The Wall Street Journal on Increased Oversight of ESOP Transactions

Posted By Stephen D. Rosenberg In ESOP
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The Wall Street Journal ran an interesting, if superficial, story on tougher scrutiny of ESOP transactions and how that is impacting smaller companies with ESOP programs. As the article pointed out, ESOPs in that context are very much a tool for the owner/founder class to cash out their equity developed by building the business – including for the purpose of transforming the business into a retirement nest egg – without having to go out into the open market to sell it, by instead selling it in an essentially captive transaction to the employees. But the interesting thing about that is that the former – selling the company into the open market – comes with the built in valuation discipline of an open market, with the company having the value that informed buyers are willing to put on it relative to other potential investment options open to those buyers. ESOPs, as a tool for the owner/founder class to cash out their equity, don’t come with the protections and tools for valuing the worth of the company that are inherent in selling into an open market; the pricing, and thus the amount of cash out open to the owner/founders, is instead determined artificially, independent of an open market, by an appraisal process that is supposed to be watched over, on behalf of the employees, by the plan fiduciary.

The Journal article discusses the fact that DOL initiatives in this area are driving up the cost and requiring somewhat more disciplined oversight of the process by companies proceeding with ESOPs. The article, however, references that it is simply driving up the cost of appraisals from an average of $10,000 to $11,000, and that certain legal and related fees are higher for companies that want to ensure that there are no perceived or actual conflicts of interest in the transaction. If that is all the additional cost for ESOPs that are caused by enhancing the protections of employees in such a transaction, then that isn’t much cost at all to give the employees at least some of the protections that the marketplace would give to a third party buyer.
 

Three for Thursday

Posted By Stephen D. Rosenberg In Fiduciaries , Pensions
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Well, some of you may recall that when I joined Twitter, I originally did it so that I would have an additional outlet to point out and comment on the various interesting articles and commentaries that cross my desk.  Twitter, though, turned out to be a two way street, with it driving interesting articles onto my desk at a faster rate than I could use Twitter to push other interesting articles off my desk and out to a wider audience.  Not only that, but in what might reflect more on my personality than it does on Twitter, I have found that I have trouble limiting myself to 140 characters when it comes to talking about many of the articles that catch my eye.

This week was much like others in that respect, with at least three very interesting items landing on my desk (one directly from my Twitter timeline) that I wanted to both pass along and to comment on in more than 140 keystrokes.  So I thought I would steal a heading from FM radio (Three for Thursday, no commercial interruptions, somehow keeps running through my head today) and discuss three interesting items that I think are worth your time.

The first is Mark Firman of Canada’s (how’s that for provincialism?  He’s actually of Toronto, as we New Englanders recognize that Canada, a near neighbor, is in fact a diverse place) excellent article on whether socially conscious investing can be squared with a fiduciary’s obligation to act in the best interest of plan participants.  It’s a well-written and stylish piece, on what in the hands of a less skilled writer court be a dry topic.  More than that, though, in this era of tobacco stocks, environmental risks and consumer boycotts, it’s a timely take on an important issue.

The second is Greg Daugherty’s excellent piece on the Employee Benefits Law Report concerning court decisions finding service providers to plans to, in one case, not be a fiduciary under ERISA and, in another case, to be a fiduciary under ERISA.  Greg’s post highlights a key issue, which is understanding why the outcome was different in each case, which in this instance, had to do with the fact that one of the service providers could alter its compensation level by decisions that it could make with regard to the plan.  The court found this to be enough to render it a fiduciary under ERISA.  Plan sponsors and participants often assume that service providers are fiduciaries, but they often are not, and it’s important to understand when they are and when they are not fiduciaries.

The third is George Chimento’s excellent piece on further operational complications of the ACA for employers, particularly small employers.  George’s article illustrates an important aspect of the ACA for employers: you can’t go it alone.  Operational and compliance issues raised by the ACA are such that employers have to have competent, trusted experts they can rely on when it comes to issues raised by the ACA.

 

Tetreault, Gabriel, and the First Circuit's Reluctance to Recognize Equitable Estoppel in ERISA Cases

Posted By Stephen D. Rosenberg In Equitable Relief
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The First Circuit issued an interesting ruling early last month that touched on a number of issues, but one that jumped out at me was its approach to the question of equitable estoppel claims under ERISA. In Tetreault v. Reliance Standard, the Court rejected an estoppel claim, but once again – as it has done a number of times in the past – refused to come out and recognize estoppel as a viable claim under the equitable relief prong of ERISA. Instead, the Court applied the logical structure of first noting that the circuit has not yet recognized estoppel as a viable cause of action, and then stating that, even if it were to be recognized as a viable cause of action, the plaintiff’s claim would still fail because the plaintiff could not show its elements, namely, in that case, reasonable reliance.

When I first read the decision, I chuckled to myself, wondering why the Court couldn’t just come out in one of its rulings and expressly acknowledge the existence of estoppel as a viable remedy under the equitable relief prong of ERISA. As I said to one fellow ERISA litigator, isn’t it time for the Court to just come right out and say equitable estoppel exists as a claim under ERISA in the First Circuit? After all, we are something like three years on now from the Supreme Court’s ruling in Amara, which clearly seemed to tell lower courts that equitable estoppel claims are part of the traditional forms of equitable remedies captured in the statute’s equitable relief prong.

In preparing for a talk on ERISA litigation to the Boston Bar Association last week, however, I think I came up with an answer to that riddle, and it rests in the Ninth Circuit’s decision in Gabriel v. Alaska Electrical Pension Fund, where that Court surveyed the post-Amara forms of equitable relief open under ERISA. That decision has received most of its attention – for good reason – for the Court’s discussion of the surcharge remedy, and whether it only applies where there was loss to the plan itself and not just to an allegedly misled plan participant. However, Gabriel has another interesting element, which is the Ninth Circuit’s discussion of the equitable estoppel remedy, which that circuit does recognize under ERISA. The Ninth Circuit explained that equitable estoppel requires, in that context, the existence of additional elements beyond the traditional two of a misstatement and accompanying harmful reliance on it, namely the existence of extraordinary circumstances, such as repeated misleading statements by a plan sponsor/employer. 

As I prepared the part of my talk that concerned Amara remedies, I posed the question of why the Ninth Circuit requires such extraordinary circumstances and, further, what that told us about the First Circuit’s reluctance to fully acknowledge equitable estoppel as a claim under ERISA. The answer, I think, lies in the institutional desire to avoid turning every ERISA denial of benefits dispute into a “participant said/employer said” back and forth dispute, with the courts forced to constantly adjudicate the factual question of whether the participant was misled whenever the participant isn’t actually entitled, under the plan’s terms, to the benefits sought by the participant. By adding on additional factors that must be proven to make out an estoppel claim, such as the Ninth Circuit’s reference to extraordinary circumstances, the courts are able to mitigate this risk and limit equitable estoppel claims to the more egregious or most factually viable circumstances. For instance, in Gabriel, when the Ninth Circuit discussed the need for extraordinary circumstances, the Court gave, as an example, repetitive misleading statements by the employer with regard to the benefits at issue or the benefit plan. As an evidentiary bar, this requirement separates the routine case where there is a random misstatement from a low level HR person upon which a plaintiff’s lawyer tries to fashion an entire estoppel claim (which federal court judges have been seeing, and for the most part rejecting, for years) from a deliberate pattern and practice of self-serving conduct that harms participants (and which federal court judges don’t see all that often). These types of additional requirements for estoppel claims under the equitable relief provision of ERISA, above and beyond the standard requirement of reasonable reliance on a misstatement of fact, allow the courts to limit this type of relief, in the ERISA context, to the more egregious circumstances only.

In many ways, doing so makes complete sense, for at least two reasons. First, it harkens back to ERISA’s grand bargain, whereby employers were to be encouraged to create benefit plans by being protected from excessive (I know, I know, the question of when litigation becomes excessive is in the eye of the beholder) litigation, and limiting estoppel claims to only the egregious ones is of a piece with this. Second, it accomplishes what many of us saw as the real benefit – and perhaps judicial purpose – of the Supreme Court’s seeming expansion of equitable remedies in Amara: the granting of a form of relief that would target ERISA’s long standing problem (again, I know, I know: whether it’s a problem is in the eye of the beholder) of harms without a remedy, which lawyers have always used to refer to the fact that ERISA’s limited bodies of remedies left some harms suffered by participants incapable of being remedied by court action. This type of a limited, restricted expansion of equitable remedies with regard to estoppel claims bars opening the courthouse doors to every unhappy participant while still allowing for the possibility of using estoppel to remediate the worst of the harms suffered by participants in circumstances where the denial of benefit and breach of fiduciary duty prongs of ERISA do not offer access to relief.

So to circle back, how does this tie into the puzzle of the First Circuit’s refusal, lo these many years after Amara, to formally recognize equitable estoppel claims under ERISA’s equitable relief prong, despite the opportunity presented, most recently, in Tetreault? The answer, I think, is that the Court is waiting, as the right vehicle for formally acknowledging the cause of action, for the type of egregious fact pattern in which relief by means of equitable estoppel is warranted. Presented with such a fact pattern, the Court will be able to explain what additional factors are present in the case that raise it above the typical type of claims that, I suspect, the Court does not want to capture within the equitable relief prong of ERISA, thus demonstrating and establishing what additional elements, beyond simply a misstatement of fact and reliance, are necessary to make out an estoppel claim under ERISA. In other words, the First Circuit, I believe, is waiting to recognize estoppel as a cause of action under ERISA for the type of case that will allow it to announce what extraordinary circumstances the First Circuit requires for a misstatement to give rise to estoppel, much as the Ninth Circuit identified in Gabriel the extraordinary circumstances that it requires. When that fact pattern finally gets before the First Circuit is when you will see the First Circuit formally recognize estoppel as a theory of liability under ERISA.
 

Clearing Out the Attic of My Mind: Notes From ACI's 8th National Forum on ERISA Litigation

Posted By Stephen D. Rosenberg In Conflicts of Interest , ERISA Seminars and other Resources , ESOP , Fiduciaries , Standard of Review
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With all due apologies to longtime Globe sports columnist Dan Shaugnessy, who would periodically “clean out his desk” by running a column of short bits he had collected, here’s a list, in no particular order, of interesting (to me, anyway) items I took away from ACI’s excellent 8th National Forum on ERISA Litigation in New York City this week, where I spoke on ethical issues in ERISA litigation:

●What a great group of panelists, and thoughtful, educated audience. They reaffirmed my (somewhat narcissistic and self serving) belief that ERISA litigation attracts and holds onto the sharper tools in the bar.

●Day 2 of the conference had an excellent panel on ESOPs, with at least one panelist noting the pervasive problem of conflicted fiduciaries in this area, who may have interests in the outcome of a transaction that are not the same as those of the employee participants in the ESOP. During the course of the day, whether at lunch or by the coffee table outside the meeting room, everyone I spoke to had a horror story about a conflicted ESOP trustee and an ESOP transaction that disserved employees as a result. Isn’t it past time to effectively require the appointment of independent fiduciaries, from outside of the employee owned or soon to be employee owned company, to pass on transactions on behalf of the employee owners?

●I’ve been hearing for years that Broadway is either dead or dying, but you couldn’t tell that from the outdoor advertising at all of the theaters surrounding the conference site. Either all the shows out there right now are the best there’s ever been, or it is truth in advertising, rather than Broadway, that is dead.

●Incidentally, every time I left my hotel I saw a big promo for Bradley Cooper in a new version of Elephant Man on stage. I know everyone’s a critic, but Cooper was the weak link in the American Hustle cast, so I can’t say the promo had me reaching for my wallet.

Nobody knows nothing, at this point, about what impact Dudenhoeffer will have (I exaggerate slightly, as many panelists and audience members had calculated and well-educated guesses as to the future of stock drop litigation). As I discussed with some members of the audience, one wonders whether the class action bar will go forum shopping with regard to the next round of decision making in this area, looking for the most favorable possible venues for the first of the next round of decisions in this area.

●Speaking of the class action bar, those of its members who were in the audience looked amused when a panelist referenced the class action bar as “sharks.”

●There was an excellent panel on the public pension crisis. It looks to me like the problem will inevitably be left to bankruptcy courts and litigators to sort out, which drives home the extent to which the political will and leadership needed to address the problem is absent.

●One of the most interesting panels to me every year is the insurance industry panel discussing fiduciary liability and other insurance matters related to insuring risks and exposures in the benefit plan industry. It lays the complexity of insurance coverage law (which many lawyers find a very complex area) on top of one of the few areas of the law that exceeds it in complexity, ERISA.

●In the time between the insurance panel’s presentation and getting back to my office, what showed up on my desk but a complicated problem concerning the extent of insurance coverage for an ERISA exposure.

●In the time between my own presentation on ethical issues in litigating ERISA cases and getting back to my office, what showed up on my desk but an ethical conundrum I had never seen nor even thought of before. Grist for the next time I give a presentation on that issue, I suppose.

●The judicial panels on the morning of the second day of the conference are always interesting, and it always catches my attention how many times, and in how many different ways, the judges reference their desire to have the lawyers before them simply act courteously and respectfully to each other in the cases pending before them. One judge commented that, from his seat on the bench, it looks to him that “civil lawyers act criminally to each other and criminal lawyers act civilly to each other.”

●In the time between that judicial panel and my own presentation several hours later, I received at least two emails that documented the judges’ concerns in this regard.

●And I bet so did every other lawyer sitting in the audience.

●There are worse places in the world to watch a World Series game than the West Side Palm in NY.

●I really enjoyed the top hat plan litigation presentation, but that may just be me. There is something I have always found fun about litigating top hat and other executive compensation disputes. Maybe it’s the structure of top hat plan cases, which have a very logical order and composition of issues that can be exploited by a litigator. The presentation matched this, with a focus on the step by step elements of creating top hat status and defending against challenges to it.

●And finally, the panelist who discussed standards of review in ERISA litigation and noted that he may be the only person in the room old enough to remember litigating before Firestone was a treat. Firestone was decided in1989, and, despite nearly 25 years of experience, I never litigated benefit disputes in a pre-Firestone environment, so it was fun to hear, even briefly, how the litigants and the courts addressed the standard of review in the days before Firestone (hint: they typically didn’t).
 

Church Plan Litigation and My New Article On It

Posted By Stephen D. Rosenberg In ERISA Statutory Provisions , Employee Benefit Plans
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When courts first started tackling the new wave of suits challenging the church plan status of certain health care entities, I thought it an amusing curiosity, at best. I did grasp, however, the impetus from the perspective of the class action bar, which is that, if able to overturn the claimed exemptions of the defendants in court, there were potentially large amounts of money at stake, as well as potentially large fees. What I didn’t quite grasp at the time, because I was looking at the question solely from the point of view of an ERISA litigator, was the substantive impact on plans if the case law, as a result of the filing of those suits, started to put into question the propriety of church plan status for entities, not involved in the suit, who had long relied on the church plan exemption as the framework for structuring their employee benefit plans. For instance, I was having a conversation the other day about a particular plan’s obligations in light of Windsor and same sex marriage issues, and whether the obligations of a plan entitled to the church plan exemption might differ from those of a plan not entitled to that exemption. Multiply that by the many differences between the operations and terms of a plan covered by ERISA and one entitled to the church plan exemption and you realize how significant the exemption can be on the operations of a plan and, in turn, how much it would affect plans currently claiming the exemption if, as a result of new judicial interpretations of the exemption driven by the pending cases, some of those plans lost access to the exemption.

Tibble v Edison, now up before the Supreme Court, and the history of excessive fee class action litigation presents a nice way of looking at this phenomenon. In the early years of those claims, other than with regard to the large risks they posed because of the amount of money involved, people in the industry weren’t all that impressed by those types of claims, as the courts showed an initial reluctance to credit the theories of the class action bar in that regard. With the passage of time, though, those claims started to be taken much more seriously and became more successful. Now, years into the process, we have the Supreme Court, in Tibble, using one of those cases as an opportunity to set forth the rules governing ERISA’s statute of limitations for fiduciary duty claims. Tibble shows the long tail of the institution of new theories of liability in ERISA litigation, and their potential for causing unanticipated change to the jurisprudence. Years after the excessive fee claims began being filed and years after Tibble was tried, that once novel theory of liability is provoking the system to look anew at a fundamental element of ERISA, its statutory provision governing statute of limitations for breach of fiduciary duty claims.

Therein lies the fly in the ointment with regard to giving little weight to the current crop of church plan cases; no matter what becomes of those particular cases, they may well upturn the apple cart and create confusion, where currently little exists, as to when plans can invoke the exemption. One reason that this risk is present is that it really isn’t clear, given the statutory language, which side is really right about the exemption and when it should apply, a point I discussed in detail in my new article in ASPPA’s Plan Consultant magazine. With unclear statutory language, it is hard to predict how the cases that are currently wending their way through the system may come out and whether, as in the excessive fee cases, one of them might substantially impact the jurisprudence years down the road.
 

An Overview of 401(k) Litigation, Courtesy of Chris Carosa's Excellent Interview with Jerry Schlichter

Posted By Stephen D. Rosenberg In 401(k) Plans , Class Actions , Conflicts of Interest , ERISA Seminars and other Resources , Fiduciaries
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Chris Carosa of Fiduciary News has a tremendous interview with Jerry Schlichter, who has carved out an important niche litigating class action cases against 401(k) plans. Schlichter has litigated nearly all of the key excessive fee cases of the past few years, and currently has one pending before the Supreme Court. I discussed the case he currently has pending before the Supreme Court, Tibble v. Edison, in an article way back after it was decided by the trial court, where I contrasted the trial court’s analysis of the excessive fee issues to that provided around the same time by the Seventh Circuit. You can find that article here.

Chris’ interview with Schlichter is important and valuable reading. The opposite of a puff piece or personality profile, it contains some real thought provoking comments on 401(k) plans and the risks of fiduciary liability, and I highly recommend reading it.

Interestingly, I am speaking next week at ACI’s ERISA Litigation Conference in New York on conflicts of interest and other ethical issues arising with regard to ERISA litigation. Chris, in his interview with Schlichter, goes right to the heart of the question, when he turns the conversation to the “obvious and serious conflicts-of-interest” that can exist in 401(k) plans given their structure, compensation schemes, and the sometimes contradictory interests of fiduciaries, participants and service providers. In the interview, Schlichter provides a nice window for approaching the issue, when he presents three key rules that he believes fiduciaries should follow, which are:

1) Putting participants’ interests first – this should be the beacon that fiduciaries follow; 2) Developing a fully informed understanding of industry practices and reasonableness of service providers’ fees – in other words becoming a knowledgeable industry expert; and, 3) Avoiding self-dealing – you simply cannot benefit yourself in any way.

A great deal of conflicts of interest in this area of the law can be avoided simply by keeping those three principles first and foremost. Indeed, many of the conflict of interest issues that I will be discussing next week on a granular level are violations, on a macro level, of one or the other of those three ideas.
 

What Are the Costs and Risks to Administrators When District Courts Remand Benefit Denials Back to Them?

Posted By Stephen D. Rosenberg In Attorney Fee Awards , Benefit Litigation , Long Term Disability Benefits
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I have been writing a lot recently about big picture items, from Supreme Court cases over ERISA’s statute of limitations to the ability of plan sponsors to legally control litigation against them, and everything in between. It is worth remembering, however, that ERISA is a nuts and bolts statute that is litigated day in and day out, often by plan participants for whom the pension or lump sum or disability benefit at issue is the most important financial vehicle open to them. As a result, the details of litigating under the statute are of supreme importance to them.

One of the technical and less sexy areas of litigating these types of cases concerns the circumstances in which federal District Courts, in deciding benefit disputes, elect not to enter an order granting benefits to a participant because of flaws found in an administrator’s processing of a claim for benefits, but instead order the administrator to revisit the issue, in much the same way that an appeals court would remand a case back to a trial court for further proceedings. Issues arising from this type of a remand have become more and more important over the years, as the district courts have become more inclined to remand benefit denials back to administrators for further review as opposed to overturning a denial outright and awarding benefits. Partly, this has occurred because of years of defense lawyers arguing that this is the appropriate way of proceeding, with the courts eventually coming around. Defense lawyers pressed this point in benefit litigation for years before it really became the standard mode of operating for many trial judges, and the reason was simple. It gave the administrator two bites at the apple, in the sense of they would either win at the district court by having the denial upheld by the court or, worst case, would get to decide the issue again on remand. For administrators and plans, this beat the heck out of having a benefit decision up on summary judgment before a court with one of two possible outcomes, those being the court upholding the denial or instead the court granting the benefits to the participant. The remand argument, at a minimum, meant that a court considering a benefit denial on summary judgment would be invited to make any of three decisions, only one of which was truly and immediately detrimental to the administrator, which are: (1) uphold the denial of benefits; (2) overturn the denial and grant the benefits; or (3) remand the denial to the administrator to redo the whole thing.

My friend, colleague, and sometimes adversary, ERISA lawyer Jonathan Feigenbaum, recently won a pair of significant rulings from the First and Second circuits (he will have to try for the Third and Fourth in short order, so as to hit for the cycle) on two key issues arising out of remands of this nature to an administrator, one being the circumstances in which attorney’s fees can be awarded and the other being whether a plan or its insurer can appeal a district court order remanding the benefit dispute back to the administrator for further analysis. The two decisions, and the two issues, are interconnected in an interesting way. In one, the First Circuit’s ruling in Gross v. Sun Life, the Court held that such a remand order is sufficient success on the merits of the case to support an award of attorney’s fees. In the other, the Second Circuit’s opinion in Mead v. Reliastar Life Insurance Company, the Court held that such a remand order is not appealable, as it is not a final order.

Together, they form an interesting counter to the preference of administrators and their lawyers to seek a remand, rather than an outright reversal, when a district court finds problems with an administrator’s benefit determination. They stand for the proposition that administrators may be able to seek that relief, but if they get it, they will have to pay attorney’s fees to the participant and will not have an opportunity to test the remand order on appeal until the entire benefit dispute has been conclusively resolved once and for all at the district court level. Together, they represent an interesting doctrinal response to the preference of administrators to seek remand when problems are found with a benefit determination. Like all legal doctrines, it needs a catchy name – like the Younger doctrine is for abstention – if it is to get much traction in the legal literature. Let’s call it the “Feigenbaum doctrine.”
 

