What Happens When the Pirates of the Caribbean Go Looking for a Financial Advisor to Help Invest Their Treasure?

Posted By Stephen D. Rosenberg In Conflicts of Interest , Fiduciaries
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All men, who after all are all just overgrown 12 year olds, admire Johnny Depp to some degree – a grown man who becomes fabulously wealthy by playing pirate??? Sign me up! But what’s not to emulate, as this article in the New York Times points out, is his sheer malfeasance in handling his own finances. Depp is now involved in litigation with his management company over who is responsible for the financial disaster he finds himself in, and it looks clear that there is more than enough blame to go around for all parties involved.

But the reason I write about this is not for the opportunity to link to this, but rather because the author of the article, Charles Duhigg, uses Depp’s situation as a frame of reference for considering the appropriateness of the Department of Labor’s new fiduciary regulations. Of course, Depp and his problems don’t implicate the rule itself, but they do illustrate the question of how much responsibility should be imposed on financial advisors to act in their clients’ best interest and how much responsibility should instead be placed on investors to – when it comes to their advisors’ advice – “trust but verify” (which is always a good rule in life, and one I have lived by since the Reagan era). As the author of the article suggests, the new fiduciary regulations can be understood as an attempt to recalibrate where the line should be drawn on the continuum between an advisor’s responsibility to protect his client, on the one end, and the client’s responsibility to protect himself on the other. The new fiduciary regulation moves that dividing line closer to the advisor’s end of the scale, making the advisor a fiduciary of the client’s needs when it comes to investing.

The author suggests that Depp’s extreme lack of attention to his own finances suggests that there are limits on the extent to which the obligation of protecting a client against bad investment decisions should be imposed on financial advisors. However, when it comes to the Department of Labor’s new fiduciary rules, there is something important that the article’s author leaves out of the equation, which is the sheer difficulty of understanding the expenses and risks of investment products offered to clients by their advisors. I litigate disputes over retirement plan holdings all the time, and I can tell you, that information is not always readily available to advisors’ clients, their clients often don’t even know to ask for it or if so, what to ask for, and they often cannot understand the information provided to them. That information and knowledge gap between financial advisors on the one side and their customers on the other cannot be ignored in considering how much obligation to protect customers – including, if need be, taking on the status of a fiduciary – should be assigned by regulation to financial advisors.

The Year in Review: Looking Back at ERISA Litigation In 2016

Posted By Stephen D. Rosenberg In Benefit Litigation , Class Actions , ESOP , Fiduciaries
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2016 was the year that church plans went to the Supreme Court, excessive fee claims came to elite universities and the Department of Labor’s authority to alter its regulation of fiduciary conduct was challenged in multiple courts. Of course, stock drop litigation, excessive fee cases, and other assaults on the make up of 401(k) plans continued apace, even if they yielded the spotlight to flashier, more novel types of cases.

Church Plans Go To the Supreme Court

Over the past few years, at least 36 class action suits have been filed across the country against large medical institutions affiliated with religious entities attacking the status of their retirement plans under ERISA’s exemption for church plans. The lawsuits assert that these plans are not properly within that exemption and therefore must be brought compliant with ERISA. The relevant statutory language governing that exemption – which allows retirement plans to escape regulation under ERISA if they qualify as “church plans” – lacks clarity and leaves room to dispute when a plan qualifies for the exemption. Medical institutions affiliated, even if only remotely, with religious organizations have long designed their retirement plans without adhering to the strict terms of ERISA in reliance on a broad interpretation of the exemption’s scope taken by the Internal Revenue Service. Three federal courts of appeal have now narrowly construed the exemption in a manner contrary to the reading given it by regulatory agencies. The United States Supreme Court recently agreed to address this issue and decide the proper meaning to be given to ERISA’s church plan exemption.

Elite Universities Get the Excessive Fee Treatment

Perhaps the biggest media sensation in ERISA litigation in 2016 was the coordinated and nearly simultaneous filing of multiple lawsuits against many of the nation’s most prestigious universities. The suits, almost all of them filed by Schlichter Bogard & Denton LLP, which pioneered the concept of suing private industry 401(k) plans for excessive fees and undisclosed revenue sharing, accuse universities of paying excessive fees and having other allegedly costly deficiencies in their retirement plans. The lawsuits charge the plans with the typical panoply of complaints about retirement plans built around investment menus, including the use of overly expensive investment choices and excessive administrative costs. However, the suits also charge that the university plans not only include excessive fees and costs, but also an excessive number of investment options leading to poor returns for individual participants.  

The Department of Labor Fiduciary Rule Litigation

If the litigation campaign mounted against university retirement plans was not the biggest media splash in the world of ERISA litigation in 2016, then it was only because it was eventually overshadowed by the high profile lawsuits filed seeking to set aside the Department of Labor’s new regulations concerning the definition of fiduciary under ERISA. Not long after the Department issued its new regulations, six different lawsuits were filed in multiple federal courts seeking to have the regulations set aside, arguing that, among other claims, the Department’s regulations exceeded its authority or, if not, then the Department’s rule making was suspect. The courts have upheld the Department’s rule making in two of the cases, while the other actions remain pending.

“Stock Drop” Litigation After Dudenhoeffer

“Stock drop” cases continued along their merry way during 2016, even if the theory of liability, and related cases, fell from the lofty perch they had long held as a hot litigation topic. The term “stock drop” has long referred, in this context, to claims arising from the loss in value of a retirement plan holding that consists of the publicly traded stock of the plan sponsor. Clever lawyering had insulated plan fiduciaries from incurring liability as a result of large losses in the value of such holdings through the creation and enforcement of a legal rule known as the “Moench presumption,” which held that fiduciaries could not be held liable for declines in the value of company stock held in retirement plans absent extraordinary circumstances, such as an existential threat to the company’s very existence. Back n 2014, however, the United States Supreme Court rejected that test in Fifth Third Bancorp v. Dudenhoeffer, holding instead that fiduciaries are subject to liability if they were imprudent in managing or overseeing company stock holdings.

In 2016 , litigation continued apace over dramatic declines in company stock prices and their impact on the value of retirement accounts. However, despite the loss of the “Moench presumption,” overall, plan sponsors and fiduciaries generally fared well in defending against such claims. The highest profile court decision in 2016 in this area was likely Whitley v. BP, PLC, which was a stock drop claim arising from the explosion of the Deepwater Horizon offshore drilling rig, resulting in “a massive oil spill in the Gulf of Mexico and a subsequent decline in BP's stock price.” The Court held that there was no viable defensive action the fiduciaries could have taken to protect the value of the company stock holdings in the plan that would not have simply inflamed the collapse in the stock price, and that this precluded liability for breach of fiduciary duty due to the loss of value in the holdings of company stock.

The central issue in the Whitley action turned out to the be the key issue in stock drop cases during much of 2016, and clearly will be moving forward into 2017 as well: namely, the need for plan participants to prove, for their stock drop claims to proceed, that plan fiduciaries could have taken an action during, or before, the collapse in value of company stock that would have made the situation better, and not worse.

Continued Litigation Over 401(k) Plans

Last but not least, 2016 saw the continuation of extensive litigation over the investment options in 401(k) plans. Many of these claims, both those newly filed in 2016 and those that were filed earlier but that continued to be litigated, were excessive fee cases, alleging that plan fiduciaries included investment options in plans that were more expensive – thus generating excessive fees for vendors – than were necessary. One of the foundational cases alleging this theory, Tibble v. Edison International, continues along after 10 years of litigation, including multiple trips to the Ninth Circuit Court of Appeals and one to the United States Supreme Court. In 2016, the Ninth Circuit reinstated the claims of plan participants that the fiduciaries breached their fiduciary duties by failing to monitor, and then remediate, excessively high fees charged by investment options in the company’s 401(k) plan.

One of the key trends in litigation in 2016 was the expansion of such lawsuits to include more novel and arguably sophisticated theories beyond simply alleging that fees were paid that were higher than necessary. One high profile example consists of the many claims filed charging that financial and similar companies included their own in-house products in the retirement plans of their own companies for the purpose of generating outsize fees for the plan sponsor, in breach of the fiduciary duty to manage the investments for the benefit of the participants. The year 2016 saw an expanding panoply of theories for attacking investment options and other aspects of the administration of 401(k) plans, and more of the same can be expected going forward.

DOL 1, Critics of the New Fiduciary Regulations 0: Comments on NAFA v. Perez

Posted By Stephen D. Rosenberg In Fiduciaries
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Well now, I wrote a few substantial posts on the multiple lawsuits challenging the Department of Labor’s new regulations governing fiduciary status at the time they were filed, a couple of which you can find here and here. One of my key points was that it is a mistake to get lost in the meta story made in the complaints in those actions, which are effectively – using the term in its broadest form – political documents making the case that the regulatory changes are just plain bad. In a way, the complaints in those actions read almost like old fashioned political pamphlets with regard to the big picture criticisms made in them, while having technical legal arguments buried beneath. That is not a criticism, not to me anyway. Hitting all of those notes in the same complaint is a tough job, and it was done well. But as I suggested in this post, if you looked past the polemics and focused on the administrative law challenges to the promulgation of the rules that are the actual technical heart of the complaints filed against the Department, it was right to be skeptical of the complaints and the claims against the Department seeking to set aside the new regulations. The scope of a challenge to this type of administrative and regulatory action is highly specific and its grounds narrow; skepticism about the various plaintiffs’ abilities to prove their claims was warranted, given the massive effort by the Department in promulgating the regulations and the history of what occurred when they did so.

That skepticism is borne out in the first substantive ruling by one of the courts with a challenge to the Department’s new regulations pending before it. The United States District Court for the District of Columbia has roundly rejected the plaintiff’s arguments in that case, firmly upholding the Department’s actions. The decision is 92 pages long and I doubt that many people spent their weekend reading it, and while I did, I don’t want to spend my whole morning summarizing it. And why should I? Nevin Adams at NAPA has done a great job of that already, right here in this story.

One of the things I like about his summary is that he really drives home the extent to which the court found that the Department acted within its regulatory authority and power. That, as I noted above, is the real central point in all of the lawsuits filed over the new fiduciary regulation, as opposed to the question of whether the financial and insurance industries should be put in the position of having to comply with the accompanying changes to industry practice, which is more properly a question for the political – and not the judicial – process.

A Tale of Two Cases, or Why Bad Facts Make Bad (Stock Drop) Law

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries
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I will be sharing a dais with Joe Barton later this month at the 13th National Forum on ERISA Litigation, where we are both part of a panel that is discussing equitable remedies under ERISA. Joe won an interesting case before the Second Circuit recently, Severstal Wheeling Retirement Committee v WPN Corporation, in which the Court held that the fiduciaries had breached their duties by failing to properly diversify the plan holdings. While the decision is interesting in a number of ways, what caught my eye about the Court’s opinion was the focus on very specific and concrete facts demonstrating a close link between the fiduciaries’ specific acts and losses to the plan. The Court drilled down into the conduct at issue, and found a very specific action or series of actions that breached the defendants’ fiduciary duties. This is worth noting because most successful fiduciary litigation – and by that I mean successful in the courtroom, not just at the settlement table – has this type of narrow, concrete linkage in common; think back to the first big breakthrough excessive fee case, Tibble, and the trial court’s focus on one specific fee aspect of the case.

In contrast, fiduciary breach cases that are based on a more generalized complaint about fiduciary conduct tend to fizzle out, and you see this nowhere more clearly than in the stock drop cases. Writing the other day about the Fifth Circuit’s decision rejecting a stock drop claim based on the impact on BP’s stock price of an oil rig explosion, I pointed out that stock drop cases are turning against the plaintiffs’ bar, and suggested that the BP decision was a good example of why that was the case: because the factual linkage between the underlying event giving rise to the stock drop and the fiduciary actions of the plan’s fiduciaries was too attenuated to support a compelling claim. In other words, at the heart of much of the failure of the stock drop claims is the old maxim that bad facts make for bad law. Many of the stock drop claims, and the BP case is the perfect exemplar, are simply based on facts that don’t easily lend themselves to concluding that a plan’s fiduciaries acted improperly. As the Second Circuit’s decision in Severstal Wheeling Retirement Committee v WPN Corporation reflects, although obviously not in the context of a stock drop claim, a close link between plan losses and fiduciary acts is a necessary prerequisite to a compelling claim.

Will stock drop claims eventually come back into fashion, perhaps after the next stock market downturn? Will they ever be successful? I think the answer to both is likely yes, but as to the latter, only if and when they start being tied much more closely to specific and concrete acts of fiduciaries and are no longer based on broad claims that essentially treat fiduciaries as somehow able to protect plan participants against the risk of declines from any and all corporate actions. That last dog simply won’t hunt, to borrow an old saying from my youth spent on the line where Baltimore’s suburbs ended and its remaining farmlands began.

Whitley v. BP, Stock Drops, and the Outer Limits of Fiduciary Responsibility

Posted By Stephen D. Rosenberg In 401(k) Plans , Class Actions , ESOP , Fiduciaries
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There is an old political saying that where you stand depends on where you sit, which, roughly translated, means that people tend to assert positions that are beneficial to their own organizations and employers, rather than based upon a consideration of broader issues. The author of the maxim, Rufus Miles, thinks the idea goes all the way back to Plato.

I often think of this maxim, known as Miles’ law, when ERISA litigators comment on prominent court decisions affecting ERISA claims, particularly breach of fiduciary duty actions. Lawyers from firms who primarily or exclusively represent major financial companies or plan sponsors always speak well of defense oriented decisions, and those who represent participants, particularly class action lawyers, always speak poorly of such decisions. The reverse, of course, tends to occur when a court issues a decision that seems to expand liability under ERISA or to favor participants on even a superficial or procedural level.

For me, probably because I represent the full range of actors in the ERISA universe, from participants to plan sponsors to third party administrators to fiduciaries and back again, I tend to be pretty agnostic about prominent decisions issued by courts on key ERISA issues. Some are good, some are bad, some are just plan poorly reasoned and worthy of criticism no matter which side of the “v” you favor.

One I am not particularly critical of is the clear trend line against participants in the so-called stock drop suits, involving claims of breach of fiduciary duty based upon collapse in the stock price of company stock held in employer plans, at least in cases where plan participants always had the option of diversifying out of those holdings but instead voluntarily kept too much of their retirement holdings in company stock. As I have written before, how many economic cycles does one have to live through to know that keeping a large portion of your retirement assets or other wealth, voluntarily, in the stock of your publicly traded employer might just not be the best idea?

But leaving that caveat aside, it is necessary to maintain some strong bars to such claims, because otherwise they simply become a back door avenue for plaintiffs’ firms to prosecute securities litigation, only in this instance, under ERISA, which – for all its reputation as a defense-oriented statute – is a more flexible basis for pursuing such claims than are the securities laws at this point. Stock drop claims more properly belong under the securities laws and its doctrines, and should be evaluated under them. Now don’t get me wrong: I am not saying there cannot be a fiduciary breach for purposes of ERISA related to employer stock that warrants a claim under ERISA under all circumstances, but only that stock collapse, without more, is really simply securities litigation in ERISA clothing.

I have always believed that the Supreme Court’s decision in Dudenhoeffer was a fine piece of line drawing in this regard, allowing such claims in a narrow class of circumstances but limiting them to a degree sufficient to maintain a firm distinction between securities law and ERISA’s fiduciary standards. I believe the post-Dudenhoeffer decisions out of the district courts and federal courts of appeal have demonstrated that this is an accurate view of that decision, including the most recent high profile decision on this issue, the Fifth Circuit’s decision this week in Whitley v. BP, PLC. Whitley was a stock drop claim arising from one of the more notorious environmental disasters in recent years, with the participants claiming that the loss in the value of their company stock holdings that resulted from it was attributable to fiduciary violations by the plan’s fiduciaries. As the Fifth Circuit explained:

On April 20, 2010, the BP-leased Deepwater Horizon offshore drilling rig exploded, causing a massive oil spill in the Gulf of Mexico and a subsequent decline in BP's stock price. The BP Stock Fund lost significant value, and the affected investors filed suit on June 24, 2010, alleging that the plan fiduciaries: (1) breached their duties of prudence and loyalty by allowing the Plans to acquire and hold overvalued BP stock; (2) breached their duty to provide adequate investment information to plan participants; and (3) breached their duty to monitor those responsible for managing the BP Stock Fund.

