries on behalf of participants. Three, plans are where the money is; there is more potential damages sitting in a company stock plan than you can shake a stick at. Remember what Willie Sutton said about banks? None of this is changing anytime soon, and ERISA litigation claims against senior officers will continue to be a growth stock as a result.

How are securities litigation and ERISA filings related and what does it mean for corporate directors and officers? Short answer: over the past several years, court decisions and congressional action have made it harder to recover in securities cases, while the same is not true for ERISA cases. In many instances, ERISA theories allow another way to target stock losses without having to jump through the hoops that exist in a securities case. For directors and officers, this means they will face more ERISA suits down the road, including against them personally. They need to have the right business structures in place to protect them against such claims, and the right insurance in place if they are found liable.

What do ERISA liability insurance underwriters want clients to demonstrate in terms of best practices? Underwriting needs in this area in many ways overlap with the same steps that should be put in place to protect the fiduciaries against suits, to reduce the risk of a judgment, and to minimize the likelihood of a suit being brought in the first place, regardless of the insurance issues. These steps are what I have often called defensive plan building, which is the need for due diligence, active understanding of the plan, accurate communications with participants, developing expertise and/or hiring it as needed, and following the same level of sophistication and investigation that would be applied to any other crucial part of a company’s operations.

What steps can the Board and top executives take to minimize their liability? This pretty much concerns taking the same steps, mentioned above, that the company’s insurance underwriters will appreciate. Interestingly, this is an area of the law and of insurance where all of the incentives line up well. The same steps reduce the risk of liability, reduce the risk of getting sued, and likely reduce premium dollars all at the same time. There is one other key step that should be looked at closely though, when considering how to protect senior executives and Board members against liability under ERISA, which is to carefully think about who will be involved in the plans and in what manner; the selected ones will be at risk for ERISA breach of fiduciary duty claims, while the others can be carefully and deliberately kept out of harms way. This means, though, that this has to be considered in advance and the proper structures put in place to accomplish it; if you do this after the fact, you are bound to end up with a lot more potentially liable fiduciaries among the executives and board members than anyone at the defendant company ever expected would be the case, due to ERISA’s concept, embedded in statute, of the functional, or deemed, fiduciary.

When should you get the CFO and board members involved? Yesterday, if possible, and right now, if not, for all the reasons noted above.
 

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries
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Here’s something very interesting, which I thought I would pass along with a couple of comments. It is the Court’s order concerning the proposed settlement of the class action at issue in George v. Kraft Food. George, which I discussed here, involved a particularly minute attack on the stock fund structure in a company 401(k) plan and on the decision making process by which the recordkeeper’s fees were determined. A panel of the Seventh Circuit found those claims viable as presented at the summary judgment stage, and allowed them to move forward. I discussed at the time of the Seventh Circuit’s ruling the fact that the decision ran counter to a wide spread sentiment that the Seventh Circuit’s earlier decision in Hecker v. Deere, which threw out an excessive fee and revenue sharing case with great vim and vigor, effectively foreclosed breach of fiduciary duty claims premised on the expenses of running a plan. What George showed, however, is that all Hecker precluded were broad, sweeping attacks on the fee structure and design of a plan; precisely targeted criticisms, with factual support for them, addressed to specific issues concerning the fiduciary’s conduct regarding the plan’s pricing and structure, can still move forward, as it did in George. And to what end? The settlement order in George indicates a settlement fund being paid out to the plan participants of $9.5 million.

So what to make of that? Here’s a good start. First, carefully targeted and supported breach of fiduciary duty claims targeting plan expenses, fees and structures are not guaranteed to go away through motion practice, as though a motion to dismiss or for summary judgment is akin to a wand at Hogwarts. Many, many, many fiduciaries – or at least their lawyers - have become convinced in recent years of the opposite, in my view. Second, if they don’t go away, their settlement value becomes significant, because of the sheer amounts at risk in a breach of fiduciary duty case involving a plan of any meaningful size. Third, breach of fiduciary duty cases, especially class actions, targeting the design and expense structures of plans are going to continue, no matter what lesson anyone hoped to take from the outcome in what was one of the earliest cases, Hecker. They are simply going to have to be better targeted and designed, and more carefully grounded in facts, than were the earliest cases, for this line of litigation to continue.
 

Posted By Stephen D. Rosenberg In ERISA Seminars and other Resources , Fiduciaries
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By the way, I and a cast of thousands (no, not really a cast of thousands; more like a very knowledgeable cast of several) will be speaking on “New Retirement Plan Regulations and Legislation Impacting 401(k) and 403(b) Plans” on Friday, March 9th. Ed Lynch of Fiduciary Plan Governance and I will be speaking on the Department of Labor’s effort – now in abeyance – to expand the definition of fiduciary by regulation. Earlier speakers will be covering the new fee disclosure regulations, and later speakers will cover target date funds, among other issues. The program is part of the Strategic Connection series hosted by the New England Employee Benefits Council, and you can find details, as well as registration information, here.

Posted By Stephen D. Rosenberg In Benefit Litigation , Coverage Litigation , Directors and Officers , Excess Policies , Fiduciaries , Rules of Policy Interpretation
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Well, given the title of this blog, I couldn’t exactly let this decision pass unnoticed. In this decision from the Court of Appeals of New York, Federal Insurance Company v. IBM, the Court denied insurance coverage for IBM under an excess fiduciary liability (apparently) policy, for a settlement by IBM of a claim that amendments to benefit plans in the 1990s violated ERISA. The Court, in short, found that the claim did not invoke IBM’s status as a fiduciary under ERISA, essentially because it involved settlor, rather than fiduciary, functions. The Court applied standard rules of policy interpretation, under which insurance policy language must be given a reasonable construction under the circumstances, to conclude that policy language that applied to claims against a fiduciary involving ERISA meant claims where the insured qualified as a fiduciary under that statute, and did not, contrary to IBM’s arguments, involve any broader meaning of the word fiduciary.

Three points about the case interested me, which I thought I would mention. The first is the case’s status as an exemplar of a phenomenon of insurance work that I have frequently mentioned in the past, which is that all major litigation disputes end up in court twice: the first time as against the insured, and the next time as against the insurer, involving the question of whether that first dispute is covered under the insurance policies held by that insured.

The second is that the case illustrates one of the most important aspects of another theme of this blog, which is the importance of what I have come here to call defensive plan building, which is a fancy way of saying developing benefit plans and affiliated structures that protect plan sponsors and fiduciaries from liability. Having liability insurance in place to protect them from the costs and potential liabilities of litigation is crucial. While in this case IBM can easily afford the uncovered exposure, this will not be the case for the vast majority of plan sponsors. Careful attention to the scope of, and holes within, insurance coverage for benefit plan operations is crucially important.

And finally, the humorous aspect of the decision is the third item, consisting of IBM being put in the position, to seek coverage, of having to argue for a broad definition of fiduciary in the context of a plan dispute. As we know from the controversy over the Department of Labor’s recent attempt to expand the definition of fiduciary under ERISA to catch more fish, most entities run from the label of fiduciary like a groom from a shotgun wedding.
 

Posted By Stephen D. Rosenberg In ERISA Statutory Provisions , Fiduciaries
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If you were going to read just one ERISA decision this year – or were starting from scratch, with a blank slate, and wanted to know the law governing breach of fiduciary duty claims under ERISA – I would read this one, Judge Holwell of the Southern District of New York’s opinion in Prudential Retirement Insurance and Annuity Co. v. State Street Bank and Trust Company. To set the stage in a nutshell, one can do worse than to borrow the opening paragraph of the Court’s opinion:

Plaintiff Prudential Retirement Insurance and Annuity Co. ("PRIAC"), brought this action pursuant to sections 409(a) and 502(a)(2) and (3) of the Employee Retirement Income Security Act of 1974 ("ERISA") against defendant State Street Bank and Trust Company ("State Street") on October 1, 2007. PRIAC commenced this suit as an ERISA fiduciary on behalf of nearly 200 retirement plans (the "Plans") that invested, through PRIAC, in two collective bank trusts managed by State Street—the Government Credit Bond Fund ("GCBF") and the Intermediate Bond Fund ("IBF") (collectively, the "Bond Funds"). This Memorandum Opinion and Order follows a seven day bench trial on the issue of whether State Street breached its fiduciary duty to the Plans by (1) failing to manage the Bond Funds prudently, (2) failing to manage the Bond Funds solely in the interest of the Plans, and (3) failing adequately to diversify the Bond Funds' assets.

In the process of awarding over 28 million dollars in damages to the plaintiff, the Court’s opinion roams in an orderly manner (can you roam in an orderly manner? I am not sure) across the most important issues in breach of fiduciary duty litigation, presenting detailed explanations of the relevant legal standards, including an excellent explanation and analysis of a fiduciary’s duty to act prudently, of the fiduciary’s duty to act with loyalty and of the same fiduciary’s duty to diversify. One particular issue that the opinion handles with great subtlety and depth concerns damages, with the Court presenting an excellent and thoughtful analysis of the burden of proof on this issue and of the relevant standards for calculating damages in this context. As the Court’s analysis reflects, this aspect of breach of fiduciary duty litigation is not fully fleshed out in the case law and is subject to real dispute, but the opinion addresses the issue masterfully.

One reason, by the way, that the damages issues are not fully developed in the case law at this point is the relative infrequency with which they arise in court, in comparison to the liability issues raised by a breach of fiduciary duty claim. There are a number of reasons for this. One is the trend in many circuits, post-Iqbal, towards deciding such claims at the motion to dismiss stage, resulting in many cases being decided at an early stage on liability in a context in which the legal issues governing damages never become relevant and never get aired. Another is the tendency of liability to be decided at the summary judgment stage, leading – more often than not – to settlement before the damages issue is ever presented to a court, if the summary judgment ruling finds a breach of fiduciary duty to have occurred. The combination of these events means that liability is far more written about by the courts than is damages in the context of ERISA breach of fiduciary duty litigation. As the opinion in Prudential makes clear, though, the subtleties of the damages determination become very important when the breach generates extremely large losses.
 

Posted By Stephen D. Rosenberg In 401(k) Plans
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Well, its 2012 and its time to pay close attention to fee disclosure involving 401(k) plans, for those of you who weren’t thinking about it already. The Wall Street Journal caught the bug yesterday, in this article that got wide play. I will tell you what about it caught my attention, which was the quote that the prospect of fee disclosure alone is already "putting downward pressure on fees." I have written on many occasions that the point of the fee disclosure regulations is to create marketplace pressure, driven by sponsors who are worried about the liability risk of failing to target fees and by participants challenging the amount of fees, that will reduce the costs inherent in plans. As I have written before, this approach will affect fees and benefit participants to a far greater degree than the hit or miss excessive fee litigation that has been targeting these issues to date. If the Wall Street Journal says this is already having this effect, then how much more proof do we need?

Posted By Stephen D. Rosenberg In Standard of Review
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You know the old saying “let a thousand flowers bloom”? Its long been a shorthand way (ironically enough, given its origin) of referring to the idea of letting state governments and programs serve as testing grounds for different approaches to the same problem, rather than having the federal government dictate one definitive solution, in the form of a particular program. What’s this have to do with ERISA? Well, in all the years I have been writing this blog, people have complained that the Supreme Court, perhaps inadvertently, granted plan administrators too much power by authorizing the application of discretionary review so long as the plan’s authors remembered to grant that to them in the plan documents. Eventually, the carping at the federal level – predominately by means of arguments made in litigation in the federal courts – resulted in some minor changes at the margins, such as rules regarding structural conflicts of interest that are at least slightly more favorable to participants than they are to plans. This approach to date has still not resulted in any great gains in favor of participants, or weakening of the system of arbitrary and capricious, or discretionary, review that governs decisions under most plans. With much less fanfare, however, certain state regulators have targeted this problem by banning the use of the operative language that generates this type of review in insurance policies affecting residents of their states. I have not made a careful study, but the cases that cross my desk from time to time clearly show that these regulatory initiatives are being upheld by the courts, are not preempted, and are serving to impose de novo review – instead of discretionary review – on plans. Why this is working in this way is perfectly summed up in this decision out of the United States District Court for the Northern District of Illinois, Curtis v. Hartford.

Posted By Stephen D. Rosenberg In Fiduciaries
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Not to be too flippant or cynical, but whenever, over the years, I have heard an economist base a nice, highly logical, elegantly structured analysis on the underlying base assumption that investors or business people or consumers are acting rationally – without accounting for the likelihood that they won’t actually do that – I understand anew why cynics call economics the dismal science (I often like to cross-examine economists by asking them about that reputation, if for no other reason than the sport of it). As a result, nothing about this article by Michael Lewis on the extensive literature in psychology – including Nobel Prize winning work –concerning the utterly non-rational behavior of individuals and the problems it exposes in economic theory really came as a surprise to me.

But if not a surprise, the article and the ideas it elegantly presents have a special significance for ERISA litigation and fiduciary obligations, believe it or not. Much of breach of fiduciary duty litigation is about establishing the parameters of what is the responsibility of the fiduciaries and what is instead the responsibility of plan participants. The Seventh Circuit, most famously, in Hecker seemed to have concluded that participants in defined contribution plans need to apply a caveat emptor approach to selecting mutual fund options and that fiduciaries do not have a particularly heightened duty to police the fees and expenses inherent in those investment choices, a point I discussed here; similarly, the history of employer stock drop litigation suggests that many courts and judges now believe that in almost all circumstances, employees – and not fiduciaries – have the duty to keep watch over whether retirement investing in employer stock is prudent, a point I discussed here.

This approach, though, places an awfully high burden on participants who are generally speaking, not particularly sophisticated investors and certainly not professional ones, and who are instead simply sorting out investment options in the spare time they have after doing their real jobs, the ones that they have to do well enough that they will stay employed so that they can continue to be a participant in such plans in the first place. Worse yet, as pointed out above, it is an unfair assumption to believe they will even act rationally in that role in the first instance. So does it make any sense, then, to place the burdens of investment decision making on plan participants, rather than on fiduciaries? Fiduciaries, after all, are charged by statute with acting in this regard with the care, skill, prudence, and diligence of someone knowledgeable about the subject, and there is no such statutory obligation imposed on participants. When you combine the original statutory calculus as to which side of the equation – participants or fiduciaries – should carry the responsibility of expertise, with the likelihood of irrational investment decision making by amateurs (a/k/a plan participants), one has to ask whether the line between the responsibilities of fiduciaries and those assigned to plan participants in recent court decisions is being drawn in the wrong place.
 

Posted By Stephen D. Rosenberg In 401(k) Plans , Employee Benefit Plans , Retirement Benefits
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All right, I am getting back in the saddle after a couple weeks off from blogging to recharge my batteries and tie up some key end of the year issues in a few cases. Not wanting to do too much heavy lifting on my first day back on the blog beat, I thought I would pass along, with minimal comment from me, this nice little piece on cash balance plans, and particularly how they might fit in alongside 401(k) plans in a particular business’ benefit plan structure. Anyone who follows the field knows that the rise of cash balance plans and their implementation, especially in instances where they have supplanted traditional pensions, has been rife with problems, both real, imagined, and litigatory (I may have just made up that last word, but still). Amara, of course, jumps to mind, but so do many other examples. The story I am passing along today, though, does a nice job of showing how, properly used, cash balance plans can be a force for good, not evil, to borrow a cliché.
 

Posted By Stephen D. Rosenberg In 401(k) Plans
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Amidst all the commentary and lawsuits over excessive fees – or allegedly excessive fees – on 401(k) investment options comes this article pointing out all that advisors do to earn that money, and raising questions, at least implicitly, as to whether courts and critics are asking the wrong question when they inquire into the reasonableness of fees; perhaps the better question, suggests the author, is whether the administration of the plan involves more than enough effort to justify the fees that are being paid. I like the article, and found it both entertaining and thought provoking.

I thought I would point out three things that the article brings to my mind. First, the author points out that determining whether fees are reasonable by comparison to industry benchmarks isn’t really a good test, because all it is showing you is that everyone of similar size and shape looks the same. As the author points out, if everyone in the industry suddenly raised their fees substantially, would all their fees still be reasonable? They would be if the relevant test was to benchmark against the industry as a whole, since their fees would all still be reasonable in comparison to each other. This harkens back to a problem with the Seventh Circuit’s analysis in Hecker, in which the Court indicated that fees in a particular plan are reasonable if they are consistent with the retail market as a whole. As the author of the commentary suggests, doesn’t this just beg the question, which is whether the fees charged across the overall market as a whole are reasonable? I know that the Seventh Circuit answered that question in Hecker by concluding that the omniscient power of the marketplace will guarantee that the answer to the question that is begged is yes, but I can’t say that the panel, in its ruling in that case, provided much empirical support for that assumption. The tribal myth of marketplace discipline, divorced from empirical support establishing that market forces actually force the fees to a level that would be found reasonable if the fees were independently analyzed without regard to the existence or not of those marketplace forces, really should not be enough support for the creation of a legal rule.

Second, the author’s point makes clear why that sort of benchmarking is not the test, or should not be, and that instead the proper test of the reasonableness of fees should be more of a two step test, of whether the fees are realistic in relation to the marketplace as a whole and whether the process of establishing the fees was prudent; this is essentially what occurred in Tibble, and circumvents the problem the author identifies with relying on benchmarking to determine whether or not fees are reasonable and, in turn, whether a fiduciary breach has occurred with regard to charging those fees.

And third and finally, the author brings us back to a fundamental issue when it comes to fees, and also to revenue sharing claims, which is that administration of a plan costs money, and someone has to pay for it. You can’t avoid it, and liability theories premised on excessive fees or on the existence of revenue sharing have to account for this fact; fees have to be paid somewhere in the system, and at a level that pays for the work needed to run a plan.
 

Posted By Stephen D. Rosenberg In Benefit Litigation , Pensions , Standard of Review
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The Second Circuit these days is the gift that just keeps on giving when it comes to ERISA litigation, and for that matter to blogging about ERISA litigation. Following up hard on the heels of its thorough and legitimately interesting opinion on employer stock drop litigation in Citigroup and McGraw-Hill, the court issued this much more low profile opinion in Novella v. Westchester County. Interestingly, while the employer stock drop cases received full blown press coverage – and while my own view is they essentially spelled the death knell for straight forward stock drop claims as a viable cause of action – I would bet a doppio that the much less noticed Novella case will be the far more cited case as time goes on. The Novella decision offers far more of relevance to the day in, day out run of ERISA cases than does Citigroup/McGraw-Hill, with its focus on one big ticket item, namely the exposure of major corporations to employer stock drop claims, and as a result, it is likely to be turned to by ERISA litigators and courts far more often over the years ahead than are its more high profile cousins.

Novella provides a thorough review and analysis of at least three key, and often encountered, issues in ERISA litigation, particularly denial of benefit cases; more than that, it provides the imprimatur of one of the country’s leading benches to a particular analysis of these issues, which are otherwise subject to some conflicting, and sometime unsettled, interpretations in various circuits. Here they are, in no particular order.

In the first instance, the court provides a clear example of how to determine the reasonableness of a plan administrator’s analysis of its plan terms, and gives some guidance to the proper use of long-accepted canons of contract construction in this context.

In the second, the court addresses one of the more enigmatic issues in denial of benefit claims, which is the question of whether a plan can defend against litigation by relying on an argument not raised in the administrative process before the plan during which the benefits were denied. The court’s words on this point are telling:

It is apparent from the record, however, that the defendants did not use Section 3.16 to calculate Novella's pension in the first instance. As the district court noted, the defendants identified this section as justification for their calculation of Novella's pension “for the first time in litigation.” They did not cite this section of the Plan in their letters to Novella explaining the calculation of his benefits. Nor did they indicate to Novella at any point during his administrative appeals that their two-rate calculation relied in any way on section 3.16. To permit them to assert this newly coined rationale in litigation despite their failure to rely upon it during the internal Fund proceedings that preceded this lawsuit would subvert some of the chief purposes of ERISA exhaustion: to “ ‘uphold Congress'[s] desire that ERISA trustees be responsible for their actions, not the federal courts,’ “ and to “ ‘provide a sufficiently clear record of administrative action’ “ should litigation ensue. It would also clearly be inequitable.

This item is a huge point that should not be overlooked. Lawyers for participants will often argue – whether calling it waiver, estoppel, or something else – that a plan cannot shift its grounds during litigation from what the plan administrator relied upon during the processing of the participant’s claim for benefits, including the participant’s appeal to the plan of an initial denial of benefits. Here, in this language from the court, is a striking, easily lifted passage supporting that exact argument. There is a proactive lesson to be learned from this, beyond just the question of how the court’s ruling on this point affects cases in litigation, and that lesson is that plan administrators must be careful to raise in their denials all plan terms and grounds they believe justify a denial. This requires more work and more attention during the claim processing and appeal stage, including – if the amounts at stake warrant it – getting the benefits lawyers involved.

And finally, I am fond of the court’s analysis of the application of ERISA’s statute of limitations, more specifically the court’s analysis of when the statute of limitations starts running on a claim involving the miscalculation of benefits. The events underlying such a claim occur over a broad swath of time, during which benefits are calculated, granted, appealed, recalculated, denied, and the like. The court narrows down the point in that run of events at which the statute of limitations starts to run, finding that “the statute of limitations will start to run when there is enough information available to the [plaintiff] to assure that he knows or reasonably should know of the miscalculation.” This is a fact based inquiry, but at least it is a standard one on which all parties can focus in litigating such disputes.
 

Posted By Stephen D. Rosenberg In 401(k) Plans
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Here is a well-done article, with data spoon fed by BrightScope, on the issue of having large employer stock holdings in defined contribution plans. The article points out the extent to which some plans have very large employer stock holdings in them, as well as the efforts being taken by some employers to educate participants on the risk of failing to diversify out of the employer stock holdings. That said, though, the real answer to the question posed by the article’s title – how much company stock is too much – is that, at this point, anything more than a small exposure is too much, if you are a participant looking to protect yourself. After the Second Circuit’s recent ringing endorsement of the Moench presumption, fiduciaries face relatively minimal legal risk from - or potential financial liability for – any significant decline in the value of the company stock held by the participants, at least under ERISA. This puts the onus further on participants to protect themselves proactively, by minimizing employer stock holdings in their defined contribution plans through intelligent investment decisions. If they don’t, when - note I leave out the word if in this day and age – the stock drops precipitously, the participants will end up stuck with the loss, as the wide spread adoption of the Moench presumption means that courts are not going to let the plaintiffs’ bar ride in on a white horse to recoup those losses by means of breach of fiduciary duty lawsuits.

Posted By Stephen D. Rosenberg In Fiduciaries
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I like this case, and these two stories about it here and here, for a number of reasons, not the least of which is their focus on operational competency in operating defined contribution plans and the fact that an occasional act of incompetence can be a pricey breach of fiduciary duty. The case is the story of a participant in a profit sharing plan who did not receive rollover forms in a timely manner, which was deemed a breach of fiduciary duty; perhaps of more import to plan sponsors and fiduciaries is the remedy, which was an award of the market losses in the account during the time the money sat, without being rolled over, while the plan participant waited for the necessary paperwork.

One of the reasons I like the case and the story is that it brings us back, in a world in which we spend a lot of time focused on and writing about major potential exposures like excessive fees and stock drops, to the more mundane day to day events that both impact participants and place fiduciaries at risk. It reminds us that it is the little things (although there was certainly nothing little about this case to the participant whose money was lost) that have to be done right in running a plan, or else fiduciaries and plan sponsors are placed at financial risk.

Another reason I like the case is that it is a perfect illustration of one of the mantras of this blog, which is that, in running a plan, an ounce of prevention is worth a pound of cure. Posts I have written along the way that emphasize this theme focus on the fact that investing time and money in perfecting compliance and operations pays off many times over in exposures that are avoided, in litigation costs that are never incurred, and in awards to participants that are never paid. This case is the touchstone of that idea. One relatively minor seeming operational failure cost the plan hundreds of thousands of dollars in damages and defense costs, all because of something that many would construe as nothing more than a minor oversight in compliance. For want of a horse my kingdom was lost; here, for want of some paperwork, hundreds of thousands of dollars were lost.
 

Posted By Stephen D. Rosenberg In 401(k) Plans
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I have worked over the years, formally or informally, with a number of third party administrators, investment advisors, and similar service providers to plans, and have always preferred those who bring to the table a real understanding of, and ability to communicate, the substantive issues that impact plan operation and performance. If you think of it in the framework of my rubric of defensive plan building (which is how I view most everything in representing plan sponsors and fiduciaries), hiring advisors who fit that description goes far towards protecting plan sponsors and fiduciaries from liability, because fiduciaries satisfy – in essence – their duty of prudence when they hire the expertise that they lack internally. By way of contrast to hiring people who know what they are doing – i.e., who can walk the walk – rather than those who can just talk the talk, there is the contrary option of just hiring the guy who takes you golfing, which probably isn’t going to satisfy the duty of prudence.

I have always liked Mark Griffith’s work for this reason and he shares his expertise on his (relatively) new blog, Fiduciary Advisor. In the first two parts of a three part series, Mark gives a thorough and thoughtful insider’s perspective on the impact of the fee disclosure regulations. They are worth a read, particularly for those of you who are ready for something above and beyond simply descriptions of what the regulations themselves require to be done.
 

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries
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Not unexpectedly, the Second Circuit has just adopted the Moench presumption, in this ruling here and this one here involving stock drop cases. For those with less time on your hands, here is an excellent news media summary of these stock drop rulings out of the Second Circuit yesterday. I have long posited that, given the trend in the case law, such an adoption of this approach by the Second Circuit would essentially spell the death knell for this theory of liability; I have essentially always been of the view that, should the Second Circuit apply the Moench presumption approach to these types of cases, the stock drop theory vanishes. It’s a strange legal structure, in a way, that an area of plan management involving vast sums of employee wealth can essentially be subject to no court oversight whatsoever, even to the minimal extent of the actions getting past the motion stage and into a court review of whether, on the actual facts, the fiduciaries’ conduct was prudent, simply because the company wasn’t on the precipice of outright collapse (which is the layman’s language version of what the Moench presumption requires for a stock drop case to get past the motion to dismiss stage). Now, this isn’t the same as saying the outcome at the end of the day in stock drop cases should be different, and that the fiduciaries shouldn’t walk under these fact patterns; it may well be a fair statement, given the ups and downs of the market and the potentially conflicting duties imposed by the securities laws, that the exact conduct made not actionable at the pleading stage by means of the Moench presumption should also pass muster on their actual facts after a review of whether the behavior was prudent under all the circumstances. But the Moench presumption is essentially a get out of jail free card that insulates the conduct without such review, simply on the basis that the plaintiffs cannot plead that the company was in near fatal financial distress; as a result, the propriety or lack thereof of holding employer stock in the stock drop scenario becomes free of any review – and of the healthy discipline imposed by the risk of court review – under pretty much all other circumstances. That’s a weird little outcome, really, if you think about it. It essentially consists of the courts making a decision to divest themselves of any jurisdiction to oversee the propriety of fiduciary conduct in the circumstances presented by stock drop cases.

Posted By Stephen D. Rosenberg In Standard of Review
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So half the parties interpreting a possibly ambiguous plan term that is subject to discretionary review come out one way in reading the term, and the other two the other way. Who wins? Well, this is a trick question to some extent, because it doesn’t matter the numbers – all that matters is who gets the last say. This means, of course, that the side who wins that split is whichever one the appeals court agrees with.

And that is a roundabout lead in to this story here - from Michael Rigney's excellent blog on Seventh Circuit appeals - that crossed my desk, about a Seventh Circuit opinion in September concerning the interpretation of the offset provisions in a pension plan where the plan terms invested the administrator with discretionary authority; in that case, the appellate bench concluded that the administrator’s interpretation was reasonable enough to pass muster and thus controlled the question.

More than the outcome, though, what I liked about the case was the panel’s explanation of the law of plan interpretation under ERISA, which was described as:

As a general rule, “federal common law principles of contract interpretation govern” the interpretation of ERISA plans. Swaback v. Am. Info. Techs. Corp., 103 F.3d 535, 540 (7th Cir. 1996). In this context, we have said that the fiduciary, in interpreting the plan, is not free, by virtue of its discretion, “to disregard unambiguous language in the plan.” Marrs v. Motorola, Inc., 577 F.3d 783, 786 (7th Cir. 2009); Swaback, 103 F.3d at 540. On the other hand, the fiduciary’s “use of interpretive tools to disambiguate ambiguous language is . . . entitled to deferential consideration by a reviewing court.” Marrs, 577 F.3d at 786 (emphasis omitted). In using such tools, the fiduciary may not, of course, rewrite or modify the plan. See Ross v. Indiana State Teacher’s Ass’n Ins. Trust, 159 F.3d 1001,12 No. 10-1900 1011 (7th Cir. 1998). “Interpretation and modification are different; the power to do the first does not imply the power to do the second.” Cozzie v. Metro. Life Ins. Co., 140 F.3d 1104, 1108 (7th Cir. 1998). Rather, the fiduciary must reach an interpretation compatible with the language and the structure of the plan document. Of course, “it is not our function to decide whether we would reach the same conclusion as the administrator.” Sisto v. Ameritech Sickness & Accident Disability Benefit Plan, 429 F.3d 698, 701 (7th Cir. 2005) (internal quotation marks omitted)

A handy synopsis of the issue, ready at a moment’s notice to be inserted in the beginning of a brief on the issue.

The case, by the way, is Frye v. Thompson Steel Company.
 

Posted By Stephen D. Rosenberg In Pensions
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Well, I don’t know. Could privately run pension plans get away with this type of planning, or would they be running smack dab into breach of fiduciary duty lawsuits? I doubt a fiduciary could get away with pie in the sky projections intended to support current pension math, and I wouldn’t want to be the fiduciary who, like one of the people quoted in the article, accepted a consultant’s report justifying the math without having "looked under the hood of the analysis.” That’s a good quote to have waived in your face at a deposition or, worse yet, on the stand in a courtroom. On the other hand, the comments of one public pension fund executive could be used as the starting point for a seminar on good governance or what I call defensive plan building:

"It doesn't matter what your assumptions are," said Laurie Hacking, executive director of the Teachers Retirement Association of Minnesota, which supports sticking with its 8.5% target return assumption. "It is what that market delivers that matters and how you react to that."

Ms. Hacking said Minnesota reacted to big investment losses after the financial crisis by cutting back on pension benefits and increasing contributions to the fund from employees and school districts. Those moves had a greater impact on the funding level of the teachers' system, now a relatively healthy 78%, than lowering return assumptions, she said.

Comparing the two examples creates sort of a koan for fiduciaries of any plan: be the latter, not the former.
 

Posted By Stephen D. Rosenberg In Benefit Litigation , Coverage Counsel , Coverage Litigation
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One of the first posts I wrote on this blog was about insurance coverage and the concept of the repeat player. The idea behind it was that insurers use the same counsel over and over again in coverage disputes, with the result that they put on the field – to use a sports metaphor – counsel who have a great deal of experience with the specific policy provisions at issue and a deep reservoir of knowledge about the effect of different fact patterns on the application of those provisions; the post pointed out that insureds are therefore not well served by using their general outside lawyers to represent them in such disputes, but are instead better served by finding their own “repeat players” to represent them in such cases, who can match the other side’s lawyers in expertise on and familiarity with the insurance policy types, terms and principles at issue.

The same holds true in ERISA litigation, particularly in the realm of denied benefit claims, whether they be short term or long term disability claims, health insurance, 401k issues, pension disputes, employee life insurance or other types of benefits made available by employers. Under ERISA, such benefits are governed by the terms of the plans under which they are provided, and litigation over any of them is subject to certain rules that are consistent across the field, such as those concerning the standard of review, the impact of conflicts of interest on the part of the administrator of the benefit plan, the contents of the administrative record, exhaustion of administrative remedies, regulations governing claims handling, and the scope of discovery. Most plan sponsors and administrators use “repeat players” to represent them on denial of benefit claims, to such an extent that some obtain discounted pricing in exchange for using the same counsel over and over again. This is actually beneficial to all involved on the defense side of such cases, as it creates a dynamic not just of cost savings for the plans, but also of the development of the level of expertise that comes through regular handling of the same type of cases, in this instance denied benefit claims under ERISA; this manner of developing expertise through repetition is exactly what is meant to be captured by the short-hand phrase “repeat player,” and this type of a consistent, mutually beneficial relationship between plans or administrators and their lawyers on such cases is how that expertise gets developed and brought to bear.

Interestingly, one should note that there is nothing unique to the defense side when it comes to the benefit of using a “repeat player” in denial of benefit claims under ERISA. You will have to trust me when I tell you that I routinely see the difference when, on the other side of the “v.” from me, is a lawyer who regularly represents plan participants in such disputes, as opposed to a general practice lawyer who represents plan participants only occasionally. This area of the law, like many others, is one where plaintiffs – who unlike the defendants may rarely be involved in such cases – also benefit from retaining a “repeat player.”

Mark Herrmann, the Chief Counsel for litigation at Aon, the insurance brokerage, wrote – whether he meant to or not – of this phenomenon in his piece the other day for Above the Law on “flotsam and jetsam,” in which he discussed the benefits to in-house legal departments of identifying areas of legal work that a company can bundle up and turn over, en masse, to an outside lawyer, who will handle the entire line of work for a fixed, and reduced, yearly retainer. I have over the years met with in-house benefit people and made the same suggestion with regard to a company’s handling of benefit claims, explaining that they are perfect for assigning to one counsel in exchange for a fixed fee payment structure for several reasons, including: (1) they are predictable in terms of time and cost investment, partly because discovery is limited; (2) the exposure to the company is narrow and predictable, because of the limited remedies available under ERISA and the ability to quantify the benefit amounts at issue under the relevant plan terms; and (3) the legal principles are consistent and should be well-known to defense counsel. This combination of predictability of the case with the expertise of the “repeat player” makes benefit claims perfectly suited to being bundled up in their totality and assigned to one outside counsel for a long period in exchange for cost savings to the company assigning the work.

Now as I noted, I have broached this idea over the years with plan sponsors and administrators, but I have to say I have never explained the concept quite as well as Mark Hermann did in his story. Writing as an in-house lawyer, he does a better job, I think, of isolating and describing the benefit to businesses in taking this approach than I have been able to do as an outside lawyer who can do no more than look through the window at the pressures, demands and needs of client companies. If you are in the benefits business, though, when you read his piece on it, think for a moment about how perfectly his description of “selling off” these types of cases fits the environment in which companies handle denial of benefit claims under their company benefit plans, and how well his idea would work for those types of claims.
 

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries
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Many of you may remember the race among law firms, after the trial court ruling in Tibble, to issue client alerts advising plan sponsors to make sure they were not holding retail share classes in their 401(k) plan investment options. Now, of course, we have the Seventh Circuit holding that it is just plain fine to have retail shares in the investment mix. So which is it? Well, of course, as I alluded to in my last post, it is really both.

In my article on Tibble, Hecker and excessive fee claims in the Journal of Pension Benefits, I took exception to the idea that Tibble effectively barred holding retail share offerings and explained that, under the detailed fact based approach applied by the court in Tibble, holding retail share classes instead of institutional share classes would not be actionable, even if the former were more expensive than the latter, if there are legitimate “issues with performance, availability of information, investment minimums, or other concerns about an institutional share class in a particular plan that would justify a deviation from including them as investment options” in favor instead of more expensive investment options, such as retail share classes. The Seventh Circuit took this exact same approach in Loomis, allowing the holding of the retail share classes in part because other possible investment selections that the plaintiffs asserted would have been preferable were not realistic, feasible, cost effective or practical alternatives to the retail shares. Thus, as was not the case in Tibble, in Loomis there was a finding that there was a legitimate basis for holding the retail share classes instead of other, proffered alternatives.

Now one can quibble with the Seventh Circuit’s preemptive determination that there were legitimate reasons for holding the retail shares and no compelling reasons not to on two potential grounds: the first that the court is substantively wrong on them (I haven’t formulated a full opinion on that yet), and the second that it is too early in the litigation process to determine that (in Tibble, for instance, it was clear that it was only on the actual facts learned in discovery that one could properly evaluate that issue, and one of the places that the Eighth Circuit, in Braden, broke from the Seventh Circuit was in allowing the plaintiffs to move forward with trying to prove the existence of issues beyond simply the holding of expensive shares). But it is fair to say that Loomis, like Tibble, rightly recognized the need to review whether there were proper alternatives to the retail share classes before determining whether or not holding them can constitute a fiduciary breach.

This means that, from a practical, boots on the ground perspective for those who build and run plans, the focus on diligent effort and investigation remains; what I always call defensive plan building, which is simply a catchy way of saying building a plan structure that will protect the fiduciaries against suit, continues to require putting in the effort of considering the propriety of different types of investment choices, and documenting that this was done. Do this, and it won’t – other than in terms of the amount of defense costs incurred before a case ends – matter one whit whether a suit is filed in the Seventh Circuit, in the Eighth Circuit, or before the same District Court judge who ruled in Tibble.
 

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries
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Well, well, well. Here is the story – well-presented by two lawyers from Williams Mullen – of the Seventh Circuit deciding this month, in the case of Loomis v Exelon Corporation, that holding retail class mutual fund shares, rather than cheaper institutional share classes, in a defined contribution plan was not sufficient to establish fiduciary liability. Here is the decision itself.

Reading them together raises more than a few thoughts about the decision and the Court’s reasoning. I wanted to focus today on one particular point, which is that, as the authors of the article point out, the Seventh Circuit, in the opinion, continues its heavy reliance in rejecting excessive fee claims on the idea that marketplace competition is sufficient, in and of itself, to police the expense levels of retail class shares offered to plan participants. This idea is, in many ways, the theoretical foundation of the Seventh Circuit’s seemingly categorical rejection of excessive fee claims, with the Court reasoning that, if market forces have set those fee levels, it is appropriate for plan sponsors to offer them.

However, it is important to recognize what the Court is really saying in Loomis, which is that the mere holding of retail shares – without more - under circumstances in which their pricing is subject to market discipline is not a fiduciary breach; the Seventh Circuit’s rulings in this regard, including in Loomis, are best understood as meaning that something more than that must be shown to make out a fiduciary breach. The Court, in fact, seemed to recognize this when it claimed for its own the Eighth Circuit’s decision in Braden, asserting that it was consistent with the Seventh Circuit’s approach in Hecker (and thus by extension in Loomis) because “the plaintiffs in Braden alleged that the plan sponsor limited participants’ options to ten funds as a result of kickbacks; while adopting the approach of Hecker, the eighth circuit held this allegation sufficient to state a fiduciary claim under ERISA.” The Seventh Circuit then went on in its decision in Loomis to explain why none of the additional assertions of potential fiduciary misconduct, above and beyond simply holding retail class shares, alleged in Loomis was sufficient to demonstrate the existence of the type of additional conduct that constitutes a fiduciary breach, such as existed on the allegations in Braden.

Loomis is therefore not properly read as meaning that excessive fee claims are futile, although it certainly means, in the Seventh Circuit anyway, that alleging excessive fee claims based solely on the decision to hold retail share classes without more is futile. The authority is instead properly read as meaning that something more than that has to be attributed to the fiduciaries to sustain an excessive fee claim, and that this something more must add up on its own to a fiduciary breach. This means that one should put little stock in news flashes, articles and client alerts that claim that Loomis means that excessive fee claims are futile or that holding retail share classes is per se fine; rather, what Loomis means is that excessive fee claims are futile and that holding retail share classes is fine only if participants can find no additional aspect of the fee related decisions that falls below a fiduciary’s standard of care. This is a subtle but clear, and important, difference, one that can cost a plan sponsor a lot of money if that sponsor turns out to be the one that left retail funds in place under circumstances where that additional lack of diligence can be shown.

Further, as many readers know, the federal district court’s decision after trial in Tibble, now up on appeal to the Ninth Circuit, is seen by many as contrary to Hecker and as finding a fiduciary breach in a plan’s holding of retail, rather than institutional, shares. The trial court’s opinion in Tibble, however, did not really find a breach just for that reason, but instead found a breach due to the lack of prudence and diligent investigation by the fiduciaries that led to holding retail share classes. Understanding both Loomis and Tibble in their proper light suggests that they are more in harmony than would appear on first glance; both require something more than just the holding of the retail class shares alone to demonstrate an excessive fee claim and a corresponding breach of fiduciary duty.
 

Posted By Stephen D. Rosenberg In Attorney Fee Awards
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I have to admit I have never been to Oklahoma. I am not, however, afflicted with the New Yorker’s view of the world and do in fact know where Oklahoma is on a map (I have also been to states that border it, if that counts). Either way though, the next time you have to brief the subject of awarding attorneys’ fees in an ERISA case in the post-Hardt world, you will be able to thank Oklahoma lawyer Renee DeMoss for the fact that you do not have to research the question or even put together your own completely original briefing of the subject to present to the court; she has already done it for you right here, in a structure useable in any jurisdiction.

Posted By Stephen D. Rosenberg In 401(k) Plans , ERISA Seminars and other Resources
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I don’t have much to say about this, but I would be remiss if I didn’t pass along this article from the New York Times the other day on BrightScope and its founders. The article, rightly, notes that BrightScope has its critics, but there is no denying that their work is adding to the knowledge of, and information available to, plan participants. Ignorance is not bliss, probably ever and certainly not for plan participants when it comes to their investments; as I noted in my most recent post (oddly, also provoked by a Times article), this same idea underlies the Department of Labor’s fee disclosure regulations as well.