Q: Where Can You Sue an ERISA Plan? A: Where the Plan Sponsor Says

Posted By Stephen D. Rosenberg In Benefit Litigation , ERISA Statutory Provisions
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So the Sixth Circuit, in Smith v. Aegon, just ruled in favor of the enforceability of forum selection clauses in ERISA governed plans. Combined with the Supreme Court’s approval in Heimeshoff of contractual limitations in ERISA plans on the time period for filing suit, the approach of Smith basically hands control of the basic procedural aspects of litigating ERISA cases – when and where – to plan sponsors. In Smith, the Sixth Circuit provides a legitimate rationale for doing so, which is that the law already provides extensive freedom to plan sponsors with regard to whether, and if so under what terms, to offer benefit plans. This principle, incidentally, flows naturally from the original grand bargain that gave rise to ERISA itself, which was the premise that employers would be granted much leeway and limited potential liability to encourage them to make benefit plans available to employees.

That said, however, the dissent in Smith makes an important point, which is that the venue provisions of ERISA have long been construed by federal courts in the manner that will best allow participants to protect their rights, and not in a manner that will make it more difficult for them to do so. The dissent’s point in this regard is well taken. ERISA expressly provides that a plan participant can sue in any federal district court where the plan is administered, the breach took place, the defendant resides or the defendant may be found. 29 U.S.C. § 1132(e)(2). Federal judges regularly find that this venue provision was intended by Congress to expand, rather than constrict, a participant’s choice of forum, so as to best protect plan participants. As one judge explained in a well-regarded opinion on the subject, Congress intended “to remove jurisdictional procedural obstacles which in the past appear to have hampered effective enforcement of fiduciary responsibilities under state law for recovery of benefits due to participants” and as a result, “ERISA venue provisions should be interpreted so as to give beneficiaries a wide choice of venue.” Cole v. Central States Southeast and Southwest Areas Health and Welfare Fund, 225 F.Supp.2d 96, 98 (D.Mass. 2002) (quoting H.R.Rep. No. 93–533, reprinted in 1974 U.S.C.C.A.N. at 4639, 4655; accord S.Rep. No. 93–127, reprinted in 1974 U.S.C.C.A.N. at 4838, 4871).

Decisions such as Smith run to the opposite of this thinking and essentially say that, while that may be the case, a plan sponsor can opt out of that system of protections in favor of selecting a forum in the first instance, and naming it in the plan.
 

Tibble v. Edison at the Supreme Court

Posted By Stephen D. Rosenberg In ERISA Statutory Provisions
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So, Tibble, Tibble, toil and trouble, to paraphrase (badly) Shakespeare (MacBeth, to be precise). And with that, I am going to launch into what I expect will be a number of posts concerning the Supreme Court’s decision to accept the Ninth Circuit’s decision in Tibble for review, limited to the application of ERISA’s six year statute of limitations. I tweeted, when the Court first accepted the case for review, that while I try to avoid the constant hyperbole about Supreme Court decisions (in which every time the Court does anything, lawyers issue client alerts and every other form of media under the sun, announcing that the sky is falling in the hope of drawing in readers), I did think that Tibble had the capacity to be a game changer.

And why is that? For a few reasons, one of which I will discuss right now. In the first instance, even leaving aside the type of excessive fee and revenue sharing dispute at issue in Tibble itself, the federal courts continue to struggle with the interpretation and application of ERISA’s six year statute of limitations. While written cleanly on its face, the statutory language is almost the walking embodiment of an insurance coverage concept, the latent ambiguity, which has to do with policy language that does not look ambiguous on its face (and thus would not appear to invoke various doctrines by which ambiguous policy language would be construed against the insurance company that issued the policy) but becomes ambiguous when applied to a particular fact pattern because, in application, it becomes unclear how the language should actually be applied. As Tibble itself reflects, the six year statute of limitation is open to varying interpretations when a court or litigant sits down and tries to apply it to a particular fact pattern, even though the language does not, as written, look like it should generate such confusion. The six year statute of limitations talks in terms of ending six years after the last date of breach or six years after the last day on which a breach of fiduciary duty could be remedied, which seems straight forward enough. The problem, though, commences when one tries to apply it to particular fact patterns. Give me a hypothetical, and I can give you two equally plausible arguments (at least on their face) as to when the six year statute of limitation ends under that hypothetical. Indeed, that is a fair description of exactly what occurs with most motions to dismiss filed on statute of limitations grounds in ERISA breach of fiduciary duty cases. Both the moving defendant and the responding participant are almost always able to present plausible sounding arguments over whether the six year statute of limitations period has been triggered, reflecting the lack of clarity and fact specific nature of the analysis under both the statutory language itself and the case law. Greater clarity on the application of the six year limitation period would be a boon to ERISA practitioners across the board.

I have a number of things I want to say about Tibble, a case which has been of interest to me all the way back to its relatively humble beginnings as a bench trial (when it was wrongly overshadowed in the legal media by the Seventh Circuit’s analysis at around the same time of many of the same issues) and I will be returning to it in detail over the next couple of weeks, as time allows. I plan to start with a discussion of the United State’s brief in support of granting cert, which offers an excellent jumping off point for a discussion of the merits of the case.
 

Santomenno v. John Hancock: Does It Matter That the 401(k) Service Provider Is Not a Fiduciary?

Posted By Stephen D. Rosenberg In Attorney Fee Awards , Class Actions , ERISA Statutory Provisions
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I wanted to comment at least briefly, or more accurately thematically, on the Third Circuit’s decision last week in Santomenno v. John Hancock, in which the Court held that John Hancock’s role as an advisor and service provider for a company 401(k) plan, by which it helped select fund options and administer participant investments, did not render it a functional fiduciary under ERISA for purposes of an excessive fee claim. It’s a well-reasoned and interesting opinion on a number of fronts, but what struck me as important about it relates more to broader issues than to the narrow details on which the decision itself turns. Personally, I think the 30 page decision itself does a wonderful job of laying out the issues and explaining them, something which is not always true of appellate decisions concerning the technicalities and complexities of ERISA class action cases, making the source document here the best place to turn for a full understanding of the details of the decision. This is not always the case, as some decisions of this ilk are simply too dense or otherwise difficult to penetrate to go first to the opinion itself, rather than to secondary sources – such as blogs and client alerts – for a full understanding of the case.

If you want to skip reading the case itself and instead go to commentary on it that sums up the central facts, Thomas Clark, who has staked out a firm position in the blogging world as one of the more scholarly analysts of fiduciary duty litigation, recommends some summaries in his post on the case. His recommendation is good enough for me in that regard, so I would refer you to his post and the summaries about the opinion for which he provides links.

For me, I was struck, as I noted, by some thematic, big picture aspects of the decision, and I wanted to discuss three of them in a post. First, in speeches, articles, presentations and even in small group meetings with clients, I often make the point that service providers to 401(k) plans are very good at structuring their contracts and relationships to avoid incurring fiduciary status. Most recently, in providing an update on ERISA litigation to an ASPPA conference, I discussed this point in the context of explaining why it is such a smart strategy: because it is simply not possible to predict the next theories of ERISA liability that the class action bar will pursue (did anyone foresee the rise of church plan litigation? I didn’t think so), the best strategy open to plan service providers is to avoid assuming fiduciary status at all, thus defanging new theories of liability without even knowing what they will be. The opinion in Santomenno provides a very detailed explanation of the contractual structure by which John Hancock avoids fiduciary status despite its intimate involvement with the plan’s assets and investment options, and as such it does a beautiful job of making my point; the Court demonstrates exactly the subtle, intelligent, thoughtful and carefully planned structure that insulates the service provider from incurring fiduciary status.

Second, I have long been a critic of a habit some courts have of, in a nutshell, jumping the gun and deciding complex ERISA cases prematurely, without first allowing the facts to develop to a sufficient level. I understand the impulse – ERISA litigation, and class action litigation in general, can be very expensive as well as disruptive to plan sponsors, and courts can often be sympathetic to the desire to avoid unnecessary litigation in circumstances where the likely outcome of the case can be anticipated at an early stage. I recently listened to one well-regarded federal judge address a law school class after a motion session, when he commented – in a different context entirely – on the fact that we have created, in the federal court system, a Maserati, a beautiful machine but one that most people can’t afford. Early resolution, such as at the motion to dismiss stage, of lawsuits that are unlikely to end up any differently later on is an antidote to this problem.

That said, however, this mindset can often lead to cases being decided too early, with regard to the question of whether a court has enough information to really get the nuances right. All too often, judicial opinions in ERISA cases issued at the motion to dismiss stage – or on appeal from an order granting a motion to dismiss – end up reading more like a law review article than a judicial decision because, by being decided without much factual development having yet occurred, they end up being based more on hypothesis and assumptions about the world of service providers, investments, fees and the like than on the actual realities of those worlds. This is a problem with a simple solution, which is for courts to avoid making significant doctrinal rulings without first having a well-developed factual record. You can see this, but from the good side, in Santomenno, in which the Court had access to significant factual information, including the relevant contractual documents, and fashioned a ruling around – and dependent upon – those facts. It makes for a far more compelling and weighty decision than would otherwise be the case. It is for me, in any event, an approach that makes me give far more value to the Court’s reasoning and makes me far more likely to be persuaded by the Court’s reasoning.

Third, the case illustrates, and the Court even alludes to briefly, a point that I think is very important and which I often raise in a variety of contexts involving ERISA litigation. This is the question of whether systemically it matters whether John Hancock or a similarly situated service provider is or is not a fiduciary, and the answer is that, generally speaking, it does not matter. Sure, it may matter to the participants and their lawyers who are looking for a deep pocket, and it certainly may matter to the business model of the service provider, but it shouldn’t actually matter to the ERISA regulatory and enforcement regime itself. As I have written many times, including too often to count in this blog, ERISA is essentially a private attorney general regime, in which the idea is that private litigation and even just the threat of it enforces proper behavior within the relevant industry. That occurs here regardless of the fact that John Hancock and other such vendors are not considered, in this context, to be fiduciaries who can be held liable, as a breach of fiduciary duty, if the expenses and fees in a 401(k) plan are too high. And why is that? Because the system outlined in Santomenno is one in which the vendors may not be fiduciaries, but they are obligated to provide sufficient information and control to the actual fiduciaries – those appointed by the plan sponsor to run the plan – to allow the actual fiduciaries to make informed decisions about the investment options and the fees. Importantly, the system as viewed and approved of by the Santomenno court is one in which the actual plan fiduciaries bear financial liability if they don’t use the power granted to them by the vendor to police fees and expenses, thereby resulting in excessively high expenses. In that circumstance, the named fiduciary becomes liable for that problem. As a result, even without the service provider being deemed a fiduciary, the system still captures the risks of excessive fees and requires action – only by the plan sponsor and its appointees rather than by service providers such as John Hancock – to ensure that the problem is either avoided or remedied.
 

Real Knowledge, Fake Knowledge, and the Duty to Inquire: Time Limitations in ERISA Litigation

Posted By Stephen D. Rosenberg In Employee Benefit Plans
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As a brief aside, while I continue to work on my promised blog post on the causation/damages aspect of fiduciary duty litigation in light of the Fourth Circuit’s recent and controversial opinion on the issue in Tatum, I thought I would pass along that my most recent article in the Journal of Pension Benefits has now been published. The article, “Real Knowledge, Fake Knowledge, and the Duty to Inquire: Time Limitations in ERISA Litigation,” discusses the discord in ERISA jurisprudence created by the Supreme Court’s recent decision in Heimeshoff on contractual time limitations on filing ERISA claims. The article is in the Journal of Pension Benefits, Vol. 21, No. 4 (Summer 2014). I don’t yet have the right to publish the article itself, as it is embargoed by the publisher for a time after publication, but I do have a couple of courtesy copies on my desk. Feel free to contact me if you would like a copy and I will send you one.

Administrative Exhaustion, Futility and the Last Refuge of the Scoundrel

Posted By Stephen D. Rosenberg In Benefit Litigation
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When it comes to claims of futility as an explanation for failing to exhaust administrative remedies in pursuing benefits under an ERISA governed plan, I have long summed up my feelings with a pithy rephrasing of Samuel Johnson’s famous line about patriotism, which I have turned into the somewhat flippant comment that “futility is the last refuge of the participant who is not entitled to benefits.” (I also like to use a similar line in insurance coverage litigation when lawyers for policyholders claim without factual support that an insurer has waived a policy term, noting – often to the court – that “waiver is the last refuge of the uninsured”). For those of you who are not especially familiar with the concept of administrative exhaustion in the context of ERISA litigation, ERISA governed plans are required to have certain internal structures for processing claims for benefits filed by participants and appeals by those participants of decisions to deny benefits under the plan. Only after those processes are concluded can a participant properly go into court and sue for benefits under the plan; if a participant goes to court without first having pursued those opportunities with the plan itself, then the participant’s claim is supposed to be dismissed for failure to exhaust the administrative remedies that were available to the participant within the plan itself.

The obligation on the part of participants to exhaust plan remedies before filing suit is stringently applied by the courts, and, naturally, in the way that physics teaches that for every action there is an equal and opposite reaction, lawyers representing participants have developed certain arguments around the application of that rule. One of those is the concept of futility, or the idea that a participant should not have to exhaust administrative remedies if the plan was clearly going to deny the requested benefits, thus making the pursuit of those administrative remedies a futile act. The law, it is said, does not require futile and wasteful action, and thus does not require a participant to pursue all avenues to collect benefits that a plan may grant if there is no question the plan administrator will never award those benefits.

Futile, in this circumstance, really means futile, however. It does not mean the plan administrator was unlikely to grant the benefits, nor does it mean that the participant believed it was futile to seek benefits. Instead, it means that the evidentiary record must establish to the satisfaction of the court that, in fact, there was no possibility the benefits would ever be awarded, no matter what information was provided to the plan and its administrator. Rob Hoskins, on his excellent ERISABoard.com, has a summary of a new decision out of the Southern District of West Virginia that emphasizes this exact point, with the Court finding that the participants did not submit enough evidence to allow the Court to actually find that benefits would not be awarded under any circumstances and that the failure to exhaust administrative remedies could not be excused away by claims of futility. This was the case even though at least one of the plaintiffs had allegedly been directly told that benefits would not be awarded even if a claim for benefits was submitted.

The case nicely highlights how high the bar is to prove futility in this context, and raises the question of what then would be enough to prove futility. Many lawyers often find that a hard question to answer, for the specific reason that most lawyers have never actually had a case in which the opportunity to recover benefits voluntarily from a plan was so futile that, in fact, futility could be proven for these purposes. When I say this, I do not mean to mock the lawyers themselves, but mean simply to point out how rare it is to see a circumstance in which the facts actually bear out a claim of futility in this context.

For myself, though, I can answer the question, and I usually do so by reference to a case I handled in which the plan administrator had used multiple ancillary proceedings and disputes to make clear that, under no circumstance, was the participant ever going to be paid the benefits in question. The ancillary disputes concerned related workplace agreements, including a non-competition provision, that perfectly paralleled the terms that had to be satisfied in the benefit plan for benefits to be awarded. Thus, as a factual matter, the decisions on the ancillary disputes pre-ordained what the decision would be from the plan administrator with regard to any claim for benefits under the ERISA governed plan in question. This fact pattern is what a valid claim of futility in response to a defense of failure to exhaust plan remedies looks like, and it illustrates how high the bar is to successfully press such a claim.
 

Tatum v. RJR Pension Investment Committee: What it Teaches About Fiduciary Obligations

Posted By Stephen D. Rosenberg In 401(k) Plans , Class Actions , ERISA Statutory Provisions , ESOP , Employee Benefit Plans , Fiduciaries
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Somehow, RJR Nabisco has always been fascinating, from beginning to now. There must be something about combining tobacco and Oreos that gets the imagination flowing; maybe its the combination of the country’s most regulated consumer product with the wonders of possibly the world’s favorite cookie. Heck, its birth even birthed a book and then, in turn, a movie starring James Garner, whose mannerisms, in the guise of Jim Rockford, are imbedded to at least a slight degree in the personality of every male my age. Ever watch a late forties/early fiftyish lawyer try a case in front of a jury? Watch closely, and you will see at least a little Rockford in the persona.

Now, in the guise of a Fourth Circuit decision over breaches of fiduciary duty involving company stock funds, RJR Nabisco has become a touchstone for ERISA litigators as well. There are a number of takeaways and points of interest in the decision, which you can find here, and the decision has generated no small number of thoughtful commentaries over the past few weeks, some of which you can find here, here, here and here. Without repeating the yeoman’s work that others have already done summing up the case, I am going to run a couple of posts with my thoughts on two key aspects of the case.

Today, I wanted to address the question of the finding of a breach of fiduciary obligations, and I will, lord wiling and the creek don’t rise, follow that up with a post on the question of proving loss as a result of the breach. These are two interrelated issues in fiduciary duty litigation, and Tatum v. RJR  has some interesting things to say, and to teach, about both.

Initially, as everyone knows, you cannot have a breach of fiduciary duty recovery without a breach of fiduciary duty. Here, the Court found a breach of fiduciary duty on the basis of the defendants’ quick and informal decision concerning whether to continue to offer company stock that was based as much as anything on myths and legends about holding company stock in a plan as it was on any type of a reasoned approach to the question. Concerned about the possible liability exposure under ERISA for holding an undiversified single company stock fund in a plan, a working group decided to eliminate the fund without actual investigation into the legal, factual, potential liability or other aspects of holding the fund. Further, they did so in a short meeting, without ever gathering any of the detailed information that would be relevant to making such a determination.

There is a real and important lesson here with regard to the manner of making any decisions with regard to plan investment options, and an additional one that is of particular significance with regard to a decision to eliminate an investment option, which was the event in RJR Nabisco that triggered potential liability. The general lesson is that the days of fly by the seat of your pants management of plan investment options are over (if they ever existed; people may have been doing it that way, but it was probably never legally appropriate to do so). Instead, a failure to properly investigate investment options, including using outside expertise to do so, has reached the point where it can essentially be considered a per se breach of fiduciary duty. It may not have that posture in the law, in the sense of pleading and proving it simply establishing the existence of a breach, but that fact pattern, at this point in time (and not simply because of the holding in RJR Nabisco, but because of a number of cases and legal developments leading up to the time of that ruling), will consistently lead to a finding of a breach.

The more specific lesson to think carefully about here is something very interesting, and to some extent ironic. The working group felt obliged to eliminate the investment option because of questions related to the liability issues of holding a non-diversified single company stock fund, but that is not the same question as whether it was in the best interests of the plan participants to hold, or to instead eliminate, that fund. It is the latter question, and not the former question which is primarily one that concerns the risks to the plan sponsor and those charged with running the plan, that is supposed to be at the heart of the decision making process when it comes to these types of issues. Fiduciaries must run a plan – subject to many limitations on that general principal – in the best interest of the plan participants, without regard to their own interests. That, in all areas of the law, is the basic premise and obligation of being a fiduciary. Here, the defendants’ fiduciary breach occurred because they failed to do that: they did not investigate or analyze the issue from the perspective of what was best for the participants but instead from the perspective of the risks to the plan sponsor and its designees (i.e., the fiduciaries).

When thought about that way, the irony becomes apparent. By being overly concerned about the liability risks of keeping the investment option, the defendants created liability exposure by getting rid of the investment option.
 

Did the First Circuit Just Change its Test for Preemption?

Posted By Stephen D. Rosenberg In Preemption
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Or did it just use a clever turn of phrase? More likely the latter, I think, but even if that is the case, it is absolutely a turn of phrase that is useful and important to know for anyone litigating an ERISA preemption issue in the First Circuit.

Historically, courts in the First Circuit have focused on two concepts in deciding whether a state law claim is preempted: (1) whether the state law cause of action seeks to supplement the causes of action available under ERISA itself; and (2) whether the state law claim requires consideration of the ERISA plan to decide the claim or would dictate specific terms or operational procedures for the plan. Two weeks ago, the First Circuit, in the case of Merit Construction Alliance v. City of Quincy, discussed the second concept by, in essence, applying a sliding scale analysis that considered how much impact the state law in question actually had on the ERISA governed plan, finding that too much equals preempted, while too little equals not preempted.

In addressing whether a city ordinance requiring bidders to establish an apprenticeship program was preempted, the First Circuit explained:

ERISA “supersede[s] any and all State laws insofar as they may now or hereafter relate to any employee benefit plan.” 29 U.S.C. § 1144(a). The Supreme Court has distilled the statute's “relate to” language into two independently sufficient alternatives: “a connection with or reference to” an ERISA plan will result in preemption. Shaw, 463 U.S. at 97. . . The battle here, as waged by the parties, focuses on the “connection with” component of the two-sided ERISA preemption calculus. . . .[N]ot every conceivable connection will support preemption. For example, state laws that merely exert an “indirect economic influence” on a plan do “not bind plan administrators to any particular choice” and, thus, do not come within ERISA's preemptive reach. Cal. Div. of Labor Standards Enforcement v. Dillingham Constr., Inc., 519 U.S. 316, 329, 117 S.Ct. 832, 136 L.Ed.2d 791 (1997) (internal quotation marks omitted). On the other hand, “state statutes that ‘mandate[ ] employee benefit structures or their administration’ ... amount[ ] to ‘connection[s] with’ ERISA plans” and are therefore preempted. Id. at 328 (final alteration in original) (quoting Travelers, 514 U.S. at 658). The path from influence to coercion amounts to a continuum and it is not always a simple task to determine where along this continuum a particular state law falls.

The Court then proceeded to analyze where on that continuum the city ordinance fell, for purposes of determining whether or not it was preempted.

I don’t believe this discussion of the continuum was intended to create a new test for preemption or to establish a new standard for analyzing the issue. There has always been an element, in First Circuit preemption analysis, of considering how closely a state law acts upon the operation or terms of an ERISA governed plan, and this discussion of the continuum seems to fit easily within that tradition. Nonetheless, looking at the question of whether a particular claim is preempted by analyzing where it falls on such a continuum is a handy and potentially persuasive manner of addressing the question. Anyone advocating for or against preemption in the First Circuit would be well-served by structuring the argument around where on that continuum the claim in question falls. It is an easy framework for the audience to grasp, while sufficiently malleable to allow a party to argue for a favorable placement on that continuum.
 

Changing Firms, and a Brief Note on the Right of Service Providers to Make a Profit

Posted By Stephen D. Rosenberg In Class Actions , Employee Benefit Plans , Fiduciaries , People are Talking . . .
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So, some of you may have noticed a change on the masthead at the top of this blog, which notes that I am now at the Wagner Law Group , in its Boston office. It has been a pleasure litigating ERISA and business disputes for the past nearly quarter century at the McCormack Firm, but every now and then an old dog needs to do a new trick. More seriously, for the past several years, I have been increasingly called on by clients to assist with DOL investigations and to handle plan deficiencies and other problems, all outside of the litigation context. The Wagner Law Group, with its deep bench and broad expertise in all areas of ERISA governed benefit plans, gives me the opportunity to provide those services more extensively to my clients, while continuing my litigation practice, which is heavily oriented towards breach of fiduciary duty and other ERISA disputes. So not only was the timing right, but so is the fit.