After much procedural maneuvering by the plaintiffs to try to plead a viable breach of fiduciary duty theory involving this fact pattern, the Fifth Circuit eventually dismissed the action, finding that the plaintiffs could not satisfy the standards for stock drop claims after Dudenhoeffer. Procedurally and doctrinally, it reads to me as a correct ruling. But there is more to it than that. If you step back and think about this case as a whole – and not just based on where you sit in terms of who should bear the losses from a stock drop, the employees or instead the employer – the decision makes even more sense. There is an awful long distance – both literally and metaphorically - between an offshore drilling rig and the plan fiduciaries sitting in an office somewhere deciding to offer company stock in a retirement plan. To borrow a concept from tort law, there is an almost inconceivable number of breaks in the chain of causation between the decision making of the fiduciaries and a loss stemming from this event. Although I fully understand how one can connect the dots, it is really pushing the outer limits of fiduciary responsibility to do so.

Thoughts From the Beach on the Excessive Fee Cases Against Prestigious Universities

Posted By Stephen D. Rosenberg In 401(k) Plans , Class Actions , Employee Benefit Plans , Fiduciaries , Retirement Benefits
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Back from spending a week in the great state of Maine (you go, Palace Diner!), but even when I am away, “the sun comes up [a]nd the world still spins,” nowhere more, it seems, then in the world of ERISA litigation. So over the next few days, I am going to try to pass on some links and thoughts concerning a few things that caught my eye while I was away.

First off, of course, is the barrage of lawsuits against university retirement plans. I have previously tweeted my cynicism over the fact that all of the defendants are bold faced name universities, asking whether only prestigious universities have retirement plans or whether, instead, only they have ones large enough to attract plaintiffs’ lawyers. Obviously, neither is true and the comment, standing alone, is tongue in cheek. But I have to ask this question. Years ago, I tried, and essentially won (the plaintiff/patent holder gave up mid-trial after its expert spit the bit on the stand), a patent infringement case where the patent holder had embarked on a litigation campaign built around suing smaller fish who couldn’t afford to vigorously defend the suits so as to develop helpful rulings and precedents before taking on bigger fish (the campaign worked until they ran into my emerging company client, for whom we were able to work out a cost efficient defense strategy that allowed us take the case to trial and demonstrate the invalidity of the patent; see my article on that approach here). I am wondering if it works in reverse here, with regard to excessive fee claims against universities. Is the idea to win against large, prestigious and well-lawyered universities and their plans, creating precedents that make it easy to then pick off low hanging fruit in the form of the nation’s numerous non-bold faced name colleges and universities, who may then just settle quick if bigger name and richer universities have already, in years past, had to pay up? Time will tell, but it’s the strategy I would use.

I also wonder, but haven’t had the time to look into it, whether the universities selected for suit reflect a deliberate approach to forum shopping. In past articles, presentations and blog posts discussing the early excessive fee cases, I have argued that certain circuits were simply not the best place for the plaintiffs to have brought the first of those cases, and that it might be fair to say that the plaintiffs’ bar picked the wrong hills on which to fight at the outset of those cases. Here, I wonder if the determination of the universities to sue can be linked, in part, to the circuits in which they sit. I also wonder whether the nearly simultaneous filing of the current round of suits likewise reflects an intentional decision to move the cases along on a parallel track in multiple circuits, with at least two purposes in mind. The first might be thought of as hedging, which is kind of ironic since we are talking about lawsuits that strike at the massive amounts of retirement assets managed by the financial industry, to whom we all owe either debt or blame for the excessive use in modern discourse of the word “hedging.” But if you think about it from that perspective, the multiple suits in multiple circuits makes complete sense: all you have to do is hit in one circuit to make up for losses in other circuits. In other words, the plaintiffs’ lawyers are hedging their bets, assuming that even if the development of the law in one circuit on these theories of liability turns out unfavorable to them, the development of that law in others may not be. The second possible purpose could be seen as typical of a deliberate litigation strategy: to create conflicts among circuits, increasing the possibility of bringing the issues eventually to the Supreme Court if the law does not break in favor of the plaintiffs as these cases develop.

Anyway, that’s enough for a first day back in the office, other than to note why I was thinking about this while lying on the beach, which was Bloomberg BNA’s Jacklyn Wille’s excellent and on-going coverage of these suits, which included this piece that popped up in my twitter feed while I was away.

Moving on From the Churches, the ERISA Plaintiffs' Bar Takes Aim at the Universities

Posted By Stephen D. Rosenberg In 401(k) Plans , Class Actions , Fiduciaries
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Well now. The world’s leading private attorney general of ERISA fee enforcement has now instituted four coordinated lawsuits against the retirement plans of major universities (MIT, Yale, NYU and Duke, as of this writing). I haven’t read the complaints yet, and have only read the industry articles on it (I like this one, and this one, and this one).

Nonetheless, anyone who downplays these lawsuits right off the bat is making a mistake. As I have written on many occasions, no one thought much of excessive fee suits when the first ones were filed against major private industry plans, and there was even more skepticism when the first church plan actions were filed. Hundreds of millions of dollars of settlements later, no one is laughing at these theories of liability under ERISA anymore. Since those who forget history are condemned to repeat it, it would be a mistake not to see these suits as the opening of a new, and potentially very expensive, front in ERISA litigation. It will be very interesting to see how these actions play out.

Two Reasons Why the Department of Labor's New Fiduciary Regulations Are Likely to Spawn More Litigation Against Financial Advisers

Posted By Stephen D. Rosenberg In 401(k) Plans , Conflicts of Interest , ERISA Statutory Provisions , Fiduciaries
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I wrote the other day about the Department of Labor’s legal position in response to lawsuits alleging that its new fiduciary regulations are illegal, and in that post, I referred to why the regulations have provoked such an outcry, which is that they fundamentally change the manner in which many financial advisers and financial firms operate. I came across a perfect demonstration of that point, which is this article explaining how a financial adviser will now have to act when a client asks advice on, or purchases a product for the purpose of, rolling over 401k assets into an IRA. As the article describes, that action will now, under the new rules, come with a host of steps and potential exposure as a fiduciary. Any of you who have done a rollover lately will certainly immediately see that what is described in the article is nowhere near what you just experienced with a rollover.

While the extent of the change is obvious, its worth asking whether the change is for the good or not: the lawsuits challenging the new regulations basically seek to set them aside on technical legal grounds without challenging whether they are valuable to the consumer of the financial products at issue, while the Department of Labor’s response to those legal challenges starts from the premise that the changes at issue are valuable to those consumers. The article on rollovers certainly describes a process that is more labor intensive, more transparent and puts more legal risk on the adviser involved in the process: however, whether that means better outcomes for consumers is the question, one that is at the heart of the dispute between the financial industry and the Department of Labor.

I would also note that the article does a good job, without actually addressing it, of illustrating why many critics of the new rule view at as being likely to increase litigation and as creating new causes of action that don’t currently exist under ERISA itself. First, as the article illustrates, the adviser – under the new rules - becomes a fiduciary subject to ERISA’s fiduciary duties, which have been the foundation for a wide, and ever expanding, range of legal claims. There is no reason to think that assigning fiduciary status to advisers won’t also have that effect here. Second, the contractual exemption for providing advice and collecting a fee in this context, which are detailed in the article, has a realm of provisions that a good lawyer can allege in a given case were breached, providing yet another avenue for constructing a claim against an adviser if an investment product goes south.

Want to Know Everything About the Litigation Over the New Fiduciary Regulations Without Having to Study?

Posted By Stephen D. Rosenberg In 401(k) Plans , Conflicts of Interest , ERISA Statutory Provisions , Fiduciaries
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The Department of Labor’s promulgation of its new fiduciary duty and best interest contract exemption regulations is, to this current lawyer and once upon a time public administration student, a case study in administrative law and regulatory action. Rightly or wrongly, whether you substantively agree or disagree with the regulatory initiative, and without regard to whether or not the promulgation is legal, the history of the promulgation provides enough material to teach multiple classes in multiple disciplines. The political battle over the regulatory and accompanying policy shift could sustain a graduate level seminar on public policy for an entire semester; the process of enacting the regulations is a case study in the administrative process; and the legal challenges to their enactment touch on effectively every key aspect of administrative law, statutory interpretation, and regulatory action.

As you can tell from that wind-up, there is a tremendous amount to say about this topic. At this point, we are past the political and regulatory aspects of the endeavor (for now anyway, at least until the next administration), and are onto the legal questions of the validity of the regulations. It took the Department of Labor 105 very well written pages to address those points in this brief filed on July 8th in the District Court for the District of Columbia, and even I have only skimmed it. I question whether anyone not directly involved with the case, or paid to follow it as part of their job, will ever read it any closer than that (although I might, but only if I bring it to the beach as my beach reading).

For those of you who want to understand the Department’s position without skipping the latest paperback thriller while on vacation, I highly recommend this detailed review of the Department’s arguments by Rebecca Moore at Planadviser. Briefly, and in only cursory fashion, I will note that I am fond of the Department of Labor’s argument that they are not boxed into the prior definition of fiduciary and precluded by the statute or congressional intent from changing it, but I will also note that I think the weakest part of their case is over the question of their authority to assert jurisdiction in this manner over IRAs. That and three dollars and a quarter will get you a cup of the daily drip at George Howell Coffee at the Godfrey Hotel nearby.

I would also note a much bigger picture issue, however. If you have only followed the dispute over this regulatory change from a distance, and have wondered about the reason for so much sound and fury, reading the Planadviser story should answer that question for you. You see from the story how much of the world is being upended by the initiative, and that, from the Department’s perspective, the point is to bring the relevant regulatory regime into balance with the realities of the modern financial world. That is quite an undertaking, and cannot help but overturn a lot of apple carts. In America today, if you overturn a lot of apple carts by government action, you get the bees buzzing, to mix my metaphors, in this case in the form of extensive litigation.

Floating a Few Thoughts on Kelley v. Fidelity

Posted By Stephen D. Rosenberg In Class Actions , ERISA Statutory Provisions , Fiduciaries
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I don’t have too much to say about the specific details of this opinion in Kelley v. Fidelity Management Trust Company, out of the First Circuit yesterday on a putative class action against Fidelity related to the use of float income from plan transactions. This is particularly because it is primarily a technical decision, that involves following the money and the redemption and seeing how, in that specific context, the float income at issue did not become a plan asset, and thus cannot be the basis for a class action alleging breach of fiduciary duty.

That said, however, there are a couple of broader lessons to draw from it. First, the decision, when read in conjunction with Tussey and with the First Circuit’s own prior decisions on float related to insurance products, can be seen as blessing a certain float structure as one that will not give rise, simply on its own, to fiduciary liability under ERISA. Thus, any administrator planning to make use of float income will want to pay close attention to it in modeling their operation.

Second, however, is that the decision makes clear that it is only about whether the float income alone, in a context where the plan document allows for it, cannot support such a claim. The opinion, partially at the behest of the Department of Labor, goes out of its way to make clear that other theories of recovery where float income is at issue, such as theories that the use of the float income contradicted the plan’s terms themselves, are still open to litigation. As such, the opinion, while taking away one theory of liability, certainly invites the smarter minds in the plaintiffs’ class action bar to put on their thinking caps and look for a different theory to pursue recovery where float income is at play.

Challenging the Department of Labor's Authority to Regulate the Annuity Marketplace: National Association for Fixed Annuities v. Thomas Perez and the Department of Labor

Posted By Stephen D. Rosenberg In 401(k) Plans , Benefit Litigation , ERISA Statutory Provisions , Fiduciaries
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I wrote yesterday on the first complaint filed, in federal court in Texas, challenging the Department of Labor’s new fiduciary regulations, and then within hours, a second such suit was filed. The second suit is a more narrowly targeted action, brought by sellers of fixed annuities and charging that the Department of Labor, for various reasons, overreached when it included insurance agents and this product within the scope of the regulation. As Nevin Adams writes on NAPA Net:

As it relates to the impact of the fiduciary regulation on fixed income annuities (FIA), the filing notes that in the Labor Department’s NOPR, both declared rate fixed annuities and FIAs were included in PTE 84-24, but that “without adequate notice as required under the APA, in the final Rule the Department moved FIAs out of PTE 84-24 and into the BICE.” The plaintiffs go on to note that all fixed annuities — including FIAs — had previously been treated as insurance products, exempt from federal securities laws and regulated under state insurance laws. “Yet the Department lumped FIAs in with securities products like variable annuities when it promulgated the Rule and the Exemptions.”

The plaintiffs here note that because FIAs are an insurance product, the FIA sellers represented by NAFA — including carriers, IMOs, and agents — “are ill-equipped to suddenly be subjected to the onerous compliance obligations required by the BICE, which more closely resemble the types of requirements imposed on the securities industry.” They go on to say that the FIA industry was “blind-sided by this last-minute switch” and that the impact to the industry and its clientele would be “highly detrimental.”

While the complaint filed in Texas yesterday is fairly read as a broad attack on the entire expansion of the fiduciary status and the BIC to retail customers, this complaint is more fairly understood as – through a number of different legal arguments – a claim that the Department simply cannot properly regulate insurance agents and the sale of this type of product, or if it can, did not follow proper procedures to do so. I like the precise focus of this argument which essentially asks, from a 30,000 foot perspective, whether ERISA itself captures such products and sellers.

And that’s an interesting question, which has a lot to do with your jurisprudential philosophy. Its almost an original intent question – do you believe that ERISA, and the Department, is limited to the issues and products on the table in 1974? If not, how much further down the field from the exact problems tackled by Congress at that time do you think the regulator can go? Or do you believe that ERISA is a federal statute intended, from the outset, to be developed along the way by regulators and the federal courts, so as to fit current circumstances and to avoid being hamstrung by changes in the retirement world over the past 40 years? To even begin to unpack these questions into subsidiary parts would turn this blog post into a law review article, so I won’t even hint at the answers in this post. But in a way, that’s what this second lawsuit asks.

Initial Comments on Chamber of Commerce v. Thomas Perez and the Department of Labor

Posted By Stephen D. Rosenberg In 401(k) Plans , Employee Benefit Plans , Fiduciaries
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There’s a famous saying that war is politics continued by other means, and I have paraphrased it in the past to point out that patent infringement litigation is frequently simply business competition continued by other means. I think it is similarly fair to say that the lawsuit seeking to overturn the Department of Labor’s new conflict of interest/fiduciary regulations is the continuation of politics by other means. Having lost over the issue before the administration and having failed to convince Congress to halt this major piece of rule making, opponents of the regulatory initiative have turned to the courts, making, essentially, the same arguments against the regulations that they previously made in the political venues: that it is onerous, oversteps the Department’s expertise and authority, is procedurally invalid, and too costly. You can find the complaint itself here.