Posted By Stephen D. Rosenberg In 401(k) Plans
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This is an interesting article from the New York Times, directed at plan participants who may want to increase the returns in their 401(k)s by decreasing the costs in their plans and of their investments. It is not interesting so much for what it says - nothing in it is likely to be very surprising, or even new, to most regular readers of this blog – but more for two points that it illustrates, both of which line up well with themes that have developed on this blog.

The first is the article’s discussion of the need for plan participants to focus on fees and the need to reduce fees in plans to increase returns; the article operates from the central premise that the plan participants reading the article may not be aware of the fees and expenses in their plans. Both recent litigation – the excessive fee cases – and Department of Labor regulatory initiatives have focused on fee disclosure and the effect of expenses on returns, and a focus on this issue is clearly trickling down – or up, depending on your point of view – into mainstream conversation at the participant level, as the article demonstrates. I have frequently mentioned in posts that the fee disclosure regulations may have more of an indirect impact on sponsors and fee structures than a direct one, in the manner in which sunshine is said to be the great disinfectant, in the classic formulation: bringing the issue out into the open is likely to provoke plan participants to press sponsors to reduce fees and the fear of being sued over fees once the information is more readily available is likely to motivate fiduciaries to focus on the issue. It is a safe bet that this indirect response is likely to have at least some downward impact on fees and expenses in plans, and it is my view that the point of the Department of Labor regulatory initiatives is to have this exact indirect effect, whereby disclosure improves performance rather than the Department having to focus its own resources or enforcement efforts directly at the issue. If they are right and it works – which, as noted, I think it will – they will have accomplished exactly what promulgating regulations should do, which is alter behavior in the intended manner solely through the process of enacting regulation. It is a much cheaper solution, and often more effective because it is prospective rather than backwards looking, then the use of litigation to change conduct.

The second relates to my recent post on Ary Rosenbaum’s article providing a short tutorial on fees and expenses in plans. In this article on excessive fee litigation, I pointed out that the use of shorthand in this area of the law can obfuscate what is really at issue with regard to the fee structure of plans, explaining that:

Certainly the starting point for any discussion of this issue should be an understanding of the nature of excessive fee claims. ERISA lawyers, like other specialists, tend to use shorthand to which only they are privy, and this type of claim is no exception. Pithy references to excessive fee claims, however, shortchange the depth and complexity of what is at issue. Teasing out the phrase’s full meaning gives a much more nuanced picture of what is at stake, and how it impacts fiduciary liability.

The New York Times article is a perfect example of this phenomenon, with the author writing that “plans sold by insurance agents (particularly with onerous “wrap” fees) and by stockbrokers tend to be the most expensive,” without ever explaining what a wrap fee is (leaving aside the question of whether this general statement is always true, only true on the outliers, sometimes true, or maybe true, etc.). This is not unique to the author of this article; the entire industry tends to throw around phrases like “wrap fees” as though everyone in the world knows what they mean, which is not the case. This is particularly not going to be the case at the participant level, which is the target audience of the story. One of the things I particularly liked about Ary’s article, which I referenced in this post here, is his excellent explanation of “wrap fees” for anyone who doesn’t already know what it means.
 

Posted By Stephen D. Rosenberg In 401(k) Plans , Third Party Administrators
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I have commented before, including here, on the fact that there is some inherent tension between the fact that the administration of 401(k) plans costs something and the obligation of sponsors to, nonetheless, keep those costs down. One of the hoped for goals of the Department of Labor’s effort to shed light on fees, expenses, costs and revenue sharing is to make sure that plan sponsors and fiduciaries have an accurate understanding of the expenses paid to run their plans, with the implicit assumption that they will then act on that knowledge (which they will, if they don’t want to end up a defendant in a future excessive fee/costs claim, likely filed as a class action in many cases).

Ary Rosenbaum does a beautiful job in this piece here of explaining the costs of administration, where they are buried, the belief of some – particularly smaller – plan sponsors that they are not paying for plan administration, and the impact on this system that the new disclosure regulations are likely to have. Ary writes regularly on 401(k) management issues, most of which I read, and I think this is his best piece yet. I highly recommend it, particularly for anyone looking for a nice, short yet comprehensive, introduction to the subject (it also has great pictures, if you like alligators).
 

Posted By Stephen D. Rosenberg In 401(k) Plans
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I don’t have much to add to this Wall Street Journal story on the interplay of spousal consent rules, ERISA and beneficiary forms in 401(k) plans, but I did want to pass it along. There may be no more common fact pattern in either my years of practice or in the case law than that of the deceased employee who meant to leave the assets of his 401(k) plan to his children from an earlier marriage – and filled out a beneficiary form so saying – but whose assets instead ended up paid out by the plan to the employee’s second wife, who was not named a beneficiary but, at the same time, never waived her right to the 401(k) assets. In most of these instances, the employee never knew that spousal consent/waiver rules would result in the widow receiving the benefits, no matter what the employee intended while alive or what he wrote in the beneficiary form.

For many people, the terms of their plans are a riddle wrapped up in an enigma, and without outside guidance, they are unlikely to get it right if they try to leave the assets in their 401(k) plans to anyone other than their current spouse.
 

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries
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By the way, I never did make available a full copy of the article I referenced in this blog post here, which I wrote for the Spring 2011 edition of the Journal of Pension Benefits. The article analyzes excessive fee litigation in light of the trial rulings in Tibble, against the backdrop of the motion to dismiss ruling in Hecker, and essentially concludes – as you might expect a trial lawyer to conclude – that the world (including that of fiduciary decision making with regard to investment selections in plans) tends to look a lot different after discovery and with evidence in hand, than it does when a complaint is drafted. You can find the article here.

Posted By Stephen D. Rosenberg In 401(k) Plans , ERISA Statutory Provisions , Fiduciaries
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Here is a very nicely written opinion out of the Third Circuit in Renfro v Unisys rejecting a breach of fiduciary duty claim alleging excessive fees in the mutual fund options in a company’s 401(k) plan. A few particular points are noteworthy. The first is the detailed explanation in the opinion of the reason that the directed trustee, Fidelity, was immune to suit for those decisions. The opinion lays out the written structure used by Fidelity to avoid being exposed to claims of this nature and, quite frankly, it is really well done. Pats on the back all the way around to the Fidelity legal department, or at least that part that over the years has formulated this structure and its documentation. While I mean that sincerely, I mean something more serious as well: somebody over there invested significant resources to get this right, and you see the value of that in this opinion. Investments in ERISA compliance and liability prevention can pay off down the road in spades, and this is a perfect example of it.

A second nice aspect of the opinion is the Court’s nice synthesis of Hecker and Braden, which otherwise can be seen as standing in conflict with each other. However, this leads to the third point, which is that the opinion reasonably and quite intelligently explains that the allegations concerning the mix of investments are not enough to show a breach, even though some of the fund choices were of the retail class in circumstances in which one can assume the sponsor had sufficient negotiating power to avoid that class of investments. As I discussed in this article here, one of the wrong lessons many people took from the District Court opinion in Tibble, which followed a trial of an excessive fee case, was the idea that having retail share classes as investment vehicles is a per se problem and needs to be avoided. That, however, was not really the case in that litigation; what was the problem there was not the use of the retail share classes, but the manner in which they ended up in the investment mix. The Third Circuit’s opinion is essentially driven by the absence of allegations that would match the evidence in Tibble showing that there were errors by the fiduciaries that caused the plan to unnecessarily and improperly carry retail share class investments. Rather, the Third Circuit’s opinion simply rejects the idea that the inclusion of retail share classes alone shows, without more, flaws in fiduciary decision making.
 

Posted By Stephen D. Rosenberg In 401(k) Plans , ERISA Seminars and other Resources , Employee Benefit Plans , Fiduciaries
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Summer time and the living is easy. Well no, not really – which is fine, because nothing makes a lawyer (at least this lawyer) more nervous than having time on his hands. Time demands have, though, cut down on my posting since the 4th. Still, I have had time over the past few weeks to think a little bit about this educational seminar I spoke at that was hosted by Asset Strategy Consultants on the role of fees and revenue sharing in designing 401k plans. My talk focused on defensive plan building, or defensive lawyering in other words, which I define as the process of building out the investment options in a manner that will reduce the risk of getting sued on the theory that fees and expenses in a plan were excessive, or, if sued, of being found liable.

This particular seminar was very interactive, with a lot of give and take with the audience, which is something I like, not least of all because I inevitably learn something. What did I learn this time around? A few things, but the following stuck with me. First, it is important to remember that there are a lot of plans out there, and many of them are staffed by committed professionals working hard to provide participants with the best plans possible. One can lose sight of this in litigation, or even in reading about the various lawsuits, settlements and judgments involving 401(k) plans, because the contentiousness of those cases, along with the real and often significant breaches of fiduciary duty that occurred in them, can obscure that reality. However, there are many more plans – some of them represented at the seminar – where people are doing the work of really diving into the plan’s investment structure, and making sure it is optimal, from both the perspective of fees and the perspective of returns. As I discussed in my talk, fiduciary prudence requires weighing both of those aspects – as well as a whole host of others – in choosing investment options.

Second, when it comes to fees and expenses in investment options, there is a lot of expertise out there, and there really is no reason not to tackle this issue prospectively. Looking backwards, the issue was not on many sponsors’ front burners, and thus I have little doubt that there may be plans out there that never put resources into controlling fees and expenses. However, at this point in time, there is no reason for any plan sponsor to be ignorant on this issue and of the risk of liability it imposes going forward, and there is more than enough expertise out there that can be brought to bear to address such concerns. I would hope that, down the road, excessive fee and expense cases will eventually go the way of the Pterodactyl, now that plan sponsors have learned to pay attention to this issue and to address it.

Third, while I am not a skeptic of excessive fee claims (the math on the impact on participants of a lack of diligence on this front is undeniable), I am of revenue sharing claims, as a general rule. Unless and until revenue sharing in a particular plan is shown to actually impact the investment choices or returns of the plan participants, it seems to be a “no harm, no foul” type of problem. If, as I discussed at the seminar in response to an excellent question, the participants can get a strong return at low fees while at the same time plan costs are driven down by revenue sharing, I don’t see a basis for finding a fiduciary breach, even if the revenue sharing was not disclosed or poorly disclosed. Obviously, this is a best case scenario, but that is my general view of that subject. I did get a good dose of reality on this issue, though, from the presentation of Mark Griffith of Asset Strategy Consultants, who illustrated the extent to which certain revenue sharing arrangements can, over time, result in too much money being paid for administration, relative to the actual costs; at the same time, Mark did a nice job of emphasizing a fact which often gets overlooked when the lawyers start yelling at each other in court about revenue sharing, which is that the costs of administering a plan are significant and have to be paid for one way or the other, a reality check that should not be overlooked when regulators, courts and lawyers are considering the propriety, or instead lack thereof, of various revenue sharing arrangements.
 

Posted By Stephen D. Rosenberg In ERISA Statutory Provisions , Equitable Relief
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Well, this piece by Alvin Lurie on Amara is about as good as you are going to find, running as it does from the technical aspects of the case to the philosophy of its jurisprudence. I can commend it to you for a few reasons, not the least of which is that it does a wonderful job of actually explaining the case itself, in terms of its genesis, the underlying proceedings, the plan at issue, and the decision of the Supreme Court. It also, though, goes straight to the most important aspect of Amara from the point of view of a practicing lawyer litigating benefit claims, which is the majority opinion’s exposition on how to obtain redress when the problem concerns inaccurate summary plan descriptions. As I discussed in this post here, the majority opinion instructs that a plan participant cannot recover increased benefits beyond what would be available under the plan terms themselves by basing a claim for benefits on the summary; rather, the proper approach is to seek reformation of the plan to provide the amount of benefits indicated by the summary, if different from that provided under the plan terms themselves. To my way of thinking, this is the key practical significance of Amara: it explains how to properly plead a claim seeking to recover the greater benefit amounts set forth in a summary, as compared to that set forth in the plan itself.

My thanks to Paul Secunda and the always vigilant Workplace Prof for highlighting the article.
 

Posted By Stephen D. Rosenberg In Fiduciaries
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I have blogged many times on the DOL’s progressive or aggressive (the adjective you choose depends on your view of the changes) program to alter the fiduciary landscape of defined contribution plans, by - in general – increasing the flow of information among providers, participants and plan sponsors on the one hand, and on the other hand decreasing loopholes that allow some providers to avoid fiduciary status. This story here gets right at the heart of one proposed regulatory change that would make it easier for providers who offer financial advice and products to be transformed into fiduciaries, by focusing on the key element of the regulatory change that has the effect; as the author explains:

ERISA regulations [currently] allow many investment service providers to escape fiduciary accountability for the advice that they provide to retirement plan sponsors and participants. The problem is that the Employee Retirement Income Security Act of 1974's definition of “fiduciary” is too narrow and nuanced. In particular, only advice that is both regular and serves as the primary source of decision making gives rise to fiduciary standing. Last October, the Labor Department proposed changing the definition by dropping the “regular” and “primary” requirements so that even one-time or periodic advice that is considered part of the decision-making process by the recipients would make the provider a fiduciary.

I like to think of this change as you make the advice, you own it. As a lawyer, that’s the rule I live by, and frankly I have no choice in the matter, from both the perspective of legal malpractice standards and the profession’s rule of ethics. For me, the fact that outlier lawyers who don’t live up to this will, in my experience, eventually find themselves in trouble, either with judges on their cases, malpractice carriers, or the state bar, means that abiding by this golden rule does not disadvantage me either in the courtroom or in the marketplace for legal services, because it creates what is in general a level playing field: most lawyers abide by this principle, and the ones who don’t will eventually be pushed out of the equation.

To me, for the quality providers of investment advice, this proposed change would do little more than have the same effect. If they are already doing a good job, they should not face any greater barrier to their work simply by this codification of a standard that they are already living up to: if they are doing prudent and informed work already, they have nothing – on a day in day out basis – to fear from being rendered a fiduciary by this change. It is the competitors who are skating by and competing with them by providing a lower quality product who will be at risk, and who will either have to raise their game to the level of the better providers or face the legal exposure that comes from doing shoddy work while operating under the title of fiduciary.
 

Posted By Stephen D. Rosenberg In Directors and Officers , ERISA Seminars and other Resources , Fiduciaries
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What’s that old saying - your lack of foresight doesn’t make it my emergency, or something to that effect?

I am a little guilty of that here, in my advice to you, at the relative last minute, to hurry up and register for a webinar on the intersection of insurance law, ERISA and fiduciary liability. It is not that last minute, really, in that the webinar isn’t until Thursday, but still, I certainly could have given you more notice.

Either way, I wanted to recommend this upcoming presentation, “ERISA Fiduciaries Under Attack: Key Litigation and Regulatory Developments,” presented by blogger Susan Mangiero and a cast of thousands (well, two actually, but they are good ones), which will cover fiduciary liability issues and the management of those risks through fiduciary liability insurance. As you will no doubt note immediately, the presentation strikes right at the intersection of the two main topics of this blog.

Speaking for myself, I think there is a great deal of misunderstanding out there as to the scope and usefulness of insurance coverage in this area. I don’t think I have previously seen a webinar directly targeting this issue, so I think it’s a good one, and I highly recommend it. You can find out more about it on Susan’s blog, here.
 

Posted By Stephen D. Rosenberg In Equitable Relief
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Here is a worthwhile, almost Cliffnotes (do they still exist?), guide to the ruling in Amara from the American Lawyer. It continues what is quickly becoming the norm for published pieces discussing the case, which is to present the opinion in an “on the one hand, on the other hand fashion,” by describing it as partly a win for employers, partly a win for employees, and a decision whose real impact and meaning cannot be determined yet. On that last point, I think it is more clear what the decision means long term than various writers are assuming. The opinion firmly directs – whether one calls it a holding or instead dicta is almost irrelevant, since when the majority of the Supreme Court says a case should proceed a particular way, as occurred here, whether that clear direction to the lower courts is actually a holding or just guidance seems to be at most of academic interest – that the proper approach to a case involving a conflict between the language of the SPD and the language of the plan terms is not to treat it as an estoppel question, as the courts have done, but to instead view it as a reformation question, and determine which set of language more accurately fits the intended scope of the plan’s benefits. If you think about it, this more properly and cleanly resolves the question of how to resolve a conflict between the language of the plan and the language of an SPD, as it results in providing the benefits that the plan itself was intended to provide, rather than whatever may be the outcome of a scrivener’s mistake, whether that inaccuracy was buried in the plan (and thus the phrasing of the SPD more accurately reflects the original intent of the plan) or in the SPD itself (in which case the SPD has the language that should be ignored). Moreover, it results in the consistent application of the plan across all plan participants, by enforcing the plan in its proper and intended terms and scope, rather than simply revising it or applying the SPD terms on an ad-hoc basis or case by case basis to suit the circumstances of the particular plan participant who is suing and who may or may not have been prejudiced by the discrepancy. An estoppel theory, and a requirement that a plan participant have been harmed by inconsistent language in the SPD as opposed to the plan terms themselves, almost guarantees that some participants – namely those who relied upon and were prejudiced by differing language in an SPD – will get different and likely greater benefits than those who cannot show this. The reformation approach to reconciling differences between the language of an SPD and the language of a plan is a much cleaner, more consistent and more appropriate way to remedy this type of problem that results in consistent treatment of plan participants in a way that an estoppel theory likely cannot do.

Posted By Stephen D. Rosenberg In ERISA Statutory Provisions , Equitable Relief
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Ran into John Lowell, who writes the Benefits and Compensation with John Lowell blog, the other evening, and we discussed his post on Cigna v. Amara, in which he referenced the fact that no one really knows for certain what the decision will mean in the long run, but he had never seen so many lawyers take pen to paper – or fingers to keyboard – so quickly as in response to that decision. Personally, I attribute it to pent up demand, in that many lawyers, myself included, have been watching for that decision for a long time, and had expected it by now; as a result, many were primed to jump right into the fray as soon as it was issued.

John is right though, that what the case means from any sort of a macro level (as opposed to its precise impact on the litigants in that exact case) is solely in the eye of the beholder at this point. The lawyers at Steptoe and Johnson in D.C. say the same thing as John, only with more legalese, commenting that “the Supreme Court’s recent decision in CIGNA Corporation v. Amara, 563 U.S. ____ (5/16/11), may revolutionize the way that employee benefit plans are drafted and the ability of plan participants to overturn provisions that they object to; or it may turn out to be the articulation of theories that have no practical impact.”

And in that is the thing, because the devil here, as in most things, is in the details. There is language and analysis in Amara that is fascinating if, as John noted, you are an ERISA lawyer who likes to wax poetic about the latest doctrinal changes and trends (guilty as charged on this end, to some extent). In fact, I think a young law professor looking to build a career could probably mine aspects of this decision for three or four major papers (feel free to email me and I will give you the topics). The technical lawyering questions about the role of the equitable relief prong addressed in the opinion raise a number of questions, and the difference in jurisprudential philosophy represented by the split between the majority opinion and the concurrence is good for an article or two.

But at the end of the day, we won’t know what the case really means in the long run until courtroom lawyers start applying it to actual facts in a case, and lower courts, and then higher courts, explain how the ideas set forth in Amara interact with those facts. It is when we have a critical mass of cases in which that occurs, and not till then, that we will finally have an answer to the million-dollar question that John posed: namely, why exactly does the case matter.
 

Posted By Stephen D. Rosenberg In Equitable Relief
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Well, I’m not going to beat Amara to death right now, and hopefully I will be back later on with more thoughtful comments on the decision. However, this wouldn’t be much of an ERISA blog if you couldn’t find a new Supreme Court decision on ERISA on it on the day it is issued, so I offer it to you right here. That said, though, here are some initial thoughts. First, the decision, from a practical perspective, says the ruling below cannot stand the way it is, but the plaintiffs can still eventually win by going back and instead putting in the case under the equitable relief prong of ERISA in the manner sketched out by the majority. This makes the ruling a full employment act for the defense lawyers in the case, who are likely to be working on this case for years more; in fact, the concurrence points out that this alternative theory posited by the majority could set the case up for another run before the Supreme Court, after the lower courts have finished with the alternative theory etched out by the majority. Thought about in this light, you have to wonder how many retirees will still be standing to collect any recovery by that point, given the length of time the lawsuit has been going on to date.

Second, Justices Scalia and Thomas come back, in their concurrence, to a point I discussed with regard to LaRue, namely their feeling that these types of cases can be decided as a matter of simple application of the terms of the statute, without more. Frankly, however, this case in particular is an example of one where you can’t possibly decide how this statute, which speaks only in generalities for the most part, can apply without considering what type of gloss can or should properly be applied to the statutory language. Indeed, this is much of what the majority’s opinion consists of: reading the language of the equitable relief prong in light of the proper gloss to apply to it, historically and in light of prior Court opinions. By doing that though, the majority opinion illustrates the mess that the entire line of cases on what is “equitable” relief for these purposes has become in light of the Court’s past rulings in this regard that attempt to define this by looking at what historically represented part of the equity bar. Simply put, there is no justification for basing a decision in 2011, like this one, that affects the retirements of people who will live well into the 21st century and involves a statute that was enacted in 1974, on treatises concerning the equity bench from the 19th century, as the Court ends up doing here. Jurisprudentially, it’s a wrong-headed approach, but the Court’s past decisions have painted them into that corner; this is yet another decision that points out the need for the Court to work its way out of its existing rubric concerning the scope of equitable relief under ERISA and into a more nuanced and modern approach to determining the scope of claims that can be brought under the equitable relief portions of ERISA.
 

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries
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Susan Mangiero, who brings expertise in finance and investments to the discussion over the propriety of various investments in defined contribution plans and whether their presence in a plan can support a claim for breach of fiduciary duty, has written this interesting post on the issue I discussed here, namely the role of CFOs in running plans and different approaches to reducing the fiduciary liability risks of including employer stock as investment options. What she points out is something we litigators, with our backwards looking focus – what is litigation, after all, but a fight over something that already happened? – may not have noticed: namely, that the fights over employer stock are likely laying the ground work for future fights over other investment choices. This idea is interesting, in that breach of fiduciary duty litigation is, in fact, much like the old saying about people who accomplish something who are standing on the shoulders of the people who came before and tilled the ground. Fiduciary duty suits involve the courts confronting a new situation, such as employer stock drops, and creating rules to deal with them, and then later suits involving other similar fiduciary acts build upon, flow from, or distinguish the rules created in those earlier cases. In future cases involving other types of investments, such as the bond losses Susan references, one key factual distinction is going to come into play, which is that stock is unique to a certain extent in this context, because of the competing obligations imposed on company officers by the securities laws and ERISA, which has driven much of the development of the law of stock drop claims in the ERISA context (along with a concern that the class action bar should not be allowed to easily reframe securities class actions as ERISA breach of fiduciary duty cases, a concern that either flows directly from or fits very easily with the recognition that corporate officers are in a position of having to serve different masters with differing agendas, in the form of the securities laws and ERISA, when employer stock is held in a plan). The question for the next round of cases, such as disputes over bond losses, is how comparable those scenarios are to that conflict, as it only makes sense to extend the breach of fiduciary duty rules developed in the employer stock drop context to other types of losses to the extent that similar concerns are as present in those cases as they were in the employer stock drop context.

Posted By Stephen D. Rosenberg In 401(k) Plans , ERISA Seminars and other Resources , Employee Benefit Plans , Fiduciaries
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Live blogging is usually used to mean that someone is attending a seminar and putting up posts about it while there. I mean it differently, that I will be talking live, about the topics I regularly address in my blog posts, at this seminar on May 10 hosted by Asset Strategy Consultants-Boston. The seminar is open to plan sponsors and their advisors, and I will be opening the event by speaking on "Hot Topics in Fiduciary Governance: Limiting the Risks Inherent in Selecting Plan Investment Options.”

Other speakers include Mary Rosen from the Department of Labor, as well as Todd Mann of AllianceBernstein Investments and Mark Griffith of the host, Asset Strategy Consultants-Boston. Mary and I spoke together on a panel awhile back in Boston, and her comments on the current focus of the DOL alone tend to be worth the price of admission.

Information on registering for the seminar can be found on this invitation, if you would like to attend. I hope to see many of you there next week.
 

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries
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This is an interesting piece on one of the most loaded issues in ERISA litigation, namely the potential personal liability of corporate officers who run a company’s benefit plans, in particular their defined contribution plans, such as 401(k)s or ESOPs. The article drives home the fact that when CFOs or other officers are named as the fiduciaries, as is often the case with company plans, they are thereby opened up to liability for any problems in the operation of the plans that can be characterized as breaches of fiduciary duty. Importantly, however, and on a topic that the article skips over (it’s a short article, and a point likely deliberately beyond its scope), corporate officers who get intimately involved with the operations of such plans are likely to be targeted as fiduciaries in litigation, and may well be found to be fiduciaries, even if the plan at issue avoids naming them as fiduciaries; their involvement is bound to render them so-called deemed or functional fiduciaries, which opens them up to much the same liability risk.

The article focuses on the problems for those corporate officers, and in particular CFOs, that stem from holding employer stock in plans, which are acute as a result of the inherent conflict between the business needs of the company with regard to its publicly traded stock and the potentially distinct risks to plan participants of financial loss from holding that stock in a plan. When problems with a stock arise, a corporate officer’s actions in response in one direction may benefit one side of that equation at the expense of the other, at the same time that different actions by that same officer could reverse that calculus. When the resolution of that problem results in losses to the company stock held by the plan or its participants, the fiduciaries enter the cross-hairs for litigation and potential resulting liability based on the possibility they have breached their fiduciary duties to the plan participants by those actions.

The article poses as one solution the creation of a data driven system that preordains decision making with regard to company stock holdings, based on such issues as changes in stock price, etc., thereby taking the day in, day out discretion over what to do with the stock holdings out of the hands of the fiduciaries. There are many benefits to such an approach when it comes to defending possible breach of fiduciary duty claims down the road involving those stock holdings, but it is far from a get out of jail free card. At a minimum, the corporate officers who have been serving as plan fiduciaries, whether in name or by operation of law, are likely to be accused of having breached their fiduciary duties by erring in creating, selecting and putting the automatic system into place in the first place, and by failing to monitor or adjust the system along the way in response to any changing dynamics in the marketplace. As the Seventh Circuit’s decision this month in Kraft Foods reflects, there is no doubt that good class action lawyers and good financial experts can identify and target financial anomalies in any system designed to process employer stock holdings, and they will do that with this approach as well. It doesn’t mean the author’s proposal doesn’t have merit, and I can see many ways in which it would strongly aid in the defense of a breach of fiduciary duty claim against corporate officers.

However, it doesn’t change the fact that the best approach to the defense of such corporate officers is either to keep employer stock out of the plan itself or, in a move court tested and approved by at least one circuit, move the entire management and decision making on whether to hold company stock or not, and if so when to buy and sell it, out of the company and onto very qualified outside advisors. This will still, just like the case as noted above with regard to the author’s proposal for creating an automated system, not completely exempt the corporate officers who are fiduciaries from the risk of liability, but will make it very, very hard to recover from them; they can still be sued for alleged errors in selecting and then failing to monitor that outside advisor, but if the outside experts are well-chosen, that’s going to be a hard row to hoe to recover from them.
 

Posted By Stephen D. Rosenberg In 401(k) Plans , Equitable Relief , Fiduciaries
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This is interesting – it’s the story, in abbreviated form, of the Seventh Circuit breathing new life into an excessive fee class action case, by finding that there is a factual question of whether the fiduciaries properly evaluated their options and that the defendants cannot insulate themselves easily from their obligation to properly monitor and test fee levels. Its also an interesting case on the question of the fiduciaries’ obligations with regard to structuring an employer stock fund and on the effect of such choices on returns net of expenses. The case itself is George v Kraft Foods Global, and you can find the opinion itself here.

The case jumped out at me for three reasons. The first is that it runs counter to the assumption, expressed in many quarters, that the Seventh Circuit’s prior and highly publicized ruling in Hecker created a significant barrier, and possibly spelled the death knell, for claims built around excessive fees and costs for plan investment options. Many, including me, thought the Seventh Circuit went too far in that regard at that time, and that excessive fee claims needed to be evaluated on the micro-level of the actual facts of the fiduciary’s conduct to decide whether a claim was viable, which was not the approach taken in Hecker. This latest case out of the Seventh Circuit seems to move in that direction, as it is clearly a fact specific investigation of the issue, one that found that the plaintiffs were free to make out such a case on the actual facts of the fiduciaries’ conduct.

The second is that this ruling thereby fit perfectly with the thesis of my article on excessive fee claims after Hecker, referenced here, which posited that subsequent judicial and regulatory developments would move the case law away from the approach of the court in Hecker and toward the approach taken in this most recent Seventh Circuit case. Time seems to be bearing out my forecast.

The third is the nature of this claim involving breach of fiduciary duty involving employer stock holdings. We all know that the traditional form for such claims is the stock drop case, in which the complaint is that the plan should not have been holding employer stock which then dropped significantly in value. In many jurisdictions, this is no longer a promising approach (although not in all, and for good reason, an issue for another day). Here, however, we see a revamping of the traditional approach to such claims, one that makes the stock holdings aspect of an investment plan a possibly significant basis for a breach of fiduciary duty claim under ERISA. Those plaintiffs’ class action lawyers – what will they think of next?
 

Posted By Stephen D. Rosenberg In 401(k) Plans
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I thought I would pass along that my article on the law of excessive fee claims under ERISA is coming out this week in the Spring 2011 edition of the Journal of Pension Benefits. Titled “Retreat from the High Water Mark: Breach of Fiduciary Duty Claims Involving Excessive Fees After Tibble v. Edison International,” the article explores the interplay of the Seventh Circuit’s reasoning in Hecker (a case I have discussed often on this blog), the detailed fact finding of the trial judge in Tibble, and the regulatory changes related to fees and fiduciary status being enacted by the DOL. The article’s takeaway – since as many of you already know, I tend to think that legal writing that doesn’t tie things up with a lesson or a conclusion that will help practitioners or clients is wasted ink – concerns how to structure plans to reduce potential liability in light of these developments.

Here is a link to the abstract for the article, which will also give you the full cite if you want to track it down.
 

Posted By Stephen D. Rosenberg In 401(k) Plans
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Funny, this chart from Bloomberg on the top rated 401(k) plans in the country, taken from the BrightScope data. When I first discovered BrightScope’s beta site and blogged on it, I was struck by the fact that if you want a good retirement, you should go to work for the Saudi Arabian oil company. This chart highlights that this advice, cheap and useless though it is, is still sound. But what’s not a throwaway comment about this chart is this: take a look a this list of the best 401(k) plans, and then look at the companies. It’s a cross sample of some of the most successful companies in America. So what comes first? Does the success breed large account balances? Or do employees who feel the company has their back on benefit plans, such as 401(k) plans, build a better company? My gut instinct from a lifetime of work and a professional career working on benefit and plan disputes is that the answer to both is yes, in that it is a self-reinforcing cycle. Properly treated employees build a better and wealthier company, which in turns leads to larger account balances in 401(k) plans (because of employer matching, because employees have more income to invest, and because employees think they will be there long enough for it to be a worthwhile undertaking), which in turn leads to more highly motivated employees, which in turn leads to a more successful company, which in turn . . . Well, you get the picture.

Posted By Stephen D. Rosenberg In 401(k) Plans , ERISA Statutory Provisions , Fiduciaries
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One underlying theme of much commentary about 401(k) plans is the idea that their replacement of pensions as the primary retirement vehicle for most private sector workers was not intended, and is the walking, talking example of the law of unintended consequences. Seen as it was in its origin myth – as a supplemental retirement investment vehicle – its flaws become less significant; for instance, questions of the appropriate levels of fees, or whether and under what circumstances to include employer stock, are less important when the risks of reduced return from those issues impact not the participant’s primary retirement investment, but rather a supplement to it. In some ways, that is the revolution of BrightScope. I have spoken with lawyers and industry people who quibble (and sometimes outright quarrel) with its math, but the reality is that, regardless, it is the first public forum (that I know of, anyway) to really treat 401(k)s as what they truly are: the primary retirement vehicle for a vast swath of the public. Viewed in that light, every piece of information that impacts or reduces performance, which BrightScope tries to capture and communicate to the participants, is of the utmost importance, something that would not be the case if 401(k)s played a less central role in employee retirement planning.

I was thinking of this today because of two stories on issues involving the use of ESOPs and 401(k) plans for purposes other than retirement income accumulation; in both cases, for the more traditional purpose – in my mind anyway – of motivating employees and managing tax exposures. As tools for these purposes, they have more value and less risk than they do as primary retirement vehicles. Both though are subject to distortion depending on the nature of the management of them: the ESOP by misuse, as I have written before, as a tempting tool for corporate transactions and the 401(k) by mismanagement of its investment selection and cost. Each risk is countered, or supposed to be, by the fiduciary obligations of those operating the plans, and at heart this is what the Department of Labor initiatives to expand the scope of fiduciaries is targeted at: making sure that all those who play a management or similar key role in the operation of these types of plans become fiduciaries and are subject to the discipline imposed by that status, in terms of potential liability exposure, behavioral demands and expectations, and litigation risks.
 

Posted By Stephen D. Rosenberg In 401(k) Plans
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I have mentioned to people in the past that I am reasonably confident that I am the only author of legal information who has managed to link Walker Percy, denied benefit claims and ERISA in the same publication, which I did here in this post. I think that’s a pretty good stupid human trick myself. Adam Pozek’s linking of Warren Zevon, Werewolves of London, 401(k) plans and the 404(c) defense, although a little less obscure in its references, is pretty good too. It also has the benefit – pun intended – of being accurate and informative, and a nice little walk through the realities of the 404(c) defense, all at the same time.

Posted By Stephen D. Rosenberg In Fiduciaries , Summary Plan Descriptions
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Well, geez, I am embarrassed by the awkward silence in this space over the past couple of weeks. I was out of the country on business for a bit, and digging out ever since. Not that I ever lost sight of the ball, though, as I kept jotting down stories and developments that I wanted to pass along in a blog post. I am going to do that right now, clearing my desk of two of them.

In the first one, I had wanted to pass along this excellent and thought provoking post from Adam Pozek’s Pozek on Pensions, in which he discusses the regulatory changes being developed by the Department of Labor related to who is a fiduciary and what information has to be disclosed to and by fiduciaries. Adam makes the point that what should not be lost in these developments, and in the controversies the changes engender – see here, for instance – is that they do not change the actual obligations of plan fiduciaries to act reasonably and conduct appropriate investigation; those obligations have always been there and continue to be there. The only thing that is changing is what information is available as part of that obligation and how it may impact a fiduciary’s compliance with that obligation. I have discussed before that the disclosure of further information through this regulatory structure will almost certainly shift the nature of fiduciary liability and litigation, and affect how such claims are structured and how they are defended. They don’t, however, change the fundamental, underlying legal obligation of fiduciaries, a point Adam drives home in his post and which, perhaps implicitly, he is reminding us of as we get lost in the details of these regulatory changes.

The second item I had wanted to highlight was this blog, by John Lowell of Cassidy Retirement Group, titled – in a walking, talking exemplar of transparency - Benefits and Compensation with John Lowell. John’s experience shines through in his posts, which are detailed, thought provoking and frankly, compared to much of what one finds on blogs, highly original. For my purposes, and for any of the rest of us waiting for the Supreme Court to rule in Amara, I particularly liked his real world discussion of the problem of misleading and inaccurate summary plan descriptions, which you can find here.
 

Posted By Stephen D. Rosenberg In 401(k) Plans
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Alert reader Tom Obara of Cassidy Retirement Group here in Massachusetts - or as I have taken to calling it during this perpetually snowy winter, East Dakota - passed along to me an article on behavioral finance in January’s issue of PlanSponsor in which I am quoted on the need for plan sponsors to adequately educate and inform plan participants about investment options and the risks they pose. You can find the article, called “Misbehavioral Finance,” here, and this is what I had to say on the matter:

Not delivering a reality check: Some of the wave of participant lawsuits since the 2008 crash could have been prevented if sponsors had delivered the message more clearly throughout to DC participants that they bear ultimate responsibility for their retirement security, believes Stephen Rosenberg, a Boston-based Partner at law firm The McCormack Firm, LLC, who works primarily with employers. “There are some lawsuits that suggest they do not want to rock the boat in telling people who are already concerned about their declining house value anything else that could worry them,” he says.

Employers should have been delivering that reality check all along, Rosenberg thinks. “There is little doubt that years and years of significant asset growth meant that many people did not pay attention to the risks and the fees. It has left people with very unrealistic beliefs and expectations,” he says. “I do not think that they were educated enough in advance. It is easier for plan sponsors, as well as for their vendors, to not really point out the risks or exposures and just let everybody be happy.” Employees need to get the clear message that “you cannot just rely on the company to get you there,” he says of retirement security. They need to know, he says, that a 401(k) “is something different from what your parents had, or what you wish you had.”

Now lets be clear. No amount of information, education and disclosure is going to insulate a plan against class actions if there is a problem in a plan that the class action bar thinks can be targeted (and let’s make sure we are fair: sometimes the class action bar is right and a plan does have legitimate problems that call for class wide relief). They will always be able to find some plan participants who are unhappy enough to serve as class representatives, no matter how much information the plan sponsor had imparted to those individuals. But it is my view and my experience that many individual complaints and individual participant lawsuits can be avoided by educating participants properly about their investments; many suits arise because participants feel blindsided and misled, and that is a dynamic that disclosure and education can defuse. Beyond that, there is little doubt in my mind that an educated workforce that, even when 401(k) balances decline, is knowledgeable enough to understand that risk and even to have foreseen that possibility, is a happier workforce, and one that suffers less damage to its morale in a downturn. Isn’t that a good enough reason right there to expand disclosure and education to plan participants?

Posted By Stephen D. Rosenberg In Third Party Administrators
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Ouch. Here’s the story of a payroll company that overpaid salary for years to an employee of its client company, because that employee was authorized to provide the payroll company with payroll information and direct it to issue payments; according to the case, she requested additional payments to herself and the payroll company made those payments. Who bears the loss here, the client company or the payroll company it hired? The former, not the latter, because the contract between the client and the payroll company could most fairly be interpreted as assigning the risk in that manner. Here is the opinion, and blogger Stanley Baum down in New York has a detailed review of the case here.

Anyone, like me, who has represented third party administrators hired by plan sponsors has seen the outline of this problem before, although often under less sinister circumstances; disputes in this relationship usually arise out of performance issues by the third party administrator relating to its operation of a benefit plan, followed by litigation over who is responsible and to what degree for those problems. Inevitably, as in the case of this payroll administrator, the linchpin of the dispute becomes the terms of the contract between the parties, and often those contracts are written in ways that protect the third party administrator from, or strongly limit its liability for, losses from its operation of the plan. As I have argued in court in the past when speaking on behalf of a third party administrator in that relationship, if the sponsor wanted different performance obligations or stronger remedies for performance failings, it should have written them into the contract in the first place. That is the story here, as well: any third party administrator contract requires looking a little bit into the future and guessing at the potential problems that may occur down the road, and allocating responsibility for them in the contract before they occur. Sure, its easier said than done, but that should be part of what a plan sponsor is paying for when it hires an attorney to deal with these types of contracts.

Posted By Stephen D. Rosenberg In 401(k) Plans
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Here is a nice article from Planadviser.com that sums up the recent opinion out of the Seventh Circuit that I discussed the other day in this post, on the propriety of certifying classes of plan participants in excessive fee cases. The article does a nice job of summing up the findings on that issue, if you don’t want to read the court’s fairly long, but well written analysis of the issue.

One of the impressions you may get from the article is that, in some manner, certifying a class in such a case may be difficult, but I don’t think that is a fair reading of the case or of the events in the litigation itself that gave rise to the ruling. If you think about it, there is little question that each plan participant’s account rises and falls on its own, independent of those of other plan participants to a certain extent, and that harm to one may not be harm to all. However, there is also little question that if there is an overarching problem with the plan that runs across all or many participants’ accounts - such as fees that are too high with certain investment options - that many participants may be injured in the same way and to a similar extent. What the Seventh Circuit’s ruling in Spano suggests, rightfully I think, is that, under these circumstances, one has to think carefully about how a class should be defined and of whom it should consist. There is no reason to draft a broad class definition that simply includes all plan participants, and instead a class should be constructed that is limited to those plan participants who actually invested in the specified investment options that are shown to have had excessive fees or other fiduciary breaches during the time period that the problems existed. That is not a lot to ask to make sure that class action litigation actually serves it purposes and satisfies the procedural and other legal limitations that exist to ensure that it does so, and doesn’t run off the tracks. It certainly requires more thinking, study and analysis of the actual scope of the investment problems at the class certification stage, rather than simply certifying the class and waiting to figure that out during the merits portion of the case, but isn’t that, after all, what class certification discovery exists for?

Just idle musings for a Monday morning.