If you want more information on my changing firms, you can find the press release on my joining the Wagner Law Firm here. When I read it myself for the first time, I immediately thought of a line a U.S. Senator I once heard speak liked to use immediately after being glowingly introduced, which was: “thanks for the kind introduction, which my father would have appreciated and my mother would have believed.”

With that out of the way, I wanted to turn to one brief, substantive discussion. Eric Berkman has a fine article out in Massachusetts Lawyers Weekly, in which he quotes me on the First Circuit’s decision in Merriman v. Unum Life, which rejected claims that a retained asset account structure for paying life insurance benefits under an ERISA governed plan violated ERISA. In one of my quotes, I explained that:

"The plaintiffs' bar is looking for ways defendants are making money or making these services profitable and calling them prohibited transactions or breaches of fiduciary duty," Rosenberg said. "But this case, which falls in line with cases in other contexts, is saying that as long as the plan beneficiary is getting everything he or she is supposed to be getting under the plan, it's OK that the insurance company or other service provider is also making a profit."

While there are a lot of technical issues to Merriman, I think this is the important takeaway if one is looking at the forest rather than the trees. Across the benefit industry, service providers have to turn a profit; if they don’t, we will quickly not have a benefit industry. The holdings in cases like Merriman, which found the payment structure appropriate even though it could create some additional profit for the insurer, drive home the point that, so long as there is no prohibited transaction or misuse of plan assets or other illegal behavior, its okay for service providers and insurers to turn a profit.
 

Just Finished Speaking to ASPPA on ERISA Litigation, Soon to Speak at ACI's National ERISA Litigation Forum

Posted By Stephen D. Rosenberg In Class Actions , ERISA Seminars and other Resources , Fiduciaries
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So I had a great deal of fun speaking on current events in ERISA litigation to the ASPPA regional conference here in Boston this past Thursday, and my great thanks both to the organizers who invited me and everyone who attended. I am especially grateful to those in the audience, more knowledgeable about the wizarding world of Harry Potter than I, who did not point out that, in trying to compare a malicious (but hypothetical) plan sponsor to an evil but all powerful wizard, I mixed up Dumbledore and Voldemort. Oh well – much better than mixing up the prohibited transaction rules, I suppose.

One of the more interesting discussions that came up during my presentation had to do with recent case law revolving around what are, and what are not, plan assets, and how that issue influences the outcomes of cases (including ones I have litigated over the years). It is worth noting that the First Circuit just issued a very important decision validating certain employee life insurance benefit structures on the basis of just that consideration, in Merrimon v. Unum Life. One of the points I touched on in my talk is that the question of when funds are and are not plan assets for purposes of ERISA is almost certain to be a central aspect of both future litigation and future efforts by plan service providers to insulate themselves from fiduciary liability, given very recent developments in the case law. The new First Circuit decision, Merrimon v. Unum Life, is very noteworthy in this regard, as one can see in it how years of litigation and the appropriateness of a relatively common form of benefit payment structure can come down to, at root, the very basic question of what constitutes plan assets for purposes of ERISA litigation.

With that said, I wanted to turn to another speaking engagement on my calendar, which is the American Conference Institute’s 8th National Forum on ERISA Litigation, on October 27-28 in New York. I will be speaking on “Ethical Issues in ERISA Litigation,” including on one of my favorite issues, the fiduciary exception to the attorney-client privilege, along with Mirick O’Connell’s Joseph Hamilton. The reason I wanted to mention it today is that, through July 24th, a special rate is available for anyone who registers, mentioning my name and this blog. To take advantage of the special rate, you should contact Mr. Joseph Gallagher at the American Conference Institute, at 212-352-3220, extension 5511.

I hate to sound like an infomercial, but if you are planning to attend anyway (or weren’t aware of the conference before but now are interested in attending), it would be silly of me not to pass along this information.
 

What Should Employees Do in Response to Fifth Third Bancorp?

Posted By Stephen D. Rosenberg In ESOP
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The Supreme Court’s decision in Fifth Third Bancorp, concerning the standards for prosecuting stock drop claims involving employer stock held in ERISA governed plans, certainly increased the attention paid to the question of the obligations of plan fiduciaries when it came to the risky holding of employer stock in a plan. But there is a flip side to that focus on the roles and obligations of corporate officers and plan fiduciaries with regard to the propriety of excessive holdings, in risky conditions, of employer stock. You see, I have often written, and I think many others have recognized it as well, that despite the protections granted to plan participants by the fiduciary obligations imposed on those running a plan and by the requirement that the plan be operated consistent with the plan documents, ERISA does not render the plan and its administrators In loco parentis, at least outside of pensions (and even then only to a certain extent), with regard to plan investments, nor does ERISA otherwise absolve participants of having to understand the plan and make sure their accounts hold suitable investments.

I was reminded of this over the weekend, when the Wall Street Journal ran this article (subscription required) about the importance of participants in plans that hold employer stock taking the time to reduce those holdings as a proportion of their investment mix. Sure, the new stock drop rules under Fifth Third make it somewhat more likely that a group of employees in a particular company who lose a large percentage of the value of their holding of employer stock under circumstances where that could have been avoided by better decision making by fiduciaries can sue for, and possibly recover for, losses in employer stock holdings. But the reality is that such recoveries will be few and far between, as the pleadings standards are still strict and only the largest plans with such losses are likely to draw the interest and ire of the class action bar. This means that, for all other plan participants who hold employer stock in their accounts, it is incumbent upon them to remember the doctrine of caveat emptor (two Latin phrases in one Monday morning after only one cup of coffee – pretty good, don’t you think?) and to reduce their exposure to a level commensurate with their tolerance for risk.
 

Why the Supreme Court Got It Right in Fifth Third Bancorp v. Dudenhoeffer

Posted By Stephen D. Rosenberg In ERISA Statutory Provisions , ESOP , Fiduciaries
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So, where do we even begin with Fifth Third Bancorp v. Dudenhoeffer, which is, first, a fascinating decision and, second, one that has already inspired countless stories in both the legal and financial media? I thought I would begin by passing along some of the better commentary I have come across in the wake of the decision, along with a few thoughts of my own.

First of all, the best substantive piece explaining what in the world the decision actually says is this one, from Thomas Clark on the Fiduciary Matters Blog. He does a nice job of explaining what the opinion really held. One of the things that grabbed me right off the bat about his post is that he opened by pointing out that, by the Court’s opinion, “the ‘Moench Presumption’ which has been adopted nearly unanimously by every Circuit Court in the country has been unequivocally rejected.” I appreciated the fact that he pointed out that the presumption had been adopted “nearly universally” by the circuits that have considered it, rather than calling it universally accepted, as I have long been the nitpicker on this, pointing out that the First Circuit has passed on opportunities to adopt the presumption, even though most authors writing on the subject have consistently but wrongly stated that the presumption had been universally accepted by those courts presented with it. Now, though, it turns out to have been universally accepted by all but two courts to have considered it, the First Circuit (as I have written before) and the Supreme Court, but obviously the decision of one of those two not to adopt it matters more than that of the other, by some significant degree of magnitude.

Second, I liked this brief piece by Squire Patton Boggs’ Larisa Vaysman in the Sixth Circuit Appellate Blog, comparing some of the conduct that the opinion could be construed to approve of by a fiduciary to conduct that one might have otherwise slurred as a Ponzi scheme. Substantively, she emphasizes that, under the Court’s holding, to plead an ERISA stock drop claim, “a plaintiff must plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary . . . would not have viewed as more likely to harm the fund than help it.” What is interesting about this to me is that I have long considered the Moench presumption, no matter the complex doctrinal discussions that have grown up around it, to reflect a judicial need to find some way to balance fiduciary obligations under ERISA with securities obligations imposed on insiders by the securities laws. The Moench presumption always struck me as too blunt an instrument for those purposes, but that didn’t change the fact that, to me, some way of balancing those sometimes competing interests was necessary. Vaysman’s post highlights the fact that the Supreme Court did not abandon this need to balance the competing interests, but instead imposed a different means of balancing those interests. I think the Supreme Court did a nice job in Fifth Third of imposing that balancing by means of a factual evaluation of the conduct in question, rather than by a presumption, unsupported in ERISA itself, that simply, for all intents and purposes, had effectively barred such claims.

I also liked this financial trade press article, from Pensions & Investments, on the decision, as much as anything for its recognition that the decision drove home the point that “courts should evaluate stock-drop cases ‘through careful, context-sensitive scrutiny of a complaint's allegations,’” rather than by means of a judicially created presumption that cannot be located in the ERISA statute itself. This is, of course, a drum I have always beaten about ERISA litigation and the Moench presumption in particular, which is that it is much more appropriate to delve into the facts to decide whether a case has merit, because the world – and a particular case - can look entirely different on its actual facts than it looks based on judicial assumptions made at the outset of a case, including when judicially created presumptions are applied without first examining the truth of the events at issue. I also liked the author’s emphasis on the fact that the opinion recognizes that the presumption simply had no basis under the statutory language itself.

Blogger - and friend - Susan Mangiero has called me on my promise, made in a prior post about predictions on the outcome of this case, to detail my views, once the decision was in, on whether the Court got it right. As my comments about the articles above probably made clear, I am fond of the decision and think the Court got it just right. They solved a troublesome riddle, which is how to balance the securities law obligations of corporate officers with ERISA’s fiduciary obligations, in a manner that neither distorted the statute – as was the case with the Moench presumption – nor encouraged the filing of stock drop suits against fiduciaries that lacked any basis other than the fact that a stock price had declined.
 

ERISA, the Wisdom of Crowds and the First Hundred Names in the Phonebook

Posted By Stephen D. Rosenberg In ESOP
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The wisdom of the crowd, or something else maybe? Susan Mangiero has a wonderful post on something that I probably should have known existed, but did not: an internet site where lawyers and other voyeurs vote on the outcome of pending Supreme Court cases. As Susan notes, the site includes a prediction on a key ERISA case, Fifth Third Bancorp v. Dudenhoeffer, pending before the Supreme Court. It will be interesting to see whether the wisdom of the crowd can accurately predict the outcome of that case.

But there might be a more interesting question to explore, which stems from William Buckley’s famous line that he would rather be governed by the first 100 people in the phone book than the faculty of Harvard. If the Supreme Court rules in a case like Fifth Third Bancorp to the opposite of that predicted in advance by the crowd, the more interesting question may not concern the accuracy of the crowd’s prediction, but instead who reached the better result: the crowd or the Court? I will tell you what. After the Court issues its decision in Fifth Third Bancorp, if the crowd came down on the other side, I will write a blog post on which one I thought was right: the stand-in for the faculty of Harvard (i.e., the sitting justices) or the stand-in for the first hundred folks in the phone book (i.e. the voting public).
 

How to Trigger Insurance Coverage for an ERISA Claim

Posted By Stephen D. Rosenberg In 401(k) Plans , Coverage Litigation , Defense Costs , Directors and Officers , Duty to Defend , Employment Practices Liability Insurance , Exclusions , New York Insurance Bad Faith Law
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Well, how can I not comment on this, given the focus of both this blog and my practice? The Second Circuit was just presented with the question of whether an insurer has to provide a defense to a company and its officer, under the employee benefits liability portion of a policy, for an ERISA claim related to a retaliatory discharge/reclassification claim brought by an employee of the insured. The employee claimed, in essence, that she had been retaliated against for complaining of sexual harassment.

Now, coverage by insurers for complaints alleging sexual harassment or similar claims under standard CGL policies have their own complicated backstory, revolving around the question of whether, no matter what is actually alleged in the complaint by the employee, the acts in question are intentional, dishonest or otherwise harmful in a manner that precludes coverage. Some of this history goes back to at least the 1980s, and, having been involved with a client’s rollout of the coverage, it played a role to some degree in the creation and eventual acceptance of EPLI – or employment practices liability insurance – coverage.

The insurer here took the same tack with regard to the ERISA claim at issue, and, given the history noted above and the nature of the claim, understandably so. The issue, though, as the Second Circuit found, is that the ERISA claim itself did not require any type of intentional misconduct, which is basically true across the board with most types of ERISA claims, and held that the insurer therefore could not deny coverage for the ERISA claim based on an exclusion for dishonest or malicious acts. The Court found that the ERISA claim could, in essence, simply be a claim for negligent conduct – at least as pled in the complaint – and thus the insurer could not deny a defense to the insured based on such an exclusion, which would not reach a claim of negligence.

There are a number of lessons here for both insured companies (and their officers) who are sued in ERISA cases and for their insurers. First, don’t assume that principles related to coverage of employment related claims will transfer to an ERISA claim; they may very well not do so. Second, you have to pay close attention to the true nature of an ERISA claim (including its key legal elements) before deciding whether or not there is coverage, and not simply to the surrounding factual allegations relating to the insured’s conduct (which in most harassment and similar claims are usually pretty egregious, at least as alleged by the plaintiff).

Anyway, here is the decision, which is Euchner-USA, Inc. v. Hartford Casualty Insurance Company, and here is an article providing a nice summary, for those of you who don’t want to read the full decision.
 

What Happens to Company Owners Who Get Overaggressive When Selling Out to an ESOP?

Posted By Stephen D. Rosenberg In ERISA Statutory Provisions , ESOP , Fiduciaries
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Just what is it about Chicago and ESOPs? Is it something in the water, redolent of gangsters and Al Capone? First, there was the Sam Zell/Tribune ESOP transaction, which, as I wrote before, was such a complex transaction that, building it around the ownership interests of the employees could not help but raise fiduciary flags, and eventually resulted in a substantial settlement of a breach of fiduciary duty lawsuit. Now, there is Fish v. GreatBanc, decided last month by the Seventh Circuit, which involved an ESOP transaction that, not only went south, but went south after the financial advisor to the independent trustee evaluating the proposed transaction on behalf of the participants called it “the most aggressive deal structure in the history of ESOPs.”

I have said it before and I will say it again (and I am sure I will say it many times after today too): ESOPs are financial stakes of employees, not mere financial tools for private company owners. Those who forget that lesson are, if not doomed to repeat the past lessons of earlier fiduciaries, at least doomed to sitting at the defendants’ table in a courtroom.

Leaving that lesson aside, the decision itself is instructive on two major points of ERISA litigation. The first is the proper interpretation and application of ERISA’s fiduciary duty statute of limitations to ESOP disputes and the second is as an excellent overview of the rules governing fiduciaries with regard to private company ESOPs. The opinion itself is so informative and, happily, well-written that I strongly recommend reading it, despite its relative length. For those who would prefer the Cliff Notes, Mark Thomas and Robert Shaw of Williams Mullen provide an excellent summary in this article from last week.
 

What Does the Moench Presumption Look Like in the Light of the Real World?

Posted By Stephen D. Rosenberg In Conflicts of Interest , ESOP , Fiduciaries
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One recurring problem in ERISA litigation is the tendency of courts to address and decide novel and complex issues on motions to dismiss, rather than after allowing full development of the factual record. New and original breach of fiduciary duty theories can look entirely different when considered by courts on the full record than they appear when analyzed solely on the pleadings, at the motion to dismiss stage. The excessive fee cases presented this dynamic perfectly, with early decisions, such as Hecker v. Deere, that were resolved on motions to dismiss appearing, in hindsight, to be incorrect in comparison to later decisions, either made after a full factual record was developed, such as in Tibble, or on motions to dismiss after years of litigation had established a broader and more general understanding of the issues raised by those types of claims. One of the underlying themes of my article, “Retreat from the High Water Mark,” was that the early decision on the excessive fee theory in Hecker was flawed, precisely because the court did not have before it a detailed, factual understanding of the nature of the claim and of the fee structure. As a result, the court, by deciding such a novel theory at the motion to dismiss stage, had to assume facts about the mutual fund marketplace and 401(k) plans that were not necessarily true.

My biggest criticism of the Moench presumption, more than its effort to strike a balance between fiduciary obligations under ERISA and securities law obligations imposed on public companies and their officers, is the creation and application of the presumption at the motion to dismiss stage, rather than waiting to see what the evidence shows as to whether corporate insiders underserved the interests of participants when serving as the fiduciary for company stock plans. Just as the history of excessive fee litigation shows, and as I discussed in “Retreat from the High Water Mark,” it is much easier to more accurately determine whether fiduciary obligations are breached when the facts are all before the court, rather than by means of the assumptions, surmise and allegations that can animate decision making in such complex and novel areas at the motion to dismiss stage. The Moench presumption effectively precludes stock drop claims under ERISA, and effectively establishes the governing rule of law for fiduciaries of employer stock plans. The rule and its application may be right, or it may be wrong, but it would be a lot easier to determine that by considering the obligations as fiduciaries of corporate insiders in light of the true facts of their conduct, which the application of the presumption at the motion to dismiss stage – and in fact even its creation without and before any court has ever fully developed and analyzed the facts of such a claim – precludes.

I was thinking of this because Mitchell Shames, who is now an independent fiduciary at Harrison Fiduciary and before that was the long time general counsel for State Street Global Advisors (including during the time that the First Circuit blessed their structure for handling exactly these types of conflicts, in Bunch v. W.R. Grace), has pointed out that corporate insiders serving as fiduciaries in this context do actually face conflicts, and not just in theory. Mitchell has written an excellent post detailing, from firsthand knowledge, the conflicts faced by corporate insiders who are tasked with making investment decisions of this kind for plan participants.

Mitchell writes that when a CEO appoints insiders to make these types of decisions:

everyone takes notice. While CEO lieutenants may be adept at various technical and managerial skills, often, intense loyalty to the CEO is a common attribute. (Dissidents typically do not rise to the C-suite).

This loyalty often includes a precise understanding of the CEO’s goals and priorities with respect to corporate strategy and is often rewarded by promotions, committee appointments, raises, bonuses, stock options and other assorted perks. The senior managers are properly incentivized to advance the vision of the CEO.

Upon assuming a spot on a fiduciary committee, however, these same senior managers are required to shed the very skills that contributed to their corporate rise. When making decisions on behalf of the plans, they are supposed to set aside any allegiance to the CEO, forget about the stock options they may have patiently accumulated over the years, and make decisions irrespective of an impact on corporate earnings.

The potential for conflicts of interest are real; they are not the abstract musings of lawyers and academics. Many transactions squarely put the corporation and the plan on opposite sides, with competing goals.

I was struck, in regards to my concerns about the limitations imposed by “motion to dismiss decision making” and their relationship to the Moench presumption itself, by Mitch’s conclusion, in which he asked: "So, can these corporate offices so deftly switch hats as ERISA lawyers assume? Are fiduciary committee members so professional, so trustworthy, so ethical, that they are immune to the human impulses which gave rise to [the principle that]: 'No one can serve two masters'?"

One wonders whether the Moench presumption would seem to fairly balance the needs of sponsors and participants if it was considered only after a full factual record was created that might show this type of problem with conflicts faced by the fiduciaries. Would the rule seem to make as much sense in that light as it does when a court is faced with only the allegations of a complaint? Would a court reach a different conclusion than at the motion to dismiss stage on this issue if the judge was considering this type of claim after hearing a senior corporate officer who had served as the fiduciary testify as to his understanding of his obligations, conflicts, and the need to balance them?

We can’t know this definitively. What we do know, though, is that it would certainly be a lot better to decide what the legal rule governing stock drop cases should be by first learning all the relevant facts, and then creating the rule, rather than by doing it in reverse (which is essentially where we are right now, with the Moench presumption applied by courts at the pleading stage).
 

More on the Golf Course RFP

Posted By Stephen D. Rosenberg In 401(k) Plans , ERISA Seminars and other Resources , Employee Benefit Plans , Fiduciaries
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Susan Mangiero, one of my favorite experts on financial deals and transactions, was kind enough to post on my presentation to the Boston Regional Office of the Department of Labor, where I spoke on common mistakes by plan sponsors. I spoke as part of a day long training program that Susan presented at as well, even if she was too modest to mention it in her post, and I was very pleased and impressed by the audience, their participation and their questions. I have written before that I generally hold a high opinion of the Department’s staff, and the audience participation at the training session did nothing to lessen that opinion. Both in my primary talk, on plan sponsor mistakes, and during a subsequent panel that I participated in on litigation issues, fee disputes, and fiduciary governance of plans, the audience raised great points and asked pointed questions. One member of the audience shared with me an additional important mistake plan sponsors make, that I had not previously thought of as a significant problem, primarily because it is not one that arises in litigation but is instead more of a day to day compliance issue. There is nothing better as a speaker than having walked away having learned something from the audience that you did not know the day before.

Susan’s reference to the “Golf Course RFP,” which actually is a slide in my PowerPoint deck, concerns one of my chief cautions to smaller and mid-size companies, where benefit plans, particularly 401(k)/mutual fund programs, may be chosen by a company owner simply based on the vendors that are already in the owner’s social circle, such as, yes, those at his or her country club. If it turns out down the road that employees were paying too much for or getting too little from the plan, in comparison to what could have been located in the marketplace as a whole at that time, picking a plan’s vendor in that manner will most certainly come back to bite the company owner. Indeed, from a trial lawyer’s perspective, such a selection process would, in a fiduciary duty lawsuit over that plan, be a smoking gun used to show poor processes and a corresponding breach of a fiduciary duty. At the end of the day, RFPs aren’t normally conducted on a golf course, and this is one area of business life where it is especially important to remember that.
 

Why Commonality is Relatively Easy to Prove in ERISA Class Actions

Posted By Stephen D. Rosenberg In Class Actions , Percentage Players Die Broke Too: Notes on Litigation and Trial Tactics
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One should never underestimate the fundamental role that procedural and related tactical issues play in a case, and how they impact the very question of whether a plaintiff will ever be able to have a judge or jury rule on the merits of a case. Procedural barriers to prosecuting particular claims can be the end of a case, without anyone ever hearing the merits of the dispute, unless a plaintiff can hurdle them. In a sense, this phenomenon means that a plaintiff often has to prove two parts, broadly speaking, of a case to win: first the procedural and tactical niceties needed to even get the case in front of a fact finder, and then the actual merits. In what is sort of a mirror image, a defendant can prevail in a case simply by winning either one of those parts of the case.

This phenomenon means that there are procedural opportunities for a defendant to prevail without ever proving the merits of the defendant’s case, but, interestingly enough, this does not exist in reverse: there really is no such thing as a procedural advantage that might allow a plaintiff to prevail without ever proving the merits of the case (other than an outright default by a defendant, but that really doesn’t happen unless the defendant is judgment proof which, for a plaintiff, is the same thing as losing).

Nowhere is this phenomenon clearer than in class action litigation, in which lawyers and courts have taken to focusing on the procedural requirements for forming a class, in ways that to some extent tend to devalue, by comparison, the merits (or lack thereof, as the case may be) of what the putative class representatives and the class itself may have to say. This approach to class action litigation essentially gives pride of place to the propriety of forming a class, over the merits of the case. If the plaintiffs cannot get past this procedural hurdle, they will never get the merits of their case heard; simultaneously, if defendants can ensure that plaintiffs don’t get past that hurdle, then they effectively win without anyone ever getting to the merits of the claims.