There is a lot more to be said about the complaint, its allegations and the legal theories it presses, and I intend to comment more extensively as the case proceeds. However, for now, I would simply highlight the extent to which, as a piece of advocacy, the complaint itself is a beautiful piece of work. Perhaps even more than as advocacy, it really works as a piece of storytelling. Don’t misunderstand me when I say that – that is not meant as a criticism. I have always been an advocate of, when you have a good story to tell, telling it in the complaint, even if it goes far beyond what the federal rules require to avoid dismissal. I follow that practice myself in my own filings. There are multiple reasons for doing so, including that it allows a plaintiff to set the initial terms of discussion, and to place the case in the context that is best for the plaintiff. A skilled defense counsel will thereafter push back and seek to reframe the discussion in later filings (such as in a motion to dismiss), but will still have been forced by the complaint to engage with the narrative chosen by the plaintiff. Moreover, in complex areas of the law like ERISA, it is important to remember that our judiciary consists of generalists, with judges naturally having more experience in certain areas than in others. On the same panel of judges not too long ago, I heard one judge from a coastal state joke that, prior to being appointed to the bench, he thought ERISA was a special type of maritime winch, while another judge on the same panel pointed out that he had litigated ERISA cases for years before joining the bench. A complaint that contains a well-written narrative, as this one does, allows a plaintiff to characterize the case, at the outset, for an audience that may or may not be exceptionally versed in the subject area at issue in the case.

Even so, though, and as is especially important with regard to this action, it is important not to get lost in the story being presented in the complaint, and to remember that the legal issues themselves are what matter – and that they are often simultaneously more mundane and nuanced than the surrounding details would suggest. I think that is worth keeping in mind in reading this complaint, as the actual legal issues are much more subtle than the broad discussion of financial services regulation in the complaint might suggest: the case isn’t, in the end, going to be about the propriety or scope of regulating the financial industry, but instead about the scope of the Department’s authority and the procedural manner in which it acted. The long run up of factual allegations in the complaint would suggest otherwise, but the causes of action themselves make that clear.

Excessive Fee Litigation Against Small Plans - Damberg v. LaMettry's Collision

Posted By Stephen D. Rosenberg In 401(k) Plans , Class Actions , Fiduciaries
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My partner, Marcia Wagner, is quoted in this article about a somewhat stunning development, the filing of a class action excessive fee case against a relatively small plan, with around $9 million in assets. I have been asked for some time, by media and by audience members at speaking engagements, if and when we will see small plans sued for excessive fees. I have always felt that such suits were likely at some point, but that the issue was subject to the push and pull of conflicting forces. On the one side, the work done to date on the large dollar cases has plowed the field, doctrinally and in terms of lawyers’ understanding of the financial issues, to an extent that smaller cases are within the technical grasp of a number of lawyers who might be willing to bring smaller value cases (obviously, the firms who have won the large dollar settlements to date are not themselves going to be very interested in playing for small stakes and bringing suit over plans with only a few million in assets). Arrayed on the other side, though, and arguing against the proliferation of such suits involving small plans, is a relative constellation of forces, including; (1) the fact that there are only a limited number of lawyers capable of successfully bringing such claims and few of them would be interested in suing for small amounts; and (2) these are not easy cases to win, factually or doctrinally, and thus the risk to reward ratio may not be worth it in such cases.

The question of whether such suits will proliferate may depend on a number of factors. First off, will the first companies with smaller plans who are sued put up vigorous defenses? If so, the cost/benefit analysis for plaintiffs’ lawyers who might consider bringing such claims changes to the worse for them; it becomes harder, and riskier, to try to obtain a settlement or recover a verdict. Having to go to trial to recover where a potential verdict or settlement is in the tens of millions is one thing; having to do that to recover several hundred thousand, and then only if you prevail, is another. Second, to quote Butch Cassidy and the Sundance Kid, who are these guys? Are the lawyers bringing the suits the real deal, or are they the ERISA equivalent of patent troll lawyers, simply bringing a rash of suits and looking for a quick and inexpensive settlement? If it’s the latter, and sponsors of small plans think its better just to pay a small amount – even if just in lieu of paying to defend the case – as a cost of doing business, then you can be sure we will see plenty of these types of cases.

A Brief but Reasonably Thorough Intro to the New Fiduciary Standard Being Issued Today

Posted By Stephen D. Rosenberg In Conflicts of Interest , Fiduciaries
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Crazy busy today, but – like someone on the highway slowing down to look at a wreck in the opposite lane even though it is an unnecessary distraction – I of course can’t help but read all the commentary on the new fiduciary rule due out of the DOL today. So for fun – and to distract me from the work I should be doing – I have compiled my favorite stories on it, along with a brief comment or two on each one, below:

• I was basically clickbaited by the headline of this article in the Washington Post into burning one of my free articles for the month to read it, only to basically be told that the rule means that “brokers selling investments to retirement savers would be required to put the client’s interest ahead of their own.” Ehh – if you read this blog, you probably already knew that. Still, it’s a good and readable thirty thousand foot view of the forest, without much specificity.

• If you want to see more of the trees – to continue my forest analogy – I really liked this story in planadvisor, which details the DOL’s explanation for how the rule has been changed to account for industry concerns.

• If you really want to delve down into the trees, here’s the DOL’s fact sheet explaining how it changed the rule to accommodate concerns raised by the industry. I have two thoughts on this fact sheet. First, my internal (and always close to the surface) cynic immediately thought “me thinks you protest too much,” making this big an argument demonstrating how you met your opponents’ concerns. Second, the good governance doobie in me, who resides only slightly below my internal cynic, thought this is exactly what a government agency and regulator should do: listen to affected parties, account for their concerns, address the problems, and explain what was done in response.

• That said, the DOL’s fact sheet on the new rule itself is excellent, and provides real detail on key issues such as the impact of providing financial information to consumers and the best interest exemption.

• And finally for now, I really like Pensions & Investments’ article on it this morning, “Final fiduciary rule exempts plan sponsor education.” Although the title would lead you to believe it is only about the education part of the rule, and the fact that – happily – it will not trigger fiduciary status under the new rule, its actually a very good overview of the key issues in play with the issuance of the new rule today.

The rule comes out later today, but the stories and fact sheets above should give you a thorough preview.

What Would Alexander Hamilton Say About Excessive Fees in 401(k) Plans?

Posted By Stephen D. Rosenberg In 401(k) Plans , Class Actions , Fiduciaries , Settlements
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Oceans rise, empires fall . . . This line from the musical Hamilton has been ringing in my ears for a few days now, since I saw the show on Broadway last week. There is just something about that particular line and the music beneath it that has kept it on constant repeat in my head as I have returned to work.

As it turns out, though, that line is a perfect fit for the topics discussed by Chris Carosa of Fiduciary News in this great article on the increased attention being paid by fiduciaries to the risks posed by excessive fees in 401(k) plans. As Chris explains, with the help of a very astute group of observers who are quoted in the article, the perfect storm of years of excessive fee class actions, the Supreme Court deciding Tibble, media coverage of large settlements of excessive fee claims, and mandated fee disclosure by regulatory fiat, have combined to make plan fiduciaries highly focused on the costs of their plans.

And so what does all this have to do with Hamilton, and the line “Oceans rise, empires fall?” You know those vast empires of wealth that have been built across the retirement industry by taking large fees out of 401(k) plans? That empire’s fallen. Making a lot of money out of servicing 401(k) assets is now going to have to come from doing a better job, not from charging more for the same job. There’s just too much risk in it for plan fiduciaries if they allow people to keep making a lot of money simply by charging a lot of fees to place or hold retirement assets, without providing additional benefit that warrants additional fees.

Although the real point of this post today is to, one, have some fun with the lyrics of Hamilton and, two, pass along an article that you should definitely read if you are interested in the question of fees in 401(k) plans, I also wanted to mention a broader point. If you have been a long time reader of this blog, you have actually seen this issue building up in exactly the way that Chris presents it in his article. Blog posts I have written, articles discussed in this blog and judicial decisions analyzed in this blog have covered this issue from its early days and, if you were to sit down and read them all now, reflect exactly the development that Chris discusses in the article: namely, the slow but eventually dramatic transition of the issue from an outlier about which no one – including often the courts – gave much thought, to a central aspect of ERISA jurisprudence and practice. You can actually see this illustrated in shorthand in just two posts, just by noting how the issue went, over the course of only a few years, from an issue that, as I discussed in this article back in 2011, was roundly rejected by the courts to one that, only four years later, the Supreme Court was discussing in Tibble.

Another Case Showing That You Should Not Assume That Your Plan Provider Is a Fiduciary

Posted By Stephen D. Rosenberg In 401(k) Plans , Benefit Litigation , Employee Benefit Plans , Fiduciaries , Third Party Administrators
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Okay, so law blogging evangelist and reformed trial lawyer Kevin O’Keefe is advocating for shorter, more frequent blog posts, and I read his short post on that while I was in the middle of writing a long post for this blog, hopefully to go up tomorrow, on the Third Circuit’s recent opinion on the church plan exemption under ERISA. Amusingly, right when I read Kevin’s post, I had just tweeted a quick one liner on this article – “Court Rejects Excessive Fee Claims Against Principal” - from planadviser about an Eighth Circuit decision that illustrates an important point I often make: service providers to plans employ armies of lawyers whose job is to make sure that their contractual relationships with plan sponsors do not turn them into fiduciaries. Time after time, I find that plan sponsors assume their providers are fiduciaries, but we all know that time after time, they are not, and moreover, that plan sponsors often don’t learn this until a court, during a lawsuit, lets the service provider off the hook on the ground that the service provider is not a fiduciary. This article, and the Eighth Circuit decision it discusses, illustrates this phenomenon perfectly. So I am passing it along, as part of a short post written solely for that purpose, just as Kevin suggested.

Bell v. Anthem, Excessive Fee Cases, and the Economics of Settlement

Posted By Stephen D. Rosenberg In 401(k) Plans , Class Actions , Fiduciaries
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Actuary and blogger John Lowell has a strong post today on the latest high profile excessive fee case filed involving a 401(k) plan, Bell v. Anthem. I will let you read it yourself for the details, but he asks some interesting questions. In one of them, John discusses the borderline nature, at least as it appears at this point, of the claim that the plan could have and should have used lower cost investments. John’s view is that the allegations depict only a minimal difference between the fees actually charged and what, in a perfect world, the fiduciaries might have obtained. John asks if that should be enough to charge the plan’s fiduciaries with a fiduciary breach, asking whether the fiduciaries, even on the allegations, were so close in keeping a lid on fees that they should not be liable for failing to have been, in effect, actually perfect in putting together the investment options for the plan. And the answer to John’s question is that, in fact, the fiduciaries should not be found liable for a fiduciary breach if their process was strong, the plan was well run, the investment options were well investigated, but nonetheless the plan ended up with some investment choices that were marginally more expensive than, in a perfect world, they might have been. As in most things, though, the devil is in the details: to avoid fiduciary liability based on even a relatively small bump up in expense above what was optimal (and remember that, in such a large plan, even a small amount of excess fees, multiplied across the entire plan, add up quickly), the fiduciaries will have to prove those points on the actual record, and we don’t know yet whether they can.

But this in turn leads to another problem for the fiduciaries (or perhaps more realistically, from a realpolitik perspective, for the plan sponsor and/or the plan’s insurers), which is whether the total amount at risk, given the size of the plan, is simply too much for the fiduciaries to ever risk a summary judgment ruling or, even more so, a trial, either one of which could be the final step before an assessment of damages if the plaintiffs are able to demonstrate a fiduciary breach (i.e., that the process had some flaws which resulted in higher than necessary fees) at either the summary judgment stage or a trial. I have discussed elsewhere that some of the large dollar excessive fee settlements that we have seen to date reflect simply defendants buying out the risk of having a large verdict imposed after trial for only a few cents on the dollar, even if those cents add up to millions in settlement. In essence, for a very large plan, the potential exposure if fees are found to be excessive is so large that a settlement that looks large on paper is worth paying to avoid that possible large exposure. And that will be the issue in the Anthem case as well: is the exposure too big to risk a liability finding at some point in the case, requiring that the exposure instead be bought out for tens of millions of dollars, no matter how strong the argument that the fiduciaries did not commit a fiduciary breach?

Top Ten List Of Things From 2015 That Are Somehow Related To ERISA And My Practice

Posted By Stephen D. Rosenberg In Class Actions , ERISA Seminars and other Resources , Equitable Relief , Fiduciaries , Interviews , People are Talking . . . , Summary Plan Descriptions
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Like many, I took some time off over the holidays. Unlike many, who used the time to do fun things like go skiing, I used the time to sit down with three fingers of my favorite small batch craft brewery bourbon and write a top ten list for my blog. Here, without further ado, is my top ten list of things from 2015 that are somehow related to ERISA and my practice:

1. Favorite 2015 movie about ERISA and employee benefits: Concussion. Although not really about employee benefits and ERISA, its genesis is: see my series of blog posts on the NFL’s effort to avoid granting disability benefits to the great Steelers center, Mike Webster (here, here and here). The real story behind the NFL’s attempt to avoid responsibility for CTE and head injuries harkens back to the courage of Webster’s family and the talent of their lawyers, who took on the NFL and its constant stonewalling on the issue, and won.

2. Most enjoyable city I had never been to on a business trip before: I had an absolutely fascinating two day trip to Richmond for a deposition; what a great city. From the international cycling championship it was hosting while I was there, to the history of alligators in the lobby of the Jefferson Hotel, to the hip downtown neighborhoods with cobblestone streets, to the great meal I had at Lemaire, more was packed into a 30 hour stay than I could have imagined. As a civil war and colonial history buff, being able to squeeze in a walk around the Thomas Jefferson designed capitol (with great commentary from a park ranger I chatted with) and seeing the Jeb Stuart and Robert E. Lee monuments (on the advice of a helpful hotel concierge), the whole trip was a blast. Provoking the other side’s expert into answering a question at his deposition with the one word reply “Duh” just made the whole trip even more fun.

3. Best business meal (excluding meals with clients, so I don’t leave anyone out): Dinner at BLT Prime in New York, with two of my fellow speakers on a panel on fiduciary governance, Al Otto of Shepherd Kaplan and Peter Kelly, the Deputy General Counsel and Chief Employee Benefits Counsel of the Blue Cross Blue Shield Association. Great food and high level conversation that would only appeal, I have to admit, to an ERISA geek.

4. Most satisfying judicial decision (personal case load division): After approximately five years of litigation, including a week long jury trial, convincing the Pennsylvania Superior Court (for those of you not familiar with that state’s court system, the Superior Court is its intermediate appellate court) to not just reverse a $1.4 million verdict against my client, but to also enter judgment in favor of my client. Its one thing to win an appeal, but, as all trial and appellate lawyers know, its hard enough to flip a jury verdict on appeal, but to actually get a jury verdict reversed outright (in favor of entry of a JNOV) is a rare event indeed.

5. Most unsatisfying judicial decision (non-personal case load division): Tibble v. Edison, by the Supreme Court this past summer. As I discussed here, it rendered the whole appellate history of the case much ado about nothing from a jurisprudential perspective.

6. Most interesting ERISA decision that flew under the radar: Osberg v. Foot Locker, Inc., 2015 WL 5786523 (S.D.N.Y. Oct. 5, 2015), which attracted comparatively little discussion, given the depth of the Court’s analysis and that it was issued by one of the country’s most respected courts. What I liked most about it was that it emphasized the fact that plan communications are, contrary to what many believe, a central part of fiduciary responsibility. To quote the Court, “[t]he most important way in which the fiduciary complies with its duty of care is to provide accurate and complete written explanations of the benefits available to plan participants and beneficiaries.”

7. Best presentation I attended: A tie between two panels of magistrate judges, each discussing issues involving ERISA, discovery, spoliation and the amendments to the federal rules; the first was at ACI’s Chicago installment of its ERISA litigation conference in April 2015, and the second at ACI’s New York ERISA litigation conference in October 2015. At the former, I had asked the panel a question which led to a conversation afterwards with a magistrate judge from out west on the subject of spoliation and exactly the effect he believed the changes to federal rules would have on that issue. At the latter, a diverse group of judges held court (pun intended) on topics ranging from when discovery in benefit claims should be allowed to whether – and if so to what extent - the changes to the federal rules, despite all the effort put into them, would actually alter day to day discovery practice and litigation.

8. Best selfie (written version): Chris Carosa of Fiduciary News’ interview with me, which you can find here. Lot of fun, as Chris always has his finger on the pulse of the industry and thus both asks the important questions and elicits informative responses (and not just spin or marketing drivel).