Posted By Stephen D. Rosenberg In Conflicts of Interest
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I have been blogging long enough that I can bore people by pontificating about how blogging was easier back in the old days. It’s actually true though, to some extent, at least with regard to my blog, and that’s because when I first started blogging, Paul Secunda, at the Workplace Prof blog, was still posting regularly on scholarly and legal developments concerning ERISA. He has stepped back from doing that over the past couple of years, leaving me with one less source of ready made analysis and commentary to mine.

Paul has stepped back into the salt mines, though, with this interesting post on the Third Circuit’s recent consideration of conflicts of interest under the MetLfe v. Glenn rubric. On some levels, I agree with Paul’s comment in his post that he doubts the new regime ushered in by Glenn will change the outcome of many denied benefit cases, only I agree with him from the opposite perspective: it was always my opinion that, in the courtroom, the evidence typically pointed the way to the right result regardless of the existence or non-existence of what has come to be known as a structural conflict of interest on the part of the decision maker. As I wrote in many posts back in the era when different circuits had different approaches to this issue, leading eventually to the Glenn ruling, it was more often than not my experience that the administrative record in a given case could tell you whether the decision was improperly influenced by outside factors - i.e., anything other than the facts of the participant’s claim - and thus there was generally no evidentiary reason to care one way or the other whether the decision maker, independent from what the administrative record itself showed, was acting with a conflict.

What is interesting to me at this point about this topic is that we are probably far enough along into the post-Glenn world that an academic could sit down with pre- and post-Glenn denied benefit decisions from the courts and analyze, in a statistically accurate manner, whether the Glenn rules have had a measurable impact on the outcome of these types of case. How about it, Paul? Time to bring the law and statistics movement to bear on ERISA questions?

Posted By Stephen D. Rosenberg In 401(k) Plans , ERISA Statutory Provisions , Fiduciaries
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I have written before about the various implications of the Supreme Court broadening fiduciary duty claims in LaRue to allow individual participants to sue for losses only to their own accounts, rather than just for harms suffered by all participants, or in other words, by the plan as a whole; among other aspects, I have discussed its interplay with the class action rules, and the importance for the development of the law of ERISA of the Court’s distinction in that case between defined benefit plans and defined contribution plans.

On the first point, I have noted that the famous - to a small group of interested observers otherwise known as ERISA lawyers and scholars - role played in LaRue by the so-called (by me, anyway) diamond hypothetical may have a wide range of implications for the development of the law, not all of them either intended or even foreseeable. Under the diamond hypothetical, each participant’s account in a defined contribution plan can be understood to contain its own specific bunch of diamonds, which all together add up to make up the totality of the diamonds held by the plan; this is different than a defined benefit plan, in which the diamonds are not subdivided in that manner, but instead are merely held in their entirety as the plan’s assets. I have blogged before about the question of whether this meant that an individual plan participant who suffered no harm to his particular account - i.e., his diamonds didn’t vanish - could proceed as a class representative where other plan participants did suffer harm in their accounts - i.e, their diamonds did vanish - or could seek relief on a plan wide basis. Judge Gertner of the United States District Court for the District of Massachusetts has a nice discussion of the diamond hypothetical in the footnotes of her opinion that is discussed in this post.

In a decision interesting on a number of fronts, the Seventh Circuit has now addressed this same issue in detail, in the context of deciding whether class certification orders in excessive fee cases involving defined contribution plans were appropriate. In Spano v. Boeing, the Court focused on the implication of the diamond hypothetical structure of defined contribution plans (without mentioning the diamond hypothetical), finding that class certification can be proper, despite the fact that each plan participant has his or her own individual account and possible loss, after LaRue, but that the particular injury to the different participants’ accounts had to be examined to determine whether class certification was appropriate with regard to the particular theory being pursued by the class and the representative plaintiffs. In essence, class certification may not be appropriate if there is too much variance in the impact on different participants’ accounts of the challenged conduct. The opinion is a fascinating read on this question, and you can find it here.

The opinion is notable for a number of other reasons as well, some of which I may return to in further posts, but one of which I will mention here. I have posted in the past that the Supreme Court’s opinion in LaRue invited courts to revisit the rules in place with regard to defined benefit plans when instead evaluating claims concerning defined contribution plans, and emphasized that the rules applicable to the former may not properly fit the latter. I have pointed out as well that figuring out where or how the rules should diverge in the two contexts should open up avenues for participants’ lawyers to try to advance their cases when pressing claims involving defined contribution plans. The Seventh Circuit drives home both this point and this new reality in Spano, recognizing this dynamic put into play by the Supreme Court in LaRue.
 

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries
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Well, I am not sure I could have said this better myself, although in post after post, I have spoken of the increasing litigation risk for fiduciaries, and of the need to respond by emphasizing compliance and diligence in designing and running 401(k) plans. At the end of the day, ERISA has become a fertile ground for litigation, and the inherent conflicts and difficulties in running 401(k) plans are exposing fiduciaries to lawsuits and the potential of personal liability. Susan Mangiero, in this post on her blog Good Risk Governance Pays, surveys this landscape and explains what is putting fiduciaries ever more at risk. Two particular aspects of her post are worth highlighting. The first is her reference to a leveling off of fees, and her attribution of that event to litigation risk; we are coming through a storm of lawsuits over investment fees and expenses in 401(k) plans, all alleging - in one way or another - that sponsors and fiduciaries should have used their market power to obtain lower fees. It is often remarked that litigation is a terribly blunt instrument to effect change (its also expensive and not terribly efficient), but it may have done so here and, if so, those of us who labor in the vineyards of the court system should be pleased by the system’s ability to effect change. The second is her discussion of the series of changes that are affecting fiduciaries, each of which in one way or the other has the potential to expand fiduciary liability, if manipulated well by counsel for participants. I have written many times that we are in an era of evolution of fiduciary liability under ERISA, driven by the old Marx line that at the end of the day, everything is economics. As I have written before, the simple fact is that 401(k) plans - and worse yet losses - have become the fundamental reality of retirement for most employees, and with that change in the economic environment is going to come change in the risks, obligations, demands and legal exposure of the fiduciaries of such plans; we see that here in Susan’s post as well.

Posted By Stephen D. Rosenberg In Benefit Litigation
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Like most lawyers who represent plans or their administrators in denied benefit disputes, one of the first things I check when a participant’s complaint is forwarded to me is whether the participant exhausted all review opportunities with the plan’s administrator. If not, the defense of failure to exhaust administrative remedies needs to be raised. For those on the opposite side of the “v” (i.e., the plaintiff), however, whether or not the failure to exhaust administrative remedies is fatal is not so cut and dry. Circuits vary on the circumstances under which such a defense is outcome determinative, and most circuits - probably all, but I have to admit I haven’t surveyed the more out of the way circuits on this question - provide participants with ways around this defense, as this informative blog post illustrates.

Posted By Stephen D. Rosenberg In 401(k) Plans , Conflicts of Interest , Fiduciaries , Percentage Players Die Broke Too: Notes on Litigation and Trial Tactics
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In my life as a trial lawyer, I have found myself in a recurrent situation, in which a judge or an arbitrator eventually looks at me in an argument over discovery and asks if I really want the information I am after, as it could run against me. I always answer the same way, to the effect that I am comfortable with facts, believe that more information is more likely to lead to the just result in the case, that I will trust the facts to show us which way to go, and that I am more than willing to let the facts come out in the open and drive the case. Now, the truth is that, before ever seeking the discovery that is at issue, I will have long since thought through the subject and become convinced that the evidence in question, once brought out, is far more likely to help my case than to harm it; the reality, from a tactical perspective is that, otherwise, I would not have pressed the point in the first place, with me going so far as to ask a court or arbitration panel to order production of the witness, or documents, or whatever else is in question. That said though, my response - to the effect that I favor the facts coming to light - is a true sentiment. Facts are stubborn things, in the classic formulation, and they decide cases; I am more than happy to have them see the light of day. Heck, I would certainly like to know of them while I can do something about them, even if they are bad for my case, than have them just show up for the first time out of some witness’ mouth on the stand in the middle of a trial.

I thought of this when I read this investment manager’s discussion of the Department of Labor’s expansion of the term fiduciary, which I discussed in my last post, and of the Department’s various initiatives related to fee disclosure, in particular his discussion of lobbying against those actions. Like facts in a lawsuit, the facts of revenue sharing, fees, and the like belong in the open, and can do nothing at the end of the day but improve outcomes for participants, plan sponsors, fiduciaries and the better advisors. What’s wrong with a little sunshine, a little transparency, and a lot of disclosure in this context? Frankly speaking, probably nothing. Participants will eventually end up with better outcomes, while plan sponsors and fiduciaries will have the information needed to best do their jobs, which will - if they use the information right - make them far less likely to get sued or, if sued, be held liable for fiduciary breaches. Meanwhile, we all know that advisors get paid fees, as of course they should; the only change is that everyone involved in the decision making will know who is getting paid what and for what exact services. Under that - possibly excessively rosy - view of the world, the end result should just be that the better advisors, who are providing better products and services at better prices, will get more of the business. What’s wrong with that, from a forest eye view?

Posted By Stephen D. Rosenberg In Fiduciaries , People are Talking . . .
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I have written before, on many occasions, about the evolving nature of fiduciary status, and in particular on the shifting regulatory landscape in this regard. Here is an interview I gave to Fiduciary News on the latest proposed Department of Labor regulatory change concerning the meaning of the word fiduciary in the ERISA context. If you want more background detail on that regulatory change itself, you can find it here.

Posted By Stephen D. Rosenberg In 401(k) Plans , ERISA Seminars and other Resources
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I talk regularly, of course, about the importance of compliance in the operation of ERISA plans - just take a look at my immediately preceding post for instance - but that is just a fancy way of restating the old saw that an ounce of prevention (in the form of a well run plan) is worth a pound of cure. As an ERISA litigator, the cure - litigation - is better business for me than the ounce of prevention ever could be, but that doesn’t change the basic fact that the only real precaution against litigation costs and liability is a well run plan, and the best defense against a lawsuit that arises anyway is the same thing -a well run plan.

But how do you get to a well run plan? While there are a number of ways to get there, here are a couple. Ary Rosenbaum, in this piece, explains why one step towards a well run plan is to bring in expert legal advice on the compliance aspects of the plan right from the get go. A true ounce of prevention strategy if I have ever heard one. Another is to constantly increase the knowledge base of a plan’s decision makers. On that front, Pozek on Pension’s Adam Pozek and ERISA lawyer Ilene Ferenczy have created a really useful little engine for accomplishing that, in the form of a series of webinars offered by Pension Pundits LLC. Their next one, coming up shortly after the first of the year, is on non-discrimination testing, and you can sign up for it here. At the end of the day, litigation costs too much money, even if a plan’s sponsor and its fiduciaries prevail, to not take advantage of these type of opportunities to avoid getting sued.

Posted By Stephen D. Rosenberg In Benefit Litigation
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I tell people all the time when I speak at seminars that compliance is key because in a downturn, participants will sue plans and their fiduciaries over things they just ignored when the markets just kept going up, up and up, with participants’ account balances doing the same. I have frequently noted this in posts as well here on this blog, reminding people that when the market goes up, participants don’t get upset that compliance problems or excessive fees or the like meant they earned “only” 12 or 14% in a given year, rather then 15 or 16% in that year, but they get plenty upset when those problems in a plan mean the difference between a loss and a bigger loss.

My support for this premise has always been anecdotal, based on what I see in litigation and learn in my discussions with fiduciaries, plan sponsors, vendors and participants. It appears there is some verifiable independent data to back this up, though:

The amount of lawsuits associated with the Employee Retirement Income Security Act (ERISA) have increased significantly since the beginning of the recession, the Rockford Register Star reports.

According to data from the US District Court, 9,300 lawsuits related to ERISA were filed in the country during the 12-month span that ended on March 31, 2010. While that number is lower than the nearly 11,500 lawsuits in 2004, it represents a significant increase since the beginning of the recession, according to the news provider.

Posted By Stephen D. Rosenberg In Pensions
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There is almost nothing I can add to this extremely sad story two days before Christmas, other than to point out that, for the criticism ERISA takes for preemption and its limited scope of remedies, the structure has done a pretty good job of accomplishing its true initial goal, which was to keep private pension plans from winding up like the public pension plan in Prichard Alabama.
 

Posted By Stephen D. Rosenberg In Benefit Litigation , ERISA Statutory Provisions , Fiduciaries , Retirement Benefits
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I have discussed in many posts the idea that the plaintiffs’ class action bar has alighted on ERISA and breach of fiduciary duty claims as a preferable tactical alternative, in many cases, to proceeding under the securities laws. This approach was a particularly nice fit for stock drop cases, in which company stock held in employee benefit plans rendered ERISA, and its relatively - at least compared to the securities laws - more malleable breach of fiduciary duty doctrines, a viable approach to seeking recovery for precipitous declines in company stock prices. To date that tactic - which made sense as a legal and tactical theory in the abstract - has not really worked out all that well with regard to decline in the value of company stock holdings, because of the oft-discussed Moench doctrine, which provides a strong presumption in favor of plan fiduciaries when it comes to holding company stock.

This article here, however, discusses what has, at least in perfect hindsight, turned out to be an excellent example of taking a good idea - at least if you are a class action lawyer or a plan participant - a little too far, by choosing to proceed under ERISA in a large putative class action rather than under the securities laws, only to have the court subsequently conclude that ERISA cannot apply under the facts of the particular case, and that the participants should have gone forward under the securities laws in the first place. The case it discusses, Daniels-Hall v. National Education Association out of the Ninth Circuit, can be found here, and for the ERISA practitioner, it may be more significant for its detailed analysis of the government plan exemption in ERISA than for its conclusion that the plaintiffs had overreached by relying on ERISA rather than the securities law to proceed with their case. The issue of the choice of legal doctrine to pursue is one of tactics, and reasonable lawyers can disagree at the outset of a case as to which of many plausible lines of attack should be pursued; either way, over time, the current preference for ERISA over the securities laws as a matter of tactics will likely run its course. Debates over whether a particular plan is a government plan, however, will continue to pop up, and the Ninth Circuit’s decision provides a sound template for analyzing that issue.

Posted By Stephen D. Rosenberg In Fiduciaries
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Can a fiduciary of a pension plan or other employee retirement account trade in derivatives without breaching his fiduciary duty? If this article from the New York Times is to be believed, then the answer is really no. If there is no transparency to fees and costs of the undertaking, than, theoretically, a fiduciary cannot truthfully say whether or not the transaction is financially appropriate in light of its costs to the plan and whether the assets of the plan are in turn being handled properly. Further, a fiduciary’s obligations run more to the duty to investigate and properly handle a plan’s investments than it does to ensure the best outcome; it would not seem that a fiduciary can engage in the due diligence necessary to satisfy his, her or its duty of prudence if the fiduciary cannot obtain clear and accurate information about an investment opportunity, which the article suggests cannot be done as part of a derivative based investment.

Now on some levels this reads like a perfect law school exam hypothetical: here is a widely used investment in which there is no transparency as to costs and the like; now identify all of the ways in which investing in them would violate the fiduciary obligations of plan sponsors and others with regard to an ERISA governed retirement plan. At the same time, though, ERISA has to have some flexibility to allow the real world to be accounted for, and if derivatives may in some instances be an appropriate investment for a pension plan, fiduciaries should be allowed to make use of them, despite having access to only imperfect information. The question, from a fiduciary liability perspective, is where in the middle of those two extremes does fiduciary obligation, duty and breach lie? It unquestionably is somewhere in the middle, and if and when a retirement plan is sued for underperforming due to the use of derivatives, we may well find out exactly where in the middle that line rests.

Posted By Stephen D. Rosenberg In Summary Plan Descriptions
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I have been keeping my eye out for an article on the CIGNA Corp. v. Amara case before the Supreme Court - argued a little over a week ago - that focuses more on the practical realities of the case for plan sponsors and participants, rather than on the “inside baseball” analysis of the lawyers and their arguments, which were all the rage in the immediate aftermath of the argument before the high court. I think I finally found it here, in this piece from CFO.com. I have to say that my view of the case, the arguments, and the analysis about it floating around out there have me perpetually in an “on the one hand, on the other hand” mindset about the case, which of course - as someone paid by people to give them definitive advice on which they can actually act - makes me think of Harry Truman’s famous line that he wanted a one-armed economic advisor, because when asked for his opinion he wouldn’t be able to tell the president on the one hand this, and on the other hand that.

As the CFO article points out, the central practical question here is the impact of potentially misleading or, more innocuously, simply incorrect summary plan descriptions, ones that do not accurately state the terms of a plan itself. As the CFO article points out, allowing the SPD to govern or at least alter the benefits by operation of its variance from the actual plan terms - something which in this instance could cost the plan sponsor $70 million or so - can result in a large, unfunded expense and a benefit plan of a scale a company never intended to offer. That really isn’t and was never the point of ERISA, which was to encourage companies to offer benefit plans; whacking them for mistakes, particularly if innocent, isn’t really consistent with that, nor is it likely to encourage companies to offer benefit plans. On the other hand, just off the top of my head, I have at least two or three cases sitting on my desk right now that revolve around inaccurate or misleading SPDs or other information provided to plan participants, ones that simply did not conform with the governing plan documents themselves. It seems to me that, particularly with plan terms as significant as the ones at issue in Cigna, there really is no reason why an emphasis should not have been put in the first place on making sure that the relevant plan term was communicated accurately and succinctly in the SPD. And that of course brings us all the way around again to one of the obsessive focuses of this blog - that the best way to avoid liability, lawsuits and litigation costs is an obsessive focus on compliance and operational competency in the day to day running of a plan. More - in my experience - than in any other area of the law, when it comes to ERISA governed benefit plans, an ounce of prevention is worth a pound of cure.

Posted By Stephen D. Rosenberg In Fiduciaries
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I have spoken before of the Department of Labor’s regulatory initiatives to target fee setting and disclosure issues, and how they are likely to expand fiduciary liability related to the expenses of 401(k) investment options. Of a piece is the Department of Labor’s yet more recent regulatory initiative to expand the scope of advisors who can qualify as fiduciaries, which, if and when enacted, will by definition expand the number of fiduciaries and the potential number of parties liable for problems in a plan or its investments. Although it comes from Canada by way of New York, I am partial to this blog post on this regulatory change, which covers it quite succinctly.  For a further discussion of the proposed regulatory change, you can see here as well.

I mention this now because, in my view, we have already entered a world of expanding fiduciary liability, and this regulatory change will speed that change. With the change from a pension based system (which had relatively little risk for the individual participant) to a defined contribution plan system (in which all investment risk is borne by the participant), it was only a matter of time before the narrower application of fiduciary liability, ensconced during that earlier era and likely appropriate to it, shifted to accommodate this new reality. We are seeing that occur now, even if often just glacially.

For fiduciaries of defined contribution plans, this means an expansion of their own personal risk, one that in turn demands higher diligence by them in managing plans, selecting investments, and other potentially risky activities. Nevin Adams had a cute post early this week about what fiduciaries of 401(k) plans should know in a nutshell, which you can read here: its particularly apt advice in light of the expanding nature of their potential liability.

Posted By Stephen D. Rosenberg In Fiduciaries
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Here’s a great story on the latest developments in the breach of fiduciary duty lawsuit arising out of the use of the Tribune’s ESOP assets as part of a complicated leveraged buy out. For some really deep background on this case, you can check out my post here from when the case commenced. I have been following it with one eye since it began, and think the summary in this newspaper article is pretty well-balanced. To the extent that there is a broader, more macro/forest and not the trees lesson here, it is the importance of thinking of ESOP holdings in the same way that a company would think of its employees’ 401(k) or other defined contribution holdings, and to both protect and respect them as retirement assets of plan participants. Unfortunately, the fact that ESOP accounts hold employer stock can make them instead appear to be another potential tool of corporate finance. The Tribune case reflects the fact that making use of that stock for transactional purposes can well end up, in at least the outlier cases, with large losses to plan participants, after which the class action bar or the Department of Labor are likely to try to transfer those losses to one or more of the parties involved in the transaction.
 

Posted By Stephen D. Rosenberg In 401(k) Plans
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I wanted to say that much ink has been spilled over the Department of Labor’s regulatory initiatives concerning fee disclosure, but no one really uses ink anymore, and we all just post on the internet, in either blogs or in intermediary sites that publish law firm client advisories. Either way, though, there is no getting around the tsunami of reporting on the fee initiatives, much of which is quite good. That said, for those of you who don’t feel overwhelmed by the amount of information out there on this subject or, on the other end of the spectrum, are not yet comfortable with the impact of the regulations, I liked this publication here for an easy to digest summary on the issue. Beyond that, Josh Itzoe, author of Fixing the 401(k), is offering this webinar on the subject on a few occasions over the next several weeks.

Posted By Stephen D. Rosenberg In 401(k) Plans , Benefit Litigation , The Hidden Law of ERISA
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As a general rule, I don’t write blog posts about cases I am handling. For the most part, nothing good can come of it. I do make an exception once and awhile, but only to the extent of passing along a particular ruling, without commentary, that may be of broader relevance and interest. Today is one of those days, in which I am posting this recent federal district court decision from one of my cases which concerns class certification related to a 401(k) dispute, and I post it only because the Court provides a nice synopsis of one particular wrinkle raised by the Supreme Court’s ruling in LaRue, namely its impact, if any, on the propriety of certifying a class in a dispute involving a defined contribution plan. In the words of the Court:

There is a question whether the Supreme Court’s decision in LaRue v. DeWolff,
Boberg & Assoc., Inc., 552 U.S. 248 (2008), bars class certification of fiduciary breach claims by participants in defined contribution plans because participants as a result of LaRue’s holding may now pursue individual ERISA actions against plan fiduciaries. Although some courts have so held, see, e.g., In re First Am. Corp. ERISA Litig., 622 (C.D.Cal. 2009), other courts, including this one, have not been persuaded that so radical a revision of Rule 23 was intended by the Supreme Court. See Hochstadt v. Boston Scientific Corp., 2010 WL 1704003 at *12 n.12 (D. Mass. Apr. 27, 2010); see also Stanford v. Foamex L.P., 263 F.R.D. 156, 174 (E.D. Pa. 2009) (“The availability of an individual account claim under § 502(a)(2) [of ERISA] does not alleviate the concerns cited by numerous courts that have certified ERISA class actions pursuant to Rule 23(b)(1)(B) in situations where claims on behalf of the Plan are identical to those on behalf of an individual account.”).

You can find the discussion at footnote 4.

Posted By Stephen D. Rosenberg In 401(k) Plans
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Investment option fees are the current bête noire of 401(k) plans, but to date the government response to them has not been a direct attack on the amount of fees themselves, in the form of regulatory or legislative establishment of appropriate ranges of fees. This differs, for instance, from the manner in which the government has effectuated health care reform, where the new regulatory structure is built around establishing and dictating exact manners of compliance. In contrast, with 401(k) fees, the government response, as formulated through regulatory initiatives, is to increase transparency, as Ryan Alfred of BrightScope discusses in this insightful post, presumably in the belief that greater transparency will lead to greater pressure to reduce fees. At a minimum, one would expect broad knowledge of the fees that are part of different investment options to increase competition, as plan participants and fiduciaries seek lower fees for their own reasons when confronted with this information, and the providers respond to that pressure by competing more on price. That, in any event, would seem to be the theory.

Will it work? Probably, would be my guess, although obviously if we give it a little time, someone will be able to give us quantitative evidence at some point as to whether or not this approach succeeded in bringing down fees. But looking prospectively, rather than in hindsight, it only makes logical sense that it would. That relatively small subset of participants who understand the impact of fees on their 401(k) plans can be expected to press for lower fee options, and fiduciaries can in turn be expected to respond by seeking such options, if for no other reason than to reduce the risk of getting sued down the road by disgruntled participants; in this way, the self-interest of the key set of players on the buy side ought to reduce plan fees, as providers respond to this pressure by competing on price. Maybe that’s a little too “invisible hand of the market” for some people, and that may not be the answer to all problems everywhere, but it seems a nice logical outcome in this instance.

Moreover, it is likely to work here because the use of transparency to bring about lower fees is not occurring in a vacuum, but instead is reinforced by the private attorney general aspect of ERISA litigation, in which participant classes and individual participant plaintiffs simultaneously pressure fiduciaries to reduce fees or risk paying out a small fortune in defense costs and settlement money if they don’t, as this story about a recent settlement over fee disputes entered into by Bechtel reflects. Greater transparency combined with increased risks of liability for failing to act on fees seems like a pretty potent combination, and a sensible way to try to bring down fees without simultaneously hemming in fiduciaries and their vendors by dictating exact fee ranges.

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries
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I mentioned in a prior post that I was speaking on a panel with David Webber of Boston University Law School. David’s blog, Labor Capital, has a nice post on the financial weakness of public pension plans, and the questionable financial transactions that have led to it; you can find it here. I have commented in various posts on the same phenomenon at different times, but what was interesting to me about David’s post is how much it sounds like the gamesmanship with pension funding that eventually brought about the enaction of ERISA itself. One wonders whether the problems of state pension funds will eventually lead to some sort of broader national reform effort of a similar nature targeted at those funds.

This in turn leads to another thought, which again links to the seminar I presented last week, which concerned the legal implications of the shift from pensions to 401(k) plans. ERISA was enacted, as noted, in response to pension problems and to create some uniform rules and regulations to govern them. One can argue that, in hindsight, the system that was created - a mix of regulation, insurance and private enforcement - did a pretty good job controlling pension issues. Now, however, we have, in essence, moved out of the pension world and, for all intents and purposes, into the defined contribution world, and ERISA in all its forms - litigation theories, judicial doctrines, regulatory provisions, etc. - have not yet caught up, resulting in ERISA not currently being as well suited to govern defined contribution plans as it was for governing pension plans. From this perspective, one can see the new fee disclosure regulations, for instance, as steps towards grafting on the type of regulatory and other controls that are appropriate for the defined contribution world, and that were not needed before, when pensions roamed the earth.

I think it is important to realize this, as we watch both the DOL develop new rules and the courts develop doctrines to govern employer stock drop, excessive fee, and other hot topics related to defined contribution plans, so that we are aware of exactly what we are watching proceed, which is - from a very broad and macro perspective - the creation of a framework for applying ERISA, and its fiduciary duty obligations in particular, to the defined contribution world which we now inhabit. In hindsight, in terms of jurisprudential philosophy, that is what the Supreme Court’s decision in LaRue was about: the recognition that the fiduciary liability rules applicable to defined benefit plans may have to change to match the reality of the defined contribution world.
 

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries
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Now here’s an interesting tale, namely the story of the Ninth Circuit’s adoption of the Moench presumption with regard to breach of fiduciary duty claims alleging that fiduciaries erred by allowing a plan to hold too much employer stock or otherwise failing to act to protect participants from the risk of holding that stock as an investment option. As I discussed in this post, the Moench presumption essentially shields the fiduciaries from such claims where the plan expressly authorizes employer stock as an investment unless the company and/or its stock value had been placed at extreme risk. As the blog post on the Ninth Circuit’s decision notes, and as I have commented elsewhere, courts vary in how they frame the circumstances in which the presumption can be overcome and a breach of fiduciary duty claim maintained, but in all circumstances it can fairly be described as requiring a significant risk to the investment, beyond just a major stock decline.  The Ninth Circuit, in its opinion, notes the variance in formulating the standard, and then formulates a pretty high bar for overcoming the presumption.

As I discussed in this post, the Department of Labor is in the process of arguing to the Second Circuit that this presumption should not exist, and the outcome of this at the Second Circuit becomes key, I think, for the future of this theory of liability against fiduciaries. If the Second Circuit joins the Ninth and a few other circuits in adopting this presumption, this becomes a very unattractive potential theory of liability for the class action bar or anyone else to pursue; large scale breach of fiduciary duty cases against large, well run and sophisticated plans are tough cases to win in the first place, before adding in the significant defense at the motion practice stage that this presumption grants to plan fiduciaries. If, on the other hand, the Second Circuit agrees with the Department of Labor and rejects the Moench presumption, it doesn’t take a soothsayer to suspect the issue goes from there to the Supreme Court, given the obvious circuit split on a significant issue of federal law that such a decision would create.  On that front, with regard to the question of what the Second Circuit may do in response to the Department of Labor's arguments, it is worth noting that the Ninth Circuit's opinion in many ways anticipates and provides the rejoinder to much of the Department of Labor's argument in its briefing to the Second Circuit, on whether the presumption is compatible with ERISA; the opinion actually presents a well reasoned framework for viewing the presumption as consistent with the statutory framework.

The Ninth Circuit decision, in Quan v. Computer Sciences Corporation, adopting the presumption, is interesting for another reason. I will confess - and frequently do, to anyone who will listen - to a preference for issues being decided on their merits and, preferably, at trial, after thorough investigation and vetting. As discussed in this interview I did awhile back with Tom Gies, right after he argued the LaRue case before the Supreme Court, I believe the jurisprudence develops better, and we get more accurate results, when key issues are decided after an evidentiary record is developed that will shed light on the propriety, or lack thereof, of challenged conduct, than is the case when such issues are decided based upon the legal arguments, hypotheses and assumptions that checker any decision made in advance of factual development, such as at the motion to dismiss stage. My experience as a trial lawyer has taught me to put my trust in facts, and to believe that they are more likely than not to lead one to the right result. They are, as the saying goes, stubborn things, far less manipulable than legal doctrine and argument.

That said, though, the Ninth Circuit case adopting the presumption presents a perfect justification for the presumption. As detailed in this blog post, the stock drop at issue in the case, and on which the claim of breach of fiduciary duty rested, was a 12% single day decline, which was recovered in a reasonable length of time. Given the variability and the volatility of the market in general, it is extremely hard to think of a convincing rationale for imposing fiduciary liability simply because of a moderate, but not company threatening, short term decline in the value of the company stock, or for allowing expensive, time consuming litigation over that stock drop. In that particular case, the presumption resolves this, by establishing that the stock drop alone isn’t enough, and much more must be shown to justify the suit going forward.

Posted By Stephen D. Rosenberg In 401(k) Plans , ERISA Seminars and other Resources
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I mentioned in a previous post that I am speaking on ERISA issues in a seminar for the Professional Liability Underwriting Society. The presentation is “I Have to Retire on THIS? ERISA and the 401(k) turn 30,” and its tomorrow, Thursday, October 7th, at 2 pm. You can find registration information here if you would like to attend. I am joined on the panel by David Webber, a law professor at Boston University School of Law whose research interests run to securities law and regulation, and Mary Rosen, the Associate Regional Director of the Employee Benefits Security Administration, U.S. Department of Labor.

Posted By Stephen D. Rosenberg In ERISA Statutory Provisions , Employee Benefit Plans
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How cool is this? I have talked in various posts and in seminars, webinars and the like for years about the transition from defined benefit plans to defined contribution plans, and how that integrates with the development of the law of fiduciary liability under ERISA. I am, in fact, outlining comments for a seminar later this week structured around that theme. Right in the middle of doing that, I look up and find this fascinating article about the death of pensions and the rise of defined contribution plans, only through the eyes of an ERISA attorney who began practicing in this field right after ERISA was enacted, and whose practice has covered the heyday of the pension, the vanishing of the pension, and the rise of the defined contribution plan. Neat story, and worth a few minutes to read.

Posted By Stephen D. Rosenberg In Employee Benefit Plans
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Compliance is its own reward. I think that’s my new motto for one of the underlying themes of this blog, which is the importance of strong operational compliance in running any ERISA governed plan. The return on that investment takes many forms, running from happier - or at least less disgruntled - employees, to better returns on participant and employer contributions, to fewer lawsuits, and to better outcomes on those occasions when a lawsuit is filed. Along those lines, here’s a neat post on complying with SPD requirements. At the risk of sounding harsh, which I don’t meant to, if you administer a plan and the information in that post is news to you, you need to focus more on compliance, and find at least a good consultant on the nuts and bolts of running your plans.

Posted By Stephen D. Rosenberg In Employee Benefit Plans
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Here is a fine overview of employee benefit issues that arise after a corporate transaction. Of interest to me in particular is the discussion of compliance problems - broadly defined - in maintaining or running off the seller’s benefit plans and in amending the buyer’s plan to deal with the acquired employees or the coordination of the benefit plans. I preach regularly on this blog and in seminars, webinars and the like about the sheer importance, from a litigation perspective, in focusing like a laser on compliance issues. Compliance issues can often lead down the road to litigation, and thus strong compliance is the best way to avoid litigation. Beyond that, though, a focus on compliance at the operational level is indicative of a well run plan, and a well run plan is less likely to make the types of errors - whether of compliance or otherwise - that result not just in litigation, but also in liability. Although other issues may be in the foreground of a corporate transaction, the centrality of compliance in these ways makes it important that the details of the benefit plans not get short shrift during or after the transaction. Indeed, in some ways it’s a penny wise, pound foolish issue; I know from my own practice a company can spend years in litigation and many thousands of dollars sorting out problems with benefit plans after a transaction, and avoiding that outcome through a little extra planning and foresight is always a worthwhile investment.

Posted By Stephen D. Rosenberg In 401(k) Plans , ERISA Seminars and other Resources , Fiduciaries
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I had the pleasure yesterday of presenting the September Advisor Success Webinar for BrightScope, in which I discussed the law and practice of fiduciary liability and exposure in detail. Its for subscribers only and not publicly available, but for those of you in the Boston area who are in the insurance industry, I will be touching on some of the same points when I speak as a member of a panel next month at a meeting of the Professional Liability Underwriting Society; more details on that to follow.

For now, though, I thought I would comment on one particular issue that seemed to strike a chord yesterday, which is the current status and likely future direction of stock drop litigation under ERISA. To date, stock drop litigation has not, as a general statement, been terribly successful, as least not from the perspective of those seeking to represent classes of participants; its been pretty darn successful for those representing plan sponsors and fiduciaries. The reason, as many readers already know, is the famous - or infamous, depending on which side of the “v.” you sit on - Moench presumption, which in essence imposes a powerful presumption that allowing substantial amounts of employer stock to be held in a defined contribution plan cannot constitute a breach of fiduciary duty unless the company was in severe financial distress, with severe meaning something more than just a significant decline in the stock price (courts' exact phrasing on this point can vary).

What was of interest in the webinar was the question of whether this presumption will remain effective, or will instead fall by the wayside, which would open the door to more suits and likely as well to greater liability as a result of electing to offer employer stock as an investment option. The answer is that it will fall by the wayside, resulting in an increase of these types of suits and a rebirth of interest in this theory among the class action bar, if the Department of Labor has its way. In an amicus brief filed before the Second Circuit in the case of Gearren v. McGraw-Hill, the Department has outlined its position in this regard, which is, in a nutshell, that the presumption is inconsistent with ERISA’s mandates, and that, with regard to employer stock, the only exception to the generally high duties of care imposed on fiduciaries is the removal of any duties related to diversification of investment options. A Second Circuit ruling adopting this viewpoint will unquestionably expand stock drop exposure and increase lawsuits based on stock drop claims, by allowing the participants to focus on proving as a factual matter through discovery that it was not prudent to include employer stock, rather than being forced to prove that the company was under the level of severe financial distress needed to trump the Moench presumption before ever being able to investigate and prove that thesis. You can find a copy of the Department’s brief on this issue here.

Posted By Stephen D. Rosenberg In Preemption
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I have a bias against writing short posts that just, in essence, pass along someone else’s work, without additional analysis, commentary or spin, which is good in many ways but does mean that it is tough to post when I am particularly busy at my day job. Nonetheless, I did want to pass along this short piece from the Legal Malpractice Law Review - which, despite its title, is a blog - on whether a legal malpractice action against an attorney who was providing legal services to a plan participant under a legal services plan can be preempted by ERISA. The answer, according to the case covered in the post, is that it can be, if one is not very careful in pleading the claim and constructing the theory. Its interesting to me because, infrequently but often enough to stick in my head, I hear from a participant in a company or union provided legal services plan who received the promised benefit of legal representation for a covered legal event, but with an outcome that screamed malpractice, and they want to know what claims they can bring against the lawyer or, just as often, the plan.

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries
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Here’s an interesting, although at a minimum somewhat overstated, diatribe against 401(k) plans from Forbes, in which the author complains about four specific risks to participants: greater investment risk than would exist investing outside of such a plan; problems with employer or vendor record keeping and management; the possibility of employer failure; and a lack of regulatory oversight, at least in comparison to the extent of regulation applicable to other investments. The author overstates some of his points - for instance, some of his complaints about regulatory oversight are more accurately seen as complaints about sponsor capabilities, such as with regard to publishing and timely distributing summary plan descriptions or making timely distributions.

What’s more interesting to note, though, than quibbling about the details of the author’s complaints, is the extent to which they primarily concern the fact that the 401(k) world, much more than being a regulatory driven regime, is governed more on a private attorney general model, in which breach of fiduciary duty lawsuits and denial of benefit claims are the tools that address and remedy the problems the author identifies. For instance, in his discussion of increased investment risk, he references the fact that, outside of 401(k)s, an investor can pick from the universe of funds, while within the 401(k), the investor is limited to the several funds included in the plan, which may not be the best performers or the cheapest (or, if neither, at least the funds with the optimum combination of performance and cost). This, though, is at heart what all breach of fiduciary duty claims related to excessive fees or other complaints about fund selection are directed at, namely whether the fiduciaries included the right mix of funds. In theory, fiduciaries will do that, if for no other reason than out of fear of being sued if they don’t. Anecdotally, there seems to be, for instance, greater attention being paid now by plans to fees and fund selection in the wake of the class action litigation that has been pursed over excessive fees and alleged non-disclosure of fees. This is a perfect example of a private attorney general mindset, in which the issues of concern - here, the operation of 401(k) plans - are expected to be avoided by the threat of liability and, if they are not, are remedied by private litigation; this is, theoretically anyway, the counter to the type of more regulated regime to which the author compares the 401(k) world.

Posted By Stephen D. Rosenberg In Summary Plan Descriptions
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Bravo. In the context of discussing the Supreme Court’s grant of cert to a case presenting the question of how to resolve conflicts between plan terms and summary plan descriptions, the authors of this client alert, Lisa Brogan and Joseph LaFramboise at Baker & McKenzie, provide, in only four pages, a succinct yet comprehensive overview of the standards applied across the country to this issue. Conflict between plan terms and the terms as described in summary plan descriptions is one of the more frequent issues that arise in benefit litigation under ERISA, raising questions about the level of talent and effort being committed to plan compliance by many companies, since the best defense to cases involving conflicts of this nature is to avoid them in the first place by ensuring that the description in both documents of the substantive benefit terms match up. That said though, as the case of the billion dollar scrivener’s error suggests, some issues are going to arise no matter how much time, effort and compliance dollars are lavished on a plan’s documentation and operations. Either way, though, this client advisory nicely sums up exactly where we are in each circuit right now when it comes to adjudicating these types of conflicts.

Posted By Stephen D. Rosenberg In Benefit Litigation , ERISA Statutory Provisions , Employee Benefit Plans
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Nothing shows up in my practice any more frequently, particularly in this economy and over the last couple of years, than severance packages, and the question of whether a particular severance package program is governed by ERISA. Roy Hoskins, on the ERISABoard.com site, reviews this issue, and its application by the District of Maine under First Circuit law, in this excellent post, along with providing a copy of the opinion by the court. For those of you who may not be able to access the Board’s site for any reason, here is a copy of the decision itself, which is Sawyer v. TD Bank US Holding Company.

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries
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Chip, chip, chip. No, that’s not the sound of the polar ice caps shedding ice, although I suppose it could well be. It’s the sound of the Fortress Europa that some of the more optimistic lawyers for 401(k) plans thought was being enacted against excessive fee claims - in the wake of cases such as Hecker - slowly being whittled away. Cases such as this, in which the fiduciaries were found to have fallen down on the job by accepting retail class fees, are going to open the door to more of these cases, and to more settlements to resolve them, than seemed possible when the first wave of excessive fee type cases were being ruled on; indeed, as this client advisory points out, it is no longer possible for plan fiduciaries to simply ignore the question of the propriety of retail fees in their plans. I have long believed that it will take only a couple of district courts who are willing to allow excessive fee cases to proceed into discovery and to adjudication on their merits to turn excessive fee cases into a potentially significant risk for fiduciaries, and I feel comfortable predicting that this is the start of that trend. To add a Civil War metaphor to my earlier climate change and World War II metaphors, these types of cases are going to bear out my prior prediction that Hecker was likely to be the high water mark in the defense of excessive fee cases.

Posted By Stephen D. Rosenberg In Fiduciaries
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Anyone who writes anything for a long time, as I have this blog, cannot help but end up with certain recurring themes. When it comes to the management of 401(k) and similar plans, one of those themes has been the importance of compliance and a careful decision making process by fiduciaries, an idea borne out of this litigator’s belief that, in the courtroom, the best defense is a good offense. In the context of breach of fiduciary duty litigation, this old chestnut should be understood as meaning that the best way to defend fiduciaries against such claims is to present a long history of active oversight of investment and other decisions by the defendant fiduciaries. Not only is that good for plan returns themselves in the long run in most instances, but it goes far towards insulating the fiduciaries themselves against being liable on claims for excessive fees, too much stock, or other alleged problems. Many claims of this nature will never even reach the point of really examining the specific conduct of particular fiduciaries, and are instead often decided at an earlier stage, such as motions to dismiss, on the basis of broader defense theories, such as the existence of presumptions in favor of the retention of employer stock in a plan, or “law and economics” type theories, such as in Hecker, that the marketplace shows that the decision making was fine, or on the application of ERISA safe harbors. But one cannot be sure that this will always be the case, and some breach of fiduciary duty litigation against fiduciaries will always get past these types of early suit Maginot lines, and in those instances the next best line of defense is to be able to demonstrate specific conduct by the defendant fiduciary that shows strong efforts being made to get the challenged issues - whether the expenses or fees of a plan, or something else - correct. If the plaintiff or class gets to that point of the case, being able to show that will more often than not determine who wins.