Commonality – which is the requirement that the class members have some central part of their claims against the defendant in common – is the central focus of this aspect of class action litigation, but it has a less than great track record in precluding certification of classes in ERISA cases. There is a clear and interesting reason for this, but it is best approached by the back door, by first explaining how defendants faced with ERISA class actions attack commonality, and seek to use the requirement of commonality to preclude certification of a class and thereby end class action litigation before the merits of the action are reached.

As explained in this excellent blog post, there are a number of ways to attack commonality in an ERISA class action, by focusing on what may be different among the members of the proposed class. I like the article a great deal as a handy checklist for where to start with regard to investigating and challenging the existence of commonality – and by extension the propriety of forming a class – in ERISA litigation.

However, in the ERISA context, one should not be fooled into overconfidence by these types of lists or, as well, by the fact that this procedural tactic has been very effective in various types of class action cases. Commonality is simply not that difficult to prove in ERISA litigation, in comparison to other types of proposed class actions, such as wage cases. This is because, in general, breaches of fiduciary duty related to an ERISA plan affect all participants and beneficiaries in the same manner, which renders the ERISA violation at issue common to all members of a proposed class. The only real trick in this regard is for the plaintiffs to make sure they account for any aspects of the breach in question that might render only some participants (for instance, those in the plan during a certain time period) and not others subject to the violation, and to then draw appropriate lines around the makeup of the class so as to laser out any plan participants who were not affected and harmed by the particular conduct in question. Do this, and commonality exists.
 

What if Trust Law Cannot Support the Moench Presumption?

Posted By Stephen D. Rosenberg In 401(k) Plans , ERISA Statutory Provisions , ESOP , Fiduciaries
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The “stock drop” presumption of Moench, now before the Supreme Court in Fifth Third Bancorp, is best understood as a judicial attempt to balance the sometimes conflicting demands placed on corporate insiders by, on the one hand, the securities laws and, on the other, ERISA, when it comes to employee stock plans in publicly traded companies. It’s not an unreasonable tack to take, even if those perceived conflicts could be easily handled and avoided simply by the use of an outside independent fiduciary, as W.R. Grace did years ago in the situation that became the First Circuit case of Bunch v. W.R. Grace, which I discussed here, rather than using a corporate insider in that role.

The problem though, for those who believe that it is appropriate for the courts to find a way to balance those obligations, is how to get to that result. The terms of the ERISA statute itself don’t easily lend themselves to the creation, justification and imposition of the presumption, leaving the importation of, and reliance upon, doctrines developed under trust law to provide a basis for the creation of the presumption. But what if trust law, properly understood, cannot support the creation of a presumption of that much benefit to plan fiduciaries? Can the presumption stand if that is the case? The extent, nature and degree to which the Supreme Court grapples with these two issues – whether either the terms of the statute or the scope of trust law can support the presumption – will tell a very interesting tale, by illustrating whether the presumption’s status is actually driven by the legal foundation crafted by the statute and trust law or, instead, by an outcome driven need to balance the securities law regime with the dictates of ERISA. If the presumption is found valid, one will need to look closely at whether the Court was able to properly base that conclusion in the historical intricacies of trust law or in the statute’s language. If so, then the presumption can be understood to follow naturally from existing law; if not, then the presumption must be seen, as many have argued it is, as simply a convenient judicial fiction, one not properly founded on either trust law or statutory language, used to balance conflicting legal obligations imposed by distinct statutes.

Into this question rides Professor Peter Weidenbeck, in this absolutely fascinating article, “Trust Variation and ERISA’s ‘Presumption of Prudence’,” in which he details the history of the trust law basis on which the Moench presumption is said to rest, and finds that the trust doctrines relied upon by the courts that have created and applied the presumption do not support the presumption. In a nutshell, Weidenbeck argues "that prevailing state law standards governing trust variation do not impose the extremely restrictive (well-nigh insuperable) barriers that the federal courts following Moench mistakenly assume” and that deciding how to handle stock drop cases requires a more nuanced and comprehensive analysis of statutory history.

You can download his article here, and I highly recommend reading it. Even though it discusses tax issues and trust law, it is very readable, and only 24 pages in any event. At a minimum, the Supreme Court’s eventual opinion in Fifth Third Bancorp will make a lot more sense if you read the article first.
 

Fifth Third Bancorp and the Lack of a Historical Foundation for the Existence of a "Coach Class Trustee"

Posted By Stephen D. Rosenberg In ESOP , Fiduciaries
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This is an interesting point, to me anyway, and a point that, for me, falls in that odd space between too short for a good blog post but too long for a tweet. I have written before that, because I seldom use blog posts to simply pass on others’ work and instead usually post substantive discussions, I created a twitter feed to have somewhere to pass along other people’s work when I am only going to briefly comment on it and not speak in depth on that work. This, of course, has left me in the position of not knowing exactly what to do when I have something to say about someone else’s writing that will take less than a couple of paragraphs to say but more than a hundred and forty characters. (Maybe someone needs to start a new micro-blogging app, say with 280 characters as the limit??).

Anyway, Chris Carosa has a wonderful essay out on the true and historic meaning of the term fiduciary, and the high level of care that its classic meaning imposes on someone serving in that role. The timing of the essay is interesting, coming as it does right after the Supreme Court heard argument on the Fifth Third Bancorp case, concerning whether there are limits on the fiduciary obligations of the trustee of an ESOP that might not exist in other circumstances. As this argument recap by Timothy Simeone of SCOTUS blog points out, at least some of the Justices seemed troubled by the idea that the fiduciary in that circumstance might have a lesser standard of care than he or she would in other circumstances, with Justice Kennedy quipping that the ESOP fiduciary, if that is the case, would then be some sort of a “coach class trustee.” And therein lies the point I wanted to make, one too long to make in my earlier retweeting of Chris’ essay: it is impossible to reconcile the existence of a “coach class trustee” with Chris’ presentation of the historical meaning of the term fiduciary. You just can’t do it.
 

Ayres is Wrong, and Hecker is Wrong: Establishing a Fiduciary Breach Through Excessive Fees

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries
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A further thought on Ayres’ focus on what he calls dominated funds, namely funds with higher than necessary fees that nonetheless contain a disproportionate amount of a 401k plan’s assets, and whether their inclusion by a plan sponsor should be seen as a fiduciary breach. As I discussed in a recent post, it’s a viable theory, and a welcome antidote to the very low bar set by the Seventh Circuit in Hecker on the question of fees when it found that simply including lots of funds with fees set by the market as a whole represented a sufficient effort by fiduciaries when it came to protecting participants against unnecessarily high fees. However, as I also pointed out in my recent post, the Eighth Circuit, in Tussey, cabined that mistake by the Seventh Circuit, without needing to take the broader step urged by Ayres, which is to treat the excessive use in a plan of one fund with higher fees, in and of itself and without anything more, as a breach (as Ayres and a co-author argue for here). It is probably a bit much to say that this later circumstance, without more (such as the circumstance being caused by a mapping strategy that benefits a plan sponsor by driving down operational costs), should be enough to impose liability for breach of a fiduciary duty.

And why is that? Probably because such an approach applies a very paternalistic view to 401k plans, employees, and their employers (in the guise of plan sponsor and/or plan fiduciary). Ayres’ thesis presumes the existence of low cost – presumably index – funds within a plan, along with higher cost funds, and assumes that it is effectively a breach to allow funds to flow into the latter. It seems to me, though, that it places too low a burden on participants, and gives them too little credit. If there are a range of funds available in a plan, and mapping or other decisions are not driving employee withholdings into the higher priced funds, then it seems to me participants should be free to make their own call on what funds to hold. Further, unless one accepts the premise that no knowledgeable investor would ever use any fund other than the lowest cost funds (which requires living under a presumption that only index funds or similar passive investing funds can ever be an appropriate investment), then it is not legitimate to say that a prudent person in the position of the plan fiduciary could not make available higher cost funds along with lower costs funds. If that is the case, then it cannot be a breach of fiduciary duty to include such a range of funds in a plan – even if it results in some participants over investing in the higher cost funds.

In essence, while the Seventh Circuit – as I have often said and written – was wrong to believe that the inclusion of many funds is enough to preclude a breach of fiduciary duty by the inclusion of investment options with excessive fees, so too is the premise that simply having an excessive amount of assets invested in a higher price product that is included among many funds with varying fee structures is enough to constitute a breach. The truth, as with most things, lies somewhere in between – you need more than simply excessive investing in a higher priced fund, and less than simply inclusion of many fund choices, to have a fiduciary breach based on the costs of the investment options in a 401k plan.
 

Tussey v. ABB - Opening Up New Avenues for Excessive Fee Litigation and Putting the Final Nail in the Coffin of Hecker v. Deere

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries
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This Forbes opinion piece by Yale Professor Ian Ayres is interesting for two things, one of broader relevance and one of interest perhaps to me alone. In it, he argues that our analysis of excessive fees as a potential fiduciary breach should not be based solely on fees in general, but also on an analysis of whether excessive amounts of plan assets are being placed into the one or two investment options in a plan that have particularly high fees, rather than in the many other investment options in a plan that have lower fees; those lower fee options give a plan the image of having reasonable fees, by balancing out the fees charged in the more expensive options. He suggests that Tussey v. ABB should be thought of and analyzed as a case concerning this type of a fiduciary breach, where the problem with the fiduciary’s conduct was the decision to map plan assets into higher fee funds for the benefit, in the longer run, of the plan sponsor. This broader argument for rethinking how we analyze fiduciary prudence in the context of fees opens up new avenues for prosecuting fee claims, but also raises a red flag that prudent and conscientious plan sponsors need to pay attention to; namely, is the overall structure of plan choices optimal for the participants, rather than just whether there are some low cost choices open to the participants who are sophisticated enough to want to avoid the higher cost options. In essence, it is an argument that plan sponsors who want to do a good job for their participants need to see the forest, not just the trees, in structuring a plan.

And this is important because, jaded and cynical as I may be after litigating ERISA disputes for decades, I still think most plan sponsors are truly motivated to put together a strong plan for their employees, and are not motivated – at least not knowingly and consciously – by nefarious purposes. (Before people start bombarding me with emails and comments about their own experiences or particular cases they have been involved with that are to the opposite, note that I said “most,” not “all,” and that I made the word choice deliberately). Diligent plan sponsors who want to create the best possible plan would do well to keep Professor Ayres’ thesis in mind in formulating a plan structure and selecting its investment options.

I also said that the article was interesting to me, as well, on another level, one that may be of interest only to me. A few years back, right after the Seventh Circuit had decided Hecker v. Deere, I took the decision to task in an article,”Retreat from the High Water Mark: Breach of Fiduciary Duty Claims Involving Excessive Fees after Tibble v. Edison International.” In it, I argued that the Court was wrong to believe that having a range of fee options spread among many investment options was enough to defeat an excessive fee claim. Ayres likewise takes exception to the Seventh Circuit’s analysis in this regard, finding that it was not consistent with plan reality. To me, one of the most important parts of the holding in Tussey v ABB was not the float issue, heavily focused on by most reports, but the Eighth Circuit’s ringing rejection of the thesis, pressed by the Seventh Circuit in Hecker, that it was enough to defeat an excessive fee claim that a plan provided a range of investment options with a range of fees; the Eighth Circuit, in my thinking, put a well-deserved end to that line of argument, when the Court explained:

The ABB fiduciaries contend the fact the Plan offered a wide “range of investment options from which participants could select low-priced funds bars the claim of unreasonable recordkeeping fees.” In support, the ABB fiduciaries rely on Hecker v. Deere & Co. (Hecker I ), 556 F.3d 575, 586 (7th Cir.2009), Loomis v. Exelon Corp., 658 F.3d 667 (7th Cir.2011), and Renfro v. Unisys Corp., 671 F.3d 314, 327 (3d Cir.2011), which the ABB fiduciaries propose “collectively hold that plan fiduciaries cannot be liable for excessive fees where, as here, participants in a self-directed 401(k) retirement savings plan that offers many different investment options with a broad array of fees can direct their contributions across different cost options as they see fit.” The ABB fiduciaries' reliance on Hecker I and its progeny is misplaced. Such cases are inevitably fact intensive, and the courts in the cited cases carefully limited their decisions to the facts presented.

I have always thought that Hecker was wrongly decided with regard to this issue, and that one of the reasons for the mistake was that the Court did not fully develop and analyze the factual context before reaching a decision. As a result, I don’t necessarily agree with the Eighth Circuit that Hecker is limited to its own circumstances by its own facts; I think it is limited to its own circumstances by its poor reasoning in this regard. Nonetheless, I can live with the Eighth Circuit approach, which I think all other courts are likely to follow as well, that Hecker’s erroneous analysis in this regard cannot control other cases because of the fact-intensive nature of the inquiry.
 

The First Circuit's Wary Relationship to the Moench Presumption

Posted By Stephen D. Rosenberg In Class Actions , ESOP , Fiduciaries
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By the way, speaking of Fifth Third Bancorp, I take exception at the assertion (see here, for instance) that every circuit to consider the issue has effectively adopted the Moench presumption, although with some dispute over how and when to apply it. The First Circuit, which tends to favor fact specific resolutions of complex ERISA disputes over sweeping doctrinal approaches to resolving them, rejected a variation on the presumption in 2009 in Bunch v. W.R.Grace. The Court explained:

Appellants seek to induce us to reject State Street's actions by having us apply a presumption of prudence which is afforded fiduciaries when they decide to retain an employer's stock in falling markets, first articulated in Kuper v. Iovenko, 66 F.3d 1447, 1459 (6th Cir.1995) and Moench, 62 F.3d at 571–72. The presumption favoring retention in a “stock drop” case serves as a shield for a prudent fiduciary. If applied verbatim in a case such as our own, the purpose of the presumption is controverted and the standard transforms into a sword to be used against the prudent fiduciary. This presumption has not been so applied, and we decline to do so here, as it would effectively lead us to judge a fiduciary's actions in hindsight. Although hindsight is 20/20, as we have already stated, that is not the lens by which we view a fiduciary's actions under ERISA. DiFelice, 497 F.3d at 424; Roth, 16 F.3d at 917–18. Rather, given the situation which faced it, based on the facts then known, State Street made an assessment after appropriate and thorough investigation of Grace's condition. Katsaros v. Cody, 744 F.2d 270, 279 (2d Cir.1984). This assessment led it to find that there was a real possibility that this stock could very well become of little value or even worthless to the Plan. It is this prudent assessment, and not a presumption of retention, applicable in another context entirely, which controls the disposition of this case. See also LaLonde v. Textron, Inc., 369 F.3d 1, 6–7 (1st Cir.2004) (expressing hesitance to apply a “hard-and-fast rule” in an ERISA fiduciary duty cases, and instead noting the importance of record development of the facts).

This came five years after the Court refused to accept and apply the Moench presumption in LaLonde v. Textron, where the Court explained:

As an initial matter, we share the parties' concerns about the court's distillation of the breach of fiduciary standard into the more specific decisional principle extracted from Moench, Kuper, and Wright and applied to plaintiffs' pleading. Because the important and complex area of law implicated by plaintiffs' claims is neither mature nor uniform, we believe that we would run a very high risk of error were we to lay down a hard-and-fast rule (or to endorse the district court's rule) based only on the statute's text and history, the sparse pleadings, and the few and discordant judicial decisions discussing the issue we face. Under the circumstances, further record development—and particularly input from those with expertise in the arcane area of the law where ERISA's ESOP provisions intersect with its fiduciary duty requirements—seems to us essential to a reasoned elaboration of that which constitutes a breach of fiduciary duty in this context.

At the end of the day, once the Supreme Court has ruled in Fifth Third Bancorp, these decisions may be rendered little more than a historical oddity and an interesting backdrop to the development of the presumption of prudence in the case law. For now, though, they constitute an interesting footnote to the discussion about how the various circuits have, to date, applied the Moench presumption.
 

One Judge's Vote on the Likely Outcome of Fifth Third Bancorp

Posted By Stephen D. Rosenberg In Class Actions , ESOP , Fiduciaries
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Wow, what a great piece by Rob Hoskins summing up the law throughout the circuits on the Moench presumption, by means of a review of a new decision by the Eastern District of Missouri on the issue. I highly suggest reading at least Rob’s “Moench Presumption for Dummies” if you want to have a solid understanding of the issues raised by the use of the presumption, or the decision itself for more detail. One of the things that is interesting about the decision itself, by the way, is the court’s handling of the pending Supreme Court review of the Moench presumption issues. The Court ruled on the motions pending before it, finding that the Moench “'presumption of prudence' is appropriately applied at the motion to dismiss stage," but noted that:

The Court is cognizant that this issue is currently pending before the United States
Supreme Court. See Fifth Third Bancorp v. Dudenhoeffer, No 12-751, cert. granted December 13, 2013. Consistent with the majority of courts construing the applicability of the presumption, the Court will apply it with respect to the pending Motion. In the event that the Supreme Court determines the presumption is inapplicable in the 12(b)(6) analysis, the Court will entertain a motion to reconsider.

Doesn’t this mean, effectively, that the District Court is making a prediction of where the Supreme Court will end up on this issue? I suspect the judge wouldn’t have ruled right now to the opposite of what the judge believed was likely to be the outcome of the Supreme Court case.
 

What Rochow Teaches Us About Amara Remedies, and What It Doesn't

Posted By Stephen D. Rosenberg In ERISA Statutory Provisions , Equitable Relief , Long Term Disability Benefits
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You know, I have been wanting to sit down for weeks – at least – to write about Rochow v. Life Insurance Company of America, initially with regard to the extraordinary remedy initially imposed by the court and then later with regard to the Sixth Circuit’s decision to return to the issue by hearing the case en banc, but I just plain haven’t had the time to write in detail on something that raises so many issues. Beyond that, I am not convinced that the problems raised by Rochow, and the issues it requires observers to consider, are well-suited to the form of a blog post, as there is simply a lot of ground to cover to be able to talk intelligently about the case. This latter problem, though, was solved for me by Alston & Bird’s Elizabeth Wilson Vaughan, who somehow summed up the entire history of the case and the issues it places in play in one simultaneously concise yet in-depth treatment, which you can find here. I highly recommend it to anyone who wants to understand the case, and what the hoo-ha is about, in advance of the en banc return to the issues by the Sixth Circuit.

I have long been on record with the view that the Amara addition of equitable remedies fills in a glaring hole in ERISA, and particularly with regard to ERISA remedies, by, if not solving, at least significantly reducing the problem in ERISA litigation of “harms without a remedy.” We all know those cases, in which a plaintiff makes a compelling presentation of harm, but the remedial structure does not provide for a clear right of recovery; most typically, benefits aren’t due in light of the circumstances at play, and thus a denial of benefits by the administrator was correct and must be upheld, but other issues – most typically a problem in communications with the participant – led to financial losses. We all know, as well, that many judges reluctantly accept that this occurs in ERISA litigation, and rule accordingly, although often expressing unhappiness about doing so – if not in their opinions, then in comments from the bench during hearings. The Amara equitable remedies framework provided a structure for resolving the most meritorious of those claims, by allowing equitable remedies such as estoppel and surcharge to fill in that hole.

The original Rochow disgorgement ruling – widely perceived, including by me, as excessive – falls outside of this framework, by going far beyond simply the proper use of Amara remedies to fix that problem, and is flawed for this reason alone. I have little doubt that the Sixth Circuit will fix this in its next opinion in the case. But for now, it is important, I think, to remember that this is an outlier decision, one that should not be seen as demonstrating some type of inherent flaw in the Amara equitable remedies rubric which, properly used and confined by judicial development of case law to the purpose of solving the “harms without a remedy” problem, is instead a valid and appropriate judicial interpretation of ERISA’s grant of equitable relief. Rochow, in the end, is best thought of, in its rulings to date, as the McDonald’s coffee cup case of ERISA remedies: an example of the need for judicial control over remedies, but not an indictment of the idea of having them.
 

If an Appeal is Filed and Nobody Knows It, Is it an Appeal?

Posted By Stephen D. Rosenberg In Benefit Litigation , Long Term Disability Benefits
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There are many variations on the old question that, if a tree falls in the woods and no one is there to hear it, did it really fall. I am sure, like me, you have heard many versions of that question that are not fit to be reprinted in a PG-13 rated blog.

But I couldn’t help thinking of that line when I read a recent decision from the United States District Court for the District of Massachusetts. In Morgan v. Reliance Standard, an LTD insurer terminated benefits, and the participant responded in, literally, “dismay,” writing a letter to the company expressing that sentiment. The carrier treated it as an appeal of the original termination, although apparently with some trepidation as to whether an appeal was really being filed. The insurer processed it as an appeal, in standard – and from the looks of the decision, appropriate – form, assigning it to an appropriate medical expert for a record review, eventually resulting in a decision upholding the denial on appeal.

Of course, that begged the existential question of whether there was an appeal at all, or, in other words, whether there can be an appeal if the participant, who must file the appeal, doesn’t mean to file one and doesn’t think he filed one. While one might think that someone must actually file an appeal to have an appeal, you would be wrong. The Court found that the participant could not complain of the insurer’s crediting him with an appeal he didn’t file, unless he was prejudiced by it, because under the law in the First Circuit, procedural errors in handling a benefit claim do not give rise to a remedy unless the participant was prejudiced by the error. The Court found that the course of communications between the insurer and the participant caused the participant to have essentially the same protections in the processing of his claim as he would have had if he had, in fact, filed an appeal, and that the participant therefore suffered no prejudice from the fact that his claim was treated as though appealed. The Court then proceeded to decide the case on its merits.

I am not certain whether this case really teaches us anything new about ERISA litigation, since it is very fact specific and certainly concerns a situation that is unlikely to repeat itself very often. It does, though, appear to provide an answer to the question of whether a tree actually falls in the forest if no one is there to hear it: the answer is clearly yes, at least if a court in the First Circuit is deciding the answer.

Thanks, incidentally, is due to Rob Hoskins’ baby, the ERISA Board, for catching this odd little fact pattern, and giving me an excuse to discuss trees, forests, and what they have to do with ERISA.
 

Excessive Fee Litigation Remains a Hot Topic

Posted By Stephen D. Rosenberg In Class Actions , Employee Benefit Plans , Fiduciaries , Standard of Review
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There’s a nice overview from Bloomberg BNA on plan fee litigation, and its status in the courts at this point in time. The article opens up by setting the stage:

Plan fee litigation had a big year in 2013, with divisive appellate court decisions affecting standards of judicial review, statutes of limitations and functional fiduciary status that may open the door for increased and novel litigation, employee benefits attorneys said during a conference panel presentation.