9. (Probable) First line of my (professional) obituary: Named one of the nation’s top 15 ERISA lawyers in 2015 by the National Association of Plan Advisors.

10. Best Article I wish I had Written but That I am Not Funny Enough to Have Written: “Declarations: The Coverage Opinions Interview With The Grinch Who Stole Insurance - A Career Spent Denying Santa’s Claims.”

And with that, Happy New Year everyone.

What Can a Chief Retirement Officer Do for You?

Posted By Stephen D. Rosenberg In 401(k) Plans , Benefit Litigation , Class Actions , Employee Benefit Plans , Equitable Relief , Fiduciaries , Pensions , Retirement Benefits , Settlements
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This is so simple, its brilliant, and so brilliant, its simple – or something like that. The “this” I am talking about is the idea of appointing a Chief Retirement Officer, or CRO, as is discussed – and proposed – in Steff Chalk’s article, “The Advent of the Chief Retirement Officer,” in the latest issue of NAPANet. Essentially, he proposes that companies appoint a senior officer with overall responsibility for retirement plans, whether they be pensions, 401(k)s or what not. CROs would have responsibility for the types of issues that bedevil plans in the courtroom, such as overseeing revenue sharing and fees, as well as for the type of operational issues that often invoke fiduciary liability and equitable relief risks, such as the communication errors in Osberg. The brilliance and the simplicity of the idea stem from the exact same data point: it is the lack of knowledge, lack of interest, lack of time and lack of concern by company officials appointed to committees overseeing retirement plans, and who are just moonlighting in that role from what they consider their real jobs (like CFO, etc.) that are the cause of an awful lot of operational failures, litigation exposures, fiduciary liability risks and large settlements in the world of retirement plans.

I spoke and blogged recently about the nature of fiduciary liabilities in plan governance operations, and the theme of both my speaking and writing was the fact that officers overseeing plans are often shoehorning that work into the cracks in their otherwise busy schedules. By this, I don’t mean to suggest anything malevolent, or even intentional. Rather, it is just a fact of life. Counsel to plans are not loathe to note that they have to make a call as to how much of a governance committee’s limited time to tie up with a particular issue. Moreover, court decisions reflect that fiduciary breaches are often based on actions taken with limited discussion, limited knowledge and with a limited investment of time. When I say this, bear in mind that I am talking about cases that are litigated to at least the summary judgment stage, providing a factual basis for a court to find such facts; as a result, the cases I am describing are outliers, rather than a representative sample. Nonetheless, they still reflect the fact that it is the lack of expertise and the insufficient investment of human capital at the highest level of a plan sponsor that is often at the heart of fiduciary liabilities. Indeed, it is hard not to think of a major decision that ran in favor of participants in this area that did not have, among its factual bases, at least some evidence that those making the challenged decisions were ignorant about a key fact or important element of the investment world: think, for instance, of the key role in Tibble of the lack of knowledge about the nature of retail and investment fund choices.

And that’s the beauty of the CRO idea: the assignment of duties related to retirement plans to one individual who not only has the expertise to do the job well, but also has that as his or her only assigned job duties. If the nature of a fiduciary breach is found in an imprudent process – and it is – the assignment of such duties to a properly selected and qualified CRO with the time to do the work is a walking, talking barrel of evidence that a prudent process existed.


On the Human Element in Plan Governance, Officiating and other Human Endeavors

Posted By Stephen D. Rosenberg In 401(k) Plans , ERISA Seminars and other Resources , Employee Benefit Plans , Fiduciaries , Long Term Disability Benefits
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I have been thinking, more than is probably healthy, about all the hue and cry over refereeing errors in pro football, particularly on the questions of, first, whether there are more errors than there used to be (or whether instead it just seems that way) and, second, why I don’t really care, despite every other sports fan I know getting all up in arms about it. First off, lets set the stage, and narrow down what we are talking about here. The pro football world, from twitter to mainstream media, is all focused on officiating errors among pro football referees, and even more on the bizarre sight of endless, play stopping conferences among officials who are meeting to try to figure out the latest officiating faux pas (I have to say, judges decide complex evidentiary issues in the middle of a trial, on the fly, with much more of real meaning at stake, much quicker than it ever takes a bunch of football refs to figure out something that, once the game is over, really doesn’t have any lasting significance).

I don’t remember officiating being such an issue in the past, and I have been watching football since, well, never mind . . . Suffice it to say, I remember watching Mike Webster play center for the Steelers, long before he became the centerpiece of a professional interest, namely his central but extremely sad role in a fascinating piece of ERISA LTD litigation against the NFL over head trauma, which occurred long before head trauma in football became a national issue (you can find one of my posts on it here). Is officiating worse now? Is the game more complicated and the refs now can’t keep up without making endless errors and needing endless conferences? One would think so, from everything you read about it and all the truly absurd conferences among officials during games. But I don’t think that’s the case at all, and instead its more like what happens when the medical community begins to focus on, or develops a new test for, a particular illness – that illness doesn’t actually become more prevalent in the population as a whole, but instead is simply diagnosed more often. And I think that’s the story here – refs have become a focus of attention, and now everybody is paying endless attention to every mistake they make, whereas in the past most would have been ignored. (I mean, really, does anyone actually care that a game between the 3-7 Ravens and the 4-6 Jaguars ended on a blown call?)

When I played high school sports (as an ERISA geek, I feel obliged on occasion to remind people that I also have five high school letters in two sports), we were always told not to complain about the refs after a loss, that they had almost certainly fouled up calls against both teams, and that they were never the real reason for a loss. Today, with the obsession on trying to expand instant replay across sports to take the human element, along with its concomitant inevitable errors, out of officiating, we seem to have lost that belief, replacing it instead with an obsession over officiating, with the inevitable outcome that now, all we seem to talk about is the refs and all we seem to watch is refs meeting in the middle of the field to decide what the call should be. Perhaps we would all be better off if we just admit that sports are a human activity, that human error is therefore inevitable, and, since we are not talking about a moon launch here, that is just fine. Certainly, watching the games would be a lot more fun if the refs just ran over, made a call, didn’t worry about being overturned by the “eye in the sky” of instant replay, and then we all moved onto the next play, rather than stopping everything so we can all watch a bunch of zebras huddle up.

More importantly, though, I have been thinking about why this issue has been bothering me so much, like a little pebble stuck in my shoe, and last week, speaking at ACI’s Employee Benefits Plan conference in New York, the reason dawned on me: it’s the belief that, if we just impose enough technology – like instant replay – we can take human error out of human endeavor, which is nothing but a chimera. I was speaking at the conference on the subject of fiduciary liabilities that arise out of errors in plan governance (you can find my slides here), and I was discussing that the nature of fiduciary liability under ERISA in a lot of ways can be reduced, in plain English, to the question of whether an investment committee or other group running a plan had acted as a reasonable, intelligent, informed, experienced person would in running the plan. As I explained to the audience, which was made up of lawyers who counsel and run such plans, if the company officers involved in plan management think of their role this way, and apply this standard to themselves, they will significantly reduce the likelihood of being sued and, if sued, reduce significantly the likelihood of being found liable at the end of the case.

I also talked about the importance of accurate communications and never appearing to sandbag (whether intentionally or unintentionally) a participant, whether outside of a formal claim or as part of a claim process. I talked about the fact that errors in plan communications are becoming a cutting edge basis for imposing fiduciary liability to an extent previously unseen (see, e.g., Osberg, discussed here), and also that poor habits in this regard in plan governance can simply be the straw that breaks the camel’s back and provokes a participant to sue, in situations where the participant might otherwise have skipped going to court.

And at the end of the day, the central element of all of these (and many other) issues with regard to ERISA plans is that we are dealing with humans here, not robo-advisors or whatever else (like target date funds, for instance) that people want to think can take the messiness out of plan governance, pension investing, 401(k) decisions and the like. Instead, like officiating in sports, plan governance cannot help but have human error baked in, which is why, if you get to the heart of it, ERISA litigation doesn’t focus on the outcome of plan governance but instead on the process of how the outcome came about: was there too much human error, or was enough effort and thought put into the process that brought about the outcome? Fiduciary liability under ERISA resides right at the heart of that question, and in the answer to it in any given case.

My Exclusive Interview with Fiduciary News on ERISA Litigation

Posted By Stephen D. Rosenberg In 401(k) Plans , Benefit Litigation , Class Actions , ERISA Statutory Provisions , ESOP , Employee Benefit Plans , Fiduciaries , Pensions , People are Talking . . . , Retirement Benefits , Standard of Review , Summary Plan Descriptions
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The good people at Fiduciary News gave me a soapbox, and I was happy to climb up on it. They interviewed me as part of their series of monthly interviews on ERISA and related topics, and I discussed ERISA litigation and a wide range of related issues. You can find the “Exclusive Interview: ERISA Attorney Stephen Rosenberg Says Litigation’s Legacy is Improved Plan Design” here.  You will see I went on for a bit, as I am wont to do when anyone wants to talk about ERISA!

What Osberg v. Foot Locker Teaches About Equitable Remedies Under ERISA

Posted By Stephen D. Rosenberg In Class Actions , Equitable Relief , Fiduciaries , Pensions , Summary Plan Descriptions
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Is Osberg v. Foot Locker a tipping point? Only time will tell, but it has that feel about it.

I have written extensively in the past on the orphan-like status of equitable remedies in ERISA litigation related to plan communications: all agree that a range of traditional equitable remedies is now open to participants, but courts have been very reluctant to adopt them, both doctrinally and as a practical matter, where the dispute concerns a disjunct between what a plan provides and what plan communications state. As I have written before, when participants in ERISA governed plans seek equitable relief, circuit courts of appeal seem intent upon reading in stricter requirements for equitable claims than exist in other areas of the law, and on enforcing existing elements of traditional equitable remedies more strictly than they do in other types of cases. I have argued that, underlying this tendency of the courts, is an understandable concern about the risk of turning every ERISA case into a “he said, the plan administrator said” case; judges do not want to birth equitable approaches to ERISA cases that turn every dispute into an argument by a participant that he or she was told something different, perhaps by a low level HR contact or perhaps in a written plan communication, than is actually provided under the express terms of a plan itself, with the participant arguing that he or she is therefore entitled to what was said rather than what was written in the plan. One can easily see a broad view and application of equitable remedies in the ERISA context, particularly with claims of equitable estoppel, giving rise to such a circumstance.

I have also always thought, however, that the concerns underpinning this view are overstated. There are, in fact, many instances in which a participant has a serious, well-documented claim of being told in writing one thing, under authorized or required plan communications, and then being given something else under the plan. There is no reason why, when there is a sufficient evidentiary basis to support the claim that a participant was misled about plan benefits, that the participant should not be allowed to proceed with an equitable remedies claim in that context, and, if the participant can prove it, to then be awarded the benefits he was led to believe existed. In that scenario, this type of case simply becomes like every other claim for equitable remedies, in every other context of the law that I can think of: if you say the defendant misled you and you should recover more as a result, then prove it on the evidence. It doesn’t require doctrinal bars or judicial reluctance to recognize equitable claims to avoid excessive litigation in ERISA cases over these types of circumstances; all that is required is testing the evidence just as would occur in any other type of case.

In fact, any concern that openly adopting and enforcing equitable claims in the context of ERISA will give rise to endless numbers of meritless claims is unwarranted. Preventing this “parade of horribles” requires nothing more than a strict interpretation and forceful application of Iqbal and Twombley – if the plaintiff cannot show the elements of an estoppel claim, for instance, based on significant factual support in pleading the claim, then the plaintiff’s claim can and should be tossed out on a motion to dismiss. Wasn’t this the original point of those two decisions, and the extent to which they raised pleading requirements? To bar the courthouse door to claims where the plaintiff cannot actually plead a factual basis for all of the elements of a claim? Courts can successfully bar the courthouse door to unfounded equitable relief claims under ERISA simply by strictly enforcing the pleading requirements of Iqbal and Twombley, and thereby dismissing estoppel and other equitable relief claims that do not have a substantial factual basis.

Nonetheless, there has been ample skepticism in the case law over the past few years towards equitable relief claims brought under ERISA. A couple of weeks ago, however, in Osberg v. Foot Locker, the Southern District of New York gave broad equitable relief to participants based on a reformation theory. In a well-reasoned 83 page opinion, the Court explained that there was more than sufficient evidence to demonstrate that the participants were actively misled about the extent of their retirement benefits. As one excellent summary explained:

U.S. District Judge Katherine B. Forrest of the U.S. District Court for the Southern District of New York found that the plan’s summary plan description (SPD) as well as other communications to participants failed to inform them that their benefits would be in a period of “wear-away” during which new accruals would not increase the benefit to which a participant was already entitled. . . . “Here, there is no doubt that Foot Locker committed equitable fraud,” Forrest wrote. “It sought and obtained cost savings by altering the Participants’ Plan, but not disclosing the full extent or impact of those changes.”

The Court ordered that “the plan must be reformed to actually provide the benefit that the misrepresentations caused participants to reasonably expect.”

Importantly, the Court’s opinion was based on substantial and extensive evidence proffered to show misleading statements about the benefits, the effect of those statements on participants, and the manner in which they differed from the actual plan terms. Enforcing equitable remedies under ERISA by focusing on whether the evidence supports the charge, as Osberg shows, is all that is necessary to separate the wheat from the chaff when participants come to court challenging plan decisions based on equitable remedies.

So is Osberg a tipping point that may lead the way to a less grudging view by the courts of equitable relief claims under ERISA where allegedly misleading plan communications are at issue? Time will tell, but it has all the indicia that past tipping points in other areas of ERISA litigation, such as excessive fee disputes, have had: a well-reasoned decision by a well-respected court, well-founded in the evidence. If the Second Circuit eventually affirms it, I think we can all expect that, yes, in fact, a tipping point on these types of claims has in fact been reached.

Co-Fiduciary Liability and, In Other News, Thoughts on the Evidentiary Status of Medical Reviewers in LTD Claims

Posted By Stephen D. Rosenberg In Benefit Litigation , Employee Benefit Plans , Fiduciaries , Long Term Disability Benefits , Third Party Administrators
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Two small notes today that I wanted to pass on. Each stuck in my mind as the possible foundation for a substantial blog post, but I have found that once items like this start to pile up in number, it can be quicker and more useful to get them out in a shorter post. Sports columnists, like the Boston Globe’s Dan Shaughnessy, used to describe columns full of small notes that were picked up along the way with none sufficient to warrant a full column on their own, as “clearing out the attic of my mind.” If I really set out to do that, we would be here awhile, but I am limiting myself to two items today: we can call it more like “cleaning out the corner of a desk drawer of my mind,” rather than the whole attic.

One of them was this article in Planadvisor titled “Do Retirement Plan Advisers Have a Duty to ‘Rat?’” Really, how can you not read an article with that heading? Although the headline sounds like clickbait for anyone in my line of work, it is actually a substantive discussion of a real problem, namely, when, given the risks on one hand of co-fiduciary liability and, on the other hand, of losing a client, a service provider should speak out about questionable or even illegal acts by a plan sponsor. One of my favorite southerners turned New Hampshire Yankee (which is not quite the same thing as a Yankee in King Arthur’s Court, but close enough), Adam Pozek, sums up the issue in this quote from the article:

Adam Pozek, a partner at DWC ERISA Consultants in Salem, New Hampshire, says, “It varies widely depending on what type of infraction there is. No one wants the reputation of turning a client in when something small happens, but in a situation where there is outright theft, most would agree the adviser has a duty to report it.”

Pozek also says it hinges to some degree on whether the adviser is acting in a fiduciary capacity. If not, in general, the adviser has less of a responsibility legally. However, depending on what titles they hold, they may have ethical or professional standards to consider. “It’s a judgment call for advisers who are not fiduciaries,” he states.