I write of this today, and it is on my mind, because of a press release that crossed my desk this week concerning the decision of a major defined contribution plan to use an index BrightScope created from its data to benchmark the performance of its target date retirement funds. The release notes that:

The BrightScope On Target Index will help [the plan sponsor] measure the performance and risk attributes of their target date portfolios while giving participants the ability to see how accurately their target date portfolio lives up to its stated goals.

At the end of the day, anything and everything plan sponsors can do to put accurate, transparent information in front of fiduciaries as part of their decision making process makes it harder for liability for breach of fiduciary duty to be imposed on those fiduciaries, and this is a perfect example of a plan sponsor doing so.

Posted By Stephen D. Rosenberg In Benefit Litigation
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This is an interesting small piece out of Reish and Reicher highlighting the fact that smaller plans, with relatively small asset pools, face many of the same risks and problems that are faced by the large plan sponsors involved in the bold face cases that show up on a daily basis in the media. To my mind, the key point is, as I have said often, one of compliance. For smaller companies in particular, an obsessive focus on compliance is needed to avoid getting sucked into these types of lawsuits. For the very largest plans, that alone won’t keep them out of the litigation cross hairs; they are simply too big of targets, and too subject - like BP - to external events that can put their fiduciaries on the wrong side of a complaint’s caption. For smaller companies, though, it is the internally controlled events, like compliance lapses, that are likely, in my experience, to trigger fiduciary or other ERISA litigation, and that is something those companies can control.

The article, incidentally, came to my attention through a Linked In group I participate in, and its only fair to note investment advisor Chris Tobe for bringing it to my attention. My comments on Linked In about the article expanded upon my thoughts above a little bit, and to the extent you are interested, were that:

The Reish article is right on point. I have represented smaller plans and their sponsors in similar cases, and relative to the size of the employer, they are every bit as disruptive, expensive and of concern as large cases against larger plans. For the smaller plans in particular, who really cannot afford the distraction from their business of these types of claims, an emphasis on compliance to avoid these types of suits is crucial. Of even more import is a willingness to work cooperatively with a participant who has a legitimate complaint to resolve the matter without litigation; I have done this, and it can save a small fortune in legal fees while ending up with a settlement similar to one that would be on the table at the end of litigation. Finally on this point, I would note one concern with regard to fiduciary liability insurance for these "small plan" claims. Many such policies have a high deductible, meaning that relatively small dollar claims in relatively small plans may not end up covered by the insurance at all or at least not to a significant extent. Small plans should keep in mind when acquiring the coverage that a low deductible is necessary to capture the typical size claim that a small plan will generate.

Posted By Stephen D. Rosenberg In BP Savings Plan/DeepWater Horizon Stock Drop Litigation , Fiduciaries
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BP has a giant employee savings plan, making it a prime target for stock drop type ERISA breach of fiduciary duty claims in light of the Deepwater Horizon leak, as I mentioned here in this post, and the lawsuits and the investigations that will eventually result in lawsuits are coming out of the woodwork as fast as vampires in one of the Twilight movies. As I noted in this earlier post, I am beyond skeptical of any such claims that are premised on the simple thesis that the fiduciaries breached their duties by not anticipating and accounting for the risk of this type of a loss when deciding to include or emphasize company stock in the plan. However, less flippantly and more exactingly, the same is not necessarily true for the alternative thesis, which I assume to be what many of these claims will play out as, that the fiduciary breach doesn’t relate to this specific environmental loss and its impact on the stock holding, but rather is that, in light of the regulatory and environmental universe in which BP operates, it was imprudent to hold or allow employees to hold a disproportionate amount of company stock; in other words, that the risk profile of the accounts as a whole was too high because too much of the investment was in company stock in an industry subject to unique and potentially catastrophic risks. Just a quick, non-analytical glance at BrightScope indicates a large company stock exposure in the BP employee savings plan, incidentally. In this sense, these claims, and the BP fiduciaries’ exposure, is no different than other instances of companies whose stock fell at a time that employee retirement accounts held a disproportionately high share of that one stock. What makes the claim here a little different, however, is the argument that there is something unique to the industry that calls for less company stock being offered to employees and instead a greater fiduciary emphasis on diversification than would be the case in other industries. For instance, if a Gillette or a Grace is sued after a stock drop, the argument is essentially that prudent investing practice as a whole calls for greater diversification, and the claims against the fiduciaries, to dress them up, may also include the argument that the fiduciaries should have anticipated stock market risks based on their knowledge of the company and its industry that should have caused them to prevent the excessive accumulation of company stock. With the BP claims, though, what you would have, I suspect, is less the argument that greater diversification was needed as a general principle, in favor instead of the argument that the oil industry itself is so subject to unique, stock value demolishing risks - from tanker crashes, to oil well blow outs, to nationalization, to wars - that it was simply imprudent to allow an excess exposure to the industry and certainly to any one particular company in that industry. (Incidentally, there is no better overview of these topics and the peculiar risks of the oil industry than Daniel Yergin’s The Prize, which may perhaps be necessary background reading for the law clerk of any judge assigned one of these cases).

Its an alluring theory, but one that raises the question of whether it plays out against the backdrop of past case law and the development of fiduciary standards when it comes to employer stock holdings, which would suggest that the claims on their merits have weaknesses, or whether instead they play out against the political backdrop of the Deepwater Horizon event and the economic losses it is strewing across a range of actors, including but not limited to the employee shareholders. If it plays out against that later backdrop - as a, perhaps, unseen or unspoken influence - the question becomes whether this fact pattern could shift the nature of these types of claims in a direction that could give them far more traction than the past history of claims of this nature suggests would otherwise be the case.

Posted By Stephen D. Rosenberg In Benefit Litigation
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Here is an excellent and very educational post that I wanted to pass along from the Florida Insurance Blog on the statute of limitations applicable to denied benefit claims under ERISA. It is an issue that is often not as straightforward as it either appears or should be, as the Ninth Circuit case addressed in the post illustrates.   If you are new to this issue, you could do worse than to start with a read of that post.
 

Posted By Stephen D. Rosenberg In 401(k) Plans , BP Savings Plan/DeepWater Horizon Stock Drop Litigation , Fiduciaries
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Well, someone thinks so. You can count me, though, as monstrously skeptical that you could tag the fiduciaries of the BP 401(k) plan with breach of fiduciary duty for overexposure to company stock because they failed to expect the Deepwater Horizon explosion and account for it by greater diversification. On the other hand are two notes: (1) perhaps there is a circuit, somewhere out there, with fiduciary liability standards for company stock investment that are so loose that including BP stock ahead of such an event could be deemed an actionable breach; and (2) the decline in the value of the plan’s assets may be so large that, if a class gets certified, even a minor settlement to avoid a potential ruling against the fiduciaries could easily run into the tens of millions.

Posted By Stephen D. Rosenberg In Preemption
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I really, really like this opinion, to paraphrase Sally Field’s perhaps most famous line (or perhaps not, since she never actually said it.)  I like it because it deals really well, and out of a highly respected court, with a question that often bedevils not just courts, but also lawyers trying to determine the scope of preemption, which is how close does a state law claim have to come to impacting an ERISA governed benefit plan for it to be preempted on the thesis that the state law claim “relates” to the benefit plan. The trend in the case law is to recognize that the word relate is overbroad in this context, and to note that, in light of current Supreme Court jurisprudence, state law claims do not become preempted simply because they relate, in the common English language sense, in some general manner to an ERISA governed benefit plan. Rather, they only relate for these purposes, and are preempted, if the state law claim “interferes with the relationships among core ERISA entities [or] tends to control or supersede their functions,” thereby threatening to undermine “the uniformity of the administration of benefits that is ERISA's key concern.” When, in contrast, the state law claims, if recovered upon, would not be paid by the plan itself and do not seek to impose peculiar, state by state, obligations on the plan’s administrators and fiduciaries, the state law claims do not relate to the ERISA governed plan for purposes of preemption analysis, and there is no preemption.

I suspect that one of the reasons this issue - of the scope of ERISA preemption - is difficult to handle at times is that there is a language barrier of sorts; as this case shows, relate has a specific meaning in the context of ERISA and ERISA preemption, and an entirely different and broader one when used as part of regular speech, including by lawyers. As a result, analyzing the scope of preemption under ERISA can become one of those areas of the law in which ERISA lawyers and other lawyers become “two peoples separated by a common language,” in the famous formulation.

The case, incidentally, is Stevenson v. Bank of New York, decided this week by the Second Circuit. You can find a copy of it here.

Posted By Stephen D. Rosenberg In 401(k) Plans , ERISA Statutory Provisions , Fiduciaries
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I have been a fan of Scott Simon’s Morningstar articles on the various fiduciary relationships among those who run plans and those who advise them. This one here is a good, practical, business oriented view of the different forms of fiduciaries - named and functional (or deemed) - in 401(k) and other plans. It is written more from the business perspective, of who are the different players and what fiduciary niches do they occupy, in the structuring and operation of a plan. This is somewhat different than how we lawyers, particularly litigators, tend to look at these issues, because it is forward facing and addresses the deliberate structuring of the plan and of these roles. We litigators in particular tend to look at things from a different vantage, more in hindsight, and say did this person or that entity, looking at what they actually did, acquire the status of a fiduciary for purposes of liability exposure, whether they were intended to be put in that position or not at the outset of the plan’s establishment. And from that perspective, one of the most useful comments in his most current article is his explanation of one type of functional fiduciary, namely the party that assumed control over plan assets to some extent unintentionally, but that nonetheless then became a fiduciary with fiduciary responsibility for any acts taken in that regard. As he points out, that party assumes fiduciary liability in that situation, even if it did not knowingly cross the line into that role. As Simon Says:

A more serious scenario is where a person unilaterally exercises discretionary control or authority over a plan without express authorization. Such a person can become a "functional" 3(21) limited scope/non-named fiduciary--without a written contract--through its mere conduct of providing unauthorized advice or exercising unauthorized control or discretion. Given that no contract is present in this situation, the entity obviously doesn't intend to become a 3(21) limited scope/non-named fiduciary but becomes so anyway through its inadvertent conduct.

From a litigation perspective, this is a far more common circumstance than one might assume, and is a central point in much breach of fiduciary litigation, where a key question is often whether a particular defendant became a fiduciary by its actions concerning the plan and its assets, where it was not intended by the plan’s authors and founders to be a fiduciary.

Posted By Stephen D. Rosenberg In Attorney Fee Awards
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Well, everybody and their mother’s lawyer has an article, blog post or client advisory memo out on the Hardt case, and I suspect that is because, frankly, its about as easy a Supreme Court decision to understand as you can find. What’s it hold? Procedural victory requiring remand of an ERISA denied benefit claim is sufficient to justify an award of attorney’s fees to the claimant so long as there is some substantive achievement by the claimant in moving his or her case forward. The question left open? What more than just a simple order of remand is necessary to trigger an award of attorneys’ fees, since that alone isn’t enough. The answer? Frankly, on a practical level, it is hard to conceive of a remand that isn’t driven by the claimant showing some significant problem in the administrative record whose existence advances the claimant’s case sufficiently to justify an award under the Hardt ruling. That said, however, I am sure there are going to be factual scenarios in which the issue is arguably close, and one can predict that the development of the case law on that point going forward will be driven by how certain fact patterns intersect with the quality of the lawyering, the quality of the administrative record at issue (and thus of the administrator in question as well, since the caliber of the administrative record in a given case is, in essence, a stand in for the quality of the work done by the administrator and is its physical representation), and with the approach of the particular judge to which the case is assigned. How’s that for an easy and safe prediction? The great southern novelist Walker Percy once commented to the effect that a well written horoscope is one that many people can fit themselves into, and, similarly, this prediction is one into which you can shoe horn pretty much any future development of the case law on this issue. That doesn’t make it any less accurate, though.

This is all a preamble to this link, registration required, to a Lawyers USA story on the decision, in which yours truly is quoted:

Stephen D. Rosenberg, a partner at the McCormack Firm in Boston and author of the Boston ERISA and Insurance Litigation blog, said the relaxed standard could result in more cases being filed.

“I can see more cases being brought by plaintiffs’ lawyers because they can file a case with a procedural problem, knowing they don’t have to win the whole case at the end of the day to collect a fee,” he said.

But a remand order to a plan administrator might not be enough by itself to be considered success on the merits, Rosenberg noted. . . .

“The fight that is going to play out in these cases [involves] the question of how much beyond just a failure to dot an “I” on remand does [a claimant] need to have,” Rosenberg said.

I have a lot more thoughts on the case, some of which are actually more subtle than these broad brush thoughts, but an important one to pass along relates to the issue I am quoted on, of the possibility of Hardt opening the door to more cases being filed. Certainly, there is room and motivation now for participants’ lawyers to bring cases where a clear procedural problem is present, thus making recovery of attorneys’ fees more likely and making filing suit more feasible economically from their perspective, in cases where previously the relatively low dollar value of the benefits at issue combined with a reasonably high degree of difficulty in prevailing on the substantive claim to reverse the denial of the benefits itself would have argued against filing suit. But even that dynamic, in terms of its likelihood of producing more lawsuits, is tempered by a dynamic somewhat peculiar to ERISA litigation, namely the relative paucity of participant lawyers who can spot both a procedural error and a strategic path from it to remand; that is not something just any old plaintiff side lawyer or moonlighting personal injury attorney is going to be able to do. As a result, you may see more cases filed by the better ERISA focused participant lawyers on claims that they otherwise would not have seen as financially worth pursuing, but I doubt you are going to see a noticeable or measurably significant increase in the filing of such suits across the legal and participant population as a whole.

Posted By Stephen D. Rosenberg In Attorney Fee Awards
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I posted recently on the Supreme Court’s consideration in Hardt v. Reliance Standard Life Insurance of the question of just how much success on the merits is necessary to trigger a plan participant’s right to an award of attorneys’ fees, and discussed the fact that requiring an outright and complete win by the plan participant is likely too high of a standard for a fair and equitable system. In a case mostly remarkeable for its unanimaty, the Supreme Court ruled to this effect today, upholding, in essence, the approach to this issue taken by those courts that find some substantive success by the plan participant to be enough to trigger an award of attorneys' fees.

A decision a week or so ago, Gelumbaukskas v. USG Corporation Retirement Plan Pension and Investment Committee, out of the United States District Court for the District of Maryland provides a perfect example of why this is the correct rule. As the case reflects, the plan participant in that case was never provided with a substantively and procedurally compliant internal appeal process, leaving a record in place from which the court could not pass on the question of whether, in fact, the decision denying benefits was arbitrary and thus should be overturned, which would have resulted in an award of benefits by the court to the plan participant. Rather, the court found that the matter had to be remanded to the plan administrator to redo the appeal process in a manner that would comply with its obligations under ERISA and would create the necessary record for the court to pass on the ultimate question of whether or not the plan participant was actually entitled to the benefits after application of the arbitrary and capricious standard.

Certainly, this is a significant enough win for the plan participant that it should allow an award of attorney’s fees, in that the remand is likely to either end in: (1) a settlement or an award of benefits to him, to avoid the court passing on the question again after having already found deficiencies in the record and having noted potential substantive problems with the record in its opinion; or (2) in the creation of a record that the plan participant can actually use to challenge the denial. In that first possible outcome, the remand order in essence becomes a victory for the plan participant, and it is hard to justify, other than as form over function, the idea that the plan participant should not be entitled to attorney’s fees for that result, when the outcome ends up substantively comparable to an actual outright victory at the courthouse. In the second potential outcome, it is clear that the procedural victory by the plan participant was, at a minimum, a necessary counterweight to the administrator’s control of the appeal process and, simultaneously, the necessary prerequisite to the court ever ruling on the substantive claim for recovery of the actual benefits in dispute; should the plan participant thereafter prevail in court, that initial procedural victory becomes a necessary prerequisite to overturning the substantive denial of benefits, thus warranting treating the remand decision as a necessary part of the court process in litigating the case and one that is therefore capable of supporting an award of fees.

Of course, one can point out the other possible outcome after the administrative appeal process is concluded after the remand by the court, which is that the benefits are still denied on remand, and the court eventually upholds that denial. But even then, the original win served the purpose of enforcing ERISA’s procedural regulations and mandates, which the court found were violated by the administrator. ERISA imposes those procedural obligations on plan administrators for a reason, which is to guarantee the type of fair process that is supposed to stand in for a quick trip to the courthouse clerk’s office; recall that ERISA is interpreted to disfavor litigation for the resolution of disputes, in favor of an administrative handling of disputes outside of the court system, so as to lower plan expenses, encourage the adoption of benefit plans, and make use of the administrator’s expertise in deciding claims for benefits. It is the plan participant in this third potential outcome who has vindicated those underlying principles, and thus has, in essence, scored a win, which should be the predicate for an award of attorney’s fees.

Posted By Stephen D. Rosenberg In Attorney Fee Awards , ERISA Statutory Provisions , Standard of Review
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That’s what this case here begins to answer, at least in the Boston market and in the context of the fees that should be awarded to a prevailing plaintiff. This case was intended to be the next in the series of recent Massachusetts/First Circuit centric decisions I started writing two weeks ago, and haven’t returned to since. It is interesting on two fronts, the first being, as intimated above, it’s survey of billing rates for ERISA counsel in the Boston market. The second is it provides a good explanation, as well as example, of applying a lodestar.

It seemed particularly timely to return to the series of recent decisions by bringing up this one, in light of the Supreme Court’s recent hearing of arguments on the question of the nature of attorney’s fee awards to prevailing plaintiffs in ERISA cases. That case, and the argument before the Court, revolved heavily around exactly what result adds up to a sufficient enough win by a plaintiff/plan participant to trigger an award of attorney’s fees, since an ERISA case involving denied benefits can end up with a result that falls anywhere across a broad continuum of possible outcomes that range from a win for the plan, to a remand back to the plan administrator to fix procedural errors and make a new decision, to an outright win for the plan participant. It is my view, even as predominately a defense lawyer, that those courts who use substantial success (under other names sometimes) by the plan participant in his or her suit as the proper trigger for awarding attorney’s fees under ERISA have it right. There are a lot of barriers to plan participants bringing suit over denied benefits that relate to the costs of doing so, including the fact that many cases simply don’t involve enough in benefit amounts to warrant the plan participant incurring the costs needed to prosecute a claim out of his or her own pocket; making attorney’s fees available so long as the participant proves some substantive problem in the handling of the claim, even if it only results in remand to the plan administrator, is both a necessary counterweight to this problem and consistent with the premise that a plan participant is entitled, even if not to benefits, than to the proper handling of his or her claim and a correct decision making process.

Indeed, if you think about it, the animating principle that makes arbitrary and capricious review morally appropriate is the idea that the decision must be based on a proper process; absent a proper process, the justification for allowing the plan administrator the leeway to make the decision, with only limited review by a court, is weak at best. One can only assume that the administrator’s decision making is appropriate, which is the essential assumption behind discretionary review, if in fact the process used to make that decision was correct; anything less, and there is no reason to assume a correct outcome by the administrator. From a practical perspective, as one who has represented various plan administrators over the years, there is nothing wrong with this approach and idea either, as it is my experience that most good companies strive for a proper process and a correct result (something that itself is dependent on a quality decision making process in the first instance).

For arbitrary and capricious review to exist in a fair legal system, there has to be a realistic opportunity for plan participants to test whether the process pursued was correct, and the opportunity to recover the legal costs incurred in proving that the process was flawed is a necessary part of that, as in its absence, participants will become, for financial reasons, even less likely than they are now to challenge the procedural underpinnings of decisions that go against them. This is simply logical, if you think about it. Why would any rational economic actor spend tens of thousands to prove a mere procedural error leading to remand to the administrator, in cases that often involve only five figures in benefits, absent a realistic opportunity to recoup those fees if correct in his or her belief that the process was flawed?

From this point of view, the exceptional (when compared to every other legal area I can think of at the moment) degree of latitude granted to the administrator by arbitrary and capricious review, something firmly shored up most recently by Chief Justice Roberts in Conkright v Frommert, must exist hand in hand with rules that create a realistic system under which participants can test the administrator’s process in reaching decisions, and the ability to recover legal fees by proving a procedural error and forcing a remand is a sensible part of that system.
 

Posted By Stephen D. Rosenberg In Standard of Review
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Well, I guess this wouldn’t be much of an ERISA blog if I didn’t put up a post about the Supreme Court’s decision in Conkright v. Frommert, on the question of whether an administrator continues to be entitled to deferential review when it has already had one interpretation of the challenged plan terms rejected by the court under that standard. Interestingly, coming on the heels of Glenn, the simple fact that the Court had accepted cert in the case suggested some type of change was in the offing for the standard of review, even if it was only incrementally with regard to the application of that standard of review in this type of a fact pattern. Otherwise, frankly, one could see no reason for the Court’s particular interest in the case. The Court, though, found no change to be warranted, and simply reinforced the basic themes of its main cases over the years related to this issue: that deferential review is to be applied, that lower courts are not to deviate from it on ad hoc rationales, and that deferential review is a necessary element of the balancing act between employee rights on the one hand and the need to encourage employers to provide benefit plans on the other. Its not a bad ruling, in the sense that it does give lower courts and practitioners some much needed guidance after decisions such as Glenn, by the Supreme Court, and lower court decisions that played at the margins of the deferential review standards; the decision can, in many ways, be understood as a signal to stick to the basic rules that apply in this area, to not accept the many creative challenges to deferential review that participant lawyers come up with (and which, to their credit, seem to be limited only by the extent of their imagination and legal skills), and to not read cases like Glenn as suggesting any fundamental weakening of that standard outside of the specific factual circumstances presented by that case. And in that regard, the majority opinion can be read as sending that message loud and clear; in fact, the language of the opinion seems to have been selected to purposely drive that point home in as strong a tone as possible. That’s my take on it, anyway.

In fact, the majority opinion was written by Chief Justice Roberts, who, you will recall, authored a concurring opinion in LaRue that has been interpreted by some writers, myself included, as an attempt to prevent the ruling from significantly expanding the extent and scope of ERISA litigation, by placing the type of claim at issue in that case in the realm of denied benefit claims - where deferential review, limited discovery, limitation to the administrative record, and internal administrative appeals rule - rather than in the more free form realm of fiduciary duty litigation. His opinion in LaRue strikes the same tone of wanting to prevent an escalation in ERISA litigation that is at play in the opinion authored by him in Conkright, and this ruling may well have that exact effect; if nothing else, it should quickly become arrow number one in a defense lawyer’s quiver whenever a participant or a participant class seeks to deviate from a strict application of the arbitrary and capricious standard.

Posted By Stephen D. Rosenberg In Benefit Litigation , ERISA Statutory Provisions , Long Term Disability Benefits , Retirement Benefits , Standard of Review
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There have been a series of interesting ERISA decisions over the past several weeks out of the United States District Court for Massachusetts, whose Boston courthouse I can see through my office window as I type this post. The decisions have stacked up on my desk a little bit, like a leaning tower of paper. I am going to run a series of posts, some short and others perhaps longer, passing them on with my comments as to their value. The first is this summary judgment ruling in DiGiallonardo v. Saint-Gobain Retirement Income Group, which has to do with a challenge to a denial of disability retirement benefits. It is most interesting, and useful to other practitioners, for one specific point, namely its handling of an administrator’s procedurally poor processing of a claim and its appeal. The court found that the administrator had not considered the actual key term in the contract in ruling on the claim for benefits, and that this required remand to the administrator for a proper handling of the claim, because under those circumstances, the claimant had not received the “full and fair review of the administrator’s decision” to which a claimant is entitled under ERISA. The court found that this procedural irregularity rendered the administrator’s decision arbitrary and capricious.

Posted By Stephen D. Rosenberg In 401(k) Plans
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Over the past week or so, several interesting items have crossed my desk, none of which have appeared while I have had time to do them justice with a full blown post. We will do three for Wednesday today - even though there is no alliteration at all to that title, as opposed to five for Friday or twofer Tuesday - and run them down here.

First is this interesting article on the 403(b) regulations, and the intersection of the tax code and ERISA. It’s a good starting point for understanding the current regulatory status of such plans.

Second, in a perfect intersection (well, almost, since surety bonds aren’t exactly insurance) of the two topics included in the title of this blog, is an excellent post summarizing ERISA’s surety bond requirements. From fiduciary liability insurance to surety bonds to the personal liability of fiduciaries, ERISA in theory, structure and operation, is built around a framework that is intended to surround retirement plan management with pockets of funds that can be used to reimburse plan participants against losses.

Third, here is a nice squib on the question of when ERISA applies to, and governs, severance package programs as part of company reductions in force. Most such programs will fall within ERISA’s ambit, and, as the article points out, it is beneficial to the employer to structure the program to bring it within the confines of ERISA.

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries
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Yesterday, the Supreme Court effectively rejected the idea that mutual fund fees, in the non-ERISA context, are not actionable if consistent with the market as a whole, in response to a Seventh Circuit decision finding that a fund did not pay excessive fees to its investment advisor in light of marketplace discipline (I am oversimplifying the Supreme Court ruling a little bit, as this is not actually a blog on the Investment Company Act of 1940). Shrewd observers of ERISA excessive fee case law, or even most casual ones, will likely quickly note that, in the ERISA context, the Seventh Circuit essentially applied the exact same thesis to an ERISA excessive fee claim in its highly influential decision in Hecker, finding, in part, that fees were not excessive if consistent with the market as a whole. In the new Supreme Court decision, the court instead applied a different test - albeit in a different context than ERISA excessive fee claims - to determine whether the fees were excessive, asking instead whether a fee is being charged “that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm’s-length bargaining.”

Is this a what is good for the goose is good for the gander situation? Is the same market based approach to testing fees that the Supreme Court has now rejected in the investment advisor scenario also, by implication, unwarranted in the context of a fiduciary’s obligations to protect participants against excessive fees in ERISA governed plans? Isn’t the test that the Supreme Court references for the investment advisor context equally a good fit for ERISA excessive fee cases, by asking not whether the fees were consistent with the market as a whole but instead whether the fees are disproportionate to the services provided and whether the evidence reflects them to be the product of an arms length negotiation? In many ways, this is what critics of the Hecker test - at least in my case - have complained about: not that the fees being paid by the defendant company in that case were necessarily too high, but rather that the court didn’t adequately test and vet them before deciding that the excessive fee claim had no merit. The Supreme Court’s new (well, actually a restatement of an old) test for fees in a different context would fit the situation very well, much better than the Hecker approach. The standard would still give a great deal of deference to plan administrators, sponsors and fiduciaries, allowing a wide range of fees to pass muster. The standard, though, would require that there be a reasonable linkage between the fees being charged and the value received by the plan, and that the evidence support the conclusion that the fees came about as a result of arm’s length, business like negotiating by the fiduciaries. In essence, this would bring the test back to the prudence required of the fiduciary, by asking not whether the fees were per se too high, but rather whether the evidence reflects that the fiduciary engaged in the basic business activity of seeking appropriate fees.

Here is the new decision from the Supreme Court, in Jones v. Harris Associates, and here, pat on the back to me, is a post I did last November suggesting that the opinion in Jones may well impact the Hecker line of thinking on ERISA excessive fee cases.

Posted By Stephen D. Rosenberg In Fiduciaries , People are Talking . . .
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Are you, or have you ever been, a fiduciary? Sometimes I am tempted to open a deposition with exactly that question, phrased as a derivation of the famous McCarthy era line. While I doubt I ever would do it, it’s the million dollar question in most breach of fiduciary duty litigation under ERISA. It is so often outcome determinative, that many cases go away after a ruling on that threshold issue (whether by dismissal if the answer is no, or settlement if the answer is yes), without anyone ever tackling the question of whether imprudent conduct that fell below the fiduciary standard of care ever actually occurred.

That’s a long lead in to this interesting article published by BNA, in which I am interviewed, on the role of attorneys and whether they can become fiduciaries to the benefit plans with which they work. Lawyers who are in essence working in the traditional role of outside advisors to plans and their sponsors really shouldn’t be deemed fiduciaries, but one can envision, at least in theory, an attorney crossing the line and taking on decision making authority that rightly belongs to plan fiduciaries in a manner that could give traction to a claim that the attorney was, in fact, a fiduciary.

On a side note, I know creating content isn’t cheap, so thanks are due to BNA for freely allowing me to republish the article here.

Posted By Stephen D. Rosenberg In Attorney Fee Awards
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This is a little item about a large award of attorney’s fees in an ERISA case to a prevailing plaintiff in a case involving only several hundred dollars in actual recovered damages, but it caught my eye for a couple of reasons. Factually, as the story goes, the court awarded some $45,000 in attorney’s fees in a case in which the claimant recovered just over $600, raising the issue of whether the fee award was too disproportionate to the recovery to be justified. Even speaking predominately as a defense lawyer, I don’t think there is any problem with the large gap between the fee and the recovery, nor do I think that proportionality is an appropriate consideration to graft onto the standard for determining fee awards in these types of situations. To be more nuanced, if proportionality is an appropriate consideration for a fee award, then the level at which fees become deemed disproportionate must be a lot higher than in the case at hand; I can foresee the immediate objection as to whether an award of $450,000 to recover a few hundred dollars is too disproportionate, and the answer to that question would probably be yes. However, it is worth noting that in that hypothetical situation, the more salient question is not proportionality, but value of the legal services - it is simply unrealistic to belief that the legal work needed to bring about such a recovery costs or should cost that much. That is not something that is true of $45,000 of legal work to recover an award - of however much - on an ERISA claim; that doesn’t seem out of line with the work needed to win such a case under many typical circumstances.

But proportionality itself is not an appropriate factor, nor an appropriate lens through which to view this issue. To an individual plan participant, a 5, 10 or 15 thousand dollar recovery of additional benefits can be a very significant recovery, one absolutely worth fighting for, but the legal work needed to recover that will almost always cost significantly more. The very purpose of shifting fees under ERISA on participant claims is to allow for that dynamic, and ensure that participants can recover unpaid benefits, even where the cost of suing would exceed the value of the benefits at issue. Worrying about the proportionality of the legal fees to the recovery, under most normal scenarios, undermines that, because in many typical situations, the fees needed to recover the amounts at issue can often exceed the value of the benefits if the participant must litigate the issue to a conclusion to recover the benefits.

The other reason the story caught my eye is that, at the end of the day, the dispute over the several hundred dollars was a dispute between two lawyers who had formerly worked together, and the litigation appears to have been very contentious. Its unclear to me from the story whether the cause of that excessive contentiousness - given the amounts actually at stake - was personal or work related enmity, or simply what inevitably happens when two lawyers sue each other. From a broader perspective, however, it is worth noting that you see similar dynamics time and again with small plans run by small businesses, in which there is often a great deal of informality with regard to benefit plans, leading to highly contentious litigation - often personal in nature - over one partner’s handling of the benefit plan, once the business comes to an end. Compliance, structure, outside management of a plan - all the things that one would hope would be in place and which could diffuse such strife are often missing in that scenario, resulting in ERISA litigation that would never have arisen in a bigger operation with more controls.

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries
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I often explain to people that as a litigator, I am typically presented with a knotty, tied up problem, consisting of all the decisions and plan choices that have been made in the past that eventually resulted in litigation, and that I then have to unravel the knot into its constituent pieces, which can then be used to defend the decisions that led to the knotty problem (if I am defending the case) or to attack the decisions that created the knot (if I am instead representing a plaintiff, whether a plan participant or a plan sponsor or other fiduciary). This is a much different perspective on plans and their design and development than that of those who assemble plans, who look at things in a more prospective manner, from the vantage point of the one developing the world from scratch. In essence, their view is the mirror image of mine, as they look at all the independent strands of a plan and assemble them into what, eventually, will become the knot that I get charged with unraveling in litigation.

That more prospective view comes through in Adam Pozek’s excellent post yesterday on the difference between different types of fiduciary advisors to plans, and how to select them, as well as in the excellent source article on section 3(38) and section 3(21) advisors he references. Adam presents a typical scenario of a plan sponsor trying to work through the issues of how to use such advisors, when to use each kind, and the factors to be considered in making such a decision. To someone like me who normally only sees those types of transactions in the rear view mirror, as they are recounted for purposes of litigation (such as in a deposition), it is very interesting to read a presentation of the decision making and the transaction back at the start of the whole process.

Posted By Stephen D. Rosenberg In Conflicts of Interest , Long Term Disability Benefits , Standard of Review
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This is interesting. I have written before on this blog, on numerous occasions, about courts sometimes engaging in a more searching level of discretionary review that, in essence, is not discretionary review at all, at least in the manner it has long been traditionally understood. The common belief, and applied in that way by many and probably most courts over the years, is that discretionary - sometimes called arbitrary and capricious - review means that an administrator’s decision in a long term disability case must be upheld if there is significant medical evidence in the administrative record to support the administrator’s determination, and that the process of weighing the different pieces of evidence in the medical record - much of which may be conflicting - belongs to the administrator; the court, applying this type of review, is normally understood to not engage in its own independent weighing of that evidence. Actually looking into and weighing that conflicting evidence to decide whether the administrator was correct was traditionally understood to be part of de novo review, not discretionary review.

However, as I have commented in the past, court decisions in this area reflect a subtle shift away from granting that much discretion to the administrator and towards analyzing the credibility and weight of the evidence supporting the administrator’s decision, even as part of discretionary review. Essentially, while applying discretionary review, some courts have begun to look more closely at the evidence to decide whether to uphold the administrator’s decision, finding that the decision is arbitrary if the court disagrees with the administrator over the value of or weight to be given to certain aspects of the administrative record. It’s a gradual and subtle shift in jurisprudence, but one that exists and that can change the outcome of a long term disability case, by affecting exactly how the court reviews the record and the administrator’s decision. The developing jurisprudence over structural conflicts of interest has provided still greater impetus to, and opportunities for, this shift.

Roy Harmon at his always excellent Health Plan Law blog had a perfect example of this in a post yesterday, concerning a Ninth Circuit ruling in which the appeals court looked behind the medical evidence to weigh it in deciding a long term disability case, finding that the evidence, looked at closely, did not support the administrator’s determination. In contrast, though, you can see in that same case how the district court applied a more traditional understanding of discretionary review, which does not involve independently analyzing the evidence in that manner, to find that the administrator’s decision was not arbitrary and capricious since it was supported by substantial evidence in the administrative record. The end result is that you can compare in this case the effect on the same facts of these two different approaches to applying discretionary review, with the more traditional view of it - applied by the district court - resulting in a win for the administrator - and the more searching and activist approach - applied by the Ninth Circuit - resulting in a win by the participant.

Posted By Stephen D. Rosenberg In Pensions
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Wow. When I saw this article about the questionable investment assumptions and increasingly risky investment choices being pursued by public pension plans, the first thing that jumped into my head was the old Yogi Berra line that “in baseball, you don't know nothing." It seems to hold true for at least some of those running the public pension plans profiled in the article. The article details how public pension plans, in order to deal with (I would say paper over) an ever increasing gap between their assets and their obligations, are increasing their exposure to ever more risky investments at the same time that the best run private pension funds are reducing theirs. My second thought, in reading the techniques, assumptions and reasoning of the public pension funds being profiled - in particular the reliance of some of them on assumed future returns in excess of anything the funds have actually been garnering - is that if these were instead the fiduciaries of private pension plans, they would be staring at breach of fiduciary duty lawsuits right now.

For a long while, many have been sounding the alarm that many public pension plans cannot possibly meet the benefit obligations that state and municipal governments have committed them to satisfy, and this article doesn’t suggest otherwise. As many have argued, this can only mean, eventually, a taxpayer bailout of one form or another, whether it is in the form of large increases in tax revenue contributed to the plans or in the form of taxes to pay out the promised benefits to the beneficiaries down the road. Playing connect the dots a little bit, I couldn’t help but think of the Washington Post Company’s Robert Samuelson’s depiction of the youngest generation in the current workforce as being the “chump” generation, who will end up paying for all of these promised benefits down the road, reducing their long term quality of life to pay off the underfunded promises made to generations that preceded them.
 

Posted By Stephen D. Rosenberg In Fiduciaries
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I have been wanting to post about the decision early last month in In re Lehman Brothers ERISA Litigation, in which the Southern District of New York dismissed ERISA stock drop claims against a number of officers and a named fiduciary, but, as it turns out, I have been too busy using the decision for my own purposes in my own practice to find time to post about it. Well, all that changes today, driven in part by this client advisory memorandum from Shearman & Sterling on the decision, which provides an excellent overview of the decision. The interesting thing to me about the memo, and its interaction with the decision itself, is the memo’s focus on the named fiduciary being exonerated on the basis of the famous - or infamous, depending on which side of the bar you sit on - Moench presumption. There is much to be said about the Moench presumption, and when it is appropriate to apply it or not apply it, including both the question of whether this single Third Circuit decision should have been allowed to morph into the de facto standard applied across the board in many circuits and district courts to an often somewhat disparate series of factual scenarios, and the issue of whether its sweeping acceptance should be understood as reflecting a judicial predisposition against allowing ERISA to be turned into an easier to plead version of securities class action litigation. I am not going to talk about all of that today, and neither did the Shearman & Sterling memo. What I am going to talk about is a particular point in the Lehman Brothers decision that is less the focus of the Shearman & Sterling memo, but, in many ways, of more significance to the day in, day out practice of handling disputes over ERISA plans, which is the status of company officers and directors. If there has been one consistent bone of contention between defense lawyers and lawyers who represent participants - whether individually or as a class - it has been the question of whether lumping in the directors and officers of the company sponsoring a plan as defendants, based solely on that capacity (or, more often, that capacity with just a little window dressing added on top) is appropriate. Lehman Brothers answers that in an authoritative voice, pointing out that such directors and officers do not become fiduciaries solely by means of that status, and further cannot be sued as fiduciaries based on the additional allegation that they had some authority to select those who made plan decisions unless they are being sued for mistakes stemming directly from taking action in that regard. Too often, lawsuits treat the directors and officers as additional deep pockets who should be named as defendants, but as Lehman Brothers points out, such individuals do not belong in the case unless they actually exercised operative control over an aspect of the plan that allegedly went awry and are being sued for that exact aspect of the plan’s operations.

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries , Health Insurance , Massachusetts Health Care Reform Act
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For reasons too obscure and uninteresting to mention, I have had almost nothing to do with the cable tv industry since, well, it was invented. What’s a DVR, anyway, and why would I want one? But yesterday, I had to obtain digital cable from my local cable company, and called them, braced to be gouged. Instead, I was offered a special deal for a year, much less than I was expecting to pay, with stuff I would never pay for thrown in. A few hours later, of course, the reason occurred to me. The cable monopoly I recall from my youth is not what I was dealing with, and I was instead talking to a cable company that had competition from dishes - Dish.com, I guess? - and the local telephone/internet/cable company, so instead of gouging me, they had to offer me a deal they figured would keep me as a customer. Classic economic, legal and antitrust theory holds that there are really just two ways to police pricing - competition or, in its absence, regulation. Competition, of course, is why I got my sweet deal on cable yesterday.

So what does this have to do with the topics of this blog? Seems like plenty, in that it is the absence of above board open competition that is at the root of much of the problems discussed in these pages concerning ERISA governed plans. I have discussed in many posts that the problem with health insurance coverage through employers has much less to do with the question of whether employers want to provide it than it has to do with the ever escalating cost of health insurance and the fact that providing health insurance is a punishing cost. Employers, in my view, are unfairly demonized as trying to avoid providing health insurance, but it is the cost that is driving their increasing balkiness about being, as I have described it in other posts, unofficially deputized as the providers of health insurance in this country. From where I sit, one of the fundamental problems with acts mandating health insurance provision or payments by employers is that they don’t account for this, either by reducing health insurance costs or by recognizing the business costs imposed by these types of statutes. Does anybody really think that the restaurants targeted by the San Francisco statute are swimming in profits? This article here, profiled on the Workplace Prof blog, describes this exact concern about costs as the driving force behind employer, and particularly small employer, health insurance decisions.

And perhaps one solution to the problem of the cost of providing health insurance - perhaps the most important one - is that what is good for the cable industry should also be sauce for the gander, i.e., much greater competition among, and significantly less market control by, health insurers, as pointed out in this op-ed piece here by Robert Reich (when even the archetype liberals are arguing that market competition is the answer to all evils, you know the world has turned upside down).

And the same thought continues across to 401(k) plans, and the ongoing issue of fees and costs in investment options, and how they are disclosed. What if, instead of arguing after the fact about whether the fees in a particular plan were too high, prudent fiduciary practices were deemed to require a competitive process for selecting investment options, in a manner forcing putative vendors to put their lowest cost options forward to win the business? Isn’t that what all the complaining about large asset plans that don’t use their size to win better pricing is about, after all? Instead of just complaining in the abstract that plan sponsors should have acted that way, or engaging in after the fact litigation to try to police how much should have been charged in fees, wouldn’t it make more sense to just require a fully competitive process among vendors for selecting investment options, conducted by fiduciaries - or their delegates - who have the knowledge base to understand the pricing structure of the proposed options?