Its interesting to read the rest of the article, which summarizes the current status of cases such as Tibble and Leimkuehler, and discusses the totally conflicting views of the defense bar and the plaintiffs’ bar over these cases. If there were ever a case of two sides not being able to agree on whether it is day or night, it is the two sides of the bar arguing over the propriety of judicial decisions over ERISA liability, particularly with regard to excessive fee litigation. I thought there was a divide bordering on the ecumenical decades ago, in my earlier life as an insurance coverage litigator (which I still sometimes am, when not busy with ERISA fiduciary problems or other types of litigation) between policyholder and insurer lawyers over oddities like the asbestosis exclusion, the meaning of the words “expected or intended,” or what the words “sudden and accidental” actually mean, but they had nothing on the current divide between the plaintiff and defense bars when it comes to high stakes ERISA litigation (a division I wrote about at length here).

Substantively, though, the best takeaway from the article comes in its last line, in a quote from someone with the Department of Labor, who notes on one particular issue raised by the fee cases that it is “an interesting issue, and I don't think we've heard the last of it.” One can say that across the board about all of the excessive fee litigation, and its spin off of other types of cases all targeting the question of whether plan participants are paying more than they should for plan benefits. Tibble itself is a wonderful example of the extent to which excessive fee litigation is a gift that keeps on giving, of a sort, for everyone from the lawyers involved, to plan participants (in those instances where they either obtain a recovery as part of a class or receive the incidental benefit of having lower plan expenses because sponsors are responding to the threat, real or perceived, of excessive fee litigation), and, yes, commentators. I wrote substantially about Tibble way back at the trial court level, in 2011, and here we still are, these many years later, writing and talking about the further history of that case.
 

The Fiduciary Exception to the Attorney-Client Privilege: What It Is and Why It Matters

Posted By Stephen D. Rosenberg In Benefit Litigation , Class Actions , Employee Benefit Plans , Fiduciaries , Percentage Players Die Broke Too: Notes on Litigation and Trial Tactics
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One of the great advantages a Massachusetts ERISA litigator has is that our federal magistrate judges are very good with ERISA issues, which is something that is well illustrated by this decision on the scope of the fiduciary exception to the attorney-client privilege in ERISA litigation. In Kenney v. State Street, the magistrate judge dealt, in a very clean and easily understood manner, with the key issues that come into play under that doctrine, which have to do with its borders: to be exact, what attorney-client communications are subject to disclosure under this exception, and what ones are not. This is a more complicated issue of line drawing than it might appear at first glance because, in essence, you are considering the same course of communications, between the same lawyers and the same plan representatives, dealing with the same general topic (the plan’s operations), sometimes as part of the same in-person meeting, and deciding where the line falls as to the communications that must be produced and those that do not have to be produced.

The takeaway from Kenney on this line drawing is summarized nicely in this blog post by an unidentified Paul Hastings lawyer or two:

First, the attorney-client privilege is available for settlor matters, such as "adopting, amending, or terminating an ERISA plan" because those decisions do not involve ERISA fiduciary functions of managing or administering the plan.
Second, the attorney-client privilege is available to a plan fiduciary who seeks the advice of counsel in response to a threat of litigation by plan beneficiaries (or the government) against the fiduciary.

This is not an issue, by the way, that is just of academic interest, or something for clients and litigators to be concerned about after the fact, when a lawsuit is pending. A few years back there was a major top hat plan case in which some of the key evidence relied upon by the plaintiff consisted of emails and communications between the plan sponsor and its lawyers that were discoverable under these standards: that evidence was very helpful to the plaintiff, and was information that simply should not have been communicated in the manner it was (without, for instance, context and qualification) if it was ever going to see the light of day, rather than being forever cloaked behind the attorney-client privilege. Plans and their outside ERISA lawyers, who on a day to day basis in establishing and running a plan are typically not litigators, need to remember that their communications can end up in a courtroom in later litigation that cannot even be foreseen at the time of the communications in question, and should be careful with regard to the accuracy, context, phrasings and tone of such communications as a result.
 

Liberty Mutual v. Donegan: The Second Circuit Reinforces the Broad Scope of ERISA Preemption

Posted By Stephen D. Rosenberg In Preemption
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The Second Circuit has just released its opinion in Liberty Mutual v. Donegan, which concerns whether certain Vermont state reporting regulations are preempted as applied to an ERISA governed plan. The Court concluded that they were, but the more interesting part of the opinion is not its analysis of that particular issue, but rather its sweeping and accurate march through the history of Supreme Court ERISA preemption jurisprudence. It’s a welcome document, one that can be read both by any practitioner seeking a general understanding of the issue and, moreover, by any court or litigant seeking a starting point for an in-depth argument over the scope of preemption.

To me, one of the more significant aspects of the opinion is its focus on the fact that preemption is invoked by any state regulations that dictate plan terms, reporting or benefits in a manner that places the plan at risk of having to comply with multiple conflicting state requirements, as well as ERISA’s own requirements. This is a broad holding that reinforces this widely applied, but often contested, rule of ERISA preemption, and extends beyond the narrow, specific confines of the specific state reporting requirements at issue in Donegan. In this vein, it is interesting that the Court launched its analysis with this point:

ERISA broadly preempts “any and all State laws insofar as they may now or hereafter relate to any employee benefit plan.” Id. § 1144(a). With remarkable consistency, the legislative history reflects that this broad wording was purposeful: it was intended to eliminate the threat of a multiplicity of conflicting or inconsistent state laws . . . See 120 Cong. Rec. 29197 (1974) (Statement of Rep. Dent) (“I wish to make note of what is to many the crowning achievement of this legislation, the reservation to Federal authority the sole power to regulate the field of employee benefit plans. With the preemption of the field, we round out the protection afforded participants by eliminating the threat of conflicting and inconsistent State and local regulation.”); id. at 29933 (Statement of Sen. Williams) (discussing “inten[t] to preempt the field for Federal regulations, thus eliminating the threat of conflicting or inconsistent State and local regulation of employee benefit plans” and stating that “[t]his principle is intended to apply in its broadest sense to all actions of State or local governments, or any instrumentality thereof, which have the force or effect of law”).

In the end, although it is nice that the Court established whether or not Vermont’s reporting requirements were preempted, the more lasting and broader value is that a broadly respected bench has reemphasized the principle that plans cannot be subject to conflicting state regulation with regard to their primary operations. Application of this principle, on a practical level, is central to the efficient and effective operation of benefit plans, since so many operate across state lines, placing them at risk of conflicting legal duties and expensive compliance obligations if they must comply with each state’s unique approach to a particular issue regarding benefit plans.
 

Mike Webster to Dwight Harrison: What they Tell Us About the NFL's Disability Benefits Plan

Posted By Stephen D. Rosenberg In Long Term Disability Benefits
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Wow – what more is there to say about this story by Michael Rosenberg of Sports Illustrated on the long and bitter fight by aging, 10 year NFL vet Dwight Harrison to obtain disability and pension benefits? The story itself is a beautiful piece of writing, humane and complex all at the same time.

There are a few particularly interesting aspects of the story that are worth commenting on. First, to those who wonder if the story is accurate and the picture painted believable, I can only say that none of us, without going back over the court record and filings, can really know. What I do know, however, is that the story reads like an exact replica of the Mike Webster story, which I wrote about here, which concerned that NFL star’s long battle to collect disability benefits from the NFL’s ERISA-governed disability plan, over a time period that matches up with the time period during with Harrison’s harrowing story unfolds. The similarities are eerie, and lend credence to Harrison and Rosenberg’s (no relation) version of events. One of the things that any good trial lawyer does in investigating and building a case is to look for similarities and contradictions among different parties’ versions of events, on the thesis that the consistencies are more likely true than not, given that more than one person reported them. The striking similarities between Webster’s story and Harrison’s story suggests that the story reported by Rosenberg is highly credible.

Second, and perhaps this also goes to the credibility question with regard to this story (since none of us are likely to ever go out and read the court record itself or to have access to all of the relevant medical records), everything that Rosenberg describes fits comfortably with the manner in which an ERISA disability and pension case would be litigated and processed. It rings, in essence, true to someone, like me, who has litigated those types of cases.

Third, and this harkens back to Webster’s case in which, after a long court battle, he eventually prevailed, overcoming many of the same obstacles faced by Harrison, is the interesting question of why Webster eventually did much better than Harrison has, so far, managed to do. The answer to that, quite simply, is lawyering. Webster, somehow, had access to excellent lawyering and was represented by what was clearly an outstanding lawyer. Harrison, it is clear from the article, for many years had no such access. The quality of legal representation, including the extent to which a plan participant’s lawyer has previous and substantial experience with litigating ERISA cases, makes a huge difference to the outcome of these types of cases: they simply cannot be properly litigated – particularly against a well-lawyered adversary like the NFL – by anyone who doesn’t have substantial experience and expertise in this area of the law.

Fourth, and this is particularly interesting to me, I have had the good fortune over the past few years to speak with more than one retired NFL player who had read my prior writings on the Webster case and wanted to speak with me about their own efforts to obtain long term disability benefits from the NFL. What is very interesting to me about the Rosenberg article is his description of the manner in which the NFL plan operated during the time period in question, including its tiers of benefits, all of which matches up with what I learned in discussions over the years with retired players. It is hard to make the complexities of disability plans and claim structures clear to anyone but experts, but Rosenberg does a good job here. If you want to understand the structure and operation of the NFL disability plan, his article is a good place to start.
 

Predicting the Future of Church Plan Litigation

Posted By Stephen D. Rosenberg In Benefit Litigation , ERISA Statutory Provisions
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Ahh, the wonders of church plan litigation. I had the distinct pleasure at an ERISA litigation conference recently of listening to a leading plaintiffs’ lawyer and a leading defense lawyer, who were both representing parties on opposite sides in class actions concerning whether benefit plans were actually church plans for purposes of ERISA, square off over the issue. What came through to me loud and clear were two distinct visions of the world, almost ideological in a way. The defense lawyer insisted that decisions to that date ran his way, and so there was little more to say on the subject, while the plaintiffs’ lawyer explained why close analysis of the facts and legal issues demonstrates that the plaintiffs’ bar is on target.

In their competing certainties over their positions, the debate reminded me of nothing so much as the early years of excessive fee litigation, when the plaintiffs’ bar was largely unsuccessful and the defense bar was more than happy to trumpet the underlying weakness on both a theoretical and practical level of that theory of liability. Of course, time would eventually turn the tables, to a large extent, on that discussion, triggered by an interesting phenomenon, one which was obvious in advance to some of us and became clear in hindsight to the rest of us: that over time, as more and more judges were asked to look at the excessive fee theory, the defense position would begin to show cracks and plaintiffs would eventually begin succeeding to one degree or another with such claims.

Even when I was listening to the two lawyers debate the viability of church plan litigation, it was clear to me we were only at the outset of the legal discussion on this issue, and that the defense bar’s assumption of an impregnable position was unfounded, as well as inconsistent with the history of what had occurred with the excessive fee cases. It was clear that what was more likely to happen was that, as the cases involving the more questionable assertions of church plan status came before courts, the plaintiffs’ bar would begin obtaining traction, and the clearly marked out defense position on these types of cases would weaken.

While I was on trial for most of this month, which I am still digging out from, Mike Reilly wrote a nice piece on something that I see as the first step in this phenomenon starting to come to pass, which was a federal judge denying a motion to dismiss last month that was grounded on the defendant’s status as a church plan. What is most interesting about that decision is that, plank by plank, the judge addressed and rejected the key elements of the defense bar’s standard position on church plan litigation, namely that the claims run contrary to existing judicial decisions and to IRS letter rulings. As the court’s decision itself reflects, the judge specifically engaged those arguments and rejected them.

What does this one decision mean? One can make the argument that it is an outlier, that standing by itself it means nothing in the long run, and has meaning only to the resolution of the specific lawsuit and plan at issue. Past experience with excessive fee litigation, however, suggests to me that the decision is more likely to be the beginning of the end of broadly claiming church plan status for broad, otherwise secular business activities – particularly in the medical area – that have some linkage to religious organizations. History – as well as logic – suggests to me that, bit by bit, we will see plaintiffs’ lawyers and court decisions chip away at the use of church plan status, leading to, eventually, a number of victories in this regard for the plaintiffs’ bar. This will not mean the end of the church plan, but will instead eventually lead to only those plans that most closely fit the purpose, intent and idea of the church plan exemption being able to claim it, with all other plans forced to abandon the claim (either voluntarily or after being sued).
 

Tick Tock, Tick Tock, Pay Attention to the Clock: The Importance of Procedural Timing Issues in ERISA Litigation

Posted By Stephen D. Rosenberg In Attorney Fee Awards , Benefit Litigation
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I have been tied up on trial out of state most of January, and am now starting to go back over the more interesting items that landed in my in-box during that time. One of my favorites is this Supreme Court decision in an ERISA case, which essentially holds that a party cannot wait for a district court’s resolution of a request for attorney’s fees before seeking to appeal any part of an earlier ruling on the substance of the ERISA claim. As Sarah Jenkins and Jon Laramore of Faegre Baker Daniels discussed in this piece – the first one I have seen discussing the substance of this opinion – the Court held in Ray Haluch Gravel Co. v. Central Pension Fund of the International Union of Operating Engineers that “an appeal was untimely because an unresolved issue of contractual attorneys' fees did not prevent judgment on the merits from being final for purposes of” the appellate clock.

While the details of the decision will be of immense interest – I am sure – to appellate mavens (oh where have you gone, Appellate Law & Practice blog?), the more interesting aspect to me is the decision’s unspoken and unacknowledged linkage to the Supreme Court’s very recent decision in Heimeshoff v. Hartford Life & Accident Insurance, which held that an ERISA claim could be barred by failing to comply with a contractual filing period established under a plan document. The combination of the two decisions drives home the highly technical nature of prosecuting ERISA claims, and the crucial importance of getting every step right so as to protect all rights of recovery available under the statute. As the two cases make clear, one can waive clear rights to recovery under ERISA by failing to prosecute them exactly as required and on the exact time schedule required by applicable plan terms and governing statutes. While some might view the particular timing requirements addressed in Ray Haluch Gravel and Heimeshoff as picayune, the Court’s strict enforcement of them make clear that parties seeking relief under ERISA had best not treat them that way.
 

Thoughts on Heimeshoff v. Hartford Life & Accident Insurance

Posted By Stephen D. Rosenberg In Long Term Disability Benefits
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The more I read yesterday's Supreme Court’s decision in Heimeshoff v. Hartford Life & Accident  Insurancethe more I return to the same position I expressed when the case was argued: that what the rule that is imposed by the Court turns out to be is much less important than that we actually have a clear rule. The Court established the rule here, and now all parties in the ERISA landscape can adjust to it and play by it. What it means is simply this: the minute a lawyer who represents participants has a new client walk in the door, that lawyer better scrutinize the plan documents and figure out when suit must be filed by. On a substantive, day in day out level, that is what the decision means.

Despite the fact that, on a day to day basis, the decision is not earthshaking in any manner, there are aspects of it that are of interest. You can start with the identity of the opinion’s author, which is Justice Thomas. The opinion falls in line, in the fundamental backbone of its reasoning, with prior opinions – concurring, dissenting or otherwise – by Justice Thomas on ERISA cases: that is to say that the logistical framework is the plan says X, the statute does not expressly require otherwise, and thus X applies. Sure, there is much more to the opinion, but all of the rest is, in many ways, just gloss added on top of that framework, in much the same way that ornaments are added to a Christmas tree, but it is still, underneath it all, a tree.

The other aspect that jumped out at me involves one piece of that gloss, which is the Justice’s suggestion that “[f]orty years of ERISA administration suggest” that claim administration is handled reasonably and generally promptly, and that under those circumstances, it should not be disruptive to enforce a reasonable contractual limitations period. While I can’t account for the whole forty years referenced by the Court, I can account for twenty or so of it in my own practice, and I would have to concur with Justice Thomas in this regard. Although there are certainly outliers that are to the contrary, my experience is that most claims are handled reasonably to very well by most plan sponsors and administrators, and that the exceptions to that rule are just that – exceptions. With that experience to draw on it, I doubt that reasonable contractual limitations periods will pose any type of a significant barrier to the efficient, effective and equitable resolution of claims.

Of course, whenever the Supreme Court weighs in on ERISA, it creates unforeseen ripples: one can think of a Supreme Court opinion on any issue under ERISA as the equivalent of throwing a pebble in a still pond, which creates waves in all directions. Going back at least as far as LaRue – which, by creation of the diamond hypothetical approach to loss, in turn gave rise to the no-diamond approach that some courts have used to find the absence of loss – Supreme Court decisions concerning ERISA have created a multitude of issues for lower courts to sort out and, more often than not, for plan lawyers to deal with in the day to day running and writing of plans. One would think that a simple ruling on a statute of limitations issue would not have that same effect, but I suspect one would be wrong, as the Workplace Prof notes in this excellent post on the decision, in which he comments on the potential future ramifications of the decision beyond simply its application to statutes of limitations.
 

Sprint(ing) Right to Federal Court to Protect Plans Against Preempted State Action

Posted By Stephen D. Rosenberg In Preemption
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You know I think all things are about ERISA, and ERISA is about everything, don’t you? And of course, my view on this is even somewhat logical, and not just an outgrowth of my own personal interests. If you walk, talk, have health insurance, invest for retirement, have a pension or, even more so, work, you and your activities are governed, to a certain extent, day in and day out, by ERISA. That is, of course, an overstatement and oversimplification, but it drives home my point: ERISA regulated and governed activities that we interact with in day to day life are ubiquitous, even if most people are not aware of it.

I mention this because the Supreme Court issued a very interesting decision on Younger abstention Tuesday, in a case, Sprint Communications v. Jacobs, that concerned telecommunications and utility regulators, and had nothing to do with, and never mentioned, ERISA. And yet to me, if you think about it, the decision has a side to it that is very important to ERISA lawyers and particularly litigators, as well as to plan sponsors. In Sprint, the Court made clear that the reach of Younger abstention is very narrow, and it cannot be invoked to regularly deprive federal courts of their jurisdiction over issues governed by federal law, particularly where federal law preempts state action; further, the Court made clear that Younger abstention cannot prevent parties from seeking federal court protection of their federal rights in most cases involving civil remedies, and in particular in cases where state regulators take action that should be preempted by federal law.

I doubt that any statute has broader preemptive effects than ERISA, but at the same time, as noted above, ERISA touches a vast number of the day to day activities and financial interests of private citizens, even without many of them knowing it. This combination means that many state regulatory bodies can, accidentally or on purpose, act in ways that infringe on plan sponsors’ express rights under ERISA to be free of state regulation with regard to their employee benefit plans. Prior to the Supreme Court’s ruling two days ago in Sprint, there may have been some doubt, in at least some jurisdictions, over whether a federal court could act to protect that right while state regulators were proceeding with regard to an ERISA governed benefit plan. Sprint makes clear that the federal courts can intervene to protect the rights of plan sponsors to be free of state regulation, right from the get go, by enforcing ERISA preemption in the face of state regulatory action.
 

Public Pensions After Detroit and Stockton

Posted By Stephen D. Rosenberg In Pensions
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Well, returning briefly to my series on municipal bankruptcies – you really can’t write regularly about pensions in this day and age without addressing, even if unwillingly, that topic – the NY Times has a very interesting article on Stockton, California’s effort to leave bankruptcy, by basically shorting bondholders while leaving the ever rising pension costs that was one of the key drivers of its insolvency untouched. You can hear in the article the skepticism as to whether, having not dealt with that problem, the city can remain solvent for any amount of time, rather than end up back in bankruptcy court again after failing to tame its pension exposures.

The impact of pension promises and debt on municipal finances cannot be understated, particularly after events in Detroit. At the same time, the problems they pose cannot be easily solved, either, because municipal leaders are faced with a highly unpalatable choice with regard to that issue: they can either raise taxes significantly (or substantially cut services, which in the long term is at least as politically dangerous to the political future of the elected officials involved, yet possibly even worse long term for the city than increased taxes) or they can, as one Stockton official put it, look people in the eyes and tell them they are having their benefits cut. Stockton appears to have avoided the latter, for the most part, by seeking a relatively minimal increase in the sales tax, but, as noted above, one wonders whether that will be enough.

At the end of the day, I hate to say it, but the only humane solution to the pension problems in places like Detroit and Stockton is likely to be some version of a bailout in the form of a derisking program, with the pensions turned into private annuities and cities taken out of the pension business once and for all. Its either that or a decision to cut benefits and leave retirees and current workers to bear that cost alone. None of the solutions are good, but the evidence says this is a long run problem that isn’t going away.
 

Who Is the Proper Defendant In an ERISA Denial of Benefits Claim? The First Circuit Has an Answer

Posted By Stephen D. Rosenberg In Benefit Litigation
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I enjoyed this post on a fundamental question in ERISA denial of benefit litigation, namely which of the many entities involved with a plan – employer, plan sponsor, fiduciary, claim administrator, insurer, and so on – is a proper defendant to such a claim. As the post points out, correctly, there is some ambiguity on the question, and courts in various parts of the country apply different rules. The author focuses on a recent decision out of the federal court in Minnesota, Nystrom v. AmerisourceBergen Drug Corp., holding, in the author's words, that “a third party administrator was a proper defendant in a lawsuit seeking benefits on the grounds that Section 502(a)(1)(B), the section of ERISA under which such claims are brought, does not limit the universe of entities that may be sued, and that liability flows from 'actual control' over benefit claims;” the author further notes that, according to that court, the “First, Fifth, and Ninth Circuits have reached a similar conclusion.”

In fact, this is the approach typically taken by courts in the First Circuit, and in some ways the case law here on this issue is more concrete and definitive than elsewhere with regard to exactly what entities, within that universe, are in fact the proper defendants. In the words of the First Circuit, “[t]he proper party defendant in an action concerning ERISA benefits is the party that controls administration of the plan.” Terry v Bayer Corp., 145 F.3d 28, 35-36 (1st Cir. 1998)(quoting Garren v. John Hancock Mut. Life. Ins. Co., 114 .F3d 186, 187 (11th Cir. 1997)). It is the decision of the “entity with the power to make, and is the entity that actually made, the final decision to terminate [the plaintiff’s] benefits” that is subject to review, not that of other parties. Id.; see also Aponte-Miranda v. Sensormatic Electronics Corp., 2006 WL 468695 (D.PR. 2006).

So in essence, the First Circuit case law does not leave open who the proper defendant is in a denial of benefit claim, in a manner that would allow the targeting of anyone and everyone involved with a plan. Rather, the proper defendant is the party that actually decided the claim for benefits and has the power to order the payment of benefits. This, in turn, is the right rule: it does not make sense to have a defendant to such a claim be anyone other than the party that could have, but declined to, pay the benefits, as any other defendants are, in that circumstance, being sued for an action they did not take and had no control over.
 