The other item I wanted to pass along is ERISA lawyer Rob Hoskins’ post on the ERISA Board the other day on this decision from the Southern District of New York noting that medical reviewers in LTD claims are not to be treated as experts for purposes of the federal rules of evidence and that their reports, on which LTD insurers and administrators rely in deciding LTD claims, are not subject to the Daubert standards that govern expert testimony. Its worth bearing that point in mind, simply because medical reviewers in litigated LTD claims sit in something of a unique position for purposes of the rules of evidence, in that they fall somewhere in between a treating physician, whose records are often broadly admissible, and an expert retained for litigation, whose testimony is governed by Daubert and the federal rules that govern expert testimony. Neither fish nor fowl, to a certain extent, are such reviewers and their reports for these purposes, but long standing practice has established the admissibility of such reports and the weight to be given them in the context of litigation over LTD claims.

Defensive Plan Building, Otherwise Known as "Minimizing Legal Risks in the Design, Implementation and Administration of Employee Benefit Plans"

Posted By Stephen D. Rosenberg In 401(k) Plans , Benefit Litigation , ERISA Seminars and other Resources , Employee Benefit Plans , Fiduciaries
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I can’t even recall how many times I have written – on this blog and elsewhere – on what I call “defensive plan building,” which is the idea that plans should be designed, built out and operated with the risk of litigation and liability exposure carefully considered and planned for, with the goal of eliminating as many risks as possible. The idea is to think - not after being sued but when a plan is written, a vendor selected, funds chosen, an investment committee put together, and the like - how best to limit the liability risks of the plan sponsor and the plan’s fiduciaries.

Here’s an easy example. A couple of weeks ago I spoke on a Strafford webinar on the duty to monitor plan investments after the Supreme Court and the Ninth Circuit’s rulings in Tibble. One of my slides concerned a favorite topic of mine, which is the risk of corporate officers who are not directly involved in a plan’s operations being dragged into a dispute over the plan on the ground that they are functional fiduciaries of the plan (how this can happen, how it can be avoided, the status of the law on this issue under a wide variety of fact patterns, and the creativity of plaintiffs’ lawyers with regard to this issue are a subject for another day, one that perhaps warrants an entire article). Often, such officers and executives were not directly involved with the plan and, moreover, did not understand themselves to be occupying a role that could expose them to liability for the plan’s operations based on a claim that they were functional fiduciaries. As I explained in my presentation, getting dragged in this tangential way into class actions brought against a plan is not a good use of a senior executive’s time and focus, and likely not good for the longevity of the lawyer who designed the plan in a way that left a senior officer at risk of being named a defendant in such a claim. The point of “defensive plan building” is to look ahead at risks like this and design the plan in such a way that this doesn’t occur by accident, by insulating such senior officers from involvement that could drag them in as defendants. Multiply this by a thousand fold, concerning all of the other exposures that a plan can bring, and you have the idea of “defensive plan building:” look ahead when building and operating a plan at your potential exposures, and avoid the ones you want to avoid.

Now this is all nice as a theory, but there is no doubt it is hard to pull off. Plans are amazingly complicated machines, with a thousand moving parts. Worse yet, new theories of liability arise all the time, and one cannot predict whether certain actions taken today will run afoul of theories of liability crafted in the future. Just look, for instance, at excessive fee cases: the cost of funds certainly wasn’t on the radar screens of most plan sponsors and their lawyers several years ago, but it would be negligent of them to ignore those costs in designing a plan today.

I will have more of an opportunity to expand on this idea in November, when I will be speaking at the American Conference Institute’s conference on plan compliance issues in New York. The actual title of the conference is “Minimizing Legal Risks in the Design, Implementation and Administration of Employee Benefit Plans,” which could almost serve as a definition for the term “defensive plan building.” Peter Kelly, who is the Deputy General Counsel of Blue Cross and Blue Shield Association, Ed Berrios of Chubb and I will be speaking as a panel on fiduciary liability and employee benefit risks, and dozens of others will be speaking on a range of other issues central to operating a well-run plan. If you are interested in attending, you can get a special bargain by contacting Joe Gallagher at the American Conference Institute by the end of the month, at 212-352-3220 x 5511 or j.gallagher@americanconference.com, and mentioning my name.

Susan Mangiero on Tibble and the Complexity of Monitoring Plan Investments

Posted By Stephen D. Rosenberg In Fiduciaries
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So, as I and dozens of other observers have pointed out (although I am confident I am the only one who quoted Shakespeare on the subject), the Supreme Court’s recent decision in Tibble drove home the importance of monitoring plan investments, as well as the fact that, dependent on the circumstances, the failure to do so, and where necessary to take corresponding action based on the monitoring, can constitute a fiduciary breach. Okay, okay, say all the ERISA lawyers: time to tell our clients to set up a monitoring schedule and to meet regularly to do so.

Well, as forensic economist, expert witness and blogger extraordinaire Susan Mangiero points out, not so fast. From a financial perspective, monitoring plan investments can be a complex enterprise, highly dependent on details of the investments themselves and their relationship to market stimuli. In this article for BNA, Susan explains in detail exactly what this means, illustrating the level of complexity that the type of monitoring that Tibble requires actually involves, and pointing out that plan fiduciaries are now going to have to carefully consider when to bring in – and pay for – still more outside expertise for these exact purposes.

What Would William Shakespeare Say About Tibble v. Edison?

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries
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Years ago I moved from reading fiction for fun to mostly reading non-fiction, not long after reading The Corrections and spending the whole time hearing, in style, tone and manner, echoes in the back of my head of writers as recent as Martin Amis, as old as Norman Mailer, and as somewhere in-between as Don DeLillo. Even more though, I had begun to be struck by the fact that, with a few exceptions, most of what anyone had to say had long since been better said by William Shakespeare.

I thought of this as I reread the Supreme Court’s opinion in Tibble. After all of the years of litigation, the high profile appeals, the articles and panels discussing the case, the decision, from a practical perspective, can be best summed up by Shakespeare: its simply sound and fury, signifying nothing, at least not from either a practical or an academic perspective when it comes to either the law of ERISA or its practical application.

The Court was confronted with, in essence, this issue: when does ERISA’s statute of limitations begin running in the context of investment decisions made many years ago, where the investments continued to be held in a plan. ERISA’s statute of limitations for breaches of fiduciary duty is an odd little duck, in many ways unique to itself: its six year limit runs from the last act in a breach, and its three year limit runs from the plaintiff’s actual knowledge of a breach (I know, this is a summary). You can see the problem though, from the practical perspective of either a litigator or a plan fiduciary, or even as part of the completely academic exercise of developing a jurisprudence for this statute of limitations. It is essentially dependent on defining the date of fiduciary breach, establishing what constitutes knowledge of that breach and on defining the last act of the breach. The Supreme Court’s opinion in Tibble in no manner expanded upon our understanding of those issues or of how to apply that statute of limitations in that context. It instead, at least implicitly, continued to uphold the unremarkable, and effectively undisputed, proposition that the statute’s running cannot occur before the breach, but without telling us anything, really, about how to determine the relevant date of breach.

Instead, the Court declared what was, again, an essentially unremarkable proposition, which is that fiduciary duties don’t simply end with the selection by fiduciaries of plan investments, but instead continue throughout the life of the plan with regard to such investments. But as the Court’s unanimity and its broad citations of standard trust rules reflect, did anyone ever really think otherwise? As the Court noted in its opinion, even the parties had agreed on that point by the time the briefing and argument before the Supreme Court was concluded.

The Court then, from there, failed to take anyone the one step further and fill in what that continuing duty with regard to plan investments looks like, and wisely so. This is an issue best filled in on a detailed factual record, not in the abstract by an appellate panel. What type of continued monitoring is needed, what type of events should trigger a revision of investment choices by a fiduciary, what level of review is needed once those events occur, are all complex questions that can vary from case to case, particularly given the wide range of plan types that exist and the fact that different types of plans may be affected in different ways by different events. For instance, certainly employer stock of a publicly traded corporation is affected in different ways by the collapse of a Wall Street bank than are index funds in a 401(k) plan. Likewise, negative events in a particular and narrow industry might require revisiting the employee ownership held in the ESOP of a private company in that industry, but would be unlikely to raise any concerns with regard to a diversified pension plan.

So when all is said and done, what do years of litigation, a Ninth Circuit opinion and a Supreme Court opinion in Tibble leave us knowing? That there is a continuing duty to monitor plan investments, the breach of which can give rise to fiduciary liability, and that ERISA’s statute of limitations runs from the date of whatever breach is identified and proven. I am not sure any experienced ERISA litigator or academic didn’t already know that already, before the Supreme Court issued its opinion in Tibble.

Should Company Officers Run Retirement and Other Benefit Plans?

Posted By Stephen D. Rosenberg In 401(k) Plans , Class Actions , Employee Benefit Plans , Fiduciaries , Pensions
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This is great – I loved the idea of this Bloomberg BNA webinar the minute it popped up in my in-box, just from the title: “Just Say No: Why Directors Should Avoid Duties That Will Subject Them to ERISA.” I have written extensively on the idea of accidental fiduciaries, and the manner in which corporate officers find themselves dragged, unwittingly, into ERISA class actions because they played some role in the administration of a benefit plan, rendering them, at least arguably, deemed or functional fiduciaries for purposes of ERISA. Sometimes, they actually have played enough of an operational role to truly be proper defendants in an action; in others, they have only enough connection – such as having appointed the members of a committee that runs the plan – to be forced to litigate the question of whether they actually qualify as fiduciaries; and in other cases, their roles lie somewhere in between.

But there is also the question of the extent to which directors should deliberately place themselves in harms way by being the overlord of the company’s benefit plans, rather than leaving that in the hand of a lower level employee. I have represented officers who have taken on that role, and I have also sued officers who have taken on that role, and I have to say that, consistently, having a director actually be a plan fiduciary, intentionally, seldom appears, in the hindsight of litigation, to have been the best idea. Moreover, it has often appeared to be the case that a company officer or director took on the role because of its seeming importance but without any real analysis as to whether or not it made sense to take on that role. In many instances, there was almost a default, knee jerk reflex that something that important should be on a senior officer’s radar screen, but at the same time, that same officer did not really have the time or expertise to focus on it, leaving the officer exposed to potential liability if a problem arose with the plan and, further, leaving the plan open to more suits based on poor oversight than would have been the case if the oversight had been assigned to a lower level executive for whom the assignment was more of a central focus and possibly even one that could raise his or her profile.

In the end, litigation teaches that it isn’t so much the question of whether directors should ever be a plan fiduciary – accidentally or deliberately – that is important, but rather the act of thinking logically in advance about who best in a company should have what roles with regard to a plan. Doing the latter not only protects against unanticipated litigation exposures, but also decreases the likelihood of litigation by increasing the probability that the plan will be in the hands of the executives best placed to run it well.

Company Stock in Retirement Plans: Where Lies the Line Between Prudent and Imprudent Conduct?

Posted By Stephen D. Rosenberg In 401(k) Plans , ESOP , Fiduciaries
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Chris Carosa at Fiduciary News highlighted this New York Times article in his twitter feed the other day, in which the author argued that there is no reason, from the point of view of a participant/employee, to hold large amounts of company stock in a retirement portfolio (as opposed to, say, as part of a bonus plan or other compensation supplement that is external to a 401(k) plan or other retirement account). The author of the article makes a very persuasive case that, as a participant, holding company stock of their employer is a mistake, and violates basic, elementary rules of diversification and investment philosophy that any competent financial advisor would insist their clients live by. So, the author asks, how can it possibly make any sense to have company stock holdings in a 401(k) plan or to have company matches to retirement savings be in the form of company stock? The author’s answer, as you can tell from the summary above, is it doesn’t.

But if it doesn’t make any sense from the perspective of a participant, then how can it ever be a prudent decision for a fiduciary to offer it in the first place? A fiduciary is supposed to be acting as a knowledgeable expert and in the best interest of the participants, so if one accepts the premise that someone knowledgeable about retirement investing would not hold company stock in a 401(k) plan, then it would seem to never be in the interest of participants – and therefore compliant with a fiduciary’s obligations – to offer company stock in a retirement plan. Note that this question concerns general retirement savings of employee participants, and not ESOP holdings, which we know are deliberately and intentionally overweighted to holding company stock.

Now, this analysis needs one qualification. We all know that some companies do so well that employees and participants would be ill-served by not holding employer stock, and the returns on their retirement accounts would be severely reduced absent large holdings of company stock. All have heard the story of Microsoft millionaires (or Apple, or Facebook, or Google, or fill in the name of the tech company) but we also know that sometimes this has been true of employers in less glamorous industries as well (even if not to the same extent with regard to the appreciation of their stock). But these events are outliers in a bell curve, and are not the experience of most participants or of most employers offering company stock, just as the instances of company stock holdings going south, i.e., a stock drop, are outliers as well. For most participants in most plans in most companies, the potential gain certainly doesn’t outweigh the general risk, accepted in investment theory, of the accompanying excessive concentration of stock of any one company, which in this instance is the employer.

So, if this is the case, how can it ever be prudent to offer company stock in a 401(k) plan, and, if the stock falls in value, not have it be a fiduciary breach? Such an analysis would suggest that even holding or offering the company stock as an option is a fiduciary breach, as it is not prudent to offer it at all. But this is where ERISA meets the real world. The statute was not enacted in a vacuum, but was instead created by balancing competing interests. And the answer to the question, and the reason why such an argument would not succeed in a stock drop case, is that ERISA allows, to a certain extent, such holdings, so their very existence alone, without more, cannot constitute a fiduciary breach. The statute allows for it, so doing it can’t breach the statute.

And this, to a certain extent, is what Dudenhoeffer was about – the idea that a plan sponsor gets the protection of being allowed to do, without being accused of imprudent conduct, what the statute specifically allows, but is not insulated anymore than that from scrutiny of its conduct. So here, with regard to company stock, despite the idea that it is probably never prudent, as an individual retirement investor, to hold an excessive concentration of one company’s stock and in particular that of one’s employer, that alone cannot support a breach of fiduciary duty claim against a plan sponsor; instead, to impose fiduciary liability, that plan sponsor must have done something more than just offering that stock to employee participants.

What Does Teamsters Local 710 Pension Fund v. The Bank of N.Y. Mellon Corp. Tell Us About the Current Judicial Approach to Breach of Fiduciary Duty Cases?

Posted By Stephen D. Rosenberg In Fiduciaries
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For many years, I argued on this blog that courts, when it came to ERISA breach of fiduciary duty cases, were too slow to decide cases on the facts and too quick to decide them on the basis of judicial assumptions or, worse yet, legal presumptions. I criticized this roundly in my article "Retreat from the High Water Mark," where I discussed the different outcomes in excessive fees cases between those where the courts made certain assumptions about the mutual fund marketplace and those where the courts took evidence on that issue before deciding the case. As I have often written, both on this blog and elsewhere, the world often looks much different after evidence is taken than it does before.

Certainly, particularly after Iqbal and Twombly – which were needed correctives to certain aspects of federal practice – there is room for dismissing poorly pled or weakly supported breach of fiduciary duty cases right at the get go, by means of motions to dismiss. The problem, though, came when courts went beyond simply considering whether the acts alleged in the complaint were sufficient to describe a breach of fiduciary duty claim under generally accepted principles concerning such claims, for instance whether the complaint alleged fiduciary status and facts indicating a lack of prudence, and instead moved onto dismissing claims that satisfied those standards by creating presumptions that established separate and additional pleading barriers to prosecuting such a claim, as occurred with the Moench presumption, or by assuming knowledge of the investment practices and world at issue as a basis for dismissal that could not be found in the record at the time the motion was decided, as the Seventh Circuit arguably did in Hecker.