In that version of the world, it would be a fiduciary obligation to impose a fully competitive, open call for investment options, and to select the best - including on fees, costs, disclosure and performance - from among them, with it being a fiduciary breach for failing to pursue this process (rather than it being a fiduciary breach for ending up with fees that are too high). The focus would return in this way to fiduciary practice, both in terms of judging conduct as meeting or failing to meet the standards of a fiduciary and in terms of whether to impose liability, rather than on an after the fact, necessarily subjective evaluation of the amount of fees, costs, or disclosure in a particular plan that resulted from the fiduciary’s decisions.

Open competition would certainly drive down the fees and costs in plans, while simultaneously giving fiduciaries a clear standard - namely their obligation to decide on the basis of such competition - against which to work. I can’t help but think that, like the cable customer, plan participants will end up with better and cheaper products to pick from, while plans - and their insurers - will spend substantially less on litigation costs.

Posted By Stephen D. Rosenberg In Employee Benefit Plans
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I always wondered what benefits whiz Adam Pozek did on Sundays, and now I know - he writes excellent blog posts on 403(b) plans, like this one right here! My own experience with such plans has concerned disputes over them, but Adam provides an interesting overview of the regulatory structure of the 403(b) plan as a whole.

Posted By Stephen D. Rosenberg In 401(k) Plans
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Ouch. Here’s a story bashing Wal-Mart for having very high plan fees in its 401(k) plan, and wanting to know why in the world it doesn’t negotiate lower fees when it has some ten billion dollars in assets to use as leverage. I am sure the plaintiffs’ class action bar has the same question. A quick cross reference to BrightScope, by the way, bears out the allegation.

Here’s the original Forbes story on the issue.

In this day and age, whether to avoid bad publicity or to avoid the costs of litigation, there is no reason for plan sponsors not to put in the effort to seek below market, rather than market - or worse - fees, particularly when they have substantial plan assets to use as a cudgel. Even if a court might eventually find that the higher than necessary fees do not add up to a fiduciary breach, why incur the costs of defending against a major lawsuit alleging that plan fees were too high? It has to be cheaper, in terms of both dollars and corporate resources, to invest the time and effort to obtain lower fees on a plan’s investment options. It’s the same old same old, that I talked about here most recently - an obsession on compliance is the best way of avoiding litigation costs and potential legal exposure. From the point of view of a plan sponsor, it may not legally be necessary to drive down plan fees - the law on excessive fee issues is still developing - but an effort to do so can only be beneficial in the long run, by avoiding potential legal costs on the one hand and improving employee morale on the other.

Posted By Stephen D. Rosenberg In Alternative Energy: Law, Regulation and Policy , Industry News , Long Term Disability Benefits
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Who knows? The only link between the two subjects that I know of right now is that this blog post is going to touch on both issues.

There are a couple of stories I thought I would pass along today that may be worth reading. In the first, here, I am quoted on climate change litigation and the potential costs to the insurance industry. Personally, I am hard pressed, as a litigator who spends a lot of time dealing with issues related to the admissibility of expert testimony under the current federal court structure, to imagine plaintiffs who are pressing a climate change case ever being able to prove causation, or, for that matter, even being able to submit expert testimony to prove causation. Take one particular hypothetical case, a claim that in essence pollution increased the ocean level and is responsible for some particular piece of coastal property damage. How would you ever prove causation in a federal court between the pollution and the rise in the water level, given the strict standards for admitting expert testimony under current federal law? Or for that matter, even if you could prove that element, how would you ever prove one particular defendant’s factory - or even those of an entire particular industry - was the cause, as opposed to hundreds of millions of automobiles or a million factories in China, just to give two examples? I don’t see the current state of the scientific research being sufficient for a court to allow experts to testify to the elements of causation needed to recover on these types of claims. That said, though, I also don’t think much of the theories used to recover the GNP of a mid-size country from the tobacco industry, but all that took was a couple of courts to give credence to such theories, and you know how that ended up after that. All it would take is one judge somewhere to allow plaintiffs to go forward on these types of claims, and industry - and quickly their insurers - will end up, at a minimum, footing the bill for very large defense costs in response to such cases.

The second story, here, I pass along just because it is fascinating, to anyone who handles long term disability cases or likes statistics, or both. Who knew doctors claimed long term disability at a disproportionate rate?

Posted By Stephen D. Rosenberg In ERISA Seminars and other Resources
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I talk a lot on these electronic pages about compliance. Its really, from my perspective as a litigator, an ERISA lawyer’s take on the old sports saw that the best defense is a good offense. I often say that, in this economy and this investment market, any problems in the operations of a plan will become grist for a lawsuit, including seemingly minor things that participants - and class action lawyers - would have simply ignored in years past while the markets were only going up, even if they suppressed returns slightly. That’s not the case when the markets take a precipitous fall, and when many participants are finding themselves out of work or forced into retirement with substantially reduced account balances. And so compliance becomes doubly important, as the best defense to the risk posed by litigation. It may or may not prevent getting sued, but strong compliance makes for a strong defense, and for a substantial reduction in the risk of getting hit for a large judgment or settlement.

This is a long lead in to this article here, on ten principles the author identified from a major ERISA conference for protecting plan sponsors and fiduciaries from liability and litigation exposures. They are very much of a piece with the idea of pro-actively protecting oneself by means of compliance. For instance, one of them has to do with watching the fees in investment options, something I have noted frequently in posts addressing how plan sponsors should position themselves going forward in the face of the glut of excessive fee claims.

One point in the article on which I do break ranks a bit from the author is in the tenth point, which discusses the importance of hiring an ERISA lawyer with litigation skills when sued, rather than just a litigator with strong litigation skills. I don’t disagree with the point about needing to hire a lawyer with significant ERISA knowledge, and not just a good litigator who hopes to learn about the subject. That latter option is not a good bet. Most areas of the law can be mastered just fine by a high quality litigator asked to handle a case, but not this one. The courts themselves are in so much disagreement from one circuit to the next - and often from one district court judge to the next in the same circuit - over various issues, and ERISA issues often raise so many subtle points, that it is just not an area that can be well litigated by someone without substantive knowledge, honed over years, of ERISA.

That said, though, it isn’t enough to just hire a good litigator who knows his or her way around ERISA. What you need is a trial lawyer, with a demonstrated record of trying and winning cases before both judges and juries, who is substantively steeped in the law of ERISA. You need it if the case ever gets tried, obviously. But more importantly, you need a trial lawyer leading your team to get the best result period, whether that is by settlement or a resolution on the papers at some point along the way. You can only fight fire with fire in a courtroom, and if the other side is fronted by experienced trial lawyers, you will be at a disadvantage every step of the way - from discovery to settlement discussions to motion practice - if you aren’t as well, in litigating against them. Conversely, if the other side’s team isn’t fronted by an experienced trial lawyer, having your team led by one will put them at a disadvantage, and will substantially increase the odds of getting a result that favors your side.

So therein lies the rub. An ERISA trial lawyer is what you need. But in this day and age, in which so few lawyers try cases anymore - or are trained to do it since most cases they will see settle or head off to arbitration - that’s not the easiest thing to find, although I do know at least one.

Posted By Stephen D. Rosenberg In Long Term Disability Benefits
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Here’s a story worth reading, about a case worth paying attention to, namely the pending First Circuit appeal - argued yesterday - concerning whether a long term disability insurer - namely Unum - engages in false claims when it instructs beneficiaries to also apply for Social Security disability benefits. Simply put, group long term disability plans routinely require participants applying for LTD benefits to also seek social security benefits, if they qualify, and the plans are structured so that the LTD benefits are off set by the amount of social security benefits received. The structure both reduces plan costs - thereby satisfying the overall goal behind ERISA itself of encouraging plan adoption - and ensures that plan participants receive - when they are entitled to them - benefits under a social security system they have been paying into for years. There is nothing wrong with this system, although in its implementation there will be circumstances in which the implementation and enforcement of the offset can have a negative short term impact on a plan participant, due to the reduction in LTD benefits from what was paid prior to the award of social security benefits. But it is a workable coordination of the two benefit systems, one that has been in place for many years. Whatever the merits of this particular case, its certainly one that presents a need to avoid tossing the baby out with the bath water, and derailing this long standing benefit plan structure.

Posted By Stephen D. Rosenberg In 401(k) Plans , Attorney Fee Awards , ERISA Statutory Provisions , Fiduciaries
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Honestly, I have spent a week scratching my head, off and on, over the Supreme Court granting cert to consider the standards governing when attorneys fees can be awarded in an ERISA case, particularly when they denied cert shortly thereafter in Hecker, which presented the opportunity to address the much more substantive issue of the scope of fiduciary responsibility for the amount - and corresponding degree of disclosure - of 401(k) fees. In my mind, there is already a conflict among the circuits over that issue, with the Seventh Circuit finding outright that there was no viable theory against fiduciaries of large plans with market standard fees, and the Eighth finding this same theory worthy of factual inquiry. However, as I thought more on it, the denial of cert for Hecker makes some jurisprudential sense. Hecker itself was decided on a motion to dismiss, leaving essentially no factual record for evaluating these types of claims (critics will say, of course, that this didn’t stop the Seventh Circuit from deciding the theory had no merit) and forcing any Supreme Court ruling to turn solely on the allegations in the pleadings. This is a complicated issue, one I have said before would have been more properly evaluated by the Seventh Circuit after factual development, and I suppose it is likewise fair to say that a Supreme Court review of the issues posed by Hecker by means of reviewing Hecker itself would have suffered from the same flaw; Supreme Court review of the fee issues raised by the Hecker line of cases is probably better suited to a case that has played out sufficiently to allow all of the factual and legal fault lines to develop prior to Supreme Court review.

But the attorneys fee case itself still doesn’t make a whole lot of sense to me, as a practicing litigator who spends plenty of time with cases pending in the federal courts that are governed by that fee statute. The reality is that such attorney fee awards are either subsumed within settlements, or the courts award them under current standards only, typically, where there is significant merit to a party’s position and the party obtains significant relief; the district court judges, in my experience, do a good job of utilizing the current standards and understanding of the fee shifting provision of the statute to bring about that result, such as in this case here. And at the end of the day, no matter certain peculiarities that exist in the wording of the statute, this is really the only standard for awarding or not awarding fees that makes practical sense in the real world. After all, do we really want attorneys fees awarded for less than obtaining at least a significant portion of the relief sought by a plan participant?

I understand that the Fourth Circuit, in the case under review, applied a somewhat more stringent test than what I am discussing here, but, from a courtroom level view, courts get this issue right often enough that it doesn’t seem to warrant Supreme Court intervention. But the Court seems to have a thing for ERISA cases these days, for whatever reason.

Posted By Stephen D. Rosenberg In Benefit Litigation , Pensions , Standard of Review
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Alright, here we go on Conkright v. Frommert, which will be argued at the Supreme Court on Wednesday. SCOTUS has the full run down of the case and what is at issue right here, and long time ERISA blogger Paul Secunda has an amici brief before the Court on the core issue, which can be found here. At its heart, the case presents one fundamental question, though cloaked - like many ERISA cases - in a wide ranging and complicated documentary, factual, and judicial history. That, by the way, is what makes ERISA cases fun for litigators like me - nothing is ever simple, even the issues that one would think should be. This is a natural outcropping from a number of aspects of this area of the law, running from a complicated statute that leaves much to further development by the courts, to the inherent limitations posed by both the English language and the (inevitably finite) skill of the scrivener in drafting complicated benefit plans, to the frequent disagreement among circuits (and even among district court judges within the same circuit in some instances) on a variety of issues under the statute. Here though, the key issue is one of deference, and whether a court must continue to apply deferential review to a plan administrator’s interpretation of a plan when the court has already rejected the administrator’s earlier interpretation as being arbitrary and capricious. A non-lawyer - and most lawyers too - would say the case is simply about whether the plan administrator only gets one bite at the apple, or perhaps is about whether its one strike and you are out.

This case continues a recent trend of the Court taking on ERISA cases that pose very finite issues, ones that aren’t likely to recur frequently but that pose the opportunity to present some sense of what are the outer guidelines of ERISA litigation - how broad is deference, does it apply when there is a conflict, what kind of conflict matters, how much room does the administrator get to work with plan language, and what is the proper balance between the plan administrator and the district courts (and eventually the circuit courts) in deciding factual and plan language issues in ERISA cases. Much of this goes back to Firestone, and the universe governing ERISA cases that it spawned; if I had my guess, I think the Court would like to have that one back, and start all over again with a cleaner, more easily applied legal structure. But they can’t go back, and I don’t think anyone believes they will go so far as to overturn that ruling and start anew with a new framework. So what we will have instead is cases like this one being decided in a manner intended to reign in the outer limits of the universe spawned by Firestone (ouch, that extended “Firestone as the Big Bang” metaphor is beginning to make my head hurt), which means I call this one for the participants, with a finding that the plan administrator gets deference only the first time around.

And yes, I know I am dramatically simplifying how the parties frame the questions here - but what I have said above will be the essence of the outcome.

Posted By Stephen D. Rosenberg In 401(k) Plans
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Here’s a very interesting article from the Financial Times on the Deere/Wal-Mart line of 401(k) suits, in which class actions are being brought on behalf of plan participants alleging that fees in the plans at issue were too high and insufficiently disclosed. I have discussed in other blog posts the essentially diametrically opposed results in Hecker and in Wal-Mart, with one circuit essentially finding no merit to the underlying legal theory, and the other deeming it viable and worthy of further fact finding to determine whether fiduciary breaches had in fact occurred. Me, personally, I think the theory, independent of actual facts of any given case, is viable and has merit. I don’t think, though, that the fiduciary obligations require the particular plans to have the lowest possible fees, but rather require reasonable fees under all the circumstances, along with a realistic and reasonably aggressive process to obtain lower fees than smaller companies or the consumer off the street would have ended up with, this later point being something which the opinion in Hecker did not require.

Factually, though, I thought it would be fun to combine two of my favorite hobby horses - the Hecker theory of fiduciary liability and BrightScope ratings - in light of the Financial Times article, and see what we learn. Interestingly, it is in Wal-Mart that the Eighth Circuit let this line of attack on 401(k) fees proceed, but we learn from the BrightScope ratings on Wal-Mart’s 401(k) plan that it has low fees in comparison to other companies. John Deere’s plan, at issue in the Hecker case, isn’t rated yet on the BrightScope site. Two other large companies identified in the Financial Times article as being the target of such suits, Lockheed Martin and Boeing, are both rated as likewise having low total fees. The same can be said of Caterpillar, which just settled such a suit. ABB Inc., which the article identifies as proceeding to trial as we write on just such a claim, doesn’t score as well as those other companies in this regard, but is rated as having low fees.

Now, long time readers know that I am quick to quote (especially when the other side on one of my cases has a statistician for an expert witness) the old line that there are three kinds of lies - lies, damn lies and statistics - and certainly there are subtle points to be made about the comparison between what the plaintiffs are claiming against those various companies and what the BrightScope ratings on fees tell us. This, though, isn’t the place to fully vet those points. What is clear, though, is that easily accessible data - for us, anyway, but surely not for the folks at BrightScope when they went through the work of getting it - suggests there is a pretty good disjunct on a macro level between the theories being crafted by participants’ lawyers in this particular area and the factual reality of the operation of many of the plans that are being targeted.

Posted By Stephen D. Rosenberg In 401(k) Plans
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I have posted frequently on BrightScope and their work in rating 401k plans, and in particular about their decision to rate them in a Zillow like manner that can be quickly understood by employees. Here’s a terrific article out of BusinessWeek on the site, and on the people behind it. Its an excellent way to wile away the end of a workweek.

Posted By Stephen D. Rosenberg In Standard of Review
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I just noticed I haven’t posted since last year, for a few weeks to be more accurate, due to the usual end of the year crunch and a briefing schedule in a case overlaid on top of that to boot. No matter the reason, it runs afoul of my general feeling that you shouldn’t host a blog if you are not going to post frequently. In any event, Paul Secunda, over at Workplace Prof, has given me an easy reentry into posting, with his post here on the Seventh Circuit - the Seventh Circuit! - overturning a denial of short term disability benefits in a case where the administrator had been cloaked with discretionary authority. The interesting thing, to me anyway, about the ruling is that the court focused on certain minute details of the administrator’s handling and the precise details of the medical review relied on by the administrator, finding that a flaw in the medical review warranted overturning the denial. This is much different than what, for many years, has been the essence of judicial review of benefit denials where the arbitrary and capricious standard of review is applied, in which the courts essentially just looked to see if there was some medical evidence in the record that could justify the decision and, if so, affirmed the decision by the administrator. What you see in the Seventh Circuit decision is something different, and something more and more apparent in rulings over the past year or two, namely a closer look behind that evidence by the judicial body before whom the case is pending, to see not just - as was traditionally the case - whether there is evidence to support the administrator’s determination, but to instead test the quality of that evidence, followed by a decision as to whether the evidence is of a sufficient quality, and not just quantity, to support the administrator’s decision. If you think about it, that is tending more and more towards de novo review, to a certain extent, just under a different name.

Posted By Stephen D. Rosenberg In ERISA Seminars and other Resources
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Speaking of new blogs, I would be remiss as well if I didn’t pass along a link to Adam Pozek of Sentinel Benefits’ new blog, the wonderfully named Pozek on Pension (I have always been a big fan of alliteration). Adam has always been a font of knowledge on compliance issues and the day to day management and operational challenges of benefit plans, and I am pleased to see he has taken up the opportunity blogging presents to share that knowledge with the rest of us. When he was president, John Kennedy, in a far less politically correct world, reputedly described Washington as the perfect combination of Northern charm and Southern efficiency; if that was true then, Adam, a recently transplanted Southerner, and his benefit plan work, including on his new blog, is walking evidence that the New South has turned that phrasing on its head, into a place of Northern efficiency and Southern charm.

Posted By Stephen D. Rosenberg In 401(k) Plans , ERISA Statutory Provisions , Fiduciaries
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I like this (relatively) new blog here, the Benefits and Employment Observer, by the lawyers at the small - only in numbers - Washington D.C. shop of Bailey & Ehrenberg. This is the cleanest, most easily understood presentation of the findings of the DOL’s recent advisory opinion “addressing the issue of whether the assets of ‘target-date’ or ‘lifecycle’ mutual funds constitute ‘plan assets’ of employee benefit plans which invest in the funds” that I have come across over the couple of weeks since the opinion’s issuance.

Posted By Stephen D. Rosenberg In Preemption , Standard of Review
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I have been wondering about the question of whether state insurance commissioners can effectively gut the industry practice of including discretionary clauses in disability policies by refusing to approve forms for use that include them, or whether ERISA preemption precludes that action. I was preoccupied with a trial at the end of October when the Ninth Circuit concluded that they could do exactly that, without running afoul of preemption, according to this post by Mitchell Rubinstein at the Adjunct Law Prof blog. I have to wonder, though, whether it is something of a pyrrhic victory, since my view, without ever having seen actuarial data one way or the other, is that discretionary clauses reduce litigation costs and thus likely reduce the price of group long term disability policies. If insurance commissioners effectively gut the industry of that option, it would seem to me it could only drive up claim costs and, naturally then, policy pricing. Will that reduce employer willingness to provide this important benefit? Time will tell, but we already know that rising costs are the primary reason that employers don’t provide as much health insurance as they used to. We should keep this in mind when legal and regulatory decisions occur that can only drive up the cost of other employer provided, and ERISA governed, benefits.

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries , Pensions , Retirement Benefits
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I have a stack of substantive ERISA matters that I have been trying to post on for the last week or two, and I am going to try to work through them over the next few weeks. The thing about a blog, though, is the world keeps on spinning, and each day you find something new you want to post on, which keeps shunting those older items further into the background. That’s happened again today.

Regular readers know I am fond of the saying that Marx was wrong about a lot of things, but he was right that everything is economics. It is economic reality that is driving the increase in ERISA litigation, both at the big ticket class action level and at the micro level of individual participant claims; as I often say, the same compliance errors or high plan fees that participants ignored while their account balances were just going up, up, up, are being sued over, now that account balances have spent a year or more going down, down, down (yes, I know, I am not accounting for recent upticks, but you get my drift). Along this line, fiduciary liability insurance expert and fellow blogger, Joe Curley of U.S. Reinsurance, and I were discussing a couple days ago the ticking time bomb posed by the impending retirement - for the first time - of a generation of employees devoid of pensions and forced to rely instead on their 401(k) plans. It is conventional wisdom and common knowledge that these retirees are not, as a class, financially prepared for retirement by the assets in those accounts, particularly after the recent market downturn. Those people are not going to go quietly into decades of financial struggle in retirement, if there is a target for complaints about the operation, returns, or anything else concerning their 401(k) plans who can be sued; they make for a nice big pool of potential class action representatives, a huge pool of potential class members, and gazillions of potential individual claimants, for the latter of whom even a relatively small recovery will be significant relative to the values of their accounts. On a practical, day in and day out level, this means two things for plan sponsors, named fiduciaries or functional (who are often simply accidental) fiduciaries. One is to make sure there is sufficient fiduciary liability insurance in place; as Joe noted when we spoke, some service providers and others who may become functional fiduciaries by their roles in company 401(k) plans are not aware of that risk, and are not necessarily prepared for it. The second is an old hobby horse of this blog - compliance, compliance, compliance. ERISA litigation, particularly breach of fiduciary duty litigation, is an area of the law where a good defense is always the best offense - watch the fees, watch the operational compliance, document a sound practice for selecting investment options, etc. A fiduciary who does that severely decreases the likelihood of being sued, and strongly increases the likelihood of not being found liable if suit is filed.

This is on my mind today particularly because of this article from the Wall Street Journal about unemployed workers in the age 55 to 64 bracket who cannot find work and are, for all intents and purposes, being forced to retire, long before they intended to and long before they are financially prepared to do so. These people - or at least the lawyers they go to - are not going to overlook problems in their retirement accounts, even if they are just arguable or comparably minor or, as is often the case, were things that no one paid attention to years ago, like fees and costs. And this is where we loop back around to the Marx quote - there may be nothing different about the operational aspects of these 401(k) plans then there ever were, but the economic forces that are driving these people into retirement are going to likewise drive them to pursue any opportunity to bolster the returns on their accounts, even if that is by suing those who ran the plans.

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries , People are Talking . . .
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I am going to catch up on a number of items I have meant to blog on this week, all in one fell swoop. So here goes:

• I posted before about my appearance in an article in the Boston Business Journal, but one that was only available on-line to subscribers. Here it is in another forum, openly available.

• I, and a cast of thousands, have been saying for some time now that the plaintiffs’ class action bar has wisely latched onto ERISA breach of fiduciary duty theories as an excellent replacement for bringing pure securities actions. As I have discussed in other posts, there are a variety of reasons for this, including easier discovery and possibly easier avenues to recovery. In addition, securities law in the area of what we in ERISA would call “stock drop” type litigation is much more well developed than it is under ERISA, leaving more room for tactical and theoretical maneuvering. Beyond that, the sort of backlash in public opinion, in Congress and in court decisions that existed - at least prior to the most recent market meltdown - with regard to securities class action litigation was non-existent with regard to framing the same types of cases under ERISA. Here’s a dog bites man story out of Business Insurance reporting on this phenomenon. Anyone who has been reading this blog or similar sources over the past few years already knows what the article is reporting, but it is still a nicely done introduction to the topic.

•And speaking of using ERISA for class action litigation, one of the central questions with regard to the increasing use of that statute to press stock drop litigation and its cousin, excessive fee litigation, has long been whether it is a successful tactic. The successful defense of the excessive fee claims in Hecker v. John Deere, in the Seventh Circuit, at an early procedural stage and prior to detailed discovery into the facts of the plans and the fees at issue, strongly suggested that ERISA claims of this nature may be no more likely to get past the procedural stage and into expensive litigation of the merits than a pure securities theory would be. The Supreme Court’s subsequent pronouncements in Iqbal seemed to confirm the approach taken by the Seventh Circuit in Hecker, of testing the legal viability of the underlying ERISA based theories before allowing the plaintiffs to conduct discovery that might more strongly establish the legitimacy of their claims (or lack thereof, for that matter). As many have been reporting, the Eighth Circuit has just essentially taken the opposite tack, in a putative class action case against Wal-Mart, Braden v. Wal-Mart Stores. Braden can be understood, in part, as rejecting the approach taken by the Hecker court and finding that discovery is necessary before the merits of a complex excessive fees type claim can be decided. For more detail on Braden, here is Paul Secunda’s take on the matter over at the Workplace Prof (including a link to the case itself) and Roy Harmon’s take on the matter (which focuses nicely on the Rule 8 pleading requirements) at his always illuminating Health Plan Law blog. I have said before that with the increased focus on fees, the increased focus on the lack of retirement savings of most Americans, and the economic impact of high fees on returns in 401(k) plans, Hecker may turn out, in hindsight a few years down the road, to have been the high water mark for the corporate bar in defending against such claims. I am not sure whether that’s a good or a bad thing (I suspect, actually, that it’s a mix of both, but addressing that in depth here would make for an awfully long post), but it may well be the case either way.

Posted By Stephen D. Rosenberg In 401(k) Plans , Coverage Litigation , ERISA Seminars and other Resources , Fiduciaries , Pensions
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I have written before that one of the things that makes insurance coverage law interesting is the fact that almost every trend in liability or litigation eventually shows back up in insurance disputes, in a sort of fun house mirror sort of way. Whether it is corporate exposure for asbestos liabilities, or the sudden invention of Superfund liability, those liability risks eventually end up in insurance coverage litigation over the question of whether insurers have to cover them. I cannot think of one major doctrinal development in tort liability or one trend in liability exposure in the last 20 to 30 years that has not, eventually, resulted in litigation to determine whether insurance policies cover the new exposures flowing from those developments and trends.

Anyone who reads this blog knows that ERISA governed plans, and in particular pension and 401(k) plans, have become a huge target for large dollar claims over the past several years. Just a click through the posts on this blog detail many of the claims, such as stock drop and excessive fee litigation, that are working their way through the legal system. And with this, hand in hand, has come a new focus on whether plan fiduciaries have appropriate insurance coverage in place for those risks. Some do, some don’t, and others - consistent with insurance coverage litigation trends in the past when relatively new theories of liability have had to be analyzed under policies written before the theories themselves were developed in depth - won’t know unless and until courts pass on the meaning and scope of their policies. But here, though, is a good initial primer on the question and here, likewise, is a webinar that looks likely to provide much greater detail on the subject. One thing that is for sure is that this is an area of the law that anyone involved with the representation of plan fiduciaries needs to have more than a passing familiarity with at this point.

Posted By Stephen D. Rosenberg In Pensions
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Well, I’m getting ready for a trial, so I certainly don’t have time to read a 105 page ruling on reformation of ERISA governed benefit plans, and I suspect you don’t either. Fortunately for both of us, here’s a great one page article on a new major decision finding that a scrivener’s error - one worth $1.6 billion to the plan participants - can be reformed out of a plan, years after the plan was written and put into effect.

Only question I have, is if the lawyers can’t always get it right when they write plans- and the lawyers in this case appear to freely admit that the pension plan was simply so large and complicated that an oversight simply and understandably occurred - should we rethink ERISA doctrines that assume plan participants can read and understand a plan’s terms?

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries
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To me, intellectually, all roads lead to Hecker right now, as the sort of touchstone around which all thinking about fiduciary obligations and the amounts of fees charged in 401(k) plans must revolve. Hecker, of course, found not only that a broad range of offering meant that marketplace discipline guaranteed appropriate fees, but also that this could be determined at the motion to dismiss stage. This whole question of whether a broad marketplace for mutual fund offerings can be counted on to guarantee appropriate fees is at issue before the Supreme Court in a different context in an upcoming case, as commented on here: once again, you see that the question is the propriety of the assumption that market discipline is all that is needed to protect against overcharging of this type, and thus whether there is a legitimate basis for the assertion that the existence of a broad market is all that is needed to ascertain that fees were not so high that a fiduciary breach has occurred. It would take many more pages, and an analysis much more suited to a different forum, such as a law review article, to break down the potential flaws in the base premise of that assumption, but for this venue, at least one comment is warranted, and that has to do with the Supreme Court’s relatively recent conclusion that the same thesis - that marketplace discipline would prevent the problem from actually coming into existence - was not an acceptable answer to the problems potentially posed by structural conflicts of interest with regard to ERISA benefit claims. There, the Court rejected the view of many circuits that the risk of the marketplace punishing companies that misbehave did not represent a legitimate basis for assuming that administrators who both decided and funded benefit decisions could not be acting out of a conflict. There is independent evidence for the argument that fees are, in fact, too high with regard to 401(k) plans, as discussed in this report here (and thanks are due to the ever vigilant eyes of the folks at BrightScope for passing that along) and other places too numerous too detail in a few minutes this morning, causing one to ask whether, much like the Court decided with regard to structural conflict claims related to benefit decisions, it is a realistic economic assumption to believe that a large public market alone is a guarantor of appropriate fees, as the Seventh Circuit assumed in Hecker.
 

Posted By Stephen D. Rosenberg In ERISA Statutory Provisions , Pensions
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This is one of the great ERISA stories of all time - its like something out of a Boston Legal episode. I am speaking, of course, of the case, detailed here, of the Continental pilots who, concerned that the retirement plan may go belly up long before they retire, divorced their wives, executed QDROs transferring the retirement benefit to their now ex-spouses, after which the ex-wives took out lump sum payments, as the plan allowed. The only twist, though, is that, according to Continental, the divorces were executed solely for that purpose, and the pilots and their spouses either thereafter remarried or just continued cohabiting. The court found that the QDRO requirements were satisfied, and that the plan itself did not include any exception preventing such an alleged end around by participants to obtain benefits in this manner, and dismissed Continental’s suit seeking to recoup the payments.

This is an Alice in Wonderland, fun house mirror version of the rule that plan terms govern, and the statutory requirements control. Normally, those rules are invoked against plan participants, who seek more than a plan’s express terms allow, or seek to prosecute a claim that cannot be sustained under the statute’s narrow and express remedy or cause of action provisions. Here, the participants were able - assuming Continental’s version of events is true - to use those same rules to access the retirement funds early, without the plan or its administrator having any means to prevent it from happening.

But there is another point here, one lurking in the background, behind the entertaining fact pattern (entertaining, at least, to ERISA lawyers): the fact that we have a retirement system that is so tenuous that employees feel it is necessary to go to lengths such as this to protect themselves. That is the more significant issue that needs addressing, much more so than whether plan terms or QDRO requirements should be able to be manipulated in such a manner.

Posted By Stephen D. Rosenberg In ERISA Statutory Provisions , Fiduciaries
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Just briefly, as I have been traveling and haven’t reviewed the case myself, Roy Harmon on his excellent Health Plan Law blog, analyzes a decision out of the First Circuit on the manner in which a fiduciary can properly delegate its authority; the decision found that excessive formality wasn’t mandated. You can find Roy’s analysis, trenchant as always, here.

Posted By Stephen D. Rosenberg In 401(k) Plans
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Many years ago, I remember hearing the comment that you knew Nixon was done for when Johnny Carson turned against him in his monologue, because Carson was a perfect proxy - some hip writer today (or maybe just some writer today trying to be hip) would instead call him an avatar - for the thinking of mainstream America at the time. I immediately thought of this when I saw this story on the cover of Time magazine entitled “Why its Time to Retire the 401(k).” When this bastion of middle of the road, middle class, mainstream American thinking has signed on to the 401(k)s are bad campaign, you have to wonder if the tide has turned for this investment instrument, its primacy, and the massive amounts of income it generates for the investment community. If it has, then Hecker and similar cases that have gone very well for the defense bar when it comes to cost and performance issues in these plans, are going to start to look, in hindsight, like little more than the last gasps of a dying regime. Not sure that is the case, but this little window into the Zeitgeist has to make you wonder.

Posted By Stephen D. Rosenberg In Health Insurance , Massachusetts Health Care Reform Act , Preemption
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I had two disparate items that I wanted to post on, one of which I didn’t really think had anything to do with the subject matters of this blog but that, nonetheless, was too cool a graphic not to pass on. Sitting here this morning, though, I figured out how to hook them together, so here goes. The first is the report, which many of you have heard by now, that the Supreme Court has sought the government’s views on whether to accept cert with regard to the Ninth Circuit’s ruling on preemption and the San Francisco health insurance mandate. I can throw out two, or actually three, quick thoughts on that one. First, dollars to donuts says the government’s advice is to not grant cert, and to wait and see whether federal health care reform either directly or in a de facto manner moots the entire question. Second, the reality is that, under current doctrines, that statute is preempted; the Supreme Court doesn’t necessarily have to overturn any precedents to find otherwise, but it is going to have to shift the analyses of the preemption case law to find that this statute is not preempted. Third, I can’t say - as one who has watched the questionable implementation in Massachusetts of its state legislated, and presumptively preempted, employer mandate - that I agree with those who think that preemption should be set aside to allow states to become bastions of experimentation on health insurance reform; anyone who has followed my posts on the Massachusetts statute knows I don’t think the states have the pocketbook or the firepower to handle the issue successfully.

What was the second item, the one that wasn’t clearly on point to this blog? Its this graphic representation of job losses and gains throughout the business cycle for different metropolitan locations across the country, a link I have shamelessly pirated this morning from the Workplace Prof blog. My first response to it was that I loved the graphical representation of complex data; it’s the same thing a trial lawyer has to do in a case of any level of complication, which is make the background information understandable, and this graphic does that beautifully. Trial graphics in particular have to serve this purpose, and this graphic could be the exemplar of exactly what computer generated graphics for trial should be: easily understandable and visually interesting representations of what otherwise would be difficult to grasp or, at best, tedious to follow information. But how do I link this graphic to this blog post? Easy, by using it like a trial graphic to make a point. If you move the time line to 2009 on the graphic, you will see the massive amounts of job losses - there is no better illustration of the point I have made time and again about employer mandates, which is that employers have enough on their plates without being made the official provider of health insurance (they have long been the unofficial one, but employer mandates push that responsibility even further). Employers should create jobs, not spend their time worrying about the costs and administrative burdens of legislated mandates such as the San Francisco ordinance or the Massachusetts Health Care Reform Act - this, in fact, may be the most concise justification for preemption of such acts I can think of.

Posted By Stephen D. Rosenberg In Benefit Litigation , ERISA Statutory Provisions , Employee Benefit Plans , Pensions , Standard of Review
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Here’s a nice little story on Conkright, and the new Supreme Court session. As the article explains in a nutshell:

The issue in Conkright vs. Frommert involves how much deference a court must give to an ERISA plan administrator's interpretation of the terms of the plan. A group of Xerox Corp. retirees who left and then returned before retiring brought the suit. At issue is the method of accounting for lump sum distributions received by the employees when they first left the company when determining the benefits to which they were entitled at retirement.

In a review of the case, a three-judge panel of the 2nd U.S. Circuit Court of Appeals ruled last year that a district court has no obligation to defer to a plan administrator's reasonable interpretation of the plan's terms if the administrator arrived at the conclusion outside the context of an administrative claim for benefits. It also held that a district court has “allowable discretion” to adopt any “reasonable” interpretation of the retirement plan terms under certain circumstances. The high court has not set a date for oral arguments.

I studiously ignored Conkright during the cert phase - we will discuss it in detail in future posts, however. Gut instinct right now, based only on what the Court did with its most recent ERISA cases? Expect a decision that narrows the administrator’s discretion and gives more freedom of interpretation to the court.  How's that for instant analysis?

Posted By Stephen D. Rosenberg In Conflicts of Interest
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Geez, I certainly don’t mean anything by it, but in its application by the courts, this new “structural conflict of interest” rule imposed by the Supreme Court in Metropolitan Life v. Glenn seems to be just as open to variation from circuit to circuit as was the case with the highly variegated rules across the circuits on this issue that predated it. Some circuits appear to be treating the standard as little more than a variation on the themes that preceded it; for instance, my take at this point in the First Circuit is that the standard now means that discovery is proper to explore whether the conflict affected the outcome and, if it did, than that should be taken into account; I have to say, I am having trouble seeing how this is much different than the circuit’s rule pre- Metropolitan Life, which held that a structural conflict was only relevant if it had an actual impact on the outcome. I suppose one change is that the rule now allows discovery into that question, before a court rules on that point - as occurred here - which wasn’t necessarily the case in this circuit prior to the Supreme Court’s ruling. On the other end of the spectrum is a recent ruling by the Ninth Circuit, discussed here, which can be fairly understood as treating the existence of the structural conflict as a legitimate basis for engaging in de novo review by another name; it is hard to read this analysis of that decision without viewing the court as having conducted a de novo review of the evidence in light of the structural conflict and using that as the basis for decision making. Variety is the spice of life, I guess, and has long been the norm when it comes to the handling by different circuits of the same issues arising under ERISA. Although Metropolitan Life appears to have standardized those rules with regard to one issue - namely the effect of “structural conflict of interests” - to some degree, it hasn’t come close to putting the treatment of that issue on the same page in every circuit.

Posted By Stephen D. Rosenberg In Benefit Litigation , ERISA Statutory Provisions , Pensions
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I don’t think anyone has made as sustained a study of the law of QDROs as Albert Feuer. Albert has a new piece he has authored on the Drainville decision, which I discussed here, in which Albert concurs that it is both well reasoned and accurate in treating substantial compliance with the statutory QDRO requirements as sufficient. Albert, however, has long maintained a particular scholarly view on the QDRO requirements, which is that they only apply to pensions under the statutory language, and don’t reach other ERISA governed plans or benefits. Albert points out that the Drainville court erred in its analysis for this reason.

Being a practical, courtroom oriented kind of guy, I have never done my own independent analysis of Albert’s thesis, since in practice QDROs are treated as applicable across the board and thus my litigation over the issue has always focused on the application of the statutory requirements, and not on whether they reach all covered benefits or only pension benefits. I have to say, though, that his argument on the point and the manner in which he presents it has always been pretty persuasive; it would certainly be interesting to see a lawyer challenge a purported QDRO on this basis and to see what a court would do with that issue.

Posted By Stephen D. Rosenberg In Attorney Fee Awards
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I have been swamped for awhile, but have wanted to post on this case, by Judge Young of the U.S. District Court here, for almost as long, and I want to get it up today while I have a few minutes of daylight, because I think it is a very important opinion for practitioners. Long time readers will know that I am very fond of federal court decisions that give a scholarly, extensive overview of the case law on both sides of an issue, because it prevents a litigator from having to reinvent the wheel by creating his or her own survey of the law on that particular issue when it comes up in their own practices, since a court has already done it. In this opinion here, Judge Young gives a scholarly overview of the split among the circuits on what it means to be a “prevailing party” entitled to recover attorneys’ fees in an ERISA case. The particular issue before him was whether a participant who does not recover benefits, but instead attains a remand to the administrator for further review has prevailed, for purposes of ERISA’s attorney fee shifting provision. The court’s conclusion, after surveying the cases throughout the country, is: (1) maybe; and (2) sometimes. I am being a bit flippant, but the truth is it is an excellent analysis of an issue you don’t see that often and the court’s conclusion, in a nutshell, is that you have to look and see if the plaintiff, beyond just getting that relief, accomplished some significant goal of the suit; if so, then the plaintiff is a prevailing party entitled to an award of attorney’s fees. It is not a black and white issue, in the sense of remand either always does or always does not warrant such an award, but a fact based one dependent on what was actually accomplished in the lawsuit. For anyone who deals with these issues, it is certainly worth a read. The case is Colby v. Assurant Employee Benefits.

Posted By Stephen D. Rosenberg In Benefit Litigation , ERISA Statutory Provisions
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Here’s a great opinion, out of the United States District Court for the District of Rhode Island, on QDROs, their statutory basis, their purpose, and how they should be structured. Notably, the court weighs in in a very sensible manner on the never ending question of whether, under ERISA, the divorce decree at issue must comply exactly with the requirements imposed by ERISA to qualify as a QDRO or whether instead, as in horse shoes, close enough counts. In this circuit, close enough is usually good enough, and courts tend to enforce the divorce decree so long as the court is convinced it can accurately ascertain the intent and purpose of the agreement from the decree, regardless of whether the exact detailed requirements that ERISA imposes to qualify as a QDRO have been met. This opinion comes closer than those to requiring close compliance with the specific requirements of the statute, but allows variance from them subject to a certain principled guidance - namely, whether the variance does not affect the plan administrator’s ability to determine to whom and in what amount to pay plan proceeds. If so, then the requirements should be considered to have been met in substance and the order in question deemed a QDRO for these purposes.

Beyond this aspect of the opinion, one of its most notable features is simply its nice exposition of exactly what a QDRO needs to contain. Exactly what needs to be contained in a divorce document to qualify as a QDRO seems to be a constant source of confusion for people who are not ERISA lawyers but who have to work out family/divorce agreements; this opinion just lays it out in clear fashion.

The opinion is Metropolitan Life Ins. Co. v. Drainville. It doesn't appear to have been posted yet on the court's website, but once it is, you should be able to find it here.  For now, here's a Lexis site for it: 2009 U.S. Dist. LEXIS 63613.