Should the DOL Further Regulate Derisking?

Posted By Stephen D. Rosenberg In Pensions
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You know, I was just going to tweet about this article, but I realized I had too much to say on this to be limited to 140 characters (I always have too much to say to be limited to 140 characters, but I often cut myself off at that number anyway, or else I could never tweet). The article, “Proposed derisking regs called burdensome,” reports on the ERISA Advisory Council’s recommendations that the DOL regulate derisking and, in particular, declare the decision to do so a fiduciary act. I find it hard to accept the premise that regulating the derisking process is overly burdensome, and, particularly in the realm of pension plans, which are already highly regulated, perhaps it is time to retire the constant complaint that a regulatory initiative is burdensome and should not be pursued for that reason, except in circumstances where someone is actually willing to put forth the effort of explaining how the benefits of the regulatory activity are outweighed by specific, identifiable burdens and costs. Simply complaining about being subject to regulation, which is all that this particular, unspecified complaint boils down to, should not be enough to even warrant the serious consideration of serious people.

Derisking is unquestionably a serious activity being pursued by very serious and big money players, both on the vendor side and on the sponsor side. It likewise has clear and serious risks and benefits to numerous plan participants. It further has a momentum at this point that is approaching, if it hasn’t already exceeded, escape velocity. It is not overly burdensome, nor even unreasonable, to make sure that a reasonable regulatory framework for the activity, intended to ensure that participants come out fine in the process, is in place. And with regard to the question of whether it should be deemed a fiduciary activity, I defer to a very senior in-house lawyer with a major plan sponsor, who, in a talk I attended recently, asserted that fiduciary obligations already require, or if not should require, sponsors to fully consider the risks and benefits to the participants, and not just to the sponsor, before deciding to derisk.
 

Why Amara's Expansion of Remedies Matters Now, But Not So Much in the Long Term

Posted By Stephen D. Rosenberg In ERISA Seminars and other Resources , ERISA Statutory Provisions , Employee Benefit Plans , Equitable Relief , Summary Plan Descriptions
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My small group of dedicated twitter followers know I was live tweeting last week from ACI’s ERISA Litigation conference in New York, at least for the first day of the conference. Tweeting allowed me to pass along ideas from the speakers and my own thoughts on their points in real time, which was, frankly, a lot of fun for me (if you haven’t tried live tweeting from an event, you should; it turns being an attendee watching others speak on a topic into a much more interactive and engaged experience). At the same time, though, its fair to say that many of the topics discussed by the panelists, and many of my own thoughts on those topics, don’t neatly fit within 140 characters, so I thought I would post some more detailed take aways from the conference, starting today.

One of the things that jumped out at me at the conference was the fact that the ERISA defense bar has clearly coalesced around the idea that Amara is a bad thing and that the expansion of equitable remedies set into motion by that opinion is objectionable. Even though I am, at least 80% of the time, a member of that defense bar, I think that’s a bit harsh and an overreaction. It does not strike me that the consensus defense bar view articulates a particularly substantial argument for why the Court was wrong to expand that remedy. At the end of the day, most of that remedial expansion – in the forms of reformation, estoppel and surcharge – is directed at only one phenomenon, which is the circumstance in which there is a disjunct between what a plan actually says and what is communicated to plan participants through summary plan descriptions, human resources employees, or other sources (though I have no illusions that participants and their lawyers won’t find ways to try to extend those remedies to other types of circumstances as well). To the extent that employees can show actual harm to them from that error (and by this I do not mean just being deprived of some legal right under ERISA or some hypothetical opportunity to act in response to learning the correct information, but rather some showing of actual concrete out of pocket loss to them), there is no reason they should be without a remedy, and the expansion of remedies in Amara prevents that otherwise all too common outcome.

As one of the prominent in-house attorneys speaking at the conference noted, the nature of ERISA is that the bar for proper performance by plan sponsors and administrators keeps rising, and that is as it should be: one panelist made the point that what is a best practice today in running a plan, will simply be the standard practice that must be lived up to tomorrow. This is all that Amara’s targeting of communication errors by imposing equitable remedies for them will really do in the end: make accurate participant communications a crucially important part of running a plan. As plan administrators raise their game in this regard (making what is today a best practice the standard in this regard in the future), these remedies and the Amara decision itself will become relatively unimportant, and people will come to wonder why there was so much defense bar hue and cry over Amara in the first place.
 

Thoughts on Oral Argument in Heimeshoff v. Hartford Life & Accident Insurance Co.

Posted By Stephen D. Rosenberg In Long Term Disability Benefits
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Well, the oral argument in Heimeshoff v. Hartford Life & Accident Insurance Co. is fascinating, in that the Court’s questioning and counsels’ argument all focus on practicalities, in the sense of when should the time period run and how, and when, will any particular rule actually impact, in a negative way, either the plan administrator or the participant. Much of the discussion circles around the fact that, no matter how few times it happens, we really cannot have a system that could bar the courthouse door to a participant who is waiting for an administrator to conclude the internal appeal process before suing, by having the statute of limitations expire while waiting. At the same time, as the Justices’ questioning makes clear, there are a number of ways to go after that problem, running from Department of Labor regulatory efforts that would preclude that outcome by means of its detailed claims processing regulations, to courts applying tolling and estoppel doctrines to prevent such an egregious outcome.

I don’t know, but it seems to me it is easier just to have a bright line rule which would effectively preclude that outlier event once and for all, and the Court has the opportunity to put that into place right now. Of course, past experience with Supreme Court opinions on ERISA demonstrate the old adage that “no good deed goes unpunished,” or perhaps instead the adage that “the road to perdition is paved with good intentions,” in that every Supreme Court decision on one particular issue under ERISA seems to open up a Pandora’s box of other issues under ERISA, that then get litigated throughout the lower courts for many years thereafter (this last sentence, by the way, may set a personal record for mixing metaphors and assimilating similes in a single sentence of a blog post). Of course, that is also one of the things that makes this the most interesting of practice areas.
 

Opening Up the Courthouse Door: The Second Circuit Weighs in on Exhaustion of Administrative Remedies

Posted By Stephen D. Rosenberg In Benefit Litigation , Employee Benefit Plans
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If one theme has emerged from my numerous blog posts over the last seven years and across the various articles I have written on ERISA litigation during that time span, it is the centrality of operational competence in sponsoring and administering ERISA plans. I have, for instance, often argued that, when it comes to ERISA litigation, the best offense for plan sponsors and company officers is a good defense, in the form of what I have taken to calling defensive plan building; defensive plan building is the idea that taking careful and precise steps in building out, and then running, pensions, 401(k)s, ESOPs, and other plans creates the optimal environment for defending against lawsuits down the road related to those plans. When one can document a careful process for selecting vendors, for picking funds, for the fees attached to plans, for the handling of float income, and for all the other myriad choices that must be made with regard to how a plan will operate, it becomes relatively easy to defend fiduciaries and company officers alleged to be fiduciaries against breach of fiduciary duty actions, because these types of documents and steps demonstrate a prudent process.

Likewise, there has been a clear trend in the case law over those years, directly reflected in my posts and writings, towards the loosening of the procedural and substantive advantages held by plans, sponsors and fiduciaries. These shifts run from the subtle – such as a tendency for courts to now look much more closely at medical evidence in benefit cases, even where arbitrary and capricious review applies – to the bold, such as the Supreme Court’s expansion of equitable remedies in Amara. All of these shifts have this in common: they decrease the likelihood of a fiduciary or sponsor winning early in a case on procedural grounds, and increase the likelihood that a court will eventually reach the merits of a claim. Excessive fee litigation provides a ready example, as we have shifted, in just a few years, from early and relatively easy procedural victories for defendants in those types of cases to substantial settlements and the occasional outright trial victory for participants. What does this have to do with operational competency in operating a plan? It makes competency in running the plan ever more important, because it increases the likelihood that a court will someday consider the merits in a lawsuit targeting those actions, rather than the case ending, as it often would have in the past, at an early point in the litigation on procedural or highly technical grounds.

My latest published article, “Opening Up the Courthouse Door: The Second Circuit
Weighs in on Exhaustion of Administrative Remedies
,” addresses this idea in another context, namely the weakening, in a recent Second Circuit opinion, of the requirement of administrative exhaustion as a defense against ERISA actions. As I discussed in the article, for many years, this defense was a solid bulwark against many ERISA claims, one that could often stop a suit long before the parties or the court would get to the merits of an action. Indeed, historically, participants who tried to argue their way around this requirement rarely succeeded. The Second Circuit, however, as I discuss in the article, substantially weakened that defense and opened up a new line of attack for participants faced with the claim that they had not exhausted their administrative remedies before the plan administrator. As I discuss in the article, it is yet another example of courts making it easier for participants to prosecute ERISA claims and, in particular, to leapfrog the type of early procedural defenses that defendants used to be able to use to stop many such claims in their tracks at a very early stage. Anything that makes it easier for participants to get the merits of a lawsuit in front of a court increases the importance of competence in running the plan, because it is the level of operational competence that will be on trial once a court gets to the merits of an action.
 

A Called Shot: Mangiero Predicted the Public Pension Crisis 6 Years Ago

Posted By Stephen D. Rosenberg In Pensions
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Last week, Thomas Clark was kind enough to point out in his FRA PlanTools blog that, in a series of posts and an article a few years back, I had guessed right on the future of excessive fee litigation in the courts. At the same time that he was writing that post, I was in the midst of what I have now come to call “public pensions week” on this blog, in which I put up a series of posts on that problem, which is on everyone’s front burner and the cover of media from the NY Times to Rolling Stone.

Now it is my turn to point out some very educated and well-informed prognosticating, this time by Susan Mangiero, who writes the Pension Risk Matters blog. Susan predicted the current spate of public pension problems, and the nature of the on-going debate over them, in a post six years ago. As she explained then, the question to be played out was whether, and how, governments – read taxpayers – would continue to fund public pensions at their prescribed benefit levels, or whether benefits would end up being cut. As she cleverly put it way back in 2006, “Is a modern Boston Tea Party soon to come? Will taxpayers say "enough" to what they perceive as generous municipal pensions while they struggle to save?”

This is, of course, in a nut shell exactly what the public pension crisis is today. The pensions are underfunded, and the question is whether the taxpayers will be forced to make up the difference or whether, instead, the participants will be forced to take a haircut. Susan was right on the money way back then in predicting the problem, so perhaps we should heed her thoughts then on what the outcome of this dilemma might be – as Susan said then about how this may play out, “How will politicians respond? After all, grumpy taxpayers tend to vote.”
 

The International Paper Settlement and the Continued Vitality of Excessive Fee Claims

Posted By Stephen D. Rosenberg In 401(k) Plans , Class Actions , Fiduciaries , Settlements
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One of the first long articles I wrote on ERISA (I had already penned some opuses on patent infringement litigation and insurance coverage disputes) was on excessive fee litigation, and was based, at heart, on the Seventh Circuit’s then recent decision in Hecker v. Deere. Titled “Retreat from the High Water Mark: Breach of Fiduciary Duty Claims Involving Excessive Fees After Tibble v. Edison International,” the article set forth my view that, in Civil War parlance, the decision in Hecker, which was being highly trumpeted by the defense bar at the time as a major victory, was, in fact, little more than the high water mark for plan sponsors and vendors in defending against excessive fee class actions. My thesis was that, when the decision was broken down and analyzed in its constituent parts (and particularly with a focus on the Court’s reasoning), it was unlikely that the decision would be replicated, and more likely that other courts would come to different conclusions in the future that would validate excessive fee claims and invigorate the theory as a basis for class action litigation.

From where I sit, four years of court decisions, settlements and courtroom results appear to have borne out my prognosis. Humble scribe that I am, I don’t believe I have ever pointed out before that I was right in this regard, but, as Thomas Clark pointed out earlier this week in an excellent post on the FRA PlanTools Blog, the recent $30 million settlement entered into by International Paper is solid evidence that I was right.

My real purpose for writing today, though, was to pass along his post on the settlement, which does an excellent job of breaking down the issues, the claims, the alleged breaches, and the settlement of the International Paper case. It comprehensively covers everything any outsider to the litigation would want to or need to know about the case.
 

Thoughts on Rolling Stone, Matt Taibbi and "Looting the Pension Funds"

Posted By Stephen D. Rosenberg In Fiduciaries , Pensions , Retirement Benefits
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Well, I did not really set out to write “public pensions” week on my blog, although it ended up working out that way, solely because two different articles on the fiscal crisis impacting government pensions caught my eye earlier this week. Having, for better or worse, gone down that rabbit hole, though, I now feel obliged to discuss Matt Taibbi’s new article in Rolling Stone on the municipal pension crisis, which, serendipitously, appeared on-line this week.

Taibbi, for those of you who don’t know his work, is, at a minimum, whether you agree with him or not, a talented polemicist. And that is not to damn with faint praise: this country was founded, in part, by great polemicists. And to be fair, there is certainly no doubt that you can take the facts of the public pension crisis and paint any of a number of pictures, all of them accurate to some degree; Taibbi presents his own impressionistic take on those facts, and his portrayal, like many other views of this problem, has some truth to it. Indeed, in many ways, the public pension crisis reminds me of one of those old trick pictures, that if looked at one way you see one thing (like an old woman’s face) and looked at another way, something else (like a young woman’s face).

The one consistent fact that holds true across all of the competing narratives, however, is this: public pensions are in a whole lot of trouble, and truly are, as a general rule, facing a fiscal crisis. The narratives vary on who is to blame for this, on how to fix it, and who should bear the costs of fixing it, but they don’t vary on that basic fact. Taibbi points to decades of pension underfunding by politicians as the primary cause, and argues that the proper solution to that is not to cut benefits back to a level that can be funded by the amounts left in the plans. His diagnosis and solutions, unfortunately, essentially fall in the category of locking the door after the horse has run off; although he targets the fact that, legally, state and municipal governments were able to avoid funding pension plans properly for years, there is no magic trick nor time machine that will allow anyone to go back and fix that. It falls into the category of what’s done is done, and the question becomes what to do now: absent some sort of massive federal bailout of underfunded public pension plans, the choices become reduce benefits below what was promised or tax the living heck out of current taxpayers to make up the difference. I am not even going to pretend to have a ready answer on how to address that problem.

Going forward, though, is a little easier, when it comes to prescribing a fix, and Taibbi feints toward it in his article, when he references ERISA and the ability of state governments over the years to underfund pension plans. Certainly a federal law, perhaps modeled on ERISA, that obligates appropriate funding by states and municipalities going forward with regard to future pension obligations is a necessary start. However, there are at least two (and probably many more, but these are the ones that jump out at me right off the bat) problems with such a scheme. First off, how will it be enforced? It certainly cannot be done by assigning, under any such new statute, personal liability as a fiduciary to state elected or appointed officials, in much the same way that ERISA assigns fiduciary liability to those who run private pensions. It is hard to picture a law with such a measure in it ever passing, and even harder to picture who would agree to run state pension plans, with all their potential issues, under those circumstances. Perhaps a stick, in the form of withholding some types of federal funds from states or municipalities that violate the law might work, in much the same way that the federal government withholds highway funds or education funds or the like from states that don’t comply with federal wishes in those realms.

Second, though, is a problem I identified in my prior posts on the public pension crisis. The moment you do anything like that, and make state governments account in real time for future pension liabilities, you will see the end of pensions in the public sector, replaced by defined contribution plans instead. It will only be a matter of time. Is that a good or a bad thing? I don’t know, and all have their own ideas on that. I have been in the private sector my whole career, and have never seen hide nor hair of a pension, other than when it is the subject of a case I am litigating, so I have my own biases in that regard.
 

Public Pensions, Overpromising, and Municipal Discipline: the Lessons of San Jose

Posted By Stephen D. Rosenberg In Pensions
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Interestingly, when I wrote yesterday on the question of imposing discipline on public pension financing, the NY Times had not yet published – at least on the on-line version that I skim each day – this detailed, and frankly harrowing, article on the pension obligations faced by San Jose and the problems it is causing for the municipal budget. As the article notes, in an almost scare mongering opening:

San Jose now spends one-fifth of its $1.1 billion general fund on pensions and retiree health care, and the amount keeps rising. To free up the money, services have been cut, libraries and community centers closed, the number of city workers trimmed, salaries reduced, and new facilities left unused for lack of staff. From potholes to home burglaries, the city’s problems are growing.

What is more interesting, in some ways, is the discussion of what caused the problem – excessive pension promises of a kind that one would never see from an employer forced to account, in real time, for future pension promises – and the proposed solutions. The proposed solutions mirror what has occurred in the private sector, which is changing future benefits (read reducing them) beyond those already accrued for current participants, reducing the retirement benefits outright for new employees, and  changing overall to a defined contribution type system. Interestingly, the latter is what I predicted, in yesterday’s post, would almost certainly occur if municipalities, like private employers, were placed in a position that they must account, in the here and now, to at least some degree for promises to provide pensions in the future.
 

Imposing Discipline on Promises of Public Pensions

Posted By Stephen D. Rosenberg In Pensions
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I am not sure there is anything in this article that will surprise anyone who is a regular reader of this blog, or who follows the issues raised by public and private pensions, including their financing. More than that, I doubt there is anything in it that anyone knowledgeable about the subject will disagree with: writing about the crisis in public pensions, the author suggests that the proper response is to impose a legal structure, possibly similar to ERISA, that will force municipalities to fund their pensions as they go, rather than promising benefits and leaving them for future taxpayers (many, frankly, too young to vote – or even read - when the pensions are promised) to fund. Nothing too shocking there, although, in truth, I think what you would see in the public sector if that were enacted is exactly what you have already seen in the private sector: the replacement of pensions with some type of defined contribution type structure.

The article is aptly titled “The Long, Sorry Tale of Pension Promises,” and, despite the somewhat lukewarm introduction above to the article, I have to say that I liked the article and greatly enjoyed it, including its excellent presentation of the history of pension busts that led up to ERISA’s enactment. Its certainly worth a few minutes of your morning.
 

CalPERS and Passive Investing: A Couple of Thoughts

Posted By Stephen D. Rosenberg In 401(k) Plans , Employee Benefit Plans , Fiduciaries , Pensions
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I have had a couple of interesting conversations recently about CalPERS considering going to index/passive investing. As I have noted in the past, if a major and highly influential pension fund goes that route, how long will it be until others follow, seeking both safety in numbers and the potential defense to breach of fiduciary duty claims of pointing to CalPERS’ decision as reflecting an industry-wide standard of reasonableness?

Two questions have come up in that event, however, in recent conversations I have had. First, how long will it be until fiduciaries who switch their plans to index and passive funds are sued by participants claiming they would have done better under actively managed funds, and that, given the make up of the particular participant base for that plan and their investment objectives, active investing was the prudent course? Second, and more fun/theoretical, is this: what happens when everyone follows along and goes index only? Who do you trade with on the other side of the deal, and what – if everyone is just moving along with the market index – drives the price one way or the other, when there is no one out there buying and selling in the hope of beating that index?

Both are simply theoretical concerns to a certain extent, and mostly entertaining thought experiments. But still, one has to wonder whether index investing can really be the answer to everything, in all circumstances. Seems to me that once upon a time all the funds in my 401k all held internet stocks at the same time to boost their returns, even when their stated investment objectives wouldn’t have called for those holdings, and that uniformity of approach didn’t work out too well for anyone. Maybe let a thousand flowers bloom in investment choices and approaches, anyone? Isn’t that what diversification is supposed to be – holding different categories of investments, selected in different approaches, rather than all holding the same portions of an index, all moving in lock step? One has to wonder.
 

Why Jobs are Job 1, to Steal from an Old Ford Ad

Posted By Stephen D. Rosenberg In Pensions
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Here’s a great piece – and not just because I am complimented in it – by Susan Mangiero on the continuing problem of workforce participation, and the impact on retirement financing of a less than robust job market. As Susan has pointed out in other posts, less workers, in a nutshell, equals fewer taxpayers and current employees to support social security and private company retirement packages, thus hastening the cycle towards funding problems on those fronts. In a way, this gives rise to a hidden and subtle bias towards 401(k) and similar programs that, despite complaints about them such as their fees, at least have the virtue of being one worker/one funder/one beneficiary systems. I know that is a gross simplification, when you consider such issues as company matches, spousal distributions, etc., but the point is simple: such retirement plans rely on the participant in the workforce to plan ahead and fund it, and not on a shrinking labor pool to fund it in the future for that worker.

There are a lot of costs to a shrinking and/or severely curtailed job market, from the personal costs to those who can’t get jobs, to the long term reduction in earnings for those who must wait years beyond graduation to really get started on a profitable work life, to the inability of many to retire after job losses and stock market losses struck them in the latter part of their work lives. There is no getting around the fact, however, that, as Susan points out, a shrunken workforce puts financial pressure on the retirement structure across the board, from a reduction in tax rolls for the funding of public pensions to a distortion of the worker/retiree leverage upon which social security rests.

It is, in the end, important to remember the linkage between jobs and the retirement scheme, whether that is pensions, social security, 401(k)s or some as yet undreamed of replacement. The latter does not exist in a vacuum and, as Susan has pointed out, is closely tied to the former.
 

Me, Massachusetts Lawyers Weekly and Gross v. Sun Life

Posted By Stephen D. Rosenberg In Benefit Litigation , Long Term Disability Benefits , People are Talking . . . , Standard of Review
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Eric Berkman’s article in this week’s Massachusetts Lawyers Weekly on Gross v. Sun Life, in which I am quoted, does an excellent job of explaining the case, particularly to those readers who do not have years of experience with ERISA cases, benefit litigation, or the long history of the law in this circuit governing benefit cases. I have written before of my thoughts on the Court’s opinion in Gross, but I realized, in reading Eric’s article, that his questions when he interviewed me for his article were astute enough to draw out some additional thoughts on the case, which I had not yet thought of when I posted about the case on my blog.

Eric presents those additional ideas of mine very well in his article and, citing my own personal interpretation of the fair use doctrine, I thought I would pass them along here:

Stephen Rosenberg, a Boston ERISA lawyer who typically represents insurers and employers, described the case as a “natural culmination of years of judicial approach” in this circuit.

“Whether or not it’s shown up in decisions, there’s been a certain level of skepticism on how best to apply standards of review to medical evidence in these circumstances,” said Rosenberg, who practices with the McCormack Firm and was not involved in the case. “It was only a matter of time before they deviated from Brigham and established a higher bar for obtaining discretionary review. The court makes clear — as do other circuits — that they really want to see a clear statement that ‘we retain discretion’ to decide the issues.”