For those of you who have been paying attention, I haven’t written much on that theme lately, and there is a reason for it: presumably independent of anything I have written, courts have begun doing exactly what I argued for, and the pendulum has now firmly swung towards courts deciding such cases on their merits after considering the evidence. Indeed, Fifth Third Bancorp v. Dudenhoeffer, with its rejection of the Moench presumption, may have signaled to lower courts the need to decide all breach of fiduciary duty cases on their merits and not on the creation of legal presumptions or judicial assumptions based on sources beyond the ERISA statute itself or the evidence in a given case.

This jumped out at me when I read this Bloomberg BNA article on the Northern District of Illinois’ decision the other day (actually, while I was at depositions in Chicago, around the corner from the court, metaphorically speaking) in Teamsters Local 710 Pension Fund v. The Bank of N.Y. Mellon Corp., followed by a reading of the decision itself. The Bloomberg BNA article nicely sums up the events that gave rise to the lawsuit, explaining that:

In 2006, the Teamsters plan authorized BNY Mellon to lend securities from the plan's accounts in return for collateral that would then be invested in certain approved investments. The goal was to provide the plan incremental returns without exposure to the substantial risk often present in speculative investments.

As part of this securities lending program, BNY Mellon purchased almost $25 million in Lehman-backed floating rate notes.

As Lehman's financial condition deteriorated and ultimately collapsed, the Teamsters plan suffered a $24.5 million deficiency from the note held by BNY Mellon.

The plan filed suit against two BNY entities, accusing them of fiduciary imprudence and disloyalty under the Employee Retirement Income Security Act.

BNY Mellon sought to have the case resolved on the pleadings by arguing that Dudenhoffer established legal rules that bar the claim, on the thesis that the defendants, after Dudenhoffer, could not be liable for breach of fiduciary duty for having failed to “[recognize,] based on publicly-available information alone, that Lehman's debt was over-valued.”

The Court, though, rejected this argument, ruling that:

Defendants' argument about the impact of Fifth Third is based upon a reading of the complaint that is too narrow. The Court does not read the plaintiffs' complaint as alleging that the defendants lacked prescience or that they should have recognized from the information available in the market that the Lehman bonds were over-valued. Rather, the plaintiffs allege that, under the circumstances as they existed in the market at the time, no reasonably prudent securities lending fiduciary would have concluded that Lehman debt was a sufficiently safe investment for a securities lending client and no reasonably prudent securities lending fiduciary would have maintained the collateral investments in the Lehman Notes through Lehman's bankruptcy filing. Thus the claim is not that the defendants were imprudent in failing to recognize that Lehman would file for bankruptcy and not pay out on the notes, but that it was imprudent to hold the Lehman debt, given the circumstances existing in the market and given the plaintiffs' investment profile. Nothing in Fifth Third forecloses such claims.

In short, the Court concluded that the complaint pled the standard elements to show a breach of fiduciary duty, namely a lack of prudence under the then prevailing circumstances, and that such a claim was entitled to proceed to an adjudication on its merits, after discovery. This is a far cry from the day, not too long ago, that many such claims never made it past the pleading stage and into discovery, at which point a court could decide whether a fiduciary breach occurred by looking at all of the evidence, learned during discovery, of what was actually done, and under what circumstances, by the fiduciaries of a plan. As I have said before, the world often looks different in that light than it does when early, preliminary motions in a case are filed.

Breach of Fiduciary Duty, Preemption and Liberal Pleading Rules

Posted By Stephen D. Rosenberg In Fiduciaries , Long Term Disability Benefits , Preemption
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I obtained dismissal of a breach of fiduciary duty claim, as well as state law claims, against my clients in an opinion filed on Friday. While long time readers know that I won’t comment substantively on rulings involving my clients, the opinion is worth a read on at least two substantive points involving breach of fiduciary duty claims. The first is the requirement of discretion on the part of a defendant for the defendant to become a fiduciary by means of administrative actions relating to an ERISA-governed plan; the second is the question of whether state law claims relating to an ERISA-governed plan are preempted when brought against a party that is not a fiduciary.

Separately, though, because this part of the opinion does not concern my clients, I can comment on a part of the opinion that will be very interesting to anyone who, like me, is a federal procedure geek. The Court engages in a sustained analysis of Federal Rule of Civil Procedure 15(a) and the right to amend as a matter of course, and how it applies in a circumstance where the original complaint, which the plaintiff seeks to amend, was in fact never served. The Court found the right to amend to still exist, regardless of the failure to serve the original complaint. The Court found that the modern rules reject hyper-technicalities when it comes to pleading, and that the rules therefore cannot bar an amended complaint simply because the original complaint was not first served. Interestingly, though, the Court recognized what is in essence a good faith requirement for a plaintiff to be allowed to avoid a bar that might otherwise be created by a perfectly literal reading of the federal rules, noting that its conclusion might be different if it were shown that the plaintiff were taking advantage of the liberality of the pleading rules for purposes of gaming, undermining or otherwise seeking to thwart the inherent purposes of the rules. Fun stuff, I think anyway.

What Does Spano v. Boeing Foretell About the Future of Excessive Fee Litigation (and about the Future Ruling in Tibble As Well)?

Posted By Stephen D. Rosenberg In 401(k) Plans , Class Actions , Conflicts of Interest , ERISA Statutory Provisions , Fiduciaries
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Tom Clark, who writes the excellent Fiduciary Matters Blog, gave me either a late Christmas or an early New Year's present when he forwarded me, last week, the district court's December 30th decision in Spano v. Boeing, which addressed numerous issues related to excessive fee litigation but, in particular, discussed the relationship of ERISA's six year statute of limitations to those types of claims. Tom has now done both you and me an additional favor in this regard, writing up an excellent post summarizing the decision, sparing me the ordeal of writing my own synopsis and you the time consuming - but rewarding - act of reading the opinion itself. You can find Tom's summary and analysis here.

From my perspective, the most interesting aspects of the decision relate to the impact on the theory of liability and on the defendants' theories of the plaintiffs' precision, at this point, in presenting their case. Tom references the same idea in his post, but I will discuss it in more detail here. For years, one thing that has jumped out from many of the district court and appeals court decisions that have run in favor of defendant fiduciaries and plan vendors has been the extent to which the plaintiffs' allegations and theories were of the blunderbuss variety, in which they broadly alleged conflicts of interest and the existence of both high fees and undisclosed revenue sharing. In many of those cases, the plaintiffs essentially never boiled their claims down to narrow, specific allegations (at the motion to dismiss stage) or evidence backed theories (at the summary judgment stage) supporting the existence of a particular fiduciary breach. As a result, the plaintiffs' theories often had holes large enough to drive a truck through, or, at a minimum, the statute of limitations or failure to prove imprudent conduct or whatever other theory was being pressed by the defendants. In many of those decisions, it was clear that a more narrowly and precisely tailored theory of fiduciary breach could have avoided the defenses raised by the plan fiduciaries, sponsors and vendors, forcing, at a minimum, a trial to resolve the claims (and thus likely a settlement of some nature, given the amounts at stake in many of the cases and corporate America's risk adverse nature and resulting preference for avoiding trials). I could walk you through many of those decisions and show you exactly how a more properly and precisely pled theory of fiduciary breach could have survived the motion to dismiss or for summary judgment that instead sunk the case.

Here, though, in Spano, you see a much more focused theory, which is not based simply on the premise that the fiduciaries had broadly erred by retaining and never dispensing with high cost funds, and did not essentially allege simply that certain types of investment or operational decisions are essentially wrong per se. Instead, what you see is a narrow focus on specific decisions and activities by which the fiduciary duty was breached, forcing the defendants - and in turn the Court - to address not whether the type of conduct in general violates fiduciary norms, but instead whether the particular fiduciaries acted imprudently under the specific circumstances that confronted them; that is a much harder claim to get tossed out by means of motion practice, and the Spano decision reflects that.

This is telling, in many ways, for the future, as the plaintiffs' bar gets better and better at framing fiduciary breach claims. As they get better at identifying, isolating and targeting specific alleged misconduct, their win rate is going to go up, and it won't be as common as it has been for prominent appellate rulings or major trial court rulings to go against them.

One other aspect of Spano that is worth highlighting is the Court's detailed treatment of ERISA's six year statute of limitations, given that some of the funds at issue where first selected more than six years before suit was filed, leading the defendants to seek to bar many of the claims related to those funds on the basis that they were time barred. This is, of course, essentially the issue pending before the Supreme Court in Tibble at the moment, and the Spano Court addressed Tibble and the Supreme Court history of that case in reaching its own determination on the statute of limitations issues. Essentially, the Court concluded that it was not enough to defeat the fiduciary breach claims that the original decisions to offer the funds in question occurred more than six years before suit was filed, so long as the plaintiffs could set forth an actionable fiduciary breach that took place within the six years before suit was filed that concerned the funds, above and beyond simply the preceding, and time barred, decision to offer the funds in the first place. Consistent with the theme of this post, the Court found that the plaintiffs had done so by showing, on the law and the facts, how the defendants had committed fiduciary breaches that post-dated the decision to offer the funds in question and within the relevant six year period; once again, the plaintiffs avoided barriers to recovery that had sunk earlier plaintiffs by focusing on the precise facts needed to keep their claims alive, rather than simply making broad and often un-nuanced allegations that could more easily be found to be time barred. And that, incidentally, is exactly what I think the Supreme Court will do in Tibble, finding that, first, the six year statute of limitations does not forever bar claims if the initial offering of the investment option, or selection of it, occurred more than six years before suit was filed, and, second, that instead the six year period is satisfied in those instances where the plaintiff can show a legally actionable breach within the six year period that is independent of the original decision to offer the investment option.

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.


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).

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.

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.

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.

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.

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.

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.

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.

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.

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 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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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?

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.

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.

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.

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.

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.

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.

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.


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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

You Say Securities, I Say ERISA

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

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

Excessive Fee Litigation and the Small Plan

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

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

More ERISA Blogging for Those of You Who Can't Get Enough

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

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

Hecker, InsideCounsel and Defensive Plan Building

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

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

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

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

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

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

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

Looking at Fiduciary Performance from the Vantage Point of a Plan Participant

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

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

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

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

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

Hecker and the Development of the Law on the 404(c) Defense

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

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

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

Pension Fiduciaries in the Hot Seat - What to Avoid and How to React if Sued

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

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


How Much Information Is Enough to Decide A Breach of Fiduciary Duty Lawsuit?

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

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

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

Asking the Seventh Circuit to Revisit Hecker

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

Fun stuff, either way.

Notes on Hecker v Deere

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

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

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

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

Shining a BrightScope on Heckler v. John Deere

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

Do People Who Are Told the Truth Sue?

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

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

Bunch v. W.R. Grace: What a Breach of Fiduciary Duty Doesn't Look Like

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

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

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

Talkin' ERISA Litigation Trends

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

More Evidence that Including Company Stock in a Retirement Plan May Not Be Worth the Litigation Risk

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

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

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

On Fiduciary Bonds and Fiduciary Insurance

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

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

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

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

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

The Tribune Bankruptcy and Breach of Fiduciary Duty Litigation Over its ESOP

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

On the Scope of the Attorney Client Privilege In ERISA Litigation

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

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

Back Again at the Crossroads of Securities Law and ERISA

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

A Thanksgiving Week Feast

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

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

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

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

Okay, that clears some of the backlog.

Excessive Fees in 401(k) Plans: Its What You Do, Not Who You Know, That Counts

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

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

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

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

You Say Securities Law, I Say ERISA

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

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

Revenue Sharing, Fees, Indemnity and Contribution: A Potpourri of Hot Button Issues Confronting Fiduciaries

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

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

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

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

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

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

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

The Amateur Fiduciary

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

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

Between a Rock and a Hard Place: Pity the Poor Fiduciary, Trapped Between the Securities Laws and ERISA

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

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

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

TARP and ERISA Litigation

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

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

To Be or Not to Be (a Fiduciary, That Is)

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

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

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

On Backdating, ERISA, and the Possibly Unintended Consequences of the Diamond Hypothetical

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

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

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

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

Fiduciary Duties: It Ain't Easy

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

Joshua Itzoe on Fixing the 401(k)

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

Does a Dying Industry Guarantee Pension Litigation?

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

ERISA, ESOP and the LA Times

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

Systemic Losses and Fiduciary Liability

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

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

The First Circuit on ERISA Standing

Posted By Stephen D. Rosenberg In 401(k) Plans , ERISA Statutory Provisions , Employee Benefit Plans , Fiduciaries , Retirement Benefits
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Very interesting case out of the First Circuit the other day on the question of whether former employees satisfy ERISA standing requirements with regard to defined contribution plans. Short answer is they do, but the Court’s analysis and discussion is an interesting open field run across a range of issues that are both explicit and implicit to any consideration of this question. One particular point, basically noted in a footnote, was of particular interest to me. I have discussed frequently in past posts my thesis that much of the evolution in ERISA law is and will continue to be driven by the economic effect on employees of the replacement of the pension system by 401(k) plans; this is partly because employees have become the persons at risk from investment mistakes, which they generally were not - barring complete failure of the employer and its pension plan - when employees were instead covered by pensions. In an interesting footnote, the Court addresses the distinction between the two types of benefits, and hints at the impact of that difference on employees:

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

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

From Preemption to ERISA Standing, and Lots of Things In-Between

Posted By Stephen D. Rosenberg In Conflicts of Interest , ERISA Seminars and other Resources , Equitable Relief , Fiduciaries , Preemption , Standard of Review
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Philadelphia, New York, court hearings - I have been everywhere the past week or so other than at my desk where I could put up blog posts. Here’s a run down of interesting things I came across along the way that you may want to read. First, for those of you who can’t get enough of this topic - I know I can’t, but then I am fascinated enough by this stuff to maintain an entire blog on the subject of ERISA - Workplace Prof passed along this student note on preemption and “pay or play” statutes: Leslie A. Harrelson, Recent Fourth Circuit Decisions: Retail Industry Leaders Ass'n v. Fielder: ERISA Preemption Trumps the "Play or Pay" Law, 67 Maryland L. Rev. 885 (2008).

Second, SCOTUS passed along that the Supreme Court decided not to accept for hearing Amschwand v. Spherion Corp., which, I noted in a previous post, presented an opening for the Court to address when monetary awards for breaches of fiduciary duty can qualify as equitable relief that can be sought under ERISA. I have commented before that the Court has advanced the ball on equitable relief under ERISA into almost untenable terrain, and I am not sure whether the Court can bring any greater clarity to the issue without backtracking from its recent jurisprudence on the subject; given the unlikeliness of the Court doing so already with regard to such relatively recent decisions, it is probably just as well that the Court did not take on the issues presented by that case.

Third, you could learn everything you need to know about the standards of review for benefit denials and the impact of the Supreme Court’s decision in MetLife v. Glenn by clicking on the “Standard of Review” topic over on the left hand side of this blog; or you could spend an hour listening to this webinar on the topic.

Fourth, Pension Risk Matters passes along this Sixth Circuit decision enforcing the Supreme Court’s approach to individual claimants in LaRue, finding that two participants could sue for breach of fiduciary duty. There are two particularly interesting side notes about this. First, it illustrates a particular point I - and others - made in a number of media outlets after the Supreme Court issued its opinion in LaRue, namely that, while it may not result in an avalanche of litigation that otherwise would not have been filed, the ruling is certainly going to lead to an increase in the filing of smaller cases on behalf of a few participants in circumstances that, in the past, would not have generated suits unless a class wide action could be brought. Second, the case presages what may be the dying off, by a thousand cuts, of the long held use of standing to cut off ERISA breach of fiduciary duty suits at the earliest stages of procedural wrangling, long before any litigation over the merits of a case, something which occurred at the federal district court level in the original LaRue case itself. Roy Harmon, over at his Health Plan Law blog, has a detailed analysis of this question, one I have been thinking about since LaRue was decided but which Roy has thankfully saved me from addressing in detail at this point.