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries
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I have to admit I have found the Workplace Prof blog tough sledding since the site’s founding blogger, Paul Secunda, took retirement from the site, apparently to spend more time in the snow in Wisconsin. Without Paul, the blog has trended heavily towards labor law and lacks the type of frequent, insightful commentary about ERISA that was a hallmark of the Secunda regime.

I mention this today because the blog has a guest/drop in post from Paul, commenting on a Wall Street Journal law blog story about the decline in securities class action litigation. Paul comments that one reason for this that was overlooked in the story may well be the discovery of the class action plaintiffs’ bar over the past few years of ERISA as a better tool for prosecuting such claims and as an excellent stand-in in many cases for securities suits. This is something I have discussed frequently over the years on this blog, but I have to admit, until Paul, the law professor formerly known as the Workplace Prof, mentioned it in his post, it had not jumped out at me as something relevant to the Wall Street Journal piece. But there you have it - more anecdotal evidence for the idea that ERISA is displacing securities actions in many circumstances.

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries
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It has become a given in any talk on 401(k) plans and fiduciary liability that I give these days - my comment that, when the market was always going up, up, up, no one cared that they might have made 15% instead of 14% but for some unresolved problem with a plan’s structure, but with the market going down, down, down, anything and everything even allegedly wrong with a plan is going to get sued over. The point is always the same: it is doubly important now to always dot all the eyes and cross all the tees, which translates into watch your investment selection mix, watch your fees, watch your level of disclosure, watch the process by which you select your vendors, and so on. It all adds up to the idea that in this market, someone is going to come after you if you are a fiduciary or a plan vendor, so be prepared to defend everything you do.

That is why I liked this post here, from the folks at the Float, about excessive fee litigation trickling down to the level where suits based on fees are being filed against plans with as little as $2 million is assets, and their advisors. There’s nowhere to hide anymore, folks. Get it right in the first place, and then defend yourself; being the small fish isn’t going to keep you out of the churn.

Posted By Stephen D. Rosenberg In Preemption
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Here’s an interesting case for you. Here in the First Circuit, we have plenty of case law making clear that theories of liability that serve as alternative enforcement mechanisms to those set forth in ERISA itself are preempted. What about the circumstance where the cause of action is not necessarily an alternative enforcement method but would nonetheless require the fact finder to reference the terms of an ERISA governed employee benefit plan to determine whether or not the plaintiff’s state law cause of action is viable? Is there a point at which the state law claim becomes too remote from the existence of the ERISA governed employee benefit plan for it to be preempted? Well sure, but it is only at a great remove from the employee benefit plan itself. The standard for determining this is a simple test - does determining the cause of action require considering or interpreting the terms of the plan? If so, the state law cause of action is preempted.

This principle is nicely illustrated by a new decision, out of the United States District Court for the District of New Hampshire, in which the plaintiff sought to recover emotional distress for tortious mishandling of her claim for benefits, by arguing that “resolution of her emotional distress claim would not require an analysis of ERISA plan documents” and therefore the state law claim could proceed. The District Court rejected the argument because, as a factual matter, deciding the plaintiff’s claim would require the court “to determine, among other things, any deadlines or other time frames set out in the plan documents. It would also be necessary, it would seem, to know the scope of the plan's coverage, in order to determine whether [plaintiff’s] claims were mainstream or borderline or meritless, which, presumably, would have a bearing on the time reasonably necessary for [the defendant] to approve or reject them.” The case, Polley v. Harvard Pilgrim Health Care, does a nice job of illuminating this aspect of preemption analysis - namely, the implications for preemption of any need under a state law cause of action to interpret the terms of an ERISA governed plan. I pass it along as useful reading on that point, and a handy, dandy case to cite to quickly for the principle.

Posted By Stephen D. Rosenberg In ERISA Seminars and other Resources
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Here at this blog, we are all about being a modern media company, as you can tell from all the pop-ups and the banner ads you encounter when you come here to read the latest posts. Synergy, and book serialization and cross-marketing and all those other business page buzzwords - that’s what we’re about here.

Now I will take a minute and pull my tongue out of my cheek, and move onto one cross-marketing opportunity that I have agreed to, because it benefits the readers of this blog and involves what promises to be an outstanding educational opportunity. The American Conference Institute is hosting what looks to be a very broad and in-depth examination of current hot topics in ERISA litigation next October in New York, and this blog has signed on as a media sponsor. As per our continuing non-commercial status, no money in it for us, but it gives readers of this blog an opportunity for a substantial discount if they register in the next couple of weeks for the seminar. Just use my name and tell them I sent you. Just kidding - the actual information and manner of laying claim to the discount is right here.

The brochure for the conference itself can be found here. I signed on as a media sponsor for the same reason I think readers may be interested in the seminar, which is that the list of topics reads like a table of contents for the blog; thus, light dawned over Marblehead here and I realized if you read this blog regularly, you would probably be interested in the subjects being addressed at the conference. Beyond that, you will see the speaker list (here comes the pun) speaks for itself.

Posted By Stephen D. Rosenberg In Health Insurance , Massachusetts Health Care Reform Act , Preemption
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File this, I suppose, in the department of inevitable events - lawyers representing the restaurant industry have filed to have the Supreme Court review the Ninth Circuit ruling finding that the San Francisco pay or play ordinance is not preempted by ERISA. This is one of those instances where you can bet how the case will come out the same day the Court announces whether it will hear the case; if it does, the statute is going to be found preempted and the Ninth Circuit overruled, for reasons I referenced in passing here.

I do have a reason for posting on this, beyond wanting to get on board early with a prediction for the outcome (even Paul Secunda, back in his days as the Workplace Prof, would never have called a case before it was even accepted for hearing!), and that is this quote from the restaurant group’s lawyer, courtesy of the National Law Journal:

"One of the most important issues that we are debating in the country today is how health care is to be provided," said Jeff Tanenbaum, chairman of the labor and employment group in the San Francisco office of Nixon Peabody, who represents the Golden Gate Restaurant Association, which filed the petition on June 5. Golden Gate Restaurant Association v. City and County of San Francisco, No. 08-1515.

"This case comes down at a time when that debate is the focus of tremendous attention at the federal level. It is an issue that needs to be addressed at the federal level," he said.
 

I have said it time and time again on this blog, that ERISA preemption serves the admirable, even if perhaps inadvertent, role of forcing health care to be tackled at the only level it can be adequately addressed, the federal one, and not at the level of state governments, which simply don’t have the resources to pull it off, as this article here reminds us yet again (and this one too). I am happy to hear someone else say it as well.

Posted By Stephen D. Rosenberg In Health Insurance , Massachusetts Health Care Reform Act , Preemption
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Well, I have argued more than once on these electronic pages that ERISA preemption, rather than being the whipping boy of choice for people who advocate state level health insurance mandates, should be understood as a key element in bringing about any type of effective change to the health insurance system. Why is that? Because ERISA preemption forbids the states from enacting health insurance reform statues since states cannot enact them without either deliberately or unavoidably rejiggering employer provided - and thus ERISA governed - health plans, meaning that any real change from the current employer provided (and voluntary) health insurance system can only take place on a national level. And why is this in turn good? Because states are kidding themselves if they think that they can, financially, pull off reform of the system on their own, as this article here demonstrates yet again. Although buried behind the praise for the fact that the state reform has increased access by decreasing the numbers of uninsured, the article notes that affordability problems have arisen, which cannot “be blamed on the state's overhaul, but on a much larger and troubling national trend [which is that] [h]ealthcare costs, in general, are increasing faster than inflation.” The city of San Francisco, or the Commonwealth of Massachusetts, cannot solve that problem, and they can’t fund it on their own, either. It’s a national problem, and one that ERISA preemption demands be handled nationally.

Posted By Stephen D. Rosenberg In Fiduciaries
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Kevin O’Keefe, the lawyer turned blogging evangelist behind the company that hosts this blog, told me when I was picking a topic for my blog that I should choose a subject where there was plentiful source material to work from on a day in, day out basis. They were oddly prophetic words, in that not too long after launching the blog, fiduciary litigation and concerns exploded, generating a seemingly endless stream of cases and business developments to blog about. Excessive fees, company stock declines, subprime meltdowns, the rise of ERISA as the new securities class actions - all of these issues that I have covered extensively here really exploded after the launch of this blog.

There is so much information and activity going on out there now in this area that it is always good to have other bloggers, the more knowledgeable the better, likewise chiming in on developments in this area, and few are more knowledgeable than long time ERISA blogger B. Janell Grenier, who has just launched a separate blog dedicated to developments concerning the law governing fiduciary status titled the ERISA Fiduciary Guidebook (A Work in Progress). Her new blog captured, for instance, a recent Massachusetts federal court decision that I didn’t cover, involving some of the issues raised by an employer who becomes delinquent in making plan contributions.

Posted By Stephen D. Rosenberg In 401(k) Plans , Industry News
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In my last post, I mentioned a seminar I gave recently on insurance coverage issues and commented on one of the themes of my presentation. Another theme I emphasized in that talk was the fact that modern insurance coverage law is basically 20 years old, with its fountainhead being the development of the law of insurance coverage to account for the complexities and size of the asbestos exposures that confronted much of American industry at that point; from that development of the case law would come further refinement and expansion of the relevant doctrines as the courts, insurance companies and industry subsequently struggled to allocate financial responsibility for the surge in environmental clean up actions. Insurance coverage law before then was essentially a backwater of random, not necessarily sophisticated decisional authority; since then, it has become a complex weave of interdependent theories and doctrines.

I mention this because I am reminded of it by the current state of the law concerning fee and cost issues in 401(k) plans. To some, it may be a weird correlation, but not to me. I have written before about how the Seventh Circuit’s decision in Hecker provides a broad range of issues that warrant review and thought, some of which I have touched on in my posts and others of which I have not. I suspect there will come a time in which we will think of the law on this particular subject as being divided into two eras: before Hecker and after Hecker. And by that, I do not necessarily mean that the case law will start to follow Hecker and reform or solidify the landscape on this issue as a result. That might happen, but I am skeptical, at least in the longer or middle term. There are many issues in Hecker that were not played out fully in that decision or in the record underlying it in my view, and I suspect they will be in later cases, or by legislation or regulation, in ways that will change how we think about this type of issue, both from what existed before Hecker and from what Hecker itself suggests.

I am thinking in particular today of the court’s treatment of the amount and lack of transparency of the fees and costs in the plan before it as essentially not important, for all intents and purposes, either to participants, or, seemingly, to the court’s analysis of the plan’s obligations. A deeper look at the role of costs and fees, along with their impact, I suspect, might suggest an entirely different outcome to excessive fee cases such as Hecker, and it would not surprise me if at least some other courts in the future engage in such a closer examination and come to a different conclusion as a result. What has me thinking about this today? It is this excellent post by Ryan Alfred of BrightScope on the range of fees and costs in funds, a fiduciary’s obligations to understand all of them, and the lack of transparency as to exactly what plans are actually paying in fees and costs. Moreover, he points out the systemic differences among how different knowledgeable parties - experts may be a fair statement - calculate such fees and costs. This analysis suggests that fees and costs are nowhere near as simple to interpret and analyze as the Hecker court’s analysis assumes them to be, given that the court analyzed them on a motion to dismiss without detailed factual development of the evidence on the fees and costs in question. My educated guess, using Ryan’s analysis as a backdrop, is that a court may reach an entirely different understanding of fiduciary obligations in this regard if it first engages in a thorough factual development of the record on this issue before ruling, which the Hecker court did not.

Posted By Stephen D. Rosenberg In Benefit Litigation , Conflicts of Interest , Long Term Disability Benefits , Standard of Review
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I thought I would post some thoughts and comments on the First Circuit’s pronouncement of its law after Glenn, before too much more time goes by, rather than waiting for a window of time that would allow me to write a much longer post on it. Some things that sit too long get stale, and comments on new, noteworthy opinions fall in that category, so here are my thoughts. First, for those of you who haven’t seen it yet, a First Circuit panel has now issued an opinion detailing how the First Circuit will handle structural conflict of interest situations in light of the Supreme Court’s ruling in Glenn. You can find the opinion here. Of note, the panel goes out of its way to paint prior, pre-Glenn, First Circuit decisions as not particularly different than the holding in Glenn, and to a certain extent this is true: prior First Circuit precedent had required that structural conflicts only affect the outcome if there was a showing that the conflict had actually impacted the benefit determination, and in many ways this is very consistent with the holding in Glenn that consideration of the structural conflict is only one aspect of the review and that such a conflict is essentially irrelevant if the evidence shows the conflict was cabined in a way that demonstrates it played little or no role in the outcome.

Second, and of particular note, the panel made clear that it was only dealing with the specific issue at play in Glenn, namely the impact of a structural conflict of interest. The court indicated that the rule may well be different in the presence of evidence showing that there was an actual conflict that motivated the outcome, and that a change in the standard of review might continue to be appropriate under that circumstance. In essence, while withholding judgment on what rule it might adopt in that circumstance after Glenn, the First Circuit is distinguishing between arguments that begin from the premise that there was a structural conflict of interest - the Glenn type scenario - and arguments based on the idea that the administrator was actually subjectively motivated by a conflict; the court made clear that only the former scenario is governed by its new decision applying the Glenn rubric.

Third, in an aspect of its decision that provoked the ire of one member of the Panel who wrote a concurring opinion specifically to challenge the opinion’s analysis of this issue, the case holds that the First Circuit’s prior rulings on discovery in denial of benefits cases - that little is to be allowed and it is disfavored - remain in effect and are consistent with Glenn. Of even more interest and practical concern going forward, though, is the court’s conclusion that, rather than engage in discovery into the possible impact of a structural conflict of interest on a decision, it is incumbent upon administrators to make the evidence of the cabining and lack of impact of such a conflict part of the administrative record compiled during the administrator’s handling of a claim. If there is a functional impact of the First Circuit’s ruling on plan administrators, it is this one - the need to evidence the lack of importance of the structural conflict in the administrative record itself.
 

Posted By Stephen D. Rosenberg In Health Insurance , Massachusetts Health Care Reform Act , Preemption
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Two interesting things worth passing along this week on the topic of ERISA preemption, both reinforcing its breadth. The first is this well-written analysis of preemption out of the state trial court in Massachusetts, unusual for the reason that, normally, if ERISA preemption exists, the case ends up by original or removal jurisdiction in federal court; you seldom see a state trial judge write extensively on this subject as a result. Moreover, you don’t always see any judge write this well and accurately on the subject:

This Court finds that these claims for contribution are barred under the ERISA preemption provision, 29 U.S.C. §1144(a), which supersedes "any and all State laws insofar as they may now or hereafter relate to any employee benefit plan . . ." 29 U.S.C. §1144(a). "State law" under ERISA is not limited to state statutes; it includes judicial decisions declaring the common law of the state. 29 U.S.C. §1144(c) ("State law" includes "all laws, decisions, rules, regulations or other State action having the effect of law, of any State"). . . . To determine whether State law, namely, the common law of misrepresentation, "relates to" an employee benefit plan and is thus preempted, we must look to Congress's intent. "The purpose of Congress is the ultimate touchstone." Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 138 (1990), quoting Allis-Chalmers Corp. v. Lueck, 471 U.S. 202, 208, (1985). There can be no doubt that Congress intended that ERISA's preemption provision be broadly construed. See Ingersoll-Rand Co., supra, 498 U.S. at 138; Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 46-47 (1987). The provision's "deliberately expansive" language was "designed to 'establish pension plan regulation as exclusively a federal concern.' " Pilot Life Ins. Co., supra at 46, quoting Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504, 523 (1981). See Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 98-100 (1983). "A law 'relates to' an employee benefit plan, in the normal sense of the phrase, if it has a connection with or reference to such a plan." Id. at 96-97. "Under this 'broad common-sense meaning,' a state law may 'relate to' a benefit plan, and thereby be preempted, even if the law is not specifically designed to affect such plans, or the effect is only indirect." Ingersoll-Rand Co., supra, 498 U.S. at 139, quoting Pilot Life Ins. Co., supra, 481 U.S. at 47.

In spite of its undeniable breadth, ERISA's preemption provision does not apply to every State action that affects an employee benefit plan. "Some state actions may affect employee benefit plans in too tenuous, remote, or peripheral a manner to warrant a finding that the law 'relates to' the plan." Shaw, supra, 463 U.S. at 100 n. 21. . . .Here, the alleged claim under the common law of negligence would directly relate to an ERISA plan because it would require a state court to determine the duty owed by these fiduciaries to an ERISA plan with respect to their investment of Plan monies. See Zipperer v. Raytheon Co., Inc., 493 F.3d 50, 53-54 (1st Cir. 2007) (finding that a negligence claim was preempted because it was based on the defendant's record-keeping responsibilities under an ERISA plan); Donavan v. Robbins, 752 F.2d 1170, 1180 (7th Cir. 1985) (declaring it "extremely unlikely that Congress would have wanted ERISA fiduciaries to be subject to the vagaries of state contribution law"). Even if the Massachusetts common law of negligence were to mirror precisely the fiduciary duty owed under federal ERISA law governing the investment of ERISA funds, the mere possibility that it would differ and be in conflict with ERISA's objectives is sufficient to require this state court to forbear from touching the contribution claim.

The case is Edward Marram as Trustee of the Geo-Centers, Inc. Profit Sharing Plan & Trust v. Kobrick Offshore Fund, Ltd. et al., out of Suffolk Superior Court, and you can find it at 2009 Mass. Super. LEXIS 85.

The second is Edward Zelinsky’s detailed analysis of the Ninth Circuit’s decision on the San Francisco health insurance ordinance, in which he lays out, in formal, analytical fashion, what many of us already concluded on a gut level - that the statute is a preempted invasion of rights controlled only by ERISA, no matter the false distinctions created by the Ninth Circuit in an attempt to avoid that conclusion. Writes Professor Zelinsky (courtesy of the Workplace Prof blog):

An exploration of the most recent decision of the U.S. Court of Appeals for the Ninth Circuit in Golden Gate Restaurant Association v. City and County of San Francisco (Golden Gate III) indicates that ERISA Section 514(a) preempts the San Francisco Health Care Security Ordinance. Two premises guide this exploration of Golden Gate III. First, employers’ ongoing payments to health care administrators, such as insurance companies, constitute employee benefit “plans” for ERISA purposes. Second, employers’ contributions are central features of their employee plans.

This first premise indicates that a San Francisco employer which regularly contributes to San Francisco pursuant to that City’s health ordinance thereby creates a “plan” for ERISA purposes. The ERISA status of this plan purchasing municipally-administered medical services is the same as the ERISA status of an analogous employer-financed plan paying a private administrator for comparable health care: As to all of these plans, ERISA Section 514(a) preempts state and local regulation.

Moreover, it is not persuasive for purposes of ERISA Section 514 to say (as does the Ninth Circuit) that San Francisco, by its health care ordinance, regulates employers’ health care contributions, but not employers’ health care plans. Contributions are central features of employers’ health care plans for their employees. By regulating employers’ contributions, San Francisco regulates employers’ plans.

Frankly, I thought the Supreme Court made clear in an offhand comment in Kennedy v. Dupont that the San Francisco statute, were it to come before it, would be found preempted, when the Court, in a gratuitous aside completely unnecessary to decide the issue before it, commented that a state law is preempted when it would “undermine the congressional goal of ‘minimiz[ing] the administrative and financial burden[s]’ on plan administrators.” Can you think of a better description of what the Rube Goldberg contraption that is the San Francisco ordinance does than that? And the same, by the way, holds true for the equally Rube Goldbergesque Massachusetts health care reform act as well.

Look, once again, many people may want these types of health insurance expanding statutes to exist, and the political consensus in Massachusetts means that such a statute is operating without court challenge, but that doesn’t mean they are not, in fact, preempted. They are, absent an actual change in the scope of preemption by the Supreme Court.

Posted By Stephen D. Rosenberg In 401(k) Plans , Employee Benefit Plans , Fiduciaries
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Hecker is the gift that keeps on giving, for either an academic or a blogger (or perhaps a blogger with an academic frame of mind). It presents a wealth of issues warranting further consideration, running from those commented on in my prior posts on the Seventh Circuit’s decision, to one I haven’t even passed on yet, namely the propriety from a jurisprudential perspective of using every trick in the trade, as the Seventh Circuit did, to go outside the complaint for extensive evidence that would allow the case to be decided on a motion to dismiss. It is fair to say that the circuit’s heavy reliance on those maneuvers (and I don’t criticize those tactics in general, as they are a litigator’s stock in trade in presenting motions to dismiss and I am one of those who thinks that, used properly, they provide an opportunity to focus a court on issues that should be decided in a lawsuit at the earliest stage possible) renders the opinion more akin to a law review article that now has the force of law - at least in the Seventh Circuit - than the type of factually based analysis that we normally think of with regard to a binding judicial opinion.

But that’s a topic for another day. What I wanted to pass along today was this excellent article - quoting yours truly extensively, although that’s not what makes it excellent - in InsideCounsel magazine this month on the Hecker decision. It is a well written, interesting report on the case, but I wanted to focus on what I am quoted on at the closing of the article, in which the author writes:

"Hecker is almost a quintessential law and economics opinion. It assumes the 401(k) plan included funds that charged the same [fees] as the market as a whole, and that’s all we need to know," Rosenberg says. "I would be surprised if many other courts are willing to just stop their analysis at that point."

Although Hecker provides a lot of protection for companies, he advises general counsel to assume the decision is just a baseline for ERISA compliance.

"Hecker didn’t impose a very high standard," he says. "Far and below Hecker is going to get you in a lot of trouble in a lot of different jurisdictions."

The defense bar, of which 80% of the time I am one, is very pleased with the decision and thinks it protects and/or validates much of what plans have done when it comes to fees in 401(k) plans. I am not so sure, and I think that prospectively at least it warrants more vigilance from plan sponsors, not less. To my mind, everything follows economics, whether its fashion, car design, house sizes (think McMansions), the social propriety of using company jets and, yes indeed, legal regimes. I have little doubt that with the baby boomer generation looking at becoming the first cohort to both lack pensions and have battered 401(k)s, the economic impact will eventually increase the level of performance and fiduciary expertise demanded of plan sponsors and those they select to run their 401(k) plans. It might take one year, it might take ten years, and I don’t know if it will come about by new regulation, statutory enaction or the development of case law, but it will happen.

Prospectively, as a result, plan sponsors and other fiduciaries can and should assume that, down the road, there will be much tougher looks taken at their 401(k) plans on issues such as fees than the very deferential approach taken by the Seventh Circuit in Hecker; when that comes to pass, they will have been much better off having understood Hecker as presenting only the base minimum standard for the plans they operated, and having targeted a much higher level of participant protection in building their plans than Hecker seemed to them, today, to have required. After all, if you think about it, what really is so hard about looking closely at fees as part of putting together a 401(k) plan’s investment options from here forward, and documenting that this was undertaken, as an additional step in defensive lawyering and plan building, rather than just stopping at the Hecker level of analysis and conduct? It doesn’t take all that much - there are independent fiduciaries out there right now who will try to do it for you - but the legal protection in the long run, and the participant goodwill in the short run, that it will buy far outweighs the costs.

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries
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I had dinner recently with the brothers Alfred, Mike and Ryan, two of the co-founders of BrightScope, and much of the conversation centered around the question of transitioning the management and analysis of 401(k) plans from a practice oriented perspective to a plan participant oriented one. Translated into practical terms, this encompasses the idea that fiduciary standards for plan sponsors currently take the approach of considering whether the fiduciary’s practices in operating the plan, for instance with regard to deciding which vendors to use or funds to offer, were prudent and reasonable; this is particularly evident in the case law that is developing concerning the current bete noir in this area of the law, the amount of fees and costs in a 401(k) plan and their impact on plan participants. In the context of fiduciary liability, this plays out in cases like Kanawi and Hecker as courts finding that fiduciaries did not breach their obligations because the evidence showed that the means and methods by which those plans were built was reasonable, rather than by looking at whether the fiduciaries built a strong plan in terms of the fees and costs and performance of the investment options; in Kanawi, the court was swayed by the fact that the sponsors had followed a reasonable course in selecting the plan options, and in Hecker the court was persuaded by the simple fact that the plan sponsors included funds that were publicly available at the same cost structure.

Case law routinely takes the approach that fiduciary obligations when it comes to fees charged in a plan or other aspects of the operation of a plan relate to the nature and manner in which the plan is built or operated, rather than the actual returns or costs structures of the plan itself. As a result, the focus of plan sponsors who are trying to be proactive in protecting themselves and of lawyers counseling them on how to do so has long been on pursuing a “best practices” approach: solicit multiple bids, have them compare themselves against benchmarks they use, bring in outside advice if needed to evaluate them, and then pick the best one. The end result of this process isn’t necessarily going to be a plan with the best ultimate outcome (something driven heavily in a 401(k) plan for instance by the plan’s fee and cost structure) for plan participants, but will instead be a plan that looks best from among the range of options considered. This is an approach that most ERISA lawyers recognize is defensible if the plan sponsor is sued, because it allows for the argument that, regardless of what problems there might have been in the plan, the approach used to put the plan together - and to run it - was prudent and reasonable. To a large extent, courts have accepted this idea, that the manner in which the plan was built and, for instance, fees settled on is the central issue to be tested, with the fiduciaries having lived up to their obligations if the approach to building the plan and selecting the funds (and accompanying potential fee structure) was reasonable.

This approach to the issue by courts is understandable, in that it is almost the only approach that practical reality leaves open to them on many difficult issues, such as the amount of fees and costs in a 401(k) plan. There is no uniform, consistent, hard data driven, accepted benchmark for what such fees and costs should be, or how one particular plan’s fees and costs compare to those across the industry. Courts are, quite understandably, therefore devoid of an appetite for allowing disputes over the cost and fee structure in a plan to devolve into a simple battle of experts, with each side putting up an expert saying the objective amount of fees and costs in a plan are, according to one expert, too high, and according to the other, just right. It would quickly turn into the Goldilocks school of ERISA litigation - these fees are too high, these costs are too low, these are just right. Beyond that, there would be tremendous practical barriers to such an approach due to the general absence of uniform, broadly accessible industry wide data on many of these points, which results in serious questions as to whether, and if so with what credibility, experts could even testify to an opinion as to whether fees in a particular plan are too high or too low; the difficulty of accessing industry wide data that would allow for a detailed and defensible opinion in this regard would undercut both admissibility and credibility of any such expert testimony. Courts, to a certain extent, have thus to date been better served by a practice oriented analysis of fiduciary conduct in areas such as 401(k) fees because of the difficulty of effectively testing fiduciary conduct against any other standard.

But what if you could test fiduciary obligations against a more definitive standard, particularly with regard, for instance, to the fees and costs built into a 401(k) plan? You could then rightfully have a standard for determining whether fiduciary breaches have occurred that is based on the outcome to the plan participants, such as whether the fees were too high and drove down returns. If you could do that, because a true benchmark for testing the performance and management of a plan existed, there would be no reason to base a decision about the propriety of fiduciary conduct in running a plan on an analysis of how the plan was run, but instead one could base the analysis on how the operation of the plan impacted outcomes for the plan participants. Such an approach to fiduciary liability would be entirely different than the one currently employed, and would instead ask whether the fees, costs or other challenged operational aspects of the plan negatively impacted - and if so to what extent - the plan participants. You would then be focusing the question of whether fiduciaries have lived up to their obligations on whether the optimal results were achieved for the plan participants, rather than simply on the question of whether the fiduciaries followed industry wide practices in operating the plan, practices which may or may not create the optimal results for plan participants. The latter approach always threatens to be a race to the bottom, moderated only to whatever extent some sponsors are driven to provide good returns to motivate their own workforces, which can keep the bottom from falling too low. In contrast, the former is a race to the top, or at least near enough to the top that fiduciaries can be said to have lived up to their obligations to the participants by shooting for the best results possible; it goes without saying that everyone cannot be at the top unless everyone simply buys the same products from the same vendors, which basic economics tells you is antithetical to driving down fees and thereby increasing returns, so something short of the very pinnacle of performance as against a legitimate independent benchmark would have to be sufficient to satisfy a fiduciary’s obligations. Isn’t that approach far more consistent with fiduciary obligations than the current practice oriented focus, given the oft used cliche about ERISA, that the fiduciary obligations are the highest known to the law?

And that is the idea behind BrightScope: to collect independently verifiable data on fees, costs and performance variables behind the 401(k) statements given to participants, and use that data to create a defensible, industry wide benchmark allowing fees, costs and performance to be compared across plans. When you reach that goal, done to a level of mathematical sophistication and defensible data sufficient to allow its use as evidence in a courtroom or as a foundational piece for expert testimony on how a particular plan’s fees, costs or performance compare to the broader universe, you have the linchpin on which you can turn analysis and the standards for fiduciary conduct in this area from the practices by which a 401(k) plan was run to the outcomes for the participants. And that, in a nutshell (though an admittedly long one) is what I meant in the first paragraph in this post when I referred to the question of transforming fiduciary obligations from a practice oriented perspective to a participant outcome oriented perspective.

Posted By Stephen D. Rosenberg In 401(k) Plans , ERISA Statutory Provisions , Fiduciaries
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One of the Seventh Circuit’s most interesting tricks in its recent decision in Hecker was the extraordinary breadth it gave to the 404(c) defense. This was an aspect of the decision that raised a lot of hackles, and I noted in my own post on the case that I doubted this was the last word on the subject and that it would be interesting to see how the case law developed as other courts tackled this question. Well, here’s a decision from a week or so ago out of the United States District Court for the District of New Hampshire taking a much narrower approach in interpreting the amount of protection granted to fiduciaries by section 404(c), finding that the defense does not apply to “a fiduciary's designation of the investment options that are available to plan participants.” The court reached this conclusion because:

First, section 404(c) is unclear as to whether it can be used to bar a claim based on a fiduciary's designation of investment options. Second, section 404(c) requires the DOL to adopt regulations explaining when a participant or beneficiary has sufficient control over his assets to be subject to a section 404(c)defense. 29 U.S.C. § 1104(c)(1)(A). Third, the DOL's implementing regulations are themselves unclear as to whether section 404(c) applies to a fiduciary's decision to designate investment options. Fourth, the DOL reasonably determined in the preamble to its regulations that losses which result from a fiduciary's designation decision are neither a "direct" nor a "necessary" result of a participant's exercise of control over plan assets. Finally, both the Supreme Court and the First Circuit have recognized in similar circumstances that an agency's reasonable interpretation of its own regulations in a regulatory preamble is entitled to deference.

Frankly, I am inclined to think that a close review of the actual statutory text and regulations suggest that this judge is closer on the mark on this issue than was the Seventh Circuit in Hecker, leading to what I think is the real takeaway from the continued development of the case law on this issue: namely, that plan sponsors should not overly rely on Hecker in evaluating their potential exposure and their obligations. Rather, as I have said in other forums, Hecker should be understood by plan sponsors and their vendors as setting forth the base minimum in terms of how a plan should be structured with regard to investment option fees, and should not be seen as a get out of jail free card by a sponsor who does no more than build a plan consistent with the reasoning in that case.

Posted By Stephen D. Rosenberg In Long Term Disability Benefits
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Judge Gertner of the federal district court in Massachusetts issued a pair of bookend decisions in long term disability cases a few days back that present an interesting contrast with regard to an issue that troubles many critics of the arbitrary and capricious standard, namely the extent to which an administrator deciding a claim for benefits can favor the opinions of its own reviewing physicians over the opinions of the participant/claimant’s treating physicians. In the first decision, in the case of Sorenson v. Metropolitan Life, the judge sets forth, and then finds in favor of the plan to a large extent based on, the general rule, which is, in the court’s words, that:

The law permits a plan administrator to rely on the opinions of a non-examining, reviewing doctor like Dr. Schroeder, see Tsoulas v. Liberty Life Assurance Co. 454 F.3d 69, 81-82 (1st Cir. 2006), and does not require that the opinions of treating physicians be given special weight, see Leahy v. Raytheon Co., 315 F.3d 11, 20 (1st Cir. 2002). To the extent that the reviewing and treating physicians offer conflicting opinions, the plan administrator has the discretionary right to choose between them, so long as its decision is reasonable.

However, in another decision issued the same day - Taylor v. Metropolitan Life - the court imposes, and bases its decision in favor (this time) of the participant/claimant on, certain limitations on that principle, finding that:

While MetLife is not required to give deference to treating physicians, see e.g., Vlass v. Raytheon Employees Disability Trust, 244 F.3d 27, 30-32 (1st Cir. 2001), Doyle, 144 F.3d at 186-87, it is unreasonable to selectively reference that physician's notes and fail to address the sections of her submissions most relevant to the claimant's ability to work. A plan administrator "may not arbitrarily refuse to credit a claimant's reliable evidence, including the opinions of a treating physician."

ERISA litigation, even LTD cases governed by the arbitrary and capricious standard, is not close to the locked in, pro-administrator structure that many critics of ERISA claim it to be. Rather, as the interplay of these two cases show, there is unquestionably a yin and yang to the case law and to the controlling standards, that tries to find the right balance between the authority of the administrator and the rights of the participant.
 

Posted By Stephen D. Rosenberg In 401(k) Plans
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You know what a dog bites man story is, right? Well, here’s one, though a well-written one. This piece on CFO.com surveys the collateral damage from the Wall Street collapse, with a focus on its severe impact on 401(k) plans and the corresponding increase in fiduciary duty litigation. It is a well done piece that is worth a read, though nothing in it will come as a surprise to anyone familiar with the subject.  The take away?  The collapse in 401(k) values, combined with the extinction of pensions, will lead to "lawsuits, new regulations, and the specter of an aging workforce that, like a bad party guest, shows no inclination to leave."  I have to admit, I do like that last analogy.

Posted By Stephen D. Rosenberg In 401(k) Plans , ERISA Seminars and other Resources , Fiduciaries , Pensions
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I and a cast of thousands will be speaking at a webinar on April 14th on “Pension Fiduciaries in the Hot Seat - What to Avoid and How to React if Sued,” put on by Pension Governance, Inc. Well, its not really a cast of thousands, just me and four very experienced worthies, who know so much about the subject that they seem like a cast of thousands.

I have to say that, long before ever being invited to participate in one of Pension Governance’s webinars, I attended as a member of the audience, and not only found them informative but enjoyable as well.

Posted By Stephen D. Rosenberg In 401(k) Plans , Benefit Litigation , Fiduciaries
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Is a motion to dismiss a good tool for disposing of major breach of fiduciary duty lawsuits? In essence, should it be treated as a mini-summary judgment proceeding, that tests the sufficiency of the case’s theories against, not the detailed facts of a specific case, but instead against the world as a whole as understood by the court? Or are these cases instead ones that are better decided by - and both litigants and the development of the case law better served by - a decision on the actual factual merits of a case, after drilling down into the conduct in question?

The former scenario is, in essence, the route taken by the court in Hecker, and Kevin LaCroix provides another example in his post yesterday, on the dismissal of the breach of fiduciary duty lawsuit in the Huntington Bancshares ERISA litigation. What happened in both cases is, in a nutshell, the court comparing the allegations of fiduciary errors to the market as a whole, finding that what took place was not inconsistent with what was occurring in the broader market (in the case of Hecker, that being the pricing on mutual funds in a plan, and in the case of Huntington, that being the stock losses in the plan), and that therefore, essentially by definition, the plan fiduciaries could not have fallen below the standard of care imposed on them. I can understood the arguments on both sides, and particularly those in support of this approach. A fiduciary is charged with acting with the skill and care of a prudent person in that position, and one can argue that this standard was not breached if the plan losses were consistent with what occurred across the market and with regard to others similarly situated; after all, if all the other investment managers took the same beating, then the plan’s fiduciaries, by definition, were acting like all others with expertise in the area when they likewise took the same pummeling. Plus, of course, conducting extensive class action litigation to further analyze what the market itself seems to be telling us - that the fiduciaries were acting like all other prudent investors since all got clobbered to the same extent - is a tremendous drain on the defendant’s resources. Then you add on top of that the realpolitik of the situations, which is that we know that most cases of these types settle after expensive litigation if they survive the motion to dismiss stage and possibly the summary judgment stage, so in many ways these procedural stages dictate the outcome, and there will never actually be a trial to allow a full drilling down into the actual facts of fiduciary conduct which can serve as the basis for a decision; delaying the day of reckoning from the motion to dismiss stage to the summary judgment stage, in this way of thinking, doesn’t really change that, as there will undoubtedly be factual disputes at the summary judgment stage that will preclude a fact based decision and instead any decision at that stage will, like the motion to dismiss rulings, likewise be based on the types of broader legal theories addressed by the courts in the motions to dismiss in these types of cases.

But on the other hand, is it really safe or fair to just assume that fiduciaries have lived up to their obligations, simply from the existence of broader market indicia? I am thinking in particular of two sets of data that crossed my desk recently, the first courtesy of 401(k) blogger Josh Itzoe and the second courtesy of the guys at BrightScope, who slice and dice the data on this field for fun and profit. In this post, Josh points out survey results showing that a large number of plan sponsors don’t really have a structure in place for operating 401(k) plans at a high level, while this chart here, passed along by BrightScope and based on its data, shows the wide range of fees that plans assume in their 401(k)s. This information reflects the tremendous diversity one can find in operating talent, execution, fees and other aspects of a plan that can seriously impact performance. Under those circumstances, is it really appropriate to stop the analysis of fiduciary conduct at the motion to dismiss stage, before investigating the aspects of a particular plan, just because the market as a whole lines up in a reasonably consistent manner with the performance of or fees in a particular plan? Market performance may be down, or fees across the market may line up with those in a plan, but this doesn’t by definition mean that a plan sponsor is living up to its obligations without further analysis. Behind those market numbers and the relationship of a particular plan’s performance to those numbers, may very well be a fiduciary whose operational structures and/or charges to plan participants fall below what other fiduciaries are doing; I am not sure it is fair to allow the muck of a bad market to provide cover for that.

Posted By Stephen D. Rosenberg In 401(k) Plans , ERISA Statutory Provisions , Fiduciaries
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I was going to post on something else today - namely the scope of contractual obligation clauses in insurance policies - but my Google Alert pulled in something else that I wanted to pass along first instead, namely, this post by Paul Secunda at Marquette on an amicus brief filed by several law professors asking the Seventh Circuit to reconsider Hecker v. Deere en banc. The brief asks the Seventh Circuit to consider the exact issues that I noted in my post on Hecker as being the debatable parts of the decision, namely the panel’s decision to link a very narrow interpretation of fiduciary obligations with a very broad interpretation of the 404(c) safe harbor. I am very curious to watch how the panel’s analysis of those issues gets played out as the case law develops on excessive fee issues, 401(k) plans, and the application to them of the safe harbor and of breach of fiduciary duty claims, whether that takes place in the courts of other circuits who are confronted by the Hecker decision, or in an en banc revisiting of the issues by the Seventh Circuit.

Fun stuff, either way.

Posted By Stephen D. Rosenberg In Benefit Litigation , Conflicts of Interest , Long Term Disability Benefits , Standard of Review
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There is an interesting twist to a recent Seventh Circuit decision, Leger v. Tribune Company Long Term Disability Plan. The decision starts out as an attempt by the participant to resuscitate her benefits claim by invoking Glenn v. MetLife and asserting that a structural conflict of interest existed warranting an alteration to the standard of review. The Seventh Circuit, though, quickly rejected that position, finding that there wasn’t even a conflict of a level that warranted being considered as a factor in conducting an arbitrary and capricious standard of review. Uh oh, says the reader, we know how this story ends: the conflict of interest argument in this context signifies in most decisions that the participant has no other hook to hang her claim on, and is taking her last, desperate shot, dooming her when, as in this opinion, the court summarily rejects the argument. But the Seventh Circuit surprises here, as this issue is not the last one addressed, but is instead simply a signpost along the way to the ultimate conclusion and to the application by the court of what, in most cases, is not an approach one sees taken. Rather than stopping with the standard analysis that, one, the conflict of interest doesn’t change anything, and, two, there is reasonable support in the record for the decision to terminate benefits, thus ending the case, the court continued from there, finding, instead, that the decision, despite having support in the record, failed to account for numerous conflicting pieces of evidence contained in the administrative record or possible interpretations justified by the record. The court held that the decision to terminate could not be sustained in that circumstance, and that, instead, the issue had to go back to the administrator for purposes of making a decision that did, in fact, take all such concerns into account (the court actually just remanded it to the district court for proceedings consistent with its ruling, but one presumes this would mean remanding it back to the administrator to address these issues, followed by litigating the issues all over again).

I have commented in the past on this point - the question of courts applying a more searching level of review while nominally still proceeding under the arbitrary and capricious standard of review is much more significant both to parties and to the development of the law in this area than is the question of whether conflicts exist, and if so their impact.
 

Posted By Stephen D. Rosenberg In Employee Benefit Plans
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Readers of this blog have undoubtedly picked up on the fact that I like to litigate cases (even more to try them), and that the focus of my practice, including with regard to ERISA governed plans, is litigating disputes. But there are probably far more benefit plan attorneys whose focus is on keeping people out of litigation in the first place, by keeping plans and their operations in line with statutory and regulatory mandates. I just recently came across an excellent new blog both by and for exactly those lawyers, and you can find it right here.