He also said the ruling extends beyond long-term disability insurance plans. In many contexts, the employer itself, rather than an insurer, provides an ERISA plan and wants to maintain discretion to determine benefits eligibility, Rosenberg explained.

“These plans are often written by an in-house benefits person or an in-house attorney who has no ERISA expertise,” Rosenberg said. “Years later, when a dispute arises, the company will always want to claim discretionary review, and I think they’ll have to learn from this decision that they need to use the proper language in these types of plans as well.”
 

A State of the Art ERISA Benefits Decision from the First Circuit: Gross v Sun Life

Posted By Stephen D. Rosenberg In Benefit Litigation , Long Term Disability Benefits , Standard of Review
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Great, great decision out of the First Circuit a few days ago on ERISA benefits litigation, covering, in no particular order: what language is necessary to establish discretionary review; when does the safe harbor exception to preemption apply; when is an LTD policy part of an ERISA governed plan; the proper weight and mode of analysis to be given to video surveillance in the context of an LTD claim; and when to remand to a plan administrator for further determination as opposed to the court ordering an award of, or denial of, benefits.

I can’t say enough about the Court’s analysis of each one of these issues, particularly if, like me, you have been carefully reading all of the ERISA decisions out of the First Circuit and the district courts in this circuit over the past decade or more. On each one of the issues I noted above, the opinion builds quite carefully, and persuasively, on the evolution on each of these issues that has taken place in this circuit, quite slowly, over many years. I will give you two examples. First, the Court raises the bar for establishing discretionary review, and in so doing, gives a careful presentation of exactly why this is the normal and logical result of years of jurisprudence. Here’s a second example. It wasn’t that long ago that we all expected the district court to either affirm a denial of benefits by an administrator or to instead overturn that denial and order an award of benefits. At one point in time, though, the case law shifted towards an analysis of whether, if a denial would not be upheld by the district court, the entire issue should be remanded to the plan administrator for further evaluation of evidentiary concerns identified by the court, so that the plan administrator could determine whether an award of benefits was warranted given those concerns; further litigation could thereafter ensue if the administrator maintained a denial and the plan participant wanted to challenge that determination in court. In this latest decision out of the First Circuit, however, you see something very interesting: the pure application of the need for remand to the administrator, as though this is simply the basic rule in this circuit (which, in fact, is what it has become).

The decision is Gross v. Sun Life. To echo a comment I made on Twitter about it, I don’t think you can litigate ERISA cases in this circuit unless and until you have both read it and thoroughly incorporated its lessons. And a side note: one of the plaintiff’s lawyers was Jonathan Feigenbaum, who, as I discussed here, takes exception to the very idea that discretionary review is even constitutional.
 

Why Discretionary Review Is Not Unconstitutional

Posted By Stephen D. Rosenberg In Long Term Disability Benefits , Standard of Review
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Attorneys Jonathan Feigenbaum and Scott Riemer, who represent claimants in long term disability cases, have published a fascinating article, titled “Did the Supreme Court Flunk Constitutional Law when it Permitted Discretionary Review of Insured ERISA Benefits Cases?” In it, they argue, not surprisingly given the title, that it is unconstitutional for courts to apply discretionary review. In short form, their argument is that it deprives claimants of their constitutional right to have their cases adjudicated by an Article III court, by giving initial decision making, subject to a limited scope of review, to an outside, non-judicial party, without allowing for a full trial in court. This is a simplification of their well-developed thesis, which is more subtle and complicated than that, which is what makes it fun.

The response to their argument, though, rests in the proper response to a gauntlet the authors throw down at the outset of their paper, in which they challenge readers to:

identify any litigation in the federal courts between private litigants, other than discussed in this paper, where the Article III Judge must defer to the decision of the defendant without conducting a full trial on the merits. We bet you can’t.

This isn’t really what discretionary review does, however. Instead, it is simply a presumption running in favor of the private decision maker – who is best understood as a party to a contract who made a decision that is now being challenged in court by the other party to the contract – under which the other party must rebut the presumption by showing that the decision was not based on substantial enough evidence to support it. The American legal system is rife with these types of presumptions. What is the Moench presumption in stock drop litigation, if not a presumption running against the claimants that they can overcome with the right type of evidence? Employment law, with its burden shifting evidentiary rules, historically was rife with similar examples, in which one party bears a burden of proof only after another party makes a certain showing. The business judgment rule applies a gloss in favor of directors and officers in certain types of cases, which must be overcome by a plaintiff. Patents are presumed valid when challenged in court, and a holder of a registered copyright is presumed to have a valid copyright, unless and until proven otherwise in court.

One could go on like this for hours, making such a list. The point, though, is simple: discretionary review is not an unconstitutional removal from the court system of decision making authority over a claim, but rather the creation by the courts of an evidentiary presumption and a burden of proof, no different than what occurs in numerous other areas of the law.
 

Doubling Down on a Bad Bet: Liability for Portfolio Company Pension Obligations After Sun Capital

Posted By Stephen D. Rosenberg In Pensions
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Just what more is there to say about Sun Capital at this point? The decision, out of the First Circuit, concerns the withdrawal liability for a multiemployer pension plan of the private equity owners of a portfolio company that was a member of the pension plan, with the First Circuit finding that, while a certain claim against the private equity owners could not proceed for technical reasons, they could nonetheless be liable for the pension obligations of the portfolio company. The decision has been written on by almost every large firm with a significant private equity practice (either in actuality or hoped for down the road), with much more haste than they often display in getting out client alerts.

And of course that is completely understandable, as the short form take away from the decision is that private equity ownership can be liable for the pension obligations of portfolio companies. This is of course a tremendously significant issue for investment shops of that nature, and it raises highly technical questions going forward for structuring acquisitions, in terms of examining whether it is possible to legally structure the acquisition and ownership of a portfolio company in a manner which will insulate the acquirer from unfunded pension obligations or, if it is not certain whether that can be achieved, will at least make it as hard as possible for potential plaintiffs to recover, thus hopefully dissuading future lawsuits of the type at issue in Sun Capital. Of course, as those of us who often represent investors, emerging companies, start ups and other oft targeted defendants know, dissuading lawsuits is almost as good as having a highly defensible legal position in the courtroom itself.

Among the many, many good client alerts out there on Sun Capital are this one, and this one, which can provide you with the details of the decision itself. If you are engaged in structuring corporate acquisitions and need to be concerned about protecting yourself or a client against pension liabilities, frankly, you need to read the decision itself, which you can find here.

Perhaps the more interesting issue, though, is to step away from the legal questions, which really concern how best to structure a transaction to insulate the acquirers after the acquisition has been settled on, and to look instead at the more fundamental issue that an excessive focus on the technicalities of the decision in Sun Capital itself can mask. As Susan Mangiero notes – almost uniquely among prominent bloggers writing about the decision, perhaps because she is a business expert, rather than a lawyer, and approaches the world from that vantage point – the most important take away from the opinion concerns the decisions made long before the legal structuring of the transaction, which concern valuing the pension exposures of the target company and accounting for that exposure financially in the purchase price. Do that correctly, and you have already accounted for the possibility of being forced to cover the portfolio company’s exposure; do that incorrectly, and you may have – as occurred in Sun Capital – doubled down on a losing proposition.
 

Futility Is Not in the Eye of the Beholder, But Depends on the Facts

Posted By Stephen D. Rosenberg In Benefit Litigation
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I have written and spoken on a number of occasions about the extent to which courts will enforce the exhaustion doctrine with regard to benefit claims, and about the exceptions that exist to exhaustion; I have litigated those disputes as well, in a number of contexts running from top-hat plans involving substantial deferred compensation to old fashioned LTD benefit denials.

Many lawyers and courts start out from the premise that the exhaustion requirement should be strictly applied, and that exceptions should be granted infrequently. This is all true, but the reality is that the dividing line between when to require exhaustion and when to allow an exception should be fact based: when a claimant simply alleges the elements needed to establish an exception, exhaustion should be strictly enforced, but an exception should be allowed where the plaintiff can demonstrate that the factual elements of a particular exception exist.

The United States District Court for the District of Puerto Rico just captured this distinction nicely, in an opinion addressing whether the futility exception to exhaustion could be invoked, when the Court explained that:

a plaintiff's belief that bringing administrative remedies would be futile is insufficient to call the futility exception into play. If, however, the plaintiff's belief is accurate—as demonstrated by factual evidence—and exhausting the administrative remedies would, in fact, be futile, then the futility exception is called into play.

Perfectly said.
 

The Lessons of Detroit for Private Sector Retirement Plans

Posted By Stephen D. Rosenberg In Employee Benefit Plans , Pensions , Retirement Benefits
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Much has been written over the years about the transition of employees from pension plans to 401(k)s by private industry over the past decade or so, with pensions disappearing and the obligation to fund – and risk of underfunding retirement – passed to employees. There is much to be said both for and against this change, but the fact that it is underway and effectively irreversible cannot be disputed; the numbers document the former, and reality establishes the latter.

There are instances, as I suggested was the case with First Data the other day, where changes that transfer risk to employees clearly seem to be driven by the short term financial interests of investors and ownership, but generally speaking, those are outlier events when it comes to this shift in retirement funding. More often, in my view, what you have seen are viable companies that are serious about their talent pool nonetheless making shifts in this direction to ensure the long run health and future of those firms, which is at least as important to the future retirement opportunities of their employees as the continuation of pensions would have been. For a number of reasons, which I won’t discuss in detail here, companies have found such a change necessary to achieve the arguably greater good of ensuring that, in the long run, they can continue to provide good jobs at good wages, in the old formulation, having found that this socially important good is put at risk by promising to fund distant pensions.

Detroit’s bankruptcy, as has other municipal bankruptcies, demonstrates the importance of managing retirement risk for employers, and the manner in which the failure to do so in a timely manner can spell disaster down the road, for both the employer and its retired employees. Detroit’s bankruptcy is driven in large part by almost $9.2 billion (yes, that’s billion, with a B) in pension and other retirement benefits that the city cannot afford to pay – something which is putting its retirees, more than anyone else, in harm’s way. I acknowledge that comparing municipal pension problems with corporate, ERISA-governed retirement plans is a little bit of comparing apples to oranges, but the differences between the two scenarios can’t override the key similarity and take away: that ignorance by an employer of its ability long term to continue to make pension promises without regard to a future ability to pay is not bliss; that it is employees who suffer in the long run if companies don’t make changes necessary to create sustainable retirement plans rather than blindly promising pensions forevermore to employees; and that it is entirely appropriate for employers to find that elusive middle ground between contributing to retirement security for employees and the risk of taking on future obligations that the employer can’t promise it can meet, such as guaranteeing pensions.
 

The Lessons of First Data Corp's Suspension of 401(k) Contributions

Posted By Stephen D. Rosenberg In 401(k) Plans , ESOP , Employee Benefit Plans
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There is a fascinating story in today’s Wall Street Journal, about First Data Corp. abandoning the practice of making cash contributions to employee 401(k) accounts, as part of cost cutting clearly designed to make the company more profitable (or at least profitable enough) to hold an IPO, which would allow an exit for the leveraged buyout group that had acquired First Data but has so far failed to improve the company’s prospects. As the article explains, First Data is instead going to make stock awards to all employees, but apparently outside of the retirement plan format. As best as one can tell from the article, the stock grants to employees won’t be made as part of an ESOP or some other type of retirement plan account, although the article is not entirely clear on this point.

We have seen for years the abandonment of pensions in favor of 401(k)s and similar plans that remove long term funding and investment risks from the sponsor/employer, and transfer those obligations and risks to employees. That is old news. What is new, however, and both interesting and troubling about the First Data story, is that it takes that transitioning of retirement risk from a company to its employees one step further, by replacing the cash contribution by the plan sponsor with the entirely speculative and risky grant of private stock, for which there is not even a current public market. In so doing, First Data has gone one step beyond simply the transitioning of employee retirement risk to employees by means of 401(k) plans, by removing the certainty – and cost to the company – of cash contributions in favor of paper awards that do not increase the employees’ current retirement assets. There are multiple problems with this step, viewed from the prism of retirement policy. First, we have all long counseled employees against excessive reliance on company stock in retirement planning, and in fact, it is a common refrain in defending against ERISA stock drop cases that employees in many cases could have and should have diversified out of company stock, but did not do so. This change by First Data effectively forces employees to have less cash to use for diverse investments in their 401(k) plans in favor of holding, apparently outside of the retirement plan, a concentrated amount of company stock. Second, and related to this, the company is reducing the cash in employee 401(k) accounts at the same time that the market is doing well as a whole (generally speaking), reducing the employees’ ability to invest broadly and keep up with the market; instead, they get company stock which, according to the article, is becoming less and less valuable each day.

A related and to me, fascinating, note on this is the fact that the stock grants, as noted above, may not be made as part of an ESOP or otherwise within the context and confines of an ERISA governed plan. If this is so, then the plan sponsors will avoid the obligations and potential liabilities that come with fiduciary status, when it comes to the granting of the stock and company decisions that impact the value of the employees’ stock holdings down the line. This is a very interesting and subtle point that should not be overlooked, particularly since the company is basically a creature, at this point, of the leveraged buyout industry and the real purpose of the changes in question are clearly directed at future transactions that would allow the current major investors to cash out. If they keep the employee stock obligations out of any ERISA governed plan, including an ESOP, the fiduciary obligations imposed by ERISA will not be implicated in or by any future transactions designed to unwind the stakes of current ownership. If those stock grants are instead placed in ERISA protected plans, in contrast, ERISA’s fiduciary obligations will serve as a check on any future complex transaction involving the company’s stock that might negatively impact the value of stock held by employees, in circumstances where those same events might positively impact those with control over the company and the majority of its stock. Those of you who recall the tortured history of theChicago Tribune’s ESOP and its role in a complex corporate transaction will recognize this point, and the risks and benefits incumbent in the decision to keep, or not, the stock grants within an ERISA governed plan.
 

To Boldly Go Where No Class Action Plaintiff Has Gone Before: Church Plan Class Actions

Posted By Stephen D. Rosenberg In Class Actions , ERISA Statutory Provisions , Pensions
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One of the interesting developments that caught my eye recently, and likely many of yours as well, was the filing of class action complaints challenging whether certain plans were, in fact, church plans for purposes of ERISA and thus, exempt from many of its requirements. This excellent paper on this development, by Wilber Boies and a cast of thousands at McDermott Will, delves into this issue with great insight. It is worth a read in and of itself if you want to understand both this development, and the legal arguments being pressed to challenge the status as church plans of the defendants in those cases.

Separately, though, I wanted to comment on a few points that the article focuses on, and how it relates to some of the thoughts on ERISA litigation and class action litigation that I have developed in posts over the years. First, I have discussed over the years that ERISA, to a large extent, is based on a private attorney general approach to plan discipline. There are limits to the resources of the DOL when it comes to enforcing the fiduciary obligations, funding requirements, prohibited transaction rules, and other aspects of benefit plans. ERISA, primarily through its breach of fiduciary duty provisions and the availability of the class action mechanism, relies on private enforcement actions to enforce those rules and obligations in the many, many cases where problems with a plan arguably exist, but for one reason or another are not resolved by action by the designated regulator. No matter what one thinks of class action plaintiffs’ firms, the reality is that both the threat of breach of fiduciary duty class actions and the changes imposed by suits that are successful play a significant role in maintaining the standards and integrity of benefit and pension plans. I have often written that most plan sponsors and fiduciaries, in my experience, want to run a sound and successful plan. They don’t, however, always succeed, and there are enough exceptions to this rule to demonstrate that at least some plans aren’t run with that goal in mind. The threat of breach of fiduciary duty class actions serves as a kind of Damocles’ sword hanging over the heads of all fiduciaries – both those who are trying to do a good job and those who have other motivations – leading, in my opinion, to better run plans in the cases of those sponsors who mean well and less egregiously run plans in the cases of those sponsors who mean less well. Of course, successful class action cases alleging breach of fiduciary duty in instances where a plan truly is poorly run also have the effect of actually fixing, to one degree or another, problems in those plans.

Second, the article explains the theories being pressed by the class action bar in these cases, which can be summed up in a soundbite as: the regulators have given plans a free pass in this area for years; the plans in question should not rightly be considered church plans; and the courts should now actually look closely at this issue and narrow the scope of the exception for church plans. I am not sure how persuasive an argument this will be, given the decades of regulatory rulings the argument challenges. However, the argument itself is a perfect example of my first point, above, concerning the beneficial private attorney general role played in the system by the class action plaintiffs’ bar: here, they are testing whether the controlling standards for church plans are correct, and giving the courts an opportunity to address this in detail. Eventually, these cases and this argument will almost certainly end up in the appeals courts, giving rise to a body of modern, well-developed authority on the issue. In the end, this can only benefit everyone (even if it ends up being expensive for the particular plans who are sued and/or for their insurers); plan sponsors, participants, and their lawyers will have a much better sense at the end of the day of exactly where the borders of church plan status rightly rest. There is a perfect corollary for this in the run of employer stock drop class action cases prosecuted over the past several years, which resulted in a series of extensive, well-reasoned appeals court opinions discussing and adopting what has come to be known as the Moench presumption. If you think about it honestly, without a bone to pick dependent on which side of the “v” you normally sit, this was an important and beneficial development for ERISA plans, and not just for litigation, but also for designing and running benefit plans: we now know, but did not before, exactly the context in which holding employer stock in a falling market can and cannot give rise to fiduciary liability. This is a tremendous boon to anyone designing a plan going forward, or trying to advise a plan sponsor or fiduciary of its obligations with regard to employer stock holdings in an existing plan.
 

Cancelling a SERP and the Limits of Preemption

Posted By Stephen D. Rosenberg In Preemption
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One of the more singularly interesting problems in ERISA litigation for anyone who, like me, greatly enjoys the complexities of civil procedure is the interplay of preemption (which, as we all know, is very broad under ERISA) and removal from state court to federal court. We all know that many plan participants would prefer to litigate disputes with plans under state laws rather than under ERISA, as such state causes of action may provide broader recoveries, easier burdens of proof, and the right to a jury; further, those same participants would, for various tactical reasons, prefer, if at all possible, to press their claims in state courts and not in federal courts. ERISA, and the body of jurisprudence that has built up around it, seeks to thwart these preferences by, first, broadly preempting state law claims that impact the duties imposed by or that exist under a plan, and, second, by allowing for removal to federal court of even purely state law claims if, in fact, they are really just ERISA claims in state law clothing; preemption is allowed under those circumstances by means of the doctrine of complete preemption.

But as participants and their lawyers often argue, there must be some limit on the scope of preemption and on the ability of defendants to remove purely state law claims and litigate them in federal court as ERISA claims (or else have them dismissed outright if the participant does not proceed with an alternative ERISA based cause of action). In many circuits, and under a fair reading of much of the case law on the issue, that limit may exist, but it resides far out there; few state law claims based on harms arising under or related to an ERISA plan will be deemed by courts to be so tangential to the plan as to avoid preemption and, where necessary, removal to federal court on the basis of the preempted status of the state law claim. However, the Sixth Circuit recently found that certain claims related to SERPs could fall outside those boundaries, and thus be neither preempted nor subject to removal to federal court. The Court found that the dispute over the SERPs concerned a decision to cancel them so as to smooth the sailing for a particular corporate acquisition, and the Court found that under those circumstances, the executives who were participants in the SERPs could prosecute a state law claim in state court, on the thesis that it does not affect the terms of the SERPs or the duties imposed by it. The Court found that the state law claims did not require interpreting the SERPs or applying duties owed under them, but only required reference to the SERPs for the specific purpose of determining the damages due the executives if the SERPs were, as alleged, canceled in violation of state law. The Sixth Circuit found that this reference to the SERPs to calculate the damages on the state law claim was not sufficient to invoke preemption to an extent needed to allow removal to the federal court on the basis of complete preemption. The decision is Gardner v. Heartland Industrial Partners, which is discussed in some detail in this recent article from Plansponsor.
 

Why the Complexity of Plan Valuation Argues Against Turning Appraisers into Fiduciaries by Regulatory Pronouncement

Posted By Stephen D. Rosenberg In ESOP , Fiduciaries
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I have written before, both in short form on this blog and long form for the Journal of Pension Benefits, on my view that it is not necessary to alter the regulatory definition of fiduciary to transform appraisers into fiduciaries. Simply put, there are so many parties who already bear the title of fiduciary and are therefore legally responsible for the impact on a plan of a deficient appraisal that transforming appraisers into fiduciaries is likely to do little more – when it comes to plan performance and governance – than create another party to name as a defendant in ERISA litigation, namely the plan’s appraisers. Moving the risk of fiduciary liability for a poor appraisal from the fiduciaries who run the plan – and selected the appraiser and accepted the appraiser’s findings – to the appraiser itself is unlikely to change the incentives and disincentives that impact the quality of a plan’s appraisal; it will simply move some of those incentives and disincentives from those who operate the plan to the appraisers they hire, or else will simply multiply those same incentives and disincentives so they are borne both by those who run a plan and by the appraisers they hire.

When it comes to the general opposition by the appraisal industry to such a change, however, I have to admit that I nonetheless have generally assumed it to be basically an act of economic self-interest: taking on fiduciary risk will increase potential liabilities and thus, at a minimum, the industry’s overall insurance and legal costs. Dr. Susan Mangiero, one of my favorite experts on business valuation, however, has published an excellent article explaining the complexity of appraising and valuing the holdings of pension plans, which illustrates another component to the industry’s opposition to turning appraisers into fiduciaries; the appraisal process for a particular plan can be particularly complex, with significant judgment calls. At the end of the day in any particular case, an appraiser, if a fiduciary to a plan and thus a defendant in ERISA litigation, may be found to have acted prudently in making those calls and thus not liable as a fiduciary under ERISA. However, that broad range of judgment calls leaves plenty of room for litigation over each of those calls, making it an expensive and long process for an appraiser to reach that point of exoneration. I am not certain that imposing fiduciary risk on each one of those calls by an appraiser is really likely to improve the analysis provided to plan fiduciaries – it seems to me it is more likely to simply create a “CYA” mentality when making appraisal calls, with one eye on the risks those calls pose down the road in a courtroom. I don’t see how creating that dynamic, rather than a dynamic that increases the accuracy and thoughtfulness of the information provided to those who operate a plan, is really likely to improve plan performance.
 

A Very Good Read: PLI's ERISA Benefits Litigation Answer Book 2013

Posted By Stephen D. Rosenberg In ERISA Seminars and other Resources
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I can still remember the first hearing I argued at, close to twenty five years ago, in Massachusetts Superior Court, in the very quaint (realtor speak for old, but still) courthouse in Dedham – I can still see the dusty parking lot out back, the old wood banisters separating the lawyers from the public area, and the close quarters among the lawyers, clerks and judge that are typical of courthouses of that vintage. Sure, I remember the argument too, which I won – it was an insurance coverage dispute over whether a voluntary payments clause barred coverage of a settlement in a trade dress infringement dispute between two Boston area businesses.