A Brief List of Things Worth Reading

Posted By Stephen D. Rosenberg In Benefit Litigation , Fiduciaries , Long Term Disability Benefits
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Even when trying cases, I have never had a week so busy since launching the blog that I haven’t been able to find time to post. David Rossmiller likes to say that work is the curse of the blogging class, but even when really busy, I have always found writing up a blog post to be a nice chance to recharge my batteries. So for those of you looking for something ERISA related to read on this upcoming summer weekend, I thought I would at least pass along some of the more interesting things I have been reading this week. These include: Kevin LaCroix’s latest post summing up the status of all of the subprime related lawsuits filed around the country’s courthouses, including two new cases brought under ERISA alleging breach of fiduciary duty as a result of subprime related exposures; the Workplace Prof’s series of posts on, in order, the Supreme Court’s request for the government’s view on a cash balance plan issue, the Ninth Circuit’s view that a disability benefit plan claim can be denied if the claimant does not cooperate with investigation of the claim to the extent required by the plan’s terms, and on recent appellate authority on the effectiveness - or ineffectiveness - of particular approaches to delegating discretionary authority to administrators; and the Florida Appellate Blog’s post on an Eleventh Circuit decision finding that an administrator did not have to provide a copy of an IME report to a claimant prior to conclusion of the internal appeal procedure.

Two More ERISA Cases for the Supreme Court?

Posted By Stephen D. Rosenberg In Benefit Litigation , Equitable Relief , Fiduciaries , Standard of Review
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The good folks who write the SCOTUS blog are engaged in one of their periodic attempts to read the tea leaves and predict what cases the Supreme Court will choose to hear. This time, they think the Court will review two ERISA cases, Geddes v. United Staffing - which concerns the standard of review to be applied to benefit determinations when fiduciary duties are delegated to a non-fiduciary - and Amschwand v. Spherion Corp., which presents an opportunity to clarify when monetary awards for breaches of fiduciary duty can qualify as equitable relief actionable under ERISA. If the Court hears both cases, we will see a continuation of the trend of the Court focusing on and likely reframing the course of ERISA litigation. Geddes provides not just an opportunity to understand the impact of delegation to third party administrators, and to open up for further development some of the unsettled issues in that realm, but also an opportunity, on the heels of whatever the Court decides in the currently pending MetLife v. Glenn case, to alter the settled understandings of when and how to apply the differing standards of review that apply in benefit cases. Amschwand, in turn, presents the Court with an opportunity to address a very technical and specific question, but one that continues to bedevil courts and litigants, namely the question of what types of claims for monetary recovery can proceed, under current Supreme Court jurisprudence, as claims for equitable relief under ERISA. Of note, the Solicitor General’s office, in recommending that the Court accept review of that case, seems to emphasize a need to broaden the range of theories that can be brought as equitable relief claims under ERISA so as to ensure an acceptable range of remedies and recourse to aggrieved plan participants, a proposition that many who favor broader remedies might not have expected to be forwarded by the administration’s legal team.

Follow the Numbers: the Evolution in ERISA Law

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries , Pensions
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I have noted two things - well, many things, only two of which are relevant to this post - in the past, one the line that Marx was wrong about a lot of things, but he was right that everything is economics, and the second that we are beginning to see an incremental evolution in the law of ERISA to account for the reality that pensions - predominant at the time of many of the earlier, key court rulings on ERISA - have been supplanted by defined contribution plans. We saw the latter, for instance, in dramatic fashion in the Supreme Court’s ruling in LaRue, with the justices’ discussion of how rules applicable to pensions may not be equally applicable to 401(k) plans. The two ideas - that everything is at base driven by economic reality and the evolution of ERISA law - are linked, in a way driven home by this column in the Washington Post yesterday arguing for a new retirement structure based on the belief that the defined contribution approach simply is not going to work for most employees. The author noted “that when ERISA went on the books in 1974, employers were contributing 89 percent of the funds in pension plans, but by 2000, the employers' share of contributions had dropped to 49 percent.” With that change, as I have argued before, we are going to see a real shift in court rulings on ERISA as applied to defined contribution plans, with rulings providing more protection - or at least more recourse - to plan participants when the conduct of plan fiduciaries, particularly in the realm of investment choices, is challenged. When ERISA was only concerned with a world in which almost all retirement benefits were in the form of a pension, investment mistakes were, speaking generally and in sweepingly broad terms, the problem of the sponsor, as the employee was still promised his or her benefits; defined contribution plans invert this paradigm, making investment mistakes by fiduciaries the employees’ problem, and the law of ERISA will continue to shift to give those employees more redress than they have traditionally had in that situation under ERISA.

Millions for Defense, Billions for Damages: State Street's Exposure

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries , Pensions
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Backdating. It’s a scandal. No, not that backdating. I mean when bloggers can’t get to something when it first comes up, and then go back in time to talk about it. That’s what I mean by backdating, and that’s what I am going to do today. Last week, I read, but didn’t have a chance to discuss here, this article from Bloomberg on the State Street Bank subprime losses and potential ERISA related exposure. The article was particularly interesting because it takes a tack someone different than most articles that, like this one, rely on lawyers to evaluate the litigation against State Street arising out of those events; most such articles focus on liability issues, the procedural defenses available to State Street under ERISA, and the defensive position that the company can assert. This article, though, asks and attempts to answer the million dollar - or in this case, more like the billion dollar - question of how much losing these cases will cost State Street. The numbers bandied about by well informed lawyers are staggering, even to the jaded eye.

The article rounds up the usual band of worthies to comment, including the Workplace Prof’s mild mannered alter ego, Paul Secunda, who tacks the eye popping number of “hundreds of millions to the billions” on State Street’s potential liability, and Boston ERISA lawyer Marcia Wagner, who noted that the plan administrators filing suit against State Street may have had no other options but to sue. To quote the article:

Wagner said fund managers hurt by the drop may have an obligation to sue as the existing plaintiffs have. “To the extent plans were misled into purchasing something they were not authorized to purchase, they may have a fiduciary obligation to sue,'' said the lawyer, who isn't representing the investment manager or plaintiffs. ``It's sue or be sued,'' she said. ``They allowed bad investments, so they should be attempting to make the plans whole.”

This echoes something I said in my last post on the State Street mess, in which I raised concerns about the fact that pension fund managers invested in the State Street products without properly understanding what they were buying. As I suggested in that post, administrators fall down on their own fiduciary obligations in such circumstances. As Wagner’s comment suggests, it may well be that the administrators’ fiduciary duties under those circumstances require them to then try to remedy their initial mistakes by suing to recover the losses, rather than compounding their own fiduciary breaches by simply absorbing the loss; that latter course of action would likely just make the administrators themselves targets for breach of fiduciary duty lawsuits based on their own mistakes in investing in the State Street funds.

Big Questions From A Small Story on a (Relatively) Small Loss

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries , Pensions
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Here’s a short newspaper story of a local municipal pension plan that suffered a $2.4 million loss to its pension fund, which is only about a $53 million fund, as a result of investments in subprime mortgage backed assets made either by State Street or in State Street funds (the article isn’t clear on the relationship between the pension plan and State Street, the current poster boy for breaching fiduciary duty by subprime investments). As the article points out, the pension plan has retained counsel to pursue State Street over the loss, on the theory that State Street did not adequately disclose the nature of the investments and the risk; this is pretty much par for the course for the various State Street subprime lawsuits being brought by pension and 401(k) plans, which essentially allege that volatile subprime related exposures were not disclosed but were instead contained within investment products sold as safe, conservative bond investments. Although dressed up to suit ERISA and breach of fiduciary duty issues, they can essentially be understand as highly gussied up bait and switch claims, in which retirement plan administrators and fiduciaries allege that they thought they were buying one thing from State Street - a conservative investment vehicle to balance out riskier investment allocations - but instead were sold something else, namely a highly volatile and risky exposure. State Street, of course, as the article reflects, views the cases otherwise, as instances in which the proper disclosure was made, but market downturns harmed the investments.

This whole scenario raises an interesting question, aside from whether it is the plaintiff administrators or instead State Street that is right, because no matter which one is correct in their interpretation of the events at issue, you still end up in the same place, which is that the plans signing off on these investments just plain didn’t know what they were buying. This is certainly the case if, as the plaintiff fund fiduciaries claim, they weren’t told the truth, but it is likely also the case if, as State Street claims, plan sponsors were told the truth and are now simply complaining about market outcomes; if it’s the later case, one can only assume that the sponsors didn’t understand the risk being taken when they signed up for the investment.

And this goes right back to the most important question of all here, which is what were the plan sponsors and fiduciaries doing when they were offering these investment options or making these investments themselves? This scenario speaks of poor investigation and over reliance on the investment provider, namely State Street, and suggests the plans themselves did not have proper processes, including independent administrators with the sophistication to analyze the investment choices and risks, in place for choosing investment options, prior to offering them to plan participants or investing the plans' funds directly. In this day and age, I think we are moving past the point of debating whether those types of processes are part of the fiduciary obligations of those running retirement plans.

And by the way, for the record, I am not buying the article’s spin that the loss was not that damaging to the pension plan discussed in the article, because it was only about $2.4 million. Against total plan assets of approximately $53 million, and with the taxpayers on the hook to fund the pensions because it is a municipal plan, that’s an important hit, both financially and to the public pocketbook.

Excessive Fee Litigation: A Real Problem or An Imaginary One?

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries
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Here's a piece passed along by the Workplace Prof, noting the rise in excessive fee litigation under ERISA. I have noted before that the combination of demographic and economic factors with the ruling in LaRue is going to create more of these types of actions over the years, not less, and thus I share the skepticism the Prof expresses over whether, as a defense lawyer quoted in the piece suggests, these cases don't pose a significant problem for plan administrators. Moreover, I don't necessarily buy the sentiment suggested by defense counsel quoted in the article, to the effect that these cases are about a battle of the experts over whether any particular plan's fees were too high relative to the market or not. I think of them more as due diligence and best practices cases, as really revolving around whether the administrator followed a proper process to pick providers and funds, and to make sure the fees involved remained appropriate as measured against appropriate benchmarks.

Pension Estimates: Not Worth The Computer They Are Printed On

Posted By Stephen D. Rosenberg In Fiduciaries , Pensions
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Here’s an interesting decision out of the First Circuit yesterday, concerning errors in providing estimates of pension amounts to participants and whether a participant can hold the sponsor to the erroneous estimate, rather than receive only the correct amount under the actual terms of the retirement plan in question. Short answer? A participant only gets what the plan, by its express terms, grants, and not the larger erroneously estimated amount. Although it is fair to say that the actual outcome of any such dispute will depend on the actual facts of a given circumstance and the particular theories under which a particular participant elects to proceed, this case reflects that enforcing the estimate, rather than simply receiving the lower actual amount due under the plan, is an uphill battle, at best. In this particular case, Livick v Gillette, the employee struck out both on attempts to obtain the higher amount by arguing that the erroneous estimate was an actionable breach of fiduciary duty, and on an estoppel theory. The court’s analysis of the estoppel theory is particularly noteworthy, as it provides great fodder for any sponsor or fiduciary defending against an estoppel claim related to an ERISA governed plan. If you are litigating a case in the First Circuit concerning an estoppel claim related to the benefits available under a particular ERISA governed plan, this case would be the place to start.

Does Employer Stock Even Belong In Retirement Plans?

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries , Pensions
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Should there even be employer securities in a 401(k) plan or other retirement vehicle? That’s the million dollar question (or more like the hundred million dollar question) that cases like those arising out of the Bear Stearns collapse raise. Moreover, it goes right to the underlying tension between ERISA and the securities laws that plays out in the concept of fiduciary duty: namely, the extent to which it is appropriate for a fiduciary to continue to allow employer stock holdings in a retirement vehicle when the company is simultaneously facing market pressure on its stock price and an obligation to comply with the securities laws in dealing with the marketplace as a whole. The legal and philosophical issues of this inquiry go on and on, spinning on like a fall into the rabbit hole; this is manifest in cases such as the Seventh Circuit’s ruling in Baxter, discussed here, in which these types of issues are merely raised, but not resolved. It’s a good topic for a law review article, but since blog posts traditionally don’t run to the hundreds of pages, I am not going to get very far into answering those issues here, but rather want only to raise the topic, which I think will be played out in a fundamental manner in the case law as the subprime mess lurches its way through the legal system. And on a practical level, what raised this thought this morning was this story here in the New York Times about pension funds moving out of equities, because, while there is a certain apples and oranges aspect to any comparison between that issue and employee holdings of employer stock in defined contribution plans (in that pension funds are moving in this direction because of future liabilities related to pension plan payouts and not necessarily for the same reasons that an employee might not want to be invested in his or her own employer’s equities), that fact does raise an interesting question. Simply put, if the professionals who run pension funds are moving out of the stock market for, in part, volatility reasons, should comparatively unsophisticated 401(k) investors be allowed to, even in some instances encouraged to, overload with one particular company’s equities?

Passing Along Some Reading on Excessive Fee Cases and Other Timely ERISA Topics

Posted By Stephen D. Rosenberg In 401(k) Plans , ERISA Seminars and other Resources , Equitable Relief , Fiduciaries , Preemption
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What would this blog be if it was done as a newsletter instead? Well, probably something like this new ERISA newsletter out of Proskauer Rose, with its detailed but readable length discussions of current events in the field, such as the Supreme Court’s recent decision in LaRue and the Supreme Court’s consideration of whether to hear a case that will allow it to return again to the problem of defining the available scope of equitable relief under ERISA. For me personally, I particularly liked the discussion of the latest trends at the trial level in the federal court system with regard to lawsuits filed over allegedly excessive fees charged on mutual fund investment options, as it takes an approach that I like to pursue whenever possible in my own posts here on this blog: it discusses the early decisions on the issue at the motions stage in the trial courts, and looks ahead to what this may mean for the industry as a whole and service providers. Its worth a read, and if you enjoy this blog, you will almost certainly enjoy this newsletter as well.

What Happens When ERISA and the Law of Insurance Coverage Collide?

Posted By Stephen D. Rosenberg In Coverage Litigation , Duty to Defend , Duty to Indemnify , Exclusions , Fiduciaries , Pensions , Retirement Benefits
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Wow, I guess this is really Seventh Circuit week here, with, I guess, a particular focus on the jurisprudence of Judge Easterbrook, whose opinion in Baxter I discussed in my last post. This time, I turn to his decision from Wednesday in Federal Insurance Co. v. Arthur Andersen, which strikes right at the intersection of the two subject areas in the title of this blog, insurance and ERISA. The Arthur Andersen opinion concerns the extent of coverage, if any, for Arthur Andersen’s massive settlement of lawsuits related to its retirement liabilities upon its well publicized, post-Enron collapse, under a policy covering breaches of fiduciary duty. The court found that there was no coverage, for a number of reasons, the most salient of which being that, first, the losses in question were the actual pension amounts, which the policy does not cover (it instead covers only other losses related to a pension plan, separate from the actual amount of the pension benefits in question), and second, that although the claims in question related to pension plans, they were not actually for breaches of fiduciary duty related to such plans, which is all that the policy actually responds to. There are some interesting lessons for plan sponsors and plan administrators in these findings: first, that it is important to remember that, in buying fiduciary liability coverage, this is not the same thing as insuring the benefits owed to pensioners themselves, and, second, that the exact scope of the coverage is narrow and limited by its exact terms, which may not extend coverage to the specific allegations of any particular lawsuit arising from the pension plan. What’s the take away? A close look by an expert is needed when selecting insurance coverage for pension plans and the people who run them, if for no other reason than to have an accurate understanding of the extent to which potential problems with the plans may actually be covered.

Beyond these lessons in the case for people on the ERISA side of this blog’s title, the decision provides a fascinating run through a number of complicated insurance coverage topics for those of you who are interested in the insurance coverage half of this blog’s title. The judge - or perhaps his clerk, I don’t know the practices in that particular court - writes fluidly on the law of estoppel, waiver, the duty to defend, and the respective rights of the insurer and the insured when it comes to control of the defense and settlement of a covered lawsuit.