Posted By Stephen D. Rosenberg In Employee Benefit Plans
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If it’s a pleasure to read a piece by someone who gets it, whatever the it may be, it’s even better when that same person can explain it successfully to others. In this case the “it” is how in-house counsel responsible for ERISA governed benefit plans should conduct their oversight of the plans, and the someone is American Airlines’ Vicki D. Blanton, who has that exact responsibility at her company. She has written an excellent “how to” piece for in-house counsel who are charged with those responsibilities, and you can find it right here.

Posted By Stephen D. Rosenberg In 401(k) Plans , ERISA Statutory Provisions , Fiduciaries
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The Seventh Circuit’s opinion in Hecker v Deere is interesting in a number of ways, and on a number of levels. I won’t detail the facts of the case in depth here, but the case turns on the question of the plan sponsor’s and service providers’ potential fiduciary liability for allegedly high fees in the mutual funds offered in a 401(k) plan and the limited degree of disclosure provided to participants about the fees. You can find the case itself here, and for those of you who don’t have an interest - or possibly the time - in reading the entire 33 page opinion, a readers digest overview of the case itself right here. It is, though, a well-written, fluid, almost elegant opinion, an easy read if you care to take the time.

Perhaps most notable, from an overview perspective, is the fact that the Seventh Circuit simultaneously gave the scope of protection granted to fiduciaries by Section 404(c) pretty much as broad an interpretation as possible, and the scope of fiduciary obligations with regard to investment selection and fee disclosure as narrow a one as possible. Its an interesting double whammy. I am not saying its right or wrong (although Ryan Alfred at BrightScope has made a detailed argument that the court is off base in reading the protections of section 404(c) so broadly), but it is certainly a very interesting framework. If you think of it as a Ven diagram, with one circle the world of problems that can arise with mutual funds and 401(k) plans, and the other the extent of fiduciary obligations in the view of the Seventh Circuit, the overlap is smaller than one would have anticipated.

Then there is the question of the court’s view of the fiduciaries’ obligations of disclosure with regard to fees in the plan, finding that the statute and the regulations did not require more disclosure than was made, and thus there was no breach in failing to disclose more information about the fee structure. Paul Secunda in his piece on the intersection of preemption and the statute’s limited remedies (in which he emphasizes how those two aspects of ERISA can result in harms that cannot be remedied) discusses what he views as two competing ideological camps with regard to the interpretation of ERISA, literalists and remedialists. I don’t fully agree with this particular bicameral division of the world, but it offers a handy frame of reference for understanding the Seventh Circuit’s ruling: the panel took a truly literalist approach to the question of disclosure, finding that what the statute and regulations don’t expressly require, is not required. This seems, I have to say, hard to square with the idea that a fiduciary’s obligations run to a high level of care, which would seem to raise the question of whether a fiduciary has more obligations than simply those that are required by express mandates, but the panel does not squarely address that question.

This leads into a central point that animates the case, in my opinion, and which can be summed up in two famous words: caveat emptor, at least if you are the plan participant. The court finds that the mutual funds in the plan are numerous and also sold to the public as a whole, and therefore the fees are, in some broad sense, fair and appropriate, as they are what the public marketplace as a whole is willing to bear. But is the public pricing as a whole a fair determination of whether fees charged within a 401(k) plan are excessive or not? Isn’t this just using the lowest common denominator to make this call? After all, a public buyer does not have the leverage or the expertise - at least in theory - that a plan sponsor brings to negotiating investment options and their fees. Part of the problem in analyzing this question is that the district court, and now the appeals court, resolved the case on a motion to dismiss, where argument and supposition play too much of a role and factual development of these types of questions have not occurred. Deciding whether the fees are excessive on an actual factual record may suggest an entirely different answer than just the assumption that the market as a whole has acquiesced in the pricing, so therefore it was not excessive when a plan sponsor signed off on it. But for a plan participant, the ruling clearly means one thing: it is your responsibility to engage in the same full due diligence that you would have to pursue if you just purchased the mutual fund from a 1-800 number, and you are not entitled to rely on the plan’s fiduciaries to have done that for you.

Posted By Stephen D. Rosenberg In ERISA Statutory Provisions
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Well, maybe.  Either way, the nice folks at LawyersUSA are making their article on Kennedy v. DuPont, in which I am quoted and that I discussed here, available free online.  You can find it here.  Thanks, LawyersUSA!

Posted By Stephen D. Rosenberg In 401(k) Plans , ERISA Statutory Provisions , Fiduciaries
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Still parceling out items of interest that have stacked up on my desk in the last week or so. Among the things I still haven’t gotten to, I have to admit, is a careful reading of the Seventh Circuit’s recent decision in Heckler v John Deere, but I will, shortly. In the meantime, though, the bright guys over at BrightScope have, and their’s is a very interesting take. You can find it right here. Its clear, when you read the post, that they don’t just have the analytics down when it comes to 401(k) plans, but also their structure and the manner in which they operate.
 

Posted By Stephen D. Rosenberg In Benefit Litigation , ERISA Statutory Provisions , Employee Benefit Plans
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A lot of interesting things have piled up in my in-box during the past week and a half or so, when I have not had time to blog. I still think they are interesting, even after a few days of having them underfoot, so I am going to try to parcel out as many of them as possible over the course of this week, until I have either run out of them or out of time, whichever comes first.

I thought, for reasons of both vanity and timeliness, I would start with a couple of items on the Supreme Court’s decision in Kennedy v. DuPont. I am quoted in an article in the current edition of Lawyers USA discussing the case, along with a motley assortment of worthies, including the law professor formerly known as the Workplace Prof. It’s a good article, and for those of you who are subscribers, you can find it here; for those of you who aren’t, I am going to pass on my usual approach of (by putting on my copyright litigator hat) deciding how much of it I can quote under the guise of fair use, and instead send you to my post on the case here, which says pretty much what I think on the subject.

Also, I would be remiss if I didn’t point out that attorney Albert Feuer was kind enough to send along to me links to a series of papers and commentaries he has written on the Kennedy decision and the issues it raises (and, in many cases, does not answer, in both my and Albert’s views).  You can find them here, here and here.

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries
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I love this story. A couple of weeks ago I blogged about BrightScope’s launch, and pointed out my view that more information generally means less litigation. I learned thereafter that some think that is a counter-intuitive thought; presumably, people who believe that think that if you cover up problems and don’t let people know what’s going on, they may not find out and thus may not sue you. The oldest saying in the book, of course, is that the cover up is worse than the crime. Rather, people who are legitimately wronged will sue no matter what, as they should; but people on the margins are more likely to sue if they feel they were not told the truth, than they would be if they feel they were given a fair shake, even if it worked out badly for them. More technically as well, many breach of fiduciary duty claims are based on allegations of non-disclosure - that the sponsors did not disclose problems with the company stock, or backdating, or cdos. etc., that would have changed the participants’ investment strategies had they known. Obviously, something that is disclosed, rather than kept under wraps, cannot be the basis for a breach of fiduciary duty claim based on the failure to disclose.

This thesis, which I maintain is hardly counter-intuitive, but just plan common sense, is borne out beautifully by this story about a long time Merrill Lynch broker who has lost millions of dollars in company stock held in an ESOP. He points out that had he been told the truth and given the opportunity, he would have divested and diversified along the way, but did not, and that he was regularly told things by management that were not true. Now, in the close of the article, he points out that what he needs now are “the services of a sharp labor and ERISA attorney." Had he been told the truth and given the opportunity to move his retirement savings out of company stock in light of information given to him at that time, he may be worse off today than he was before the Wall Street meltdown, but he is likely well enough off still that he isn’t looking for a lawyer to file suit for him.

Posted By Stephen D. Rosenberg In Benefit Litigation , ERISA Seminars and other Resources , ERISA Statutory Provisions , Equitable Relief , Preemption
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Paul Secunda, the law professor formerly known as the workplace prof, has a new law review article out on the “wrong without a remedy” aspect of ERISA litigation, which is the fact that the broad scope of preemption can combine with the limited range of remedies available under ERISA in a way that makes some alleged wrongs involving employee benefit plans simply not redressable. Notice that unlike many commentators, including Paul in his article, I call it an aspect of ERISA litigation, rather than a problem, as, contrary to Paul’s article, I am not convinced this isn’t the logical outcome, rather than the problematic distortion, of the original statutory structure. Either way, there is certainly room to argue over whether, and if so what, should be done about this aspect, and Paul provides his own version of changes that could be enacted legislatively or by judicial development to eliminate the “wrong without a remedy” scenario. I don’t necessarily agree with all of his points or his reasoning, but its an interesting read and presents some interesting approaches. Moreover, I am on record - I guess as part of a Greek chorus at this point - with my criticism of legal scholarship that is simply part of a hermetically sealed circle of philosophical commentary, without adding value to practicing attorneys, courts, or the legal system as a whole. Paul’s article avoids this problem, I am happy to report, in two ways, making it something worth recommending as reading to practitioners. The first is that the article provides a highly readable, educational (and cite-able) survey of the historical and current state of the law of preemption. The second is that the article thoughtfully shifts the nature of the discussion of this problem from the general fixation on the preemption prong, which is usually the focus of the discussion in commentary and in litigation, to the remedies part of the problem, posing the idea that preemption is broad enough to preclude adding state law causes of action to benefit plan cases, and that instead the place to look to end the “wrong without a remedy” conundrum, which Paul has called in other places the “grand irony of ERISA,” is to the statutory remedies under ERISA and to whether they can be expanded by judicial development or legislative fiat. In the courtroom, in cases involving the clash between preemption of state court remedies and the limited nature of the relief available under ERISA, the focus tends to be on the scope of preemption; Paul, in his article, posits that it would make more sense to simply start the analysis, and any response to this issue, from the premise of accepting the broad scope of preemption, and then go from there.

The article is titled “Sorry, No Remedy: Intersectionality and the Grand Irony of ERISA,” and can be downloaded here.

Posted By Stephen D. Rosenberg In Health Insurance , Massachusetts Health Care Reform Act , Preemption
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I have argued many times on these - virtual - pages that fair share acts, and their backers’ obsession with trying to circumvent ERISA preemption, puts the cart before the horse, in that they focus on putting more health insurance obligations on employers without addressing the real reasons that employers struggle to provide health insurance, which is its ever expanding cost. Stories like this one here make me think that I have understated the case, and that demanding more insurance out of employers, without tackling the cost problem first, isn’t just putting the cart before the horse, but is actually just plain wrong headed, and bordering on the willfully obtuse (not to put too fine a point on it). It is all well and good to insist that everyone should have health insurance and access to health care, but simply blindly assuming that employers can pay for it is a mistaken premise that sits at the base of all fair share acts. It is cost that is driving the access and uninsured problem, an issue that is not addressed to any real degree by fair share acts, including the one in Massachusetts and the San Francisco version that has so far managed to survive preemption challenges.

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries
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I cannot do better by anybody interested in fiduciary obligations under ERISA than to recommend to you the First Circuit’s decision the other day in Bunch v. W.R. Grace & Co.. For those of you not familiar with the lower court proceedings in that case, what was at issue is whether it was a breach of fiduciary duty to sell company stock, rather than maintain it as an investment option, after retaining outside advisors to investigate the stock’s value, potential and appropriateness as an investment option. At the District Court level, and again now on appeal, the courts have found the fiduciaries’ conduct to be almost literally above reproach with regard to the handling of this issue. The First Circuit’s brief is notable for two points. The first is its synopsis of the duties of a fiduciary with regard to investment options, including company stock, and the court’s emphasis on the fact that it is the appropriateness of the fiduciaries’ conduct in the face of uncertainty that must be judged, not the dollar value outcome of any particular investment decision in isolation. As the First Circuit opinion noted:

what ERISA calls for from a fiduciary is that it use the "care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims." 29 U.S.C. § 1104(a)(1)(B). As the district court aptly stated, "in common parlance, [what] ERISA fiduciaries owe participants [are] duties of prudence and loyalty," Bunch, 532 F. Supp. 2d at 288 (citing Moench v. Robertson, 62 F.3d 553, 561 (3d Cir. 1995)). The district court noted that other courts faced with allegations similar to those of appellants in this case had looked at the totality of the circumstances involved in the particular transaction. Id. Among the key decisions relied upon by the district court for reaching this conclusion was DiFelice v. U.S. Airways, Inc., in which that court stated: [W]e examine the totality of the circumstances, including, but not limited to: the plan structure and aims, the disclosures made to participants regarding the general and specific risks associated with investment in company stock, and the nature and extent of challenges facing the company that would have an effect on stock price and viability.

And second, if you want to read an outline of what a thorough and, once in court, easily defensible, course of conduct by a fiduciary looks like when it comes to investment options, it’s the underlying course of action by the fiduciaries that is described in the First Circuit’s opinion.

Posted By Stephen D. Rosenberg In 401(k) Plans , ERISA Seminars and other Resources
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Holy Transparency, Batman! If you like Zillow, and you have a 401(k) plan, have I got a website for you. BrightScope has now publicly launched its rating website, in which you plug in a particular company’s name and the site then provides you with a colorful, graphic presentation of that particular plan’s performance and structure in comparison to certain benchmarks and comparable companies. Its simply a lot of fun, and, moreover, allows an easy, quick overview of a particular plan, without having to wade through all of the paper information for a particular plan. This facet alone makes it worthwhile, in a world in which plan participants really do need an understanding of the details of their companies’ 401(k) plans but may not have the time or expertise to parse the documents themselves. I certainly am not advocating limiting participant education to checking BrightScope, but every piece of information - the more accessible and transparent the better - helps. At the end of the day, its been my experience that, in all areas of the law, the more information, the less litigation, and I think that is clearly the case with regard to retirement funding. Remember that piece of folksy wisdom the next time you see someone pause in the face of government moves to increase 401(k) plan disclosure and transparency.

I have actually been playing with their site for awhile, while it was in testing, but its now been publicly unveiled, so you can go there yourself and see what I am talking about. I could say more about the site, what it does and how it runs, but I don’t have to, because Josh Itzoe has done it for us, right here, and you can go test run it yourself now, right here.

If you do want to read more on it, though, try here and here.  

Posted By Stephen D. Rosenberg In ERISA Statutory Provisions , Employee Benefit Plans
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Sorry, couldn’t resist - Bill being William Kennedy and Liv Kennedy being the named beneficiary in yesterday’s Supreme Court opinion, Kennedy v. Plan Administrator for DuPont Savings and Investment Plan. After reading the opinion itself last night, I thought I would add a couple of comments to my initial impressions of the opinion, which I discussed in yesterday’s post. Initially, from a practical perspective for plan administrators, drafters, sponsors, and the like, the opinion is exactly what it should have been and, in fact, had to have been. I was chatting with a veteran benefits consultant who services retirement plans a while back about this case while it was still pending before the Supreme Court, and he commented that anything other than a clear pronouncement that administrators are to follow the express terms of the plan, rather than have to go outside the plan and weigh the implications of external events such as a divorce proceeding, would create a terribly chaotic situation. The Supreme Court could not have been more clear in its opinion that it was rejecting that possibility, repetitively reinforcing the idea that administrators act properly by relying on the plan documents; indeed, the ruling really required reciting this idea only once, but instead the Court built a long opinion around the repeated reinforcement of that idea.

Second, I noted yesterday that I wouldn’t have minded some clearer guidance on QDROs as part of the opinion, and on close review of the opinion I think we got some, although not explicitly. The Court, rightfully so, emphasized that the QDRO is the one time that an administrator faced with the divorcing participant and designated beneficiary scenario must incorporate court rulings outside the plan documents into the administrator’s application of the plan terms to determine to whom benefits must be paid. What has been more of an issue in practicality, in the courtrooms of the federal district courts, is to what extent a particular court order must perfectly comply with the statute’s QDRO requirements to be a binding QDRO for purposes of ERISA; many court decisions treat divorce decrees that are close enough to meeting the requirements as QDROs, even if they do not meet each and every statutory requirement perfectly, so long as there is enough there to convince a court that the participant and the ex-spouse intended for the ex-spouse to no longer be the beneficiary.

I would argue that the Supreme Court’s discussion at page 16 of the opinion, read in conjunction with footnote 12, indicates that the QDRO requirements must be perfectly matched by a probate court order for such an order to qualify as a QDRO, and that close - even if good enough for horseshoes - is not good enough for qualifying as a QDRO that would trump a beneficiary designation under a plan’s express terms. Why do I say this? In describing QDROs as the one exception to the Court’s preferred ideal of the administrator not having to go outside the plan documents to decide cases such as this one, the Court explained that QDROs require a “relatively discrete” inquiry that is based on a specific “statutory checklist” that “spare[s] an administrator from litigation-fomenting ambiguities.” The Court then proceeded to list the exact statutory requirements that must be satisfied for a divorce order to qualify as a QDRO. If, as lower courts sometimes appear to believe, close is good enough to qualify as a QDRO, then the issue is not a discrete, precise inquiry - as the Court depicts the QDRO inquiry - and is, contrary to the Court’s interpretation of the QDRO requirements, one that leaves, rather than spares an administrator from, “litigation-fomenting ambiguities” over the question. Indeed, while a plan administrator can make its own call on whether an order is a QDRO if the exact, specific statutory requirements must be satisfied for a particular order presented to the administrator in a particular claim to qualify, this isn’t easily done if something less than complete compliance with the statutory formalities can be sufficient to qualify as a QDRO. In that latter circumstance, whether the order is close enough to qualify is in the eye of the beholder, and you can be certain that the party that didn’t get the proceeds based on the administrator’s judgment call on this issue will sue over the question.
 

Posted By Stephen D. Rosenberg In Benefit Litigation , ERISA Statutory Provisions , Employee Benefit Plans
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Here’s the early word on the Supreme Court’s ruling in Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, which revolved around the issue of divorce decrees, the QDRO requirements of ERISA, and whether - in the absence of a valid QDRO - a plan administrator can rightly just pay proceeds to an ex-spouse of a plan participant if the participant never removed the ex as a beneficiary. I have only read this analysis of the case from SCOTUS blog (I will read the opinion itself tonight), but the answer appears to be the same as what most of us have always assumed to be the case: that in the absence of a probate court order that satisfies the statutory requirements in a particular circuit for constituting a QDRO, the money gets paid as per the express terms of the plan itself and any existing beneficiary designation, without regard to any extrinsic divorce agreement that might have mandated otherwise.

Simple enough, although in at least some circuits there is some ambiguity as to exactly what constitutes a QDRO, for instance in how closely the statutory requirements must be complied with. Perhaps the opinion, once I look at it, will shed some light on this question as well.

Posted By Stephen D. Rosenberg In ERISA Seminars and other Resources
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When John Calipari was the basketball coach at the University of Massachusetts, he was famous for saying that he would play anyone, anywhere, at any time. I like to say - and did in my seminar a couple weeks ago covering current trends in ERISA litigation - that I will likewise speak to anyone, anywhere, at any time about this subject.

Well, one of the great things about publishing a blog is you can take this sentiment one step further, beyond talking anywhere to anyone at anytime, and publish what you have to say. And with that, here is the material I presented to the ASPPA Benefits Council of New England in a seminar a couple of weeks ago, entitled “ERISA Litigation: An Update from the Front Lines.”

Posted By Stephen D. Rosenberg In 401(k) Plans , Benefit Litigation , Employee Benefit Plans
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I like when you sort of hit the zeitgeist in things you write and talk about. I mentioned in a post last week that I would be presenting a seminar to the ASPPA Benefits Council of New England on current trends in ERISA litigation, and I presented the seminar yesterday. As I gave the talk, a theme unfolded: namely, that the confluence of economic problems and the unsettling of many apple carts when it comes to the rules governing ERISA related litigation (a perfect case in point being the majority’s suggestion in LaRue that litigants and lower courts should feel free to reconsider precedents established in defined benefit cases when confronting disputes over defined contribution plans such as 401(k) plans) means we are looking at an expansion of litigation, perhaps in the overall number of suits and, if not, at least in the complexity, dollar value and expense of the suits that are brought. I noted this to be a particular issue with regard to stock drop and excessive fee cases, particularly in the current stock market meltdown.

Well, lo and behold, today here comes this report, from Seyfarth Shaw by means of Global Pension:

The Seyfarth Shaw Workplace Class Action Litigation Report showed last year, the top ten settlements for Employee Retirement Income Security Act-related (ERISA) class action cases topped US$17.7bn, a dramatic increase from the $1.8bn paid out in 2007 . . .“There is an explosion in class action and collective action litigation involving workplace issues. The present downturn in the economic climate is likely to fuel even more lawsuits, and the financial risks in this type of employment litigation can be enormous . . .” The firm said this trend was likely to continue, with particular reference to cases being brought over “stock drop” complaints – in which ERISA plan members brought action over the availability of employer’s equities as an investment option and “plan administration” cases, whereby participants brought action over ‘excessive’ advisory fees and other elements of plan administration.

Posted By Stephen D. Rosenberg In 401(k) Plans
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By the way, I really like Josh Itzoe’s post here on the new DOL investment fee disclosure rules, which consists of a well-done interview by e-mail with Los Angeles lawyer Fred Reish. I have noted before that the interview style blog post is the most difficult to do well, and Josh pulls it off with panache. Not only that, but he and the interviewee still manage at the same time to educate the reader on the meaning and significance of these new regs. It’s a nice five minute investment of time in continuing education, for those of you interested in the subject.

Posted By Stephen D. Rosenberg In 401(k) Plans
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What would a 401(k) plan look like if you could create the fantasy football version (fantasy 401(k)?) for your company? Well, thanks to the good folks at Brightscope (I have only the vaguest idea at this point who they are and what they do, but I am already enjoying their new blog), you don’t have to wonder anymore - it would look something like this one right here, offered by the Saudi Arabian Oil Company. Low fees, great company contributions, high participation, high dollar values in individual participants’ accounts. The description of the plan reminds me of something I have often discussed on this blog, which is the idea that there is an inverse correlation between ERISA litigation brought by participants and the extent of retirement risk that particular plans impose on the participants; for instance, pension plans generated only a relatively low level of participant driven litigation because most of the financial risk related to pensions rested with the sponsor, but defined contribution plans will generate more participant driven litigation, because such plans transfer the risk (and thus the corresponding motivation to remedy the risk and eliminate losses by means of litigation) onto participants. A plan such as the one highlighted here by Brightscope, I suspect, would generate almost no participant driven litigation.

Posted By Stephen D. Rosenberg In 401(k) Plans , Benefit Litigation , ERISA Seminars and other Resources , Fiduciaries , Long Term Disability Benefits , Pensions , Preemption , Standard of Review
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I will be presenting a seminar next week, on Wednesday January 14th, to the ASPPA Benefits Council of New England, entitled “ERISA Litigation: An Update from the Front Lines.” After three full days of outlining my talk, I now actually have a pretty good idea of what I am going to say; the talk will blend the latest developments nationally and at the Supreme Court in ERISA law with ERISA litigation trends and realities in the First Circuit. If you are interested in attending, its not too late to register. The brochure and registration form for the talk is here.

Posted By Stephen D. Rosenberg In 401(k) Plans , ERISA Statutory Provisions , Employee Benefit Plans
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Cool, what a nice treat to me for the first real workday of the New Year. I have always wanted a reason to link to the Harvard Law School Corporate Governance blog because, well, it just sounds so impressive (that plus it’s a really good read on all things corporate), and one of their contributors handed me the opportunity over the weekend. In a post addressing SEC requirements for online posting of public company proxy materials, the author - a Gibson Dunn partner and visiting professor at Georgetown - points out how these requirements differ from the notice requirements under ERISA:

Compliance with notice and access [rules under the SEC requirements] is not likely to satisfy the requirements for electronic delivery of materials under the U.S. Department of Labor standards for participants in ERISA-covered defined contribution plans, such as 401(k) plans and employee stock ownership plans. Section 404(c) of ERISA permits electronic delivery only if a participating employee has the ability to effectively access documents furnished in electronic form at any location where the participant is reasonably expected to perform his or her duties as an employee and for whom access to the employer’s information system is an integral part of the employee’s duties (e.g., a networked desktop computer at work), or if the employee provides written consent accepting delivery of information electronically. As a result, although an issuer may rely on notice and access for permitted employees and consenting employees, other employee participants should receive paper delivery of proxy materials.

You know what’s interesting about this? The focus on procedural aspects of providing information to plan participants (and others, with regard to the SEC rules). We could use an equal level of attention and agreement when it comes to the amount, type and transparency of the information provided to plan participants in particular, something more important than just the formal procedures by which it is provided.

Posted By Stephen D. Rosenberg In Benefit Litigation , Conflicts of Interest , Long Term Disability Benefits
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I noticed in my statistics package for the blog that this past Thursday, Christmas Day, had the lowest readership of this blog in months. Come on people, ERISA is for everyday, not just workdays! And here’s why. The day before Christmas, the Second Circuit issued its ruling adjusting its case law on benefit determinations where a structural conflict of interest exists to accord with the Supreme Court’s recent ruling in MetLife v. Glenn. In a well reasoned and highly logical opinion, the court first acknowledged that its prior case law on the issue was no longer proper, in light of the Supreme Court’s ruling, because it had gone too far: the Second Circuit previously held that a structural conflict of interest meant that de novo review applied, even if the plan documents granted the administrator discretionary authority over benefit determinations, which normally invokes a deferential standard of court review. However, as the Second Circuit recognized, the Supreme Court’s ruling in Glenn meant that a structural conflict of interest could not be the basis for abandoning the deferential standard of review, but that, instead, it could only be considered as a factor to be weighed in applying the deferential standard to decide whether the administrator’s decision should be set aside as an abuse of discretion. Nothing controversial or particularly exciting there, as it reflects an accurate, almost verbatim reading of Glenn, although it is interesting to watch the way the Glenn decision, seen as one that broadens the protections available to plan participants, actually, in at least some instances such as this one in the Second Circuit, requires a lessening of the protections previously granted to participants in such jurisdictions in cases involving structural conflicts of interest. The Second Circuit previously allowed such a conflict to change the standard of review entirely, all the way back to a de novo review, which the Second Circuit, in its most recent ruling, now recognizes is not allowed under Glenn.

What is more interesting, though, is how the Second Circuit applied the new standard. By relying on the leeway the Supreme Court in Glenn granted courts to determine, based on the actual facts of the claim and the parties’ activities, how much weight to give to the conflict, the Second Circuit, in essence, applied what may as well have been de novo review to decide the case, only without putting such a label on it. Instead, accepting the Supreme Court’s invitation to review the actual facts of a particular case to decide how much weight to put on a conflict, the Second Circuit gave great weight - essentially outcome determinative weight - to the conflict, in a way that essentially mirrored de novo review.

The case is McCauley v. First Unum.

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries , Retirement Benefits
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A few months back, I discussed the broad conception of damages in stock drop type cases articulated in the case of Bendaoud, which essentially found that damages exist if the participant could have done better in an alternative investment option. This concept makes it fairly easy to construct a damages theory in 401(k) and ESOP cases that will survive the scrutiny of a motion to dismiss, and that can support a significant award of damages. A prerequisite to getting to the damages analysis, however, is a basis for attributing an actionable error in the plan to the fiduciaries; the fact that a participant could do better in a different investment is irrelevant if there was no mistake in offering the original investment option in the first place.

That, however, is not too hard to show either. The bar, for instance, is low when showing that offering company stock as an option is an actionable error. For instance, "a stock can be imprudently risky for an employee savings plan even in the absence of fraud or imminent collapse,” according to a federal judge sustaining an ERISA case against Ford alleging that the offering of company stock as an investment option was a breach of fiduciary duty, given the extensive problems in the industry at the time and the lack of broad disclosure of how those problems may affect the investment.

With numerous major industries heavily roiled, and a stock market that has tanked, I can’t say that it should really tax the imagination of any good lawyer to come up with both damages to participants and errors by plan fiduciaries in any case involving the inclusion of company stock in a retirement plan or ESOP.

Posted By Stephen D. Rosenberg In 401(k) Plans
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Sometimes the Zeitgeist is hard to read, other times it hits you smack in the face with a two by four. As we move towards the end of the year (the business year anyway, as we all know how much work actually gets done between Christmas eve and New Year’s day), the constant drumbeat of news drives home one unassailable fact, which is that ignorance cannot possibly be bliss when it comes to investing, particularly with regard to pension and 401(k) funds. From Madoff (hey, what an amazing long term track record; lets put our money there without further analysis) to pension plan fiduciaries buying CDOS they know nothing about based solely on the recommendation of the seller, it has become obvious that a little - or more - knowledge would actually be a wonderful thing. Josh Itzoe, author of “Fixing the 401(k): What Fiduciaries Must Know (And Do) To Help Employees Retire Successfully,” thinks so too, and has elected to step into the breach, launching a new blog, not coincidentally also titled Fixing the 401(k), intended to provide commentary and information related to the business of retirement investing.

As anyone who has read Josh’s work knows, he firmly believes that problems ranging from a lack of transparency to excessive fees to a host of other problems bedevil the industry, and certainly the past year has done little to undercut his thesis. It should be helpful to have his voice added to the commentary already out there.

Posted By Stephen D. Rosenberg In Fiduciaries
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Well, I suppose nothing could be located more squarely at the intersection of the two topics in this blog’s title than the difference between fiduciary liability insurance (which lets fiduciaries sleep at night) and fiduciary bonds (which protects a plan’s assets, rather than insuring the fiduciaries themselves). Scott Simmonds, who consults, writes and blogs on business insurance issues (and other things) provides this nice overview of this issue, distinguishing among the range of insurance products and bonds that come into play in running an ERISA governed benefit plan:

The Fiduciary Responsibility Liability Insurance Policy is the solution to the ERISA problem [of personal liability of fiduciaries]. Also called a FRIP, the policy provides protection for "wrongful acts" that result in a claim against the administrator of benefit plans. Premiums range from a few hundred dollars to thousands, depending on the size of the employer.

By the way, many people confuse ERISA fiduciary liability with the ERISA bond requirement. The law mandates that employee pension and retirement plans have a bond of 10% of the assets (up to $500,000) to cover loss of the funds through embezzlement. Some fiduciary policies include the fidelity coverage. Most do not.

Some businesses and insurance agents confuse employee benefit liability insurance with the FRIP. Bad call! The FRIP covers errors and omissions in the administration of benefit plans. The employee benefit liability policy covers mistakes but excludes ERISA liabilities.
 

I have written before (such as here, for instance) about the importance of properly structuring insurance programs to protect company officers, and making sure that gaps don't appear that may leave them exposed to personal liability.  Scott's commentary targets this exact same point in structuring insurance programs for protecting fiduciaries of ERISA governed plans.

Posted By Stephen D. Rosenberg In Additional Insured Clauses , Coverage Litigation , Duty to Defend , Industry News , Long Term Disability Benefits , Pollution Exclusions , Punitive Damages
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Some bloggers blog their way to greatness, other bloggers have greatness thrust upon them. For some reason, that line popped into my head when Randy Maniloff’s always entertaining article on the top ten insurance coverage decisions of the past year appeared, like manna from heaven, in my in-box yesterday, providing one weary blogger - i.e., me - with a gift wrapped post for this morning. Substantively, there is much to be gleaned from the article and the cases it reviews, on issues ranging from the current state of trigger of coverage problems to an excellent decision on handling duty to defend disputes concerning obviously intentional conduct that has been pled as negligence for purposes of triggering insurance coverage, all written with the author’s trademark good humor and style (something anyone who reads a lot of insurance coverage briefs, opinions, articles and - yes - blogs can attest is not always present in written work in this area of the law). Moreover, the author has tossed in a free extra, a truly comical special section titled “Coverage for Dummies: The Top Ten," which collects ten excellent examples of people doing really dumb things and then demanding that their insurers protect them against the outcome.

And best of all, in what can only have been a transparent attempt by the author to garner a review on this blog, one of his top ten decisions (non-dummy division) is an ERISA case, the Supreme Court’s decision in MetLife v. Glenn. More seriously, its inclusion is almost mandatory in any collection of the most important decisions affecting the insurance industry (which, obviously, underwrites and administers the vast majority of employer provided disability plans), as it is guaranteed to generate more subsequent court rulings than any other insurance related decision of the past year, as the courts of each circuit move, over time, to realign their jurisprudence to accord with Glenn.

Posted By Stephen D. Rosenberg In Fiduciaries
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I had a whole line of things I was planning to blog on, but events keep overtaking them. Today, that is the story of the Tribune bankruptcy, and its effect, detailed here, on the Tribune ESOP. We have all been watching the booming industry in filing ERISA breach of fiduciary duty cases based on the latest events in the market with, for the most part, some skepticism, as we try to deduce which ones are legitimate and whether some reflect just a piling on in the pursuit of settlements and accompanying legal fees. However, you will recall that, not too long ago and in a very prescient move, a number of participants in the Tribune’s ESOP filed a breach of fiduciary duty suit related to Sam Zell’s use of the ESOP stock in the transaction by which Zell or entities he controlled acquired the Tribune; we now are learning that this apparently deeply flawed transaction (time will tell, but all indications suggest it was deeply flawed right from the get go) placed the ESOP plan participants’ holdings at greater risk than the assets of others involved in funding the transaction, including Zell himself. Targeting the fiduciaries for possibly having allowed the ESOP assets to be used in a more risky way than others were willing to do with their own investments sure smells like a pretty credible theory to me.

Posted By Stephen D. Rosenberg In ERISA Seminars and other Resources , Electronic Discovery
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Well, I think Roy Harmon and I (mostly Roy, actually) just previewed for you what this webinar plans to cover, the ethical and privilege traps involved in providing legal counsel to ERISA governed plans and their administrators. Still - luckily for people like me and Roy who blog on these subjects and for the presenters of the seminar - there is literally always more to be said about these types of topics. That point was made crystal clear by this article here, which details a court ruling waiving the attorney-client privilege as a result of electronic discovery mistakes, just days after I posted - for the upteenth time - on my qualms about the impact of electronic discovery on clients, costs, and litigation, particularly in the data intensive realm of ERISA actions.

On the other hand, here’s a seminar on everything topical in ERISA breach of fiduciary duty litigation, presented by a who’s who’s of practitioners, which, by its description, is covering a lot more ground than can be trod by a few lone bloggers.

Posted By Stephen D. Rosenberg In Benefit Litigation , Employee Benefit Plans , Fiduciaries
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This really isn’t an instance of logrolling (or blogrolling, as the case may be), I promise, even though Roy Harmon’s post that I am passing along here refers to me and my electronic discovery post a few times; the subject of Roy’s post got my attention and led me to read it long before I realized the peripheral role I played in it.

Roy provides a very erudite discussion of a particular quirk and issue of some real concern in litigating ERISA cases, which is the scope of the attorney client privilege that exists - or often doesn’t - between a plan’s fiduciaries and its legal counsel, when engaged in a dispute with a plan participant. As Roy details, there often is no privilege in that situation that would prevent disclosure to the plan participant of legal advice obtained by the plan fiduciary. Its an interesting problem, one that arises in everything from determining the contents of an administrative record to be produced in a benefits denial case (i.e., is legal advice received by the plan administrator in deciding to deny benefits privileged or not?) to the extent to which the privilege can be raised in defending a deposition in a breach of fiduciary duty case. Roy’s analogy to multi-level chess with regard to these issues is apt, and illustrative of exactly the type of complicated gamesmanship that keeps litigators interested in the otherwise often dull interstices between trials.

Posted By Stephen D. Rosenberg In Benefit Litigation , Discovery , Electronic Discovery
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Here is an excellent article on electronic discovery under the federal rules, and efforts to reduce the expense of this process by protecting against inadvertent waiver of privilege. As long time readers know, I have frequently criticized the structure and format of the federal rules, and their application by the courts, concerning electronic discovery, for the extraordinary burden and expense they impose on litigants. Moreover, I have focused on the fact that the major problem is that the scope of relevancy is very broad in discovery, which has not been too big a problem in traditional forms of discovery because the very nature of depositions, producing existing documents held in hard copy form, etc., puts some outside limits on the process and thus, on the expense. Electronic discovery, obviously, doesn’t have the benefit of being limited in this way by such simple physical restrictions of time and space; because the quantity of data that can and is stored is immense - and not as easily confined physically as, say, simply pulling all file folders at a client related to a particular transaction - the broad scope of relevancy, when applied to electronically stored information, can expand discovery obligations exponentially in comparison to traditional forms of discovery. For this reason, I have argued in the past that courts need to leave their past rubric for discovery (which basically consisted of the view that discovery is broad, the parties are expected to work most problems out among themselves, and court intervention is only warranted for outlier type issues) where it belongs, in the past, and create new approaches to dealing with electronic discovery, in which the courts - either pro-actively or in response to motion practice by the parties - attempt to focus electronic discovery in a manner that properly balances the importance of the documents in question with both the benefits of that discovery to the requesting party and the costs of that discovery. I am, sadly, still waiting for this to happen. The reason I like this article is its focus on the fact that electronic discovery is far too expensive, and that the latest attempt to target that problem is at best, a finger in the dyke approach, in that it just isn’t a lasting solution to the bigger problem. Moreover, the article rightly focuses on the construct that rests at the heart of the problem; the incompatibility of the historically broad definition of relevance applied in discovery with the amount of data now available in a technological society.

Litigators who read this blog already understand my obsession with this issue; while trying cases is the joy of the work, discovery - and fights over it - is the heavy lifting that takes up much of a litigator’s time and a client’s money. It’s a particular problem in ERISA cases, where any type of a plan with a significant number of participants is going to create a great deal of electronically stored data, almost none of it of relevance to any particular dispute yet still possibly open to discovery as things currently stand.

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries
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Here is a case from a week or so ago that I haven’t had time to post on yet, but which warranted a little more discussion than suited inclusion in Monday’s Thanksgiving Week potpourri post. In his latest ruling in In re Boston Scientific Corporation ERISA Litigation, Judge Tauro of the United States District Court for the District of Massachusetts delves in depth into the question of whether and when putative class representatives satisfy the requirements to represent a class in an ERISA breach of fiduciary duty case involving alleged securities law violations by the defendants. Building on the work of Judge Gertner, of the same bench, in her opinion in Bendaoud, issued two months ago, Judge Tauro analyzes the question of whether the requirements of both ERISA and constitutional standing, including injury in fact by the putative class representatives, are satisfied, finding that the requirements were not satisfied. The case provides a good tutorial on these issues. Beyond that, however, of perhaps even more interest, given the ongoing development of the law with regard to the intersection of securities violations and ERISA, is that the court’s analysis is heavily influenced by certain defenses to standing and injury in fact that are borrowed from securities law. Normally, in most instances, we are seeing ERISA used as a broader forum for attacking these types of violations, as compared to relying on the securities laws to do so, but in this case, doctrines developed as part of securities litigation serve to blunt a related ERISA case.

Posted By Stephen D. Rosenberg In Pensions
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Well, I am not quite sure what to say, or perhaps more accurately where to start, with regard to this article in the New York Times today on the surprising financial health - at least for now - of the GM pension plan. As the company otherwise founders, the article describes years of responsible, forward thinking stewardship of the pension plan’s funds, including with regard to investments of the plan’s assets. Obviously, as the article points out, with the company itself in grave danger of running out of money, that may not continue for too much longer, but GM’s handling of the pension plan to date is clearly commendable, particularly so in a world in which so many other businesses insist that they cannot possibly carry the risks and expenses of offering a defined benefit plan. But GM’s contrary experience raises more questions than it answers. Is it only a company with a gigantic financial footprint - like a GM - that can handle the long term financial investments and exposure needed to run a defined benefit plan? Or is a well thought out investment strategy and a corporate willingness to actually contribute the money needed to execute it all that is needed, such that other companies - many of whom have abandoned pension plans - could have pulled it off as well, had they been so inclined? Or, finally, does GM’s current predicament and the likelihood that, barring a turnaround of the company’s fortunes, its pension plan will be in trouble as well, show that defined benefit plans are simply impractical at best in modern American economic life, where - as the GM example shows - the length of pension commitments is not concomitant with the likely life span of the company that makes those commitments?

Posted By Stephen D. Rosenberg In 401(k) Plans , Attorney Fee Awards , Benefit Litigation , ERISA Seminars and other Resources , Employee Benefit Plans , Fiduciaries
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Some of the more prolific bloggers manage to be prolific by posting short notes on various topics of interest written by others, which isn’t my usual style. But over the past week or so I have managed to back up a good stack of things that I have wanted to talk about in detail, but haven’t had the time to comment on. So in the spirit of a Thanksgiving host laying out a big spread, here’s a whole bunch of things at once:

First, here is a good follow up story providing more detail on Wal-Mart’s success in defending itself against excessive fee litigation, a topic I first discussed in this post here. This particular story, in PlanAdvisor, does a nice job of illustrating the point I made in my earlier post, which is that the court, in ruling in favor of Wal-Mart, did not focus on or analyze the propriety of the particular fees themselves, but rather focused on the method used by the fiduciary to select the investment options in question and whether that was prudent. Interestingly, the article describes the Wal-Mart investment menu, and it reads like one you would find in just about any 401(k) plan. Does this suggest that most plans are actually fine on this front? Or might it suggest that fiduciaries as a whole accept fees that are too high, and that perhaps comparing a particular plan’s investment choices, such as Wal-Mart’s, against industry benchmarks is not really the right focus for deciding whether the fees in a particular plan were too high? Just asking.