But it is interesting to me that what I most remember of that day are the sights and smells, the sensations, and the like, of being in court that day (along with the fact that I won; like many lawyers, I suspect, I tend to forget the losses but remember the wins). Yet, what I remember most about the first time I appeared in court to argue an ERISA case, close to 20 years ago at this point, had nothing to do at all with any of those types of sensations: what I remember most is that the lawyer for one of my co-defendants, a young (though still senior to me at the time) partner at a major firm, showed up at the hearing with a trial bag full of ERISA treatises, which he then arranged on the table in front of him before his argument. Now I know most of those treatises, as I can look across my office at my bookshelf and see them sitting there, and many of them are very good, but for detailed research and analysis work; none of them are really suited to being flipped open for a quick, summary answer on a litigation question, such as the kind that might arise in a courtroom itself, or for a quick consult in the few minutes one has to respond quickly to a client’s e-mail.

For years, I have looked for the type of resource that would serve well in that role, and I have at least skimmed the marketing materials for most of the major ERISA works out there as part of my search, but I never found a real fit – until now. One of the many benefits of blogging is that, on occasion, I luck into receiving a review copy of a book on ERISA or insurance coverage, and this time around it was the ERISA Benefits Litigation Answer Book 2013, edited by Jenner & Block’s Craig Martin and Amanda Amert, that landed on my desk. Published by PLI, it truly fits that niche – the handy dandy quick answer guide to litigation issues that arise in ERISA cases. Now, I am not sure it is the right book for a neophyte ERISA litigator, in that it provides – deliberately so – summary answers to questions that arise in this area, and thus requires a certain level of experience and expertise on the part of the reader; without that background, a reader cannot place a short answer in context, and understand what further analysis is needed beyond the summary answer. However, for the experienced lawyer who needs a quick but clearly accurate answer under time pressure, or the general practitioner or in-house lawyer who needs a starting point before turning to an outside expert on the subject (for instance, to determine the nature and viability of a claim against the company and to form the necessary background to discuss the claim intelligently with outside counsel), I can think of no better book out there at the moment.

Interestingly – to me anyway, because I have never noticed it before – there are two separate book groupings in my office. Across the room, on a bookshelf that I have to get up from my desk to reach, are the major treatises, copies of the “Annual Review of Banking Law” that I edited in law school (so long ago that, believe it or not, we published it on a Wang word processing system), and author copies of journals in which my work has been published. Right behind me though, on a credenza for easy reach, are books that I refer to all the time, such as the state and federal rules of civil procedure, an excellent summary of the federal rules of evidence from a seminar I attended many years ago, and Randy Maniloff’s great handbook on General Liability Insurance Coverage (the last, I just noted, rife with sticky notes on multiple pages). I have already put Martin and Amert’s PLI book with them.
 

The Scope of Equitable Relief Under ERISA: Blue Cross & Blue Shield of Rhode Island v. Korsen

Posted By Stephen D. Rosenberg In Equitable Relief
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The equitable remedies prong of ERISA was, for many years, a place where theoretically good claims went to die: courts were wary of providing expansive recovery under it, and thus a plaintiff who could not fit a claim within the confines of the denial of benefits or breach of fiduciary duty causes of action under ERISA was unlikely to recover by relying on the equitable remedies prong, no matter how factually compelling the plaintiff’s case. As I explained in my recent article, “Looking Closely at Operational Competence: ERISA Litigation Moves Away from Doctrine and Towards a Careful Review of Plan Performance,” recent case law, including from the Supreme Court, has completely changed this dynamic, and made equitable relief a viable manner of targeting harms arising from ERISA governed plans when those harms could not support claims for denied benefits or for fiduciary breach.

A decision last week out of the United States District Court for the District of Rhode Island, Blue Cross & Blue Shield of Rhode Island v. Korsen, provides an outstanding roadmap for making out an equitable relief claim under ERISA in 2013, after the lay of the land for such claims was revamped by the Supreme Court in Amara. You can do worse – much worse – than to follow the judge’s framework to determine whether you have a viable equitable relief claim and, if so, the best way to present each element.

In addition, though, the Court touched on a fundamental issue in equitable relief litigation under ERISA, which has engendered some controversy over the years, namely, is the outcome of equitable relief claims under ERISA dependent solely on whether the precise elements of such claims as set forth in Supreme Court decisions exist, or can courts go beyond those and rely on the general and long standing principles of equity to decide such claims? In short, do such claims rise or fall only on whether the exact principles detailed in the Sereboff line of cases and Amara are met (such as the recovery is one allowed in the days of the divided bench, and a designated fund is being targeted)? Or can the court, even if these elements are satisfied, still reject such claims if needed to “do equity,” in the old vernacular – i.e., to be fair?

The Court in Korsen gives a compelling argument for the latter.

And finally, by the way, in the old – and I was hoping by now discarded – vernacular, a hat tip to @Jon Pincince for bringing the case to my attention.
 

ESOPs, Appraisers and Fiduciary Liability

Posted By Stephen D. Rosenberg In ESOP , Fiduciaries
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There is much uproar at the moment over the possible expansion of fiduciary status to include appraisers, whose work includes valuing the assets held by the participants in ESOPs. Appraisers understandably do not want to assume that status, with its potential to turn them into defendants in ESOP breach of fiduciary duty litigation under ERISA; at a minimum, it opens them up to incurring defense costs (or the premium costs of insuring against that risk) from being named as a defendant. Personally, though, the risk seems to me to be overstated: appraisers will have to price that risk into their services, driving up the costs of operating an ESOP somewhat, but they are certainly not going to abandon the business, as some critics of this possible change have claimed. It’s a substantial business, providing appraisal services to ESOPs, and it is hard to imagine all the appraisers in America walking away from that work simply because of this risk, and the need to factor it into their pricing.

That said, however, I don’t believe it is necessary, or warranted, to expand the definition of fiduciary to capture appraisers of ESOP assets. I discussed this issue in depth in a presentation over a year ago to the New England Employee Benefits Council, as well as in a latter article in the Journal of Pension Benefits. Put simply, the structure of fiduciary responsibilities and liabilities that currently exists under ERISA is, in my view, sufficient to protect participants against problems with appraisals, and protecting participants from any such problems does not require turning appraisers into fiduciaries. I discussed this point, and my reasoning, in detail in this article.
 

Do You Know a Governmental Plan When You See It?

Posted By Stephen D. Rosenberg In Employee Benefit Plans
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Years ago, I worked with a client who liked to tell the story of having begun working with ERISA governed plans right after ERISA was enacted. He had been told by his bosses that there is this “new law,” and you are in charge of issues arising under it. That “new law,” of course, was ERISA. Little could he have known at that time that this “new law” would grow up, by force of preemption and the size of the benefits market, to control and govern an overwhelming slice of American life.

One of the stories I remember him telling me is about early attempts to determine whether something was or was not a governmental plan. Governmental plans, you may recall, are not subject to ERISA. Back then, as he told the story, he and others in the industry applied an “if it looks like a duck, walks like a duck and talks like a duck “ test, meaning if it looked and felt like the plan related to a governmental entity, than it was a governmental plan. It was as good a standard as any, as you have to remember that, at the time, the extensive body of case law that now exists concerning ERISA plans had yet to be created.

Well, now we know better, after years of court decisions concerning ERISA plans, including whether or not a plan constitutes a governmental plan. Mike Reilly, over at the Boom blog (I just like writing Boom blog, for some reason), has the latest word on the subject, and on how, today, we determine whether or not a plan is a governmental plan. Hint: it’s a lot different and more technical than seeing if it walks like a duck.
 

Player Safety and the Absence of Guaranteed Contracts in the NFL

Posted By Stephen D. Rosenberg In Class Actions , Percentage Players Die Broke Too: Notes on Litigation and Trial Tactics
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I don’t want to turn this into a sports law blog, or – heaven forbid – an NFL blog (heaven knows, there are more than enough of those), but the latest work of the Washington Post on player injuries was too good to ignore. I promise, after this one, I will go back to ERISA and insurance blogging. However, those of you who have read me for awhile on the real subjects of this blog know that I am a fan of data. You want to convince me of something, show me data, and your reasoning, sources and the methodology behind it; I have little use or interest in argument by anecdote.

In “Do no harm: Retired NFL players endure a lifetime of hurt,” their latest article on the NFL’s problem with seriously injured players, the Washington Post’s Sally Jenkins, Rick Maese and Scott Clement detail survey findings as to the post-career injuries and physical conditions of retired NFL players. You should read it – the findings should be enough to dissuade anyone from continuing to think that retired NFL players with serious health issues are the outliers, rather than the norm. I often think that the articulate, well-dressed, well-off, clearly not that injured retired players on ESPN’s pregame shows and the other network’s football shows leave us with the impression that they, and not the injured and complaining retired players, are representative of the population of retired players. The Post’s survey data should make clear that is not the case.

To me, the most interesting aspect of the story is the players’ refrain that they constantly felt it necessary to play while injured (and with injuries serious enough that most of the general population would be out on long term disability benefits if they suffered from them) out of fear they would lose their jobs otherwise. The reason for this, they consistently explain, is the fact that NFL contracts are not guaranteed, and thus, if they lose their roster spot, they lose their livelihood. The Post quotes one former player thusly: “If you don’t play, they don’t pay. You will get cut if you are not on the field. That is why we play through injuries: we have to feed our families.”

Frankly, the fear that ownership will terminate them if they are injured and can’t work sounds more like an issue from late nineteenth century mining in this country than from a modern workplace (if you have ever read J. Anthony Lukas’ “Big Trouble,” than you know what I am talking about; if you haven’t read it, you should). And its easily fixed – just make NFL contracts guaranteed, like they are in other major sports, and the fear of losing their paychecks that drives players to play while seriously injured disappears.

In the Post’s series of articles and in articles elsewhere on the subject, NFL representatives claim they are working to make the game safer and to better take care of players and retired players, but point out that it is slow work. The Post’s article includes a discussion of this point:

The league is also conducting an ongoing campaign to reform what executives say is a “culture” of playing through pain.“That culture has existed and it needs to change,” said NFL Executive Vice President Jeff Pash. “That is a big part of what Commissioner [Roger] Goodell is trying to do. We’re trying to move toward a player safety culture. It’s going to take time, but I think we’re making progress, seeing them being more honest about their injuries.”

Making contracts guaranteed can be done almost instantaneously, and would significantly alter the culture of “playing hurt.” The NFL often likes to hide behind the collective bargaining agreement (“CBA”) as a reason why certain things can or cannot be done: I have little doubt though, that even to the extent changing to guaranteed contracts might relate to the CBA, that the players would agree pretty much immediately to amend the CBA to allow them, or even better, to mandate them.

I will tell you one thing. If I was representing the retired players in any of the class actions being prosecuted against the league for safety related issues, the first thing I would do when the Commissioner or anyone else testified that they were working to improve the situation, is cross them on why, if that’s true and the jury should believe them on that, they still don’t have guaranteed contracts that would give players some security in deciding to sit out when injured.
 

Who Should Pay the Medical Bills of Retired NFL Players?

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.
 

Microblogging About ERISA on Twitter

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.
 

My Journal of Pension Benefits Article on Operational Competence after Amara

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.
 

How to Look Smart About McCutchen and Heimeshoff Without Really Trying

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.
 

And a Third Post on Tibble: Thoughts on Revenue Sharing and the Small Recovery for the Class

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.
 

Tibble, the Ninth Circuit and the Scope of the 404(c) Defense

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.
 

And the Ninth Circuit Swings Away at Tibble v. Edison . . .

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.
 

Directors and Officers Liability Meets the Accidental Fiduciary

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.
 

Preemption of Misrepresentation Claims

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.

Pensions as a Moral Issue, and the Role ERISA Can Play

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.
 

Valuation and Appraisal Risks for ESOP Fiduciaries

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.
 

Despite Kirkendall, Never Assume You Don't Have to File an Administrative Appeal

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.

Some Thoughts on Kirkendall v. Halliburton

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.
 

Is the Risk of Relapse a Disabling Condition for Purposes of an LTD Policy?

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.

 

A Football Story for Super Bowl Sunday, or Why Alex Smith Would Make a Great Fiduciary

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.
 

Going the Way of the Horse and Buggy: Comments on the Future, or Lack Thereof, of Pensions

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.
 

They Are Called Prohibited for a Reason

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.

Don't Look Back, Something Might Be Gaining On You: Whether a Plan Administrator Can Raise New Bases For Denying a Claim Beyond Those Raised in the Initial Denial of Benefits

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?
 

Using the Economic Loss Doctrine to Defend Company Officers

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.

Back to the Future on a US Airways Flight: Notes on Oral Argument in McCutchen

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?
 

Cut the Deficit, Not 401(k)s

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.
 

McCutchen at the Supreme Court

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.

On Getting Out of the Pension Business

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.
 

Notes on The John Marshall Law Review's Special Edition on "The Past, Present, and Future of Supreme Court Jurisprudence on ERISA"

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.
 

The Lessons of Fannie Mae, or How to Defeat the Moench Presumption

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.
 

Amnesty and the Fee Disclosure Regulations

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.

The Impact of Appraisals on the Potential Liability of ESOP Fiduciaries

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.
 

A Focus on Facts in the Seventh Circuit: George v. Junior Achievement of Central Indiana

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.

Monday Morning Quarterback: What NFL Referees Tell Us About the Public Pension Crisis

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.
 

Stephan v. Unum, the Attorney-Client Privilege, and the Need for Independent Counsel for Company Officers and Plan Fiduciaries

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.
 

On the Problem of Remedying Errors in Providing Plan Information

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.
 

Contractual Statute of Limitations Periods in the First Circuit

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.
 

Small Employers and the Problem of Plan Compliance

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.

On the Ambiguous Nature of Fiduciary Status

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.

The Zeitgeist of Chris Carosa

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.

Tails I Still Win, Heads You Still Lose: More on the Fiduciary Status Under ERISA of Traditional Banks

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.
 

Heads I Win, Tails You Lose: The Privileged Position of Traditional Banks in ERISA Litigation

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.
 

Litigating Executive Compensation Disputes

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.
 

Ask Not for Whom the Bell Tolls

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.

A Bunch of Cliches About Scary Things (Or a Few Words on Why Fee Disclosure Isn't Scary)

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.
 

Trust But Verify: The Importance of Private Attorney Generals to Plan Governance

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.

Plan Administrators and the Risk of Personal Liability: A Primer

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.

Lanfear, Home Depot and Moench

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.
 

The IRS - A Safe Port in a Storm for Plan Fiduciaries (Sometimes, Anyway)

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.
 

From Webster To Seau and the Impact of More Medical Research on Repetitive Head Trauma in Football

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.
 

On the Other Hand, There May Not Be Any Structural Impediments to Breach of Fiduciary Duty Class Actions in the Sixth Circuit

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.
 

The Dam Breaks: Tussey v. ABB

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.
 

Structural Impediments to Breach of Fiduciary Duty Claims

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.
 

Pricey Investments, Poor Outcomes

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.
 

Do the 1% Have the Same Rights as the 99%?

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.

The Tin Man's Heart

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.
 

A Perfect Storm, ERISA Style

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.
 

On ERISA and the Potential Liability of Senior Executives

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.
 

Fiduciary Prudence? 9.5 Million Reasons to Care.

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.
 

Speaking of New Department of Labor Regulations . . .

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.

At the Intersection of Insurance and Plan Fiduciaries

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.
 

The ERISA Decision of the Year?

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.
 

Fee Disclosure, the Wall Street Journal, and the Value of Regulation

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?

On State Regulators and the Continued Existence of Discretionary Review

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.

What Vanity Fair Teaches About Fiduciary Obligations

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.
 

An Entertaining Little Primer on Cash Balance Plans

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.
 

The Realities of Plan Fees - Or Why They Are Not Excessive Just Because They Exist

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.
 

The Very Interesting Lessons of Novella

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.
 

How Much Employer Stock is Too Much? Anything More than a Little

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.

The Devil is in the Details: Failure to Provide Forms Can Be a Fiduciary Breach

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.
 

Some Notes From the Real World on the Practical Realities of Fee Disclosure

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.
 

Citigroup, McGraw-Hill, and Moench

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.

Interpreting Ambiguous Plan Language

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.
 

Zen and the Art of Pension Plan Maintenance

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.
 

Denial of Benefit Claims, The Repeat Player, and Saving Money on Litigation

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.
 

Defensive Plan Building After Loomis

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.
 

Loomis, Hecker, Tibble and the Evolution of Excessive Fee Claims

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.
 

Briefing Attorneys' Fee Awards Under ERISA

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.

The New York Times on BrightScope

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.

The New York Times, Fees, Regulation and Wrap Fees

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.
 

Fee and Expense Disclosure: No Such Thing as a Free Lunch

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).
 

401(k)s, Spousal Waiver and Beneficiary Forms

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.
 

Retreat From the High Water Mark: Excessive Fee Litigation After Tibble

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.

The Lessons of Unisys

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.
 

Talking About Fees

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.
 

Lurie on Amara By Way of BenefitsLink By Way of the Workplace Prof

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.
 

Owning Your Advice

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.
 

Fiduciary Liability: Risks and Insurance

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.
 

Amara: Why Reformation Is Better Than Estoppel

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.

Leave It to a Non-Lawyer to Cut Through the Fog (Or What Amara Actually Means)

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.
 

Amara

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.
 

Extrapolating From Employer Stock Drop Cases to Other Types of Investment Losses

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.

Live Blogging from Bentley College . . .

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.
 

Playing Hot Potato With Employer Stock

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.
 

What Exactly is the Investment Drag of Macaroni and Cheese?

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?
 

Excessive Fee Claims After Tibble and Hecker

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.
 

What Can We Learn From a List of the Best 401(k) Plans?

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.

Fiduciary Definitions Change Hand in Hand with the Real World

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.
 

Pozek on Werewolves

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.

Adam and John on the Obligations of Reasonableness and the Problems with SPDs, Respectively

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.
 

Me, Behavioral Finance and PlanSponsor Magazine

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?

On Problems in the Sponsor/Third Party Administrator Relationship

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.

On Spano and Certifying Classes in Defined Contribution Cases

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.

How Much Has MetLife v. Glenn Changed the World?

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?

Class Actions, the Diamond Hypothetical and the Seventh Circuit

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.
 

The Ever Evolving Risks of Fiduciaries

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.

When Does Exhaustion of Administrative Remedies Really Require Exhaustion

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.

On Disclosure and Conflicts of Interest

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?

Interview in Fiduciary News

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.

Talking About Compliance is Cheap - Taking Action On Compliance Is What Matters

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.

Market Down? Then ERISA Lawsuits Must Be Up

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.

 

Looking Under the Hood at Public Pension Obligations Isn't Pretty

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.
 

Governmental Plans, Annuities, and the Intersection of ERISA with the Securities Laws

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.

Derivatives + No Transparency = Fiduciary Breach?

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.

Misleading Summary Plan Descriptions and the Supreme Court

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.

 

 

 

Of Fiduciaries and Liability

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.

The Lesson in the Chicago Tribune ESOP Mess

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.
 

Fees, Fees and More Fees - Once Again

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.

Does LaRue Alter the Rules for Class Actions?

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.

 

Fees, Fees, and More Fees

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.

In the More Things Change Department . . .

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.
 

The Ninth Circuit Adopts Moench and Why It Matters

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.


 

ERISA and the 401(k) turn 30

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.

From Studebaker to Stock Drops, in One Lawyer's Lifetime

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.

On SPDs and Compliance

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.

Handling the Impact on Benefit Plans of Corporate Acquisitions

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.

Moench, the DOL and the Future of Stock Drop Litigation

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.

ERISA Preemption and the Legal Services Plan

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.

Private Attorney Generals and ERISA

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.

You Say Potato, I Say Potahto: When Plan Documents and SPDs Speak Inconsistently

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.

An Unfortunately Timely Topic: When Severance Programs are ERISA Plans

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.

Pay Now and Later: High Plan Fees Pose an Increasing Risk of Fiduciary Exposure

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.

Breach of Fiduciary Duty Litigation: When the Best Defense is a Good Offense

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.

Small Plans Don't Always Have Small Problems

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.

Could the Deepwater Horizon Alter the Trajectory of ERISA Stock Drop Litigation?

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.

Statute of Limitations and Denial of Benefit Claims

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.
 

Can the Deepwater Horizon Spill Sink the Fiduciaries of BP's 401(k) Plan as Well?

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.

ERISA Preemption: Depends on What You Mean by the Word Relate

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.

On Named and Functional Fiduciaries

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.

The Future After Hardt

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.

Hardt, A Unanimous Supreme Court, and the Perfect Example of Why Remand Is Enough of a Win to Support an Award of Attorneys' Fees

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.

What's a Good ERISA Lawyer Worth, Anyway?

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.
 

What Conkright v. Frommert Means

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.

When Does a Flaw in an Administrative Appeal Render an Administrator's Denial of Benefits Arbitrary and Capricious?

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.

Wednesday Potpourri

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.

Harris, Hecker, Excessive Fees and Marketplace Discipline

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.

Attorneys as Fiduciaries

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.

When Does Little Recovery Justify a Large Fee Award?

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.

The Fiduciary Status of Investment Advisors

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.

You Say Potato, I Say Potato: Two Different Understandings of What Discretionary Review Means

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.

On the Ticking Time Bomb of Public Pension Plans

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.
 

In re Lehman

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.

A Parable About the Cable Man

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.

Pozek on 403(b) Plans

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.

On Plan Fees, Wal-Mart and the Costs of Bad Publicity

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.

How Will Climate Change Affect LTD Carriers?

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?

Ten Ways to Stay Out of Trouble

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.

Disability Insurers, False Claims and Social Security Benefits

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.

On Attorneys Fees and Hecker

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.

Here's What the Court Will Do In Conkright v. Frommert

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.

Is There A Disjunct Between Excessive Fee Cases and the Real World?

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.

BusinessWeek on BrightScope

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.

Blending De Novo and Deferential Review

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.

Introducing Pozek on Pensions

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.

 

A Nice Explanation of the DOL Advisory Opinion on Target-Date Funds

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.

Does the Bell Toll for Discretionary Clauses?

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.

Marx on 401(k) Litigation

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.

Three for Thursday

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.

On Fiduciary Liability Insurance

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.

The Case of the Billion Dollar Typo

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?

Hecker, Fees and A Broad Public Market

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.
 

Divorce Me for My Money, Or Love, Continental Style

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.

Harmon on Delegation of Fiduciary Duties in the First Circuit

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.

Time to Retire the 401(k)?

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.

Preemption, the Supreme Court, and Job Losses

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. Secon