Second, here’s one court’s answer to an oft asked question: is a plan participant seeking benefits entitled to attorney’s fees for the administrative appeal portion of his claim?

Third, here’s an interesting webinar rounding up the Supreme Court’s treatment of ERISA issues during the 2008 term. The Court’s fascination with ERISA during the past year has been well documented and the biggest item of discussion in ERISA related media, and pretty much everything about those developments has been chronicled on this blog and a million other places. But if you haven’t seen it all enough by now, the webinar may be for you. Interestingly, one of the topics noted in the webinar is the Court’s involvement in a case, still pending and not yet decided, concerning waivers by divorcing spouses of plan benefits. This is the quickly becoming infamous Kennedy case, which to date has caught the eye for two reasons: first, many people have some question as to why the Court took on this case and whether it merited the Court’s involvement, and second, because of the Court’s decision to seek supplemental, post-argument briefing on the very basic issue of the extent to which plan administrators are bound - barring an effective QDRO - to the express written terms of a plan. As a very experienced benefits consultant recently commented to me, the Court is going to upturn an awful lot of apple carts if, intentionally or even (probably by accident) implicitly, they indicate that administrators are not strictly controlled by the actual written terms of the plan instrument. As a result, a case that started out as perhaps the least substantively significant of the ERISA cases taken up by the Court in the past year threatens to become one of the more disruptive to settled practices, in a manner similar to how the Court reopened much settled thinking on fiduciary duty issues by indicating in LaRue that rules long established in the defined benefit context may not hold true for all other situations.

Okay, that clears some of the backlog.

Posted By Stephen D. Rosenberg In Pensions
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There’s an old saying that nothing focuses the mind like an execution date; all trial lawyers have heard judges rephrase it as nothing focuses the mind so much on settlement as an imminent trial date. I thought of this saying when I read this article, in which Susan Mangiero of Pension Governance, whose Cassandra like warnings that companies need to focus on improving quality and other aspects of retirement plans - including their handling of hard to value assets - predates the utter disaster that has befallen such plans in the past several weeks, discusses the fact that, having now fallen into the abyss, pension plans and fiduciaries must focus their efforts on how to respond to the market collapse, which may have a larger impact on the pension plans than the market collapse itself. If there was ever a metaphorical execution date for plan fiduciaries and administrators, it’s the upcoming and ongoing storm of litigation risks, government investigations and intervention, and need to respond to the market volatility by tightening up investment strategies. If it may be hard, in hindsight, to defend the kind of alleged problems in investment management that occurred in the past that are at the heart of the “stock drop” type suits that are being filed against 401(k) and pension plans, it will be doubly hard to defend any continuation of the same types of errors in future cases, given the extent to which the world has changed over the past several weeks, both in terms of the environment in which such cases will be litigated and the expectation that fiduciaries should have learned from past mistakes.

Posted By Stephen D. Rosenberg In Fiduciaries
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I am a real big fan of this article here, on two recent rulings in major excessive fee 401(k) lawsuits, one against Wal-Mart and the other against Bechtel. While I haven’t read the rulings in those cases themselves yet, what I like about the rulings, at least as depicted in the article, is that they apparently did not focus on the actual amount of the fees, but rather on the process used by the defendant companies in selecting them, to decide whether the amount of fees attached to the plan’s investment options violated fiduciary obligations. As the article sums up the rulings:

The details in the recent rulings in the Wal-Mart and Bechtel suits vary, but both cases offer a reassuring message to large corporate plan sponsors: In determining whether a corporation breached its fiduciary duties to 401(k) participants, the actual fees charged to workers are not nearly as important as the procedure a sponsor has in place supporting its decision to hire, and keep, any firm that provides 401(k) services to plan participants.

So, for instance, if plan sponsors offer actively managed mutual funds on their 401(k) platforms, sponsors are not acting negligently if these funds wind up underperforming—even if the funds are more costly to participants than passive investment options that could have generated better returns for a lower fee. As long as 401(k) sponsors can document that there was sound reasoning and process underlying its selection of the actively managed funds, then they are not breaching their fiduciary responsibilities.

I like this because it is a perfect match for something I have been preaching on this blog for some time, and which is exactly what I tell reporters who call up asking for suggestions as to how plan sponsors and administrators can best protect themselves against fiduciary liability: follow and document best practices that show that the company tried to locate the best funds at the best fees. Sponsors and fiduciaries can do this by such steps as: (1) bench marking selections against other options and the market as a whole; (2) bringing in outside experts who can provide that information; (3) choosing funds whose costs are consistent with the industry and not outliers; and (4) considering multiple vendors, options and choices before settling on the best overall option, just as the company would in picking vendors for any other service or product. What this really means in the real world as to follow, or mimic, an RFP type approach to selecting funds and vendors, and never, ever, just buy funds from someone a fiduciary knows from playing golf.

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries
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Stop me if I am beating a dead horse, but this press release/short story on a class action law firm’s investigation into a stock drop involving Hartford’s stock reads exactly like one that, a few years ago, would have been issued prior to pursuing a securities class action; now its written in advance of pursuing an ERISA breach of fiduciary duty claim, with the class consisting of the company’s 401(k) participants. There is no better or more succinct illustration of the movement away from using the securities laws to pursue these types of claims and towards instead using ERISA to pursue these types of claims than this brief story. The facts at issue haven’t changed; they just replaced the words “securities act” with the word “ERISA.”

More grist for the mill for those who believe that the merging of the two areas by plaintiffs’ firms needs to be met by integrating the obligations under both areas of law so that fiduciaries are not operating under two separate and sometimes contradictory legal regimes.

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries
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So you’re an amateur fiduciary, nominally in charge of a company’s pension plan or 401(k) plan but generally relying on your outside vendors and service providers for substantive advice and decision making, and you get sued for breach of fiduciary duty because of losses resulting from the investment advice you received from them. So what’s the first thing you do? File third party actions for contribution or indemnity against the outside vendors on the theory they were fiduciaries as well and must reimburse you for any loss you are held responsible for because of your role as a fiduciary? Well, not necessarily in Massachusetts, where at least one judge has now concluded, on an issue that has been treated differently in different courts, that ERISA did not expressly incorporate such rights as against other fiduciaries, and so therefore they do not exist. The case is Charters v. John Hancock, and here is a nice article on it, here is nice post elsewhere on it, and here is the decision itself.

The central issue of the case and of the court’s reasoning is presented well in the article, where the court’s reasoning is explained as follows:

Under the indemnification and contribution principle, when one person is subject to liability because of another person's action, the second person has to make good the loss, and contribution requires the loss to be distributed among several liable fiduciaries. In his ruling, Groton noted that federal appellate courts are divided on the issue of whether ERISA permits indemnification and contribution, but said Groton was siding with those courts that have found that courts should not imply statutory remedies, which are not allowed under ERISA.

"Here neither party disputes that ERISA does not explicitly provide for claims of contribution and indemnification among co-fiduciaries. Allowing fiduciaries who have breached their duty to resort to contribution and indemnification to recover from co-fiduciaries is not 'of central concern' to ERISA," Groton asserted.
 

There is a lot of room for argument on both sides of this issue, as to whether a fiduciary should have or does have such a claim against another fiduciary, and I can certainly see both sides of it, or argue either side of it. It is more of a policy issue as to how ERISA should be applied, than it is a jurisprudence question of understanding and interpreting the statute, and is one that the entire system would benefit from a simple declaration one way or the other, by Congress or the Supreme Court, as to what the rule shall be on this going forward.

In the Charters case itself, it is worth noting, and important to practitioners to recognize, that the court was confronted by this issue in a case where the defendant was using indemnification as a counterclaim to ward off a breach of fiduciary duty claim against it by a trustee by trying to pass the liability back to the trustee; it may well be that the court would have reached a different conclusion if presented with a more traditional contribution/indemnification scenario, where the defendant fiduciary was not trying to use the doctrines offensively, but instead simply to spread the liability owed to the plaintiff as a result of fiduciary breaches among all fiduciaries who may have participated in the breach.

Finally, although it seems to be the court’s rejection of the contribution and indemnity doctrines as applicable under ERISA that has caught the attention of observers, of at least equal interest is the court’s further discussion of a particularly timely issue, which is the defendant’s status as a fiduciary and possible breach of fiduciary duty based on failure to disclose fees fully and on receiving “revenue sharing payments in the form of 12b-1 and sub-transfer agency fees from
the funds in which it invested on the Plan’s behalf.” The court provides a nice analysis of these issues, making the case a good starting point for analyzing them with regard to the ever growing number of such cases being filed.

Posted By Stephen D. Rosenberg In Fiduciaries , Pensions
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Geez, I hate to do this, but sometimes you have to play connect the dots. Reading this story about amateur (some would call it democratically run - small d, local government style) municipal pension plans and their investment strategies that got them caught up in the current collateralized debt obligation/securitization mess, I kept thinking to myself, where is the responsible, professional, knowledgeable fiduciary (or fiduciary retained vendor) in the investment decisions being chronicled. I don’t see them anywhere in the story. I see what appear to be the fiduciaries in over their heads and taking advice from what, in essence, are sales people. So what happens now in those cases (I mean besides the pension plans taking big losses)? Well, either the fiduciaries are liable for the mistakes they made, or they need to find - and sue - someone who is, as suggested in this piece here.

Many commentators often have a problem with fiduciary obligations and how they are interpreted, but to me, they play an essential role, and reflect a perfect fit between aspirations and legal obligations. The fiduciary alone stands in a position to protect plan assets, while simultaneously bearing the initial exposure for failing to do so, and thus has both an obligation and a deep rooted need to actually manage a pension plan well. It is not a job for amateurs, and is not simply a role in which it is enough to just do your best. Plan participants deserve, and legal obligations require, a level of expertise far beyond what is reflected in these types of stories.

Posted By Stephen D. Rosenberg In 401(k) Plans , ERISA Statutory Provisions , Fiduciaries
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One continuing theme in the posts on this blog is the replacement by plaintiffs’ class action firms of securities actions with ERISA breach of fiduciary duty actions in stock drop and similar type cases; the large class actions are brought on behalf of plan participants who hold company stock, often in an ESOP, against the plan fiduciaries. Such claims, for all intents and purposes, serve as independent securities type lawsuits against the company involved, through the guise of a breach of fiduciary duty lawsuit against the company’s designated fiduciaries, without having to meet all the rigmarole of a traditional class action securities fraud suit. I have posted often about this developing trend pretty much since launching this blog, and it has become a commonplace among other commentators as well.

Well, Georgetown law student Clovis Trevino Bravo has taken this line of thinking one step farther, authoring a detailed look at the advantages of prosecuting these types of cases under ERISA instead of under the securities laws, with a particular focus on the procedural and discovery advantages that accrue to the litigator who files such cases under ERISA rather than under the securities laws. Beyond that, she does an admirable job of synthesizing the often conflicting case law as to the intersection of the two legal regimes, providing an understanding of an evolving consensus - which is still a bit of a moving target, though, as she notes - as to the obligations of an ERISA fiduciary trapped between two separate lines of legal duty, that provided by the law of ERISA and that provided under the securities acts.

You can read her article in full right here, and you should - it will be worth your while.

Posted By Stephen D. Rosenberg In Preemption
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A little judicial activism anyone? I am not sure what else, when you look at the actual history of how ERISA preemption came into being, you can call the demands that come from many quarters for courts to reduce the scope of preemption in the ERISA context, or, for that matter, the Ninth Circuit’s decision upholding the San Francisco health insurance mandate. James Wooten, of the University at Buffalo Law School, documents the political history of the enactment of ERISA and its broad preemption provision in this article here, emphasizing that the history of federal regulation and statutory enaction in this field progressed from one - based in legislation from the 1950s - that ceded much authority to the states to one - encapsulated in ERISA - that removed the states entirely from the field. Professor Wooten explains that the eventual progression reached the point where: “Over the course of the Ninety-Third Congress, which passed ERISA, lawmakers further expanded the preemption language so that employee benefit plans became ‘an area of exclusive federal concern.’ ERISA § 514(a) preempts state regulation of benefit plans even with respect to matters federal law does not address.” It is simply hard to understand how decisions such as the Ninth Circuit ruling that - contrary to all other courts presented with the same issues - found that a local ordinance mandating a certain structure with regard to employee benefit plans is not preempted can square with the well-documented legislative history of a deliberate intent to preempt the states even, as the professor phrases it, “with respect to matters federal law does not [even] address.” Quite simply, rulings and arguments by commentators that ERISA preemption should be read more narrowly than has been the case, and concomitant decisions like the Ninth Circuit ruling on the San Francisco act, may be understandable as an argument for or exercise in some sort of normative cum Dworkian cum Judge Hercules decision making, where the courts are to bring an aging statute into compliance with current circumstances, but they certainly cannot be justified as an accurate interpretation of congressional intent itself.

Posted By Stephen D. Rosenberg In 401(k) Plans , Attorney Fee Awards , Benefit Litigation
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Remember the grave concern in different quarters about whether the Supreme Court’s ruling in LaRue would lead to a flood of litigation? Turns out it didn’t even do so in the LaRue case itself, which, now on remand at the trial court level, has been voluntarily dismissed by the plaintiff to avoid the expense of litigating the case. There’s your real check on excessive litigation: the costs of pursuing them. While ERISA grants a prevailing party the right to recover attorney’s fees, it is not a given that they will be awarded, particularly in a case, such as LaRue, where - as the multiplicity of opinions at the Supreme Court make clear - the law governing the issues in dispute is unsettled. Moreover, they are only awarded if you win; litigating a questionable case at significant expense risks large attorney’s fees that may never be recouped.

Of course, I guess all of this is just a back door argument for the outcome suggested by the opinion in Bendaoud discussed here: that the LaRue type cases are better structured as class actions than individual actions, for a variety of reasons, apparently including that litigating one small case is just plain not cost effective.

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries , Pensions
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Here’s an interesting looking and timely webinar from West next week on the stock market meltdown, the bank bailout, and their effect on ERISA governed plans. The short version of their pitch for the webinar, which ought to be in 20 point type spread across a banner headline, is “here come the breach of fiduciary duty lawsuits.” Overhyped? I doubt it. If the markets are down 40%, so are gazillions of dollars in 401(k) assets. If an individual financial company’s stocks are being battered, then so to are megamillions of dollars in that company’s stock likely held by its own employees in esops and other vehicles. Who are all of these plan participants going to be looking at? Who can they actually make out a claim against, and have standing to sue? To ask these questions is to answer them: the applicable plan’s fiduciaries.

Now the interesting question, more so than whether such lawsuits are coming (the answer to that question falls in the dog bites man category) is the structure of the defenses that will be raised by the fiduciaries. You can expect some consistencies across the positions raised by the defendants, not the least of which - and the best of which may well be - that prudent investment processes were followed, so no breach occurred, and proper levels of disclosure to the plan participants were maintained, so again no breach occurred, but the fiduciaries got blindsided, with the underlying theme of, one, so did everybody else (supposedly, anyway) and, two, no one could have anticipated and avoided these losses. What do I think of these likely defenses? Well, it would take a book length piece to address the ins and outs of these defenses, their holes, their strengths, and their weaknesses. But I do know this - any fiduciary relying on such defenses better have a squeaky clean documented trail of disclosures to participants, investigation into investment options and vendors, and informed decision making to back it up, or they are going to be writing very big checks when all is said and done.

Posted By Stephen D. Rosenberg In Attorney Fee Awards , Benefit Litigation , ERISA Statutory Provisions
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Fee shifting provisions, such as the one in the ERISA statute, that authorize a court to award attorney’s fees to a prevailing party, are facially neutral, and allow for an award in favor of the prevailing party, whomever that may be, and against the losing party, again whomever that may be. But should attorney’s fees be awarded to a large plan or administrator, such as a multimillion or billion dollar pension plan, from a plan participant who has lost a case seeking benefits that he or she believed was owed under the plan’s terms? In essence, does a facially neutral fee shifting statute really require David to pay Goliath?

The elements that are to be considered in ruling on an award of attorney’s fees under ERISA are, like the statute’s fee shifting provision itself, facially neutral; they do not presuppose that any particular type of party is more or less entitled to an award of attorney’s fees than any other party, nor that any particular type of party is entitled to protection against being hit with such an award. But the devil, as always, is in the details or, perhaps more accurately when, as in this case, broad open ended standards in the law are applied to a particular case, in the application of the standard to the concrete facts before the court. And as this case here, and Roy Harmon’s discussion of it shows, the application of those elements to this type of scenario tends to end up with a finding that the individual plan participant who has lost a case against a large plan does not have to pay attorney’s fees to the prevailing defendant.

Posted By Stephen D. Rosenberg In Benefit Litigation , ERISA Statutory Provisions , Electronic Discovery
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A couple of different things from my desk today that are worth passing on.

First, for those of you interested - as I am and have often discussed in these electronic pages - in the need to balance effective litigation tactics with the costs of litigation, particularly given discovery and e-discovery issues, I pass along this article here, which I truly enjoyed. In many ways, it mirrors what I said in my own article on the subject, which you can find here.

Second, the Supreme Court delved back into the ERISA world yesterday with an argument on what, from a practical perspective, is a particularly vexing problem that bedevils plan administrators: namely, who is entitled to plan proceeds when a plan participant has divorced and thereafter a dispute arises as to who should rightly get plan proceeds after the parties thought they had negotiated resolution of the issue as part of the divorce proceedings? The prototypical circumstance, which seems straight out of television but actually happens all the time, is the death of a plan participant who changed the beneficiary, post- divorce, to a new boy or girlfriend, in ways that contradict the agreed division of property made as part of the divorce. For those of you interested in this question, here is a terrific article on the details of the particular case before the Court, and here is the Workplace Prof’s analysis of the argument yesterday before the Court. My own general sense of the case is that it really revolves around the question of whether ERISA’s QDRO provisions, which are directed at this issue, are to be strictly construed and treated as the only manner in which payments in accordance with the plan’s express terms and the operative beneficiary designation can be avoided, or whether, instead, the issue can be handled in a more loosey-goosey fashion that, even if the QDRO provisions aren’t technically satisfied, effectuates the apparent intent of the divorcing parties. Me, I am betting the Court's opinion ends up at the former.

Posted By Stephen D. Rosenberg In 401(k) Plans , ERISA Statutory Provisions , Fiduciaries
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I talked about a case last week that addressed the damages aspect of making out a breach of fiduciary duty claim related to stock drop type issues, and pointed out the broad, ambiguous and easy to manipulate nature of a damages claim in that scenario. Another case last week, also out of the United States District Court for the District of Massachusetts, points out that other aspects of making out a breach of fiduciary duty case on a class action basis based on the administration of 401(k) plans provide a real check on such cases. The issue in that case? Namely that not everyone involved in operating a 401(k) plan is a fiduciary, and that while deep pockets involved in allegedly inappropriate behavior with regard to such a plan may make tempting targets, they cannot be sued successfully for breach of fiduciary duty if the prerequisite of having acted as a fiduciary is not satisfied.

As Judge O’Toole’s opinion in Columbia Air Services v. Fidelity Management Trust Company illustrates, an administrator of a plan - and who is not a named fiduciary of the plan - is only a functional fiduciary with regard to those specific limited areas in which it exercised discretionary, decision making authority; alleged wrongdoing by it with regard to other areas of its work for the plan do not subject it to fiduciary liability because the administrator is not deemed to have been serving as a fiduciary in those other contexts, regardless of the fact that it served as a fiduciary for other purposes. Thus, in that case, claims that improper fees were paid to the administrator as part of the structure of the 401(k) plan it was administering could not be the basis for a breach of fiduciary duty class action, because that did not occur as part of the activity where the administrator was, in fact, a fiduciary. As a result, ERISA granted no avenue for redressing those allegations of improper fees being paid to the administrator as part of its work for the 401(k) plan in question.

Although, as I have discussed in the past and as is discussed as well in this interesting article here, ERISA is becoming a favored structure for bringing securities related class actions, as this case shows, there are hurdles to these types of claims as well, ones that should dissuade anyone who thinks that bringing a stock manipulation class action under ERISA rather than the securities laws themselves equates with shooting fish in a barrel.

Posted By Stephen D. Rosenberg In Health Insurance , Massachusetts Health Care Reform Act , Preemption
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Disparate thoughts. Connect the dots. Or maybe more unintended consequences. Take your pick. While many advocates of health care reform cheer the Ninth Circuit’s conclusion that ERISA does not preempt all state pay or play laws, I am a little dubious as to whether this represents anything more than a Pyrrhic victory for anyone actually interested in ensuring that everyone is insured. Report after report, many of them credible, tell us that employers, who provide most of the country’s health insurance, are aghast at the idea of losing ERISA preemption, and would consider it one more reason not to continue to provide health insurance to employees and to instead pull back from that role. I am hardly inclined to think that, should employers relinquish that role, state or federal governments are prepared fiscally or intellectually to step into the breach and effectively fill that hole well. I thought this before, in the past, and wrote about it in a number of postings (such as here), when we saw the financial costs of Massachusetts’ reform plan balloon, supposedly unexpectedly; I thought it again when we saw the effectiveness of federal government regulation of Wall Street; and I thought it for sure when I read Paul Krugman this morning.

Perhaps this obsession among health reform advocates with defeating ERISA preemption is a case of putting the cart before the horse; maybe we should first have effective non-employer health insurance structures in place, before we go trying to dismantle the preemption structures on which employers rely in choosing to provide health insurance to their employees.

Posted By Stephen D. Rosenberg In Preemption
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Well, my trial this week is over, and I return to the blog with a - cue self-congratulatory, self-promoting note here - win in my back pocket. Last time I tried a case, I complained, tongue firmly in cheek, about the courts insisting on issuing major ERISA decisions while I was not available to discuss them, and they did it again this time around as well, with court decisions and legal developments in this area of the law pouring into my in-box all week. Its exactly as one of my favorite philosophers once wrote: “the wheel is turning and you can't slow down, you can't let go and you can't hold on, you can't go back and you can't stand still.”

Among the most prominent decisions issued while I was in court was, obviously, the Ninth Circuit’s ruling finding that San Francisco’s pay or play law was not preempted by ERISA. Can’t say I buy that one. Whatever is the scope of preemption in the field of ERISA, it logically reaches state efforts that result in a multi-jurisdictional company having to comply, with regards to its employee benefit plans, with a differing web of regulation that varies from one state to the next.

Of more interest, perhaps, is the wide ranging group of consequences, some predictable and others unintended, that the Ninth Circuit ruling likely unleashes. The first that jumps out at me is predictable, and the same that immediately occurred to every other commentator: that with the direct conflict it creates between the Fourth and Ninth Circuits on this issue, in combination with the political impetus in numerous states and localities to legislate on this issue, Supreme Court review seems certain. What is less predictable, or at least less widely predicted at this point, is what I fear may be the unintended consequences of that occurring; much as the LaRue decision did little, if anything, to clarify the law in the area of 401(k) losses going forward, but instead opened up a Pandora’s box of not yet addressed and still to be resolved legal issues (as commented on here, for instance), I suspect a ruling in this area by the Court will have the same effect on the question of the legal validity of state action in this area. I am disinclined, given the number of differing approaches to ERISA law and interpretation applied by the differing opinions in LaRue, to think that Supreme Court review of this issue will result in one coherent, uniform theory that can easily be interpreted and applied prospectively to these types of statutes, and suspect that such a ruling is instead more likely to open up a range of issues that will have to be litigated if and when such statutes are challenged as preempted. I could be wrong, but recent history in this area of the law suggests I am not; we may know more after the Supreme Court rules on the ERISA cases currently on its docket, as to how uniform an approach in this field of law and how much helpful guidance will come down from the Court. Bear in mind on this question though, that the Court’s decision in LaRue alone already has courts and litigants thinking that every issue (“every” may be a little bit of an overstatement, but you get the point) that was previously thought resolved is up for grabs in cases filed involving 401(k) plans, if those issues were originally resolved only in cases involving defined benefit plans.

Posted By Stephen D. Rosenberg In Benefit Litigation , ERISA Statutory Provisions , Fiduciaries
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If you have an interest in both ERISA and in well written, logical judicial opinions, I can’t recommend highly enough this opinion, by Judge Gertner of the United States District Court for Massachusetts, in Bendaoud v. Hodgson, deciding a number of issues at the motion to dismiss stage. I have a trial starting on Monday, so, unfortunately, I can’t delve as deeply today into the range of issues the opinion discusses and that warrant comment as I would like, but a few issues are worth commenting on right off the bat, even in the limited time I have today.

First, I have discussed before the trend, which others are recognizing as well, of ERISA replacing securities law as a preferred structure for attacking stock drop and similar stock related manipulation type cases. Judge Gertner comes as close as anyone has to demonstrating in her opinion why this state of affairs has come to pass, in her analysis of standing and the question of whether the plaintiff, since he sold his stock holdings in the company plan before the stock manipulation in question came to light and drove down the stock price, could still show he suffered injury. The court found that the plaintiff could show injury by demonstrating that the alleged fiduciary breaches resulted in less profit than the plaintiff would have earned “had the funds been available for” other purposes than the investment made by the plaintiff. This is a pretty open damages theory, and not one as closely tied to the actual timing of disclosures and its impact on stock prices that the court recognizes would control the issue if it were more of a traditional stock manipulation securities action.

Second, the case raises questions about whether, after Justice Breyer’s famous diamond hypothetical in LaRue, a single plan participant can actually sue for losses to the plan anymore in defined contribution cases, if the diamond that was lost did not actually come from that participant’s account (or safe deposit box, in the terms of the hypothetical). The court suggests that such a plan participant may not seek recovery for the other plan members on his or her own, but that instead a class action structure may be required.

And finally, reading the court’s opinion and the analysis of the damages issue, I couldn’t help but think of the LA Times ESOP case that I discussed here and my thought that, regardless of the merits of that particular case, it certainly illustrated the risks of using ESOP held stock in corporate transactions, because the interests of those pursuing the transaction, while not by definition wrong in any way, may not line up perfectly with the best interests of the employees holding that stock in the ESOP, raising risks of breach of fiduciary duty. The damages analysis in Bendaoud goes right to this point; under that analysis, the issue is not whether the stock holding employees made out okay in the deal, but whether the ESOP assets would have been worth more had the stock been used in a different manner or different transaction. That analysis suggests a broad range of attacks on a complicated ESOP implicating transaction such as that in the LA Times case.

Posted By Stephen D. Rosenberg In Fiduciaries
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With regard to my post yesterday about fiduciaries having the power, authority and motivation to act to protect plan participants, of course, that’s a lot easier for a fiduciary to do if its vendors are giving it advance notice of losses before the rest of the market finds out, and a lot harder to do if a fiduciary is one of the vast majority who aren’t given that advantage. See this story right here. A little less flippantly, this story - of alleged advantageous information given to some customers in advance of disclosure to the market as a whole - goes right to why its easy to say (as class action complaints always do) that fiduciaries owe a high duty of care to protect plan assets and beneficiaries, but it isn’t all that easy for fiduciaries to actually do.

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries , Pensions , Retirement Benefits
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In an odd coincidence, at the same time Wall Street has been imploding, laying bare valuation and other problems with investments in retirement plans and elsewhere, I happen to have been reading independent fiduciary/401(k) advisor Joshua Itzoe’s book, Fixing the 401(k), which is premised on the idea that 401(k) plans are compromised by inherent, systemic problems, ranging from issues in plan design to the significant impact of fees charged against plan assets (Susan Mangiero, who knows as much as anyone around about valuation, fee, and other issues impacting pension investments, has a valuable review of Joshua’s book here). I hope to return to some specific chapters in the book and discuss them in detail and in the context of the types of cases that I see and that appear on the court dockets, but for now what struck me most was the extent to which the problem that Joshua identifies as needing to be fixed is really one of fiduciary talent and application; excessive fees that decrease performance, poor investment choice selection, and controlling plan costs - all items that he identifies as systemic problems at this point in the 401(k) regime - are all issues that are or should be right in the wheelhouse of plan sponsors and fiduciaries. They alone, either on their own or by exercise of their authority to bring in outside expertise, are in the position and have the authority to protect plan participants against essentially every one of these problems; further, by operation of the liability imposed on them for failing to do so, they are the one and only players in the system who both have the power to address these issues and the legal incentives to do so. Plan participants have neither the power, responsibility nor authority to do so, and outside vendors - particularly ones who do not rise to the level of a fiduciary or who will at least argue that they do not - likewise may lack, at a minimum, the incentives to address these problems. The Wall Street implosion just drives these points home further; fiduciaries alone are in a position to protect plan participants from the pressures and potentially explosive risks in retirement investing by means of company plans such as 401(k)s, and there really isn’t anyone else with the authority, power or interest in doing so. Indeed, at heart, isn’t this really what a breach of fiduciary duty lawsuit really is - a claim that the only party in a position to put the participants’ needs first, didn’t?

Posted By Stephen D. Rosenberg In Fiduciaries
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This is one of those days in which the possible blog topics come fast and furious, many of them driven by the once every hundred years or so events on Wall Street and what they tell us about both the obligations of fiduciaries of retirement plans and their concomitant ability to live up to those obligations. That may or may not be a story that can be covered adequately in the blog format, but at least some of the highlights of those issues may make for some posts along the way. For today though, I thought I would focus on something a little more concrete, namely the LA Times/ESOP/ERISA /breach of fiduciary duty case that I blogged about in my last post. Here is a nice article giving a little more context to the suit, and which is probably worth a read if you have an interest in ESOPs, ERISA, newspapers or all of the above. One thing in particular caught my eye in the article, which relates to its discussion of the underlying problems in the newspaper industry and how it relates to the lawsuit; one of the class plaintiffs comments that those problems are not with the product turned out by the reporters, but with the industry’s difficulties with “monetizing the product online.” As someone who used to read three newspapers a day in law school and now skims three or more a day on-line and on my blackberry without spending a dime for the content, I can only say amen to that. I am not sure, though, that this point really has anything to do with the validity or viability of the suit itself, other than to the extent of pointing out the underlying problems that gave rise to the transaction that allegedly harmed the ESOP participants and gave rise to the class action. Either way, the story illustrates an important point, which is that there is a need for caution in any transaction of this nature that is going to impact the dollar value of stock held in ESOP plans, in light of fiduciary obligations that run in tandem with such plans.

Posted By Stephen D. Rosenberg In Fiduciaries
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What happens when journalists, Sam Zell, ERISA and employee stock ownership plans collide? Well, at a minimum, you get a really interesting and well written complaint alleging breach of fiduciary duty under ERISA. Here is the WSJ Law Blog post on this, and thanks to the post, here is the complaint itself. A couple of brief thoughts off the top of my head. First, this case fits in nicely with the trend that I have discussed in the past on this blog, which concerns the replacement of the securities laws with ERISA as the preferred means of attacking large scale corporate transactions. Second, like most such complaints filed as potential class actions, the complaint tells a wonderful story. As a litigator, I often wonder who is the target audience for these types of dramatically written pleadings, as a jury will never see them (not that any cases like this ever reach trial or, if they do, before a jury) and I am hard pressed to think that judges pay much attention to them when it comes time to consider the merits of a case. And third, if there is any fire behind the smoke that makes up the complaint’s allegations, then it will be an interesting case to follow as it proceeds along.
 

Posted By Stephen D. Rosenberg In Health Insurance , Massachusetts Health Care Reform Act , Preemption
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You know that theme music from the movie Jaws? Cue it up - the sharks are circling the Massachusetts Health Care Reform Act. Hard on the heels of the recent reports that the state is going to have to increase the financial obligations of employers to maintain the near universal coverage called for by the act comes this story noting the same thing I said yesterday, that increasing the obligations the act imposes on employers will likely provoke a preemption challenge. The story quotes a D.C. lawyer, Kevin Wrege, who says that several law firms there are getting ready to file suit over this and that "[a]ll they are lacking is a paying client and a green light." (I think that quote is what started the Jaws theme playing in the juke box of my mind.)

More substantively, here is an interesting survey piece from the Congressional Research Service (really, one of the jewels of the federal government, a source of generally thoughtful non-partisan analysis, in my experience) on ERISA preemption and its application to “pay or play statutes.” In particular, the piece focuses on the Massachusetts statute, and on the question of whether the First Circuit will find it preempted if it is challenged. In essence, and not too surprisingly, the author finds that the statute will likely be found preempted if the First Circuit follows the reasoning of the Fourth Circuit in Fielder (concerning the Wal-Mart Act in Maryland), but not if the First Circuit follows the reasoning to date of the Ninth Circuit in the on-going litigation over the San Francisco ordinance.

The piece also provides an interesting and detailed explanation of the provisions of the Massachusetts statute, and how it operates. The article parrots something I have said often on this blog, which is that it is likely that the low burdens at this point placed on employers by these provisions of the act is the likely reason no one has challenged it to date as preempted. When you read the piece, you will see pretty clearly both how low those burdens are at this point (it is hard, for instance, to imagine any major employer not already being in compliance just as a matter of course with the “play” requirements of the statute as they are described in the article, thus precluding the statute from significantly affecting them or their bottom lines) but also the avenues for those burdens to be increased.

Thanks is due to BenefitsLink, by the way, for passing the report along.

Posted By Stephen D. Rosenberg In Health Insurance , Massachusetts Health Care Reform Act , Preemption
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I have said it before and I will say it again: the day they fess up to the real costs of insuring the uninsured in Massachusetts and admit they need to pass that cost onto employers is the day before someone files a lawsuit asserting that the Massachusetts Health Care Reform Act is preempted. Take a look at this, and this.

Posted By Stephen D. Rosenberg In Fiduciaries
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We have all taken note of the run up in filings of very large breach of fiduciary duty cases against plan fiduciaries that are based on the tremendous losses incurred in investments held by plans as a result of the subprime lending mess. The filings themselves are noteworthy, and the numbers, losses and alleged misconduct depicted in them are eye-grabbing, in ways reminiscent of tabloid headlines that focus on the most sensational elements of a story for the purpose of separating readers from their three quarters. Most lawyers, myself included, and other observers have immediately delved into the ERISA defense lawyers playbook in thinking through these cases, looking towards the procedural, and if they fail, substantive defenses that the fiduciaries can present. But it may well be that the best defense is in the fact that fiduciary obligations may be high, but they do not require omniscience, and therefore in the argument that even a fiduciary who did everything at the level of competent industry professionals was still going to have the plan assets suffer these large losses, and thus cannot be liable here. I thought about this as I read this article here (the latest in what I have always thought of as Paul Krugman’s simplified economics seminars for the non-economists among us, including myself), which could almost serve as a trial lawyer’s closing argument that, whatever happened to the plan’s assets, it wasn’t the fiduciary’s fault, but a systemic problem giving rise to losses that could not have been avoided.

I am not entirely sure I believe that argument myself, at least in all cases, but in the case of a fiduciary who can document that standard, best investment practices were pursued, and the losses happened anyway, it’s a pretty persuasive argument. For the plaintiffs’ bar bringing these cases, and for the plan participants who have suffered large losses in their retirement holdings, what does this mean? It means that pragmatically, the case to be put in will probably have to combine the existence of the large systemic losses with compelling evidence that the fiduciaries in question in any particular case did not actually follow the industry’s best practices, but instead fell down on the job somewhere along the way, before those losses struck home. That second piece of the case is where the fun will be for the lawyers, in the nitty gritty of discovery battles seeking that evidence and in the fights to submit or exclude expert testimony as to whether the professionals did not pursue appropriate practices and whether that caused or increased the losses.

Posted By Stephen D. Rosenberg In Retirement Benefits
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Two interesting but different stories that both relate to the broad impact that ERISA has across the workplace. Here, in this first one, you find the story of the Third Circuit concluding that certain death benefits were not pension, but instead welfare, benefits, which did not vest and could be revoked, despite long time practice and the reliance of employees on the benefit as part of retirement planning. This story illustrates a theme that often arises on this blog, concerning the crucial importance of understanding what is really promised as retirement benefits under ERISA governed plans, and the trouble participants get into when they don’t grasp it prior to litigation and during the time they are active participants in the plan, which is something that seems to have clearly occurred, for instance, in this case here. In the second story, you see the potential reach of ERISA in an attempt, ultimately rejected by the court, to have it reach and protect what was otherwise allegedly illegal conduct in providing fringe benefits; even there, it was only the specifics of the intersection between the requirements of the allegedly violated compensation law and the obligations of ERISA that allowed the issue to fall outside of ERISA’s reach, rather than any sort of general assumption that this criminal proceeding was simply a separate area of the world than ERISA.

Posted By Stephen D. Rosenberg In ERISA Statutory Provisions
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Probably the only really note worthy decision out of the First Circuit with regard to ERISA while I was out of the office is this one here, in Kouvchinov v. Parametric Technology Corp., which addressed the standards for proving a claim of retaliatory job action in response to a claim for ERISA governed benefits. The First Circuit found that a plaintiff has to come forward with evidence of a specific intent to retaliate to maintain the claim, and that the mere, possibly coincidental, overlap of an adverse job action and a recent claim for benefits is not enough to sustain a claim. The First Circuit stated:

The plaintiff's overarching claim is that the defendants cashiered him in retaliation for his exercise of the right to receive short-term disability (STD) benefits under an employee benefit plan, thereby violating the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. §§1101-1461, and tortiously interfering with an advantageous business relationship. ... Here, however, the plaintiff suggests that proof of specific intent is not required because the discrimination complained of is retaliatory rather than preemptive. . . . We reject that suggestion. The plaintiff fails to appreciate that, without a specific intent requirement, every terminated employee who has exercised his or her right to benefits would, ipso facto, have a potential retaliation claim against the employer. ... That would destroy ERISA's carefully calibrated balance of rights, remedies, and responsibilities in the workplace. Presumably for this reason, every federal court of appeals to have addressed the question has demanded a showing of specific intent in ERISA retaliation cases. ... Accordingly, we hold that a plaintiff must make a plausible showing of specific intent in order to survive summary judgment on an ERISA retaliation claim.

I don’t have much truck with the decision, though others do. Call me naive, but I can’t say in my practice or among my clients - whether companies, sponsors, administrators or participants - I have seen much conduct that would even possibly raise these issues, regardless of how strict a standard of proof is imposed on a plaintiff/participant.

Posted By Stephen D. Rosenberg In Benefit Litigation , Conflicts of Interest
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When people start emailing you to inquire about your health, you know you have been away from your blog too long. Rumors of my demise, however, were premature, as I was simply on vacation; normally I keep up with developments and am able to put up some posts while away, but I didn’t get a chance to this time. A number of interesting things did cross my desk while I was away, and a number of them I read remotely while out; I will try to pass along the more interesting pieces over the next few days.

For starters though, my colleague Patrick Spangler at Vedder Price in Chicago passed along a survey of some recent discovery rulings by the federal courts related to whether extra-administrative record discovery should be allowed in light of the Supreme Court’s ruling in MetLife v. Glenn. They find that such discovery is warranted under Glenn, but only if linked to the possibility of proving biased decision making. Patrick notes:

In Hogan-Cross v. Metropolitan Life Ins. Co., 2008 WL 2938056, at *3 (S.D.N.Y. July 31, 2008) the Southern District of New York compelled written discovery seeking information related to: (1) denial rates; and (2) the compensation structure for the claims representatives who evaluated the participant’s claim. However, the Southern District previously granted the participant’s motion to compel and simply confirmed its decision on Metlife’s motion to reconsider in light of Glenn, reasoning that the requests were appropriate under existing Second Circuit law and further supported by Glenn.

The Northern District of Texas reached a similar conclusion in Copus v. Life Ins. Co. of N.A., 2008 WL 2794807, at *1-2 (N.D. Tex. 2008). The court reasoned that a history of biased decisionmaking and steps taken by the administrator to reduce a conflict are relevant and should be considered under Glenn. Incorporating existing Fifth Circuit precedent, the Court allowed discovery on a variety of topics, including: (1) the selection of the claims reviewer; (2) steps taken by the administrator to reduce the conflict; (3) the compensation system for claims reviewers, and (4) any claims procedures or manuals. 

The decisions are similar to Dubois, a case out of the United States District Court for Maine that I discussed previously, which addressed when such discovery is appropriate in light of Glenn and found, like these other two decisions, both that: (a) it is appropriate if necessary to evidence biased, conflicted decision making; and (b) existing circuit precedent on the issue was consistent with Glenn and could govern the question.

Posted By Stephen D. Rosenberg In 401(k) Plans , ERISA Statutory Provisions , Employee Benefit Plans , Fiduciaries , Retirement Benefits
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Under a defined benefit plan, participants are typically promised a fixed level of retirement income, computed on the basis of a formula contained in the plan documents. See 29 U.S.C. §1002(35). The formula generally accounts for an employee's years of service and compensation level at retirement. Graden, 496 F.3d at 297 n.10. In contrast with a defined contribution plan, where the amount of benefits is directly related to the investment income earned in an individual account, the investment performance of the portfolio held by a defined benefit plan has no effect on the level of benefits to which a participant is entitled, provided that the plan remains solvent. See LaRue,128 S. Ct. at 1025 ("Misconduct by the administrators of a defined benefit plan will not affect an individual's entitlement to a defined benefit unless it creates or enhances the risk of default by the entire plan.").

The case is Kerr et al. v. W.R. Grace, et al.