What LaRue Wrought

Posted By Stephen D. Rosenberg In 401(k) Plans , ERISA Statutory Provisions , Fiduciaries , Retirement Benefits
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Suzanne Wynn has the story of the day when it comes to ERISA litigation, as she posts on the Seventh Circuit’s application of LaRue to exactly the type of case that, had the Supreme Court ruled otherwise, would have gone away without any potential liability on the part of the fiduciaries or, for that matter, recovery by the plan participant. The case, as Suzanne explains, concerns a single plan participant who charges plan fiduciaries with breaches of fiduciary duty related to the amount of company stock held in that particular participant’s account; the plaintiff’s theory holds that the fiduciaries breached their duties because they “allowed participants to invest in [company] stock despite knowing that the stock was overpriced and therefore was a ‘bad deal’.” The Seventh Circuit recognized that, after LaRue, a plan participant can move forward with such a claim, at least in terms of having standing to pursue relief that is not plan wide.

The Seventh Circuit’s decision touches on a number of themes that are not fully addressed in the opinion, but which really rest at the crossroads that the law of ERISA finds itself at today. The first has to do with the extent to which LaRue will or will not increase litigation. I have previously discussed that, in my view, the real impact of LaRue is that the types of cases, such as stock drop cases of the kind considered by the Seventh Circuit in this case, that in the past would only be brought if the scale was sufficient to attract the interest of the organized plaintiffs’ class action bar, will now be brought in many instances even if the scale is insufficient to give rise to class or plan wide litigation. Rather, as this case illustrates perfectly, these types of theories will be pressed now if even only one participant has enough loss to warrant the action, as LaRue expressly authorizes and as occurred in this case. This is where you will see the impact of LaRue with regard to expanding litigation, not necessarily in terms of a massive increase in numbers of suits, but rather in an incremental increase in the types and natures of suits brought against fiduciaries. And don’t kid yourself - as the baby boomer generation moves towards retirement, there are going to be a huge number of plan participants in 401(k) and ESOP plans and the like who have large enough accounts and holdings (for instance of company stock) for it to be worth their while to bring these types of suits if their accounts take a significant hit.

The second that I wanted to mention relates to something that is certainly not going to be news to any long time reader of this blog, and its certainly not an idea unique to me, namely, the fact that, in the aftermath of judicial and political responses to the growth - and some would say overuse - of class action securities litigation, the plaintiffs’ bar has begun using ERISA to prosecute what are in essence securities fraud claims of the kind that, in the past, would have been simply litigated under the securities laws. The plaintiffs’ bar has found that, given the evolution of the securities laws and of ERISA, ERISA may well be the better theory to prosecute in stock drop type cases. The swarm of litigation already being filed over the collapse of the Bear Stearns stock is a perfect example of the type of event that we have long been conditioned to expect to be litigated under the securities laws, but which is instead generating putative class actions under ERISA related to the company’s ESOP and other retirement vehicles. Among the many issues that this evolution in securities related litigation raises is how to integrate the securities laws and ERISA under these types of scenarios, to prevent ERISA from being distorted from its original purpose and transformed instead into simply some type of alternative securities law regime; Judge Easterbrook, writing for the Seventh Circuit, raises exactly these points, but doesn’t resolve them, noting instead that they will have to be developed in the future.

The case is Rogers v. Baxter International, and thanks to Suzanne for bringing it to my attention.

The Meaning of Justice Roberts' Concurrence in LaRue

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries
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There’s nothing really new in this piece for those who have already closely followed and studied the LaRue decision (how’s that for opening with a bang?), but this column on the decision in the April 2008 issue of Metropolitan Corporate Counsel magazine by two Proskauer attorneys is interesting. They focus on playing out the meaning of Justice Roberts’ concurrence concerning whether such claims need to be pursued as denial of benefits claims, rather than as breach of fiduciary duty claims, and just what that means practically if the lower courts take him up on that suggestion.

Back to the Well: Fiduciaries and Subprime Assets

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries , Pensions
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I guess this is the flip side of all the grief that is starting to come down on fiduciaries for excessive - or at least what seems to plaintiffs’ lawyers to be excessive in hindsight - exposure to the subprime mortgage mess in pension and 401(k) holdings: pension plan fiduciaries now adding such exposure to their funds in the hope of goosing returns by buying these beaten down assets at fire sale prices (kind of like they are playing at being Jamie Dimon). Here’s the story, and thanks to my colleague Eric Brodie for bringing this development to my attention.

Back From Trial, But the World Kept Spinning In the Interim

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries , Massachusetts Health Care Reform Act , Preemption
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My trial finally concluded late yesterday after two weeks, with the jury returning a verdict in favor of my client (pause here for self-congratulatory pat on the back). While I was able to get some posts up last week, during the first week of trial, events during trial this past week left me with no time to post. A lot went on during that week that would be of interest to readers of this blog, running from the almost certain ERISA litigation that will follow from the Bear Stearns collapse, to further Department of Labor attempts to mandate transparency, to the Commonwealth of Massachusetts’ continuing efforts to single handedly prove that state regulation of employer provided health insurance benefits should, in fact, be preempted. We’ll return to these themes, and other topics, next week, now that we have time to get the printing press rolling again here.

Want to Learn More About the Post-LaRue World?

Posted By Stephen D. Rosenberg In 401(k) Plans , ERISA Seminars and other Resources , ERISA Statutory Provisions , Fiduciaries
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I am trying to kick the LaRue habit, but couldn’t resist going back to the well one more time (how’s that for mixing my metaphors?). I know from readers of this blog and from talking to other lawyers that people are very interested in LaRue and the Supreme Court’s current interest in ERISA cases - in fact, one lawyer told me that right after LaRue was decided he was at a meeting on an entirely different topic but LaRue is all anyone wanted to talk about that day- so I wanted to pass along this very interesting looking teleconference next month on individual 401(k) suits post-LaRue. The faculty includes Tom Gies, who represented the plan and its sponsor in LaRue, and Karen L. Handorf, an attorney currently in private practice who previously worked for the Office of the Solicitor of Labor, background that may make her ideally suited to comment on one of the biggest mysteries of all raised by LaRue and the Supreme Court’s selection for its docket of two more ERISA cases, namely what’s with the Supreme Court’s sudden fascination with ERISA litigation.

More on LaRue: Lawyers USA Weighs In

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries
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Thought I would pass this along right now, while the article is still available to non-subscribers - I suspect if you read this post tomorrow, you will have to subscribe to get access to the article by then. Either way, here’s an interesting article available on Lawyers USA today on the LaRue decision, and on the broader topic of what impact it will have. I am quoted in it on the issue of whether it will spawn more litigation; to quote the article:

Some see the ruling as spawning multiple lawsuits by individual 401(k) account holders.

"It will open the door to a lot more litigation. I don't think it will be an avalanche, but plan sponsors are definitely looking at death by a thousand cuts," said Stephen Rosenberg, an attorney with The McCormack Firm in Boston, who blogs on ERISA issues.

This is pretty consistent with what I said in my post last Friday, in which I discussed my views about how much litigation will result from this case. It is hard, as I said then, to quantify, but it is clear that the case paves the way for sponsors to face a steady stream of smaller cases, whereas in the past they really - or at least predominately - only had to worry about whether they were in a position to be targeted for a large dollar value, class wide type suit.

Fiduciary Obligations - and Common Sense - Support Hiring Outside Expertise for 401(k) Plans

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries
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One of the common themes of many of my posts, as well as of many of the judicial opinions, concerning fiduciary obligations of companies sponsoring 401(k) plans is the need to bring in outside expertise to manage the plans, particularly for the purpose of insuring that investment selections are appropriate and priced right. As I have discussed both in numerous posts and in a range of articles in which I have been quoted, smaller and mid-sized companies generally lack the expertise to properly handle all of the aspects of 401(k) plans and can best discharge their fiduciary duties - and best protect themselves against litigation - by retaining outside experts to manage a plan. There is an entire industry that exists to service such companies and their plans. Here is a story out of New Hampshire that illustrates this point brilliantly; it concerns a small company that believed it could operate its own 401(k) plan without an outside vendor, and ended up, without any intention to defraud, being pursued by the Department of Labor for $33,000 in employee contributions that were never paid into the plan. By all accounts, the company was not engaged in anything underhanded; it just was wrong in thinking it could handle the logistics itself.

And not to beat the LaRue drum too much, but obviously the establishment in that case of the right of plan participants to sue fiduciaries for mistakes affecting their 401(k) accounts (whatever may be the exact parameters of that right, an issue up for some debate in light of some of the vagaries of the three opinions from the Supreme Court), just drives home the importance of making sure that a 401(k) plan is run absolutely as well as possible.

A Couple of Other Perspectives on LaRue

Posted By Stephen D. Rosenberg In 401(k) Plans , Exclusions , Fiduciaries
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There’s a lot out there on the Supreme Court’s ruling in LaRue, and I thought I would pass along today a couple of articles and blog posts that approach the issues raised by the case from a slightly different perspective than simply the technical legal issues raised by the case. Employee benefits lawyer George Chimento discusses the LaRue decision in this client advisory here, with a focus on a particular question, namely, whether in light of the problems posed by LaRue type cases, it makes any sense to sponsor a 401(K) plan that allows participants to pick and choose among investments. He makes a compelling argument that it just may not make any sense to do this, given the liability risks, amply illustrated by the LaRue case, and the investment skills of the average participant. He sums that issue up in this paragraph from his article:

With all this additional liability, is it wise to sponsor self-directed plans, with the extra expenses associated with open-end mutual funds and daily investment switching? Are participants really better off self-managing their retirement assets, doing something they were not educated to do? Perhaps it's safer, and better for all parties, just to have an "old fashioned" managed fund, without participant direction, and to employ properly certified investment managers who can be delegated fiduciary liability under ERISA. A dividend of LaRue is that it may cause employers to step back and reconsider the current, expensive, and dangerous fad of self-direction.

And Kevin LaCroix, a lawyer/expert insurance intermediary, tackles LaRue in this interesting blog post on his well-regarded D&O Diary blog, in which he focuses on the issues for fiduciary liability insurance raised by the case. One interesting point he makes is that the availability of coverage may be affected by exactly that split between the Justice Roberts’ concurrence and the other two opinions, related to whether or not claims of this nature should actually be prosecuted only as denial of benefits claims, or instead as breach of fiduciary duty claims. Anyone interested in the insurance implications of LaRue should find it a useful and informative post.

Interpreting LaRue

Posted By Stephen D. Rosenberg In 401(k) Plans , ERISA Statutory Provisions , Fiduciaries
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Some follow up thoughts on the Supreme Court’s opinion in LaRue, after having some time to digest it. First, the court’s three opinions make for an interesting assortment of analyses of the issue, but what is most important on the front lines, down at the trial level where these issues play out in court, is the unanimous agreement that an individual 401(k) participant can sue for losses to just his or her account. This resolves a key dispute that, I know from my own practice, has become a key issue in the question of when and how participants can seek legal redress with regard to their 401(k) accounts.

Second, the three opinions set forth almost radically different answers to the question of how and why such an individual participant can sue for losses just to his or her account in a 401(k) plan. The majority opinion posits that this is the appropriate reading of ERISA in the context of defined contribution plans, which may be different from what the rule should be with regard to defined benefit plans. The second opinion, by Justice Roberts, poses the extremely thorny argument that, while a plan participant can sue for such losses, he or she should do so under the denial of benefits portion of ERISA, rather than under the breach of fiduciary duty portion of ERISA. The third opinion, by Justice Thomas, finds that the plain language of the statute warrants individual participants being allowed to bring such claims, and holds no truck with the idea, relied on by the majority, that there is some underlying principle distinct to defined contribution plans that either justifies - or is necessary to justify - this conclusion.

The competing opinions present some interesting issues. First off, Justice Roberts’ suggestion that the law governing denied benefits, rather than the law of breach of fiduciary duty, should apply to the circumstances of the LaRue case appears unworkable in the context of that particular type of claim, for a variety of practical and legal reasons; there is a certain extent to which it seems to me that even suggesting that is to work mischief, particularly for the judges and litigants who, going forward, are going to have to work out the myriad issues that claims like that brought by the participant in LaRue raise, none of which were preemptively resolved by the Supreme Court. Second, there is something telling in the contrast between Justice Thomas’ approach and that of the majority, something that may well be a clash of philosophy, not just with regard to statutory construction for purposes of the instant case, but also perhaps as well with regard to the road that lays ahead for the law of ERISA. Justice Thomas is correct in his opinion that the issue can be resolved, in the participant’s favor, simply off of the plain language of the statute, without relying on any special considerations raised by the fact that the case involves a defined contribution account rather than a defined benefit plan, which is the issue animating the majority’s opinion. Does the majority’s heavy emphasis on the fact that LaRue concerned a defined contribution plan hint at a belief among the majority that, in fact, ERISA needs to be treated as an organic, evolving body of law that needs to shift from its past precedents to account for the rise of defined contribution plans? And if so, is the emphasis on this point in the majority’s opinion a subtle suggestion to lower courts to approach new issues brought before them concerning defined contribution plans - or even old issues never before resolved under defined contribution plans - with an eye to how ERISA should develop to fit those types of plans? At a minimum, it is hard not to see lawyers for participants arguing exactly that to district courts and circuit courts of appeal in the aftermath of the ruling in LaRue.

The Supreme Court Decides LaRue, In Probably Predictable Fashion

Posted By Stephen D. Rosenberg In 401(k) Plans , ERISA Statutory Provisions , Fiduciaries
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As a practicing litigator, I often can’t delve too deeply into a particular issue right when it arises, and instead have to return to it that night to analyze it for further discussion the next day. With a trial set to start in one of my cases and a court appearance this afternoon, this is one of those instances, but I did want to pass along the Supreme Court’s opinion in LaRue, just issued today. I will give it a more in-depth read tonight and may post more on it tomorrow, but in the interim, here is the opinion itself, along with two initial, superficial thoughts. First, as I - and others - expected, the opinion goes in favor of the plan participant, and expands the right of individual plan participants to sue for breach of fiduciary duties. Second, on first glance, the opinion seems animated by the need to account for the particular risks of defined contribution plans such as 401(k)s, and to recognize the need for the law of ERISA to develop in a manner that accounts for the transition to those types of benefit plans. In a weird bit of precognition, that’s something I just talked about in my post earlier this morning, on the Supreme Court accepting cert on still another ERISA case.

I Want My (Pension Tension Blues) MTV

Posted By Stephen D. Rosenberg In Fiduciaries , Pensions
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For better or worse, I’m old enough to remember where I was when MTV debuted, back when it actually played music videos. I am sure there is something to be said about the fact that a quarter century later, I now watch music videos about fiduciary risks concerning pensions, but I am not sure exactly what. You should watch it too, right here.

The Benefits of Relying On Investment Managers

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries
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We all know that in reality, most companies that sponsor retirement plans, including 401(k)s, for their employees bring in outside advisors to manage the plan. There are at least two primary reasons for this, the first being that most companies don’t have the expertise to select investments and otherwise run plans themselves, and hope to get better retirement plan performance by relying on outside expertise. The second is the hope that fiduciary exposures will be reduced by bringing in, and relying upon, an outside advisor who has superior expertise with regard to retirement investing. These two factors ideally work in conjunction to improve retirement accounts for plan participants; the fear of legal liability inspires a desire to bring in experts, who in turn can do a better job in selecting investments than the company could on its own. In this way, we see the operation of a perfectly selected legal rule, and we see the important role that fiduciary liability rules play in the ERISA scheme; the exposure does not simply exist to support litigation after the fact, but also as a motivating force that improves plan performance on a day in, day out basis, by driving plan sponsors towards reliance on expertise that will both protect them and improve performance. It is possible, to some extent, to view almost all breach of fiduciary duty litigation as examples of failures in this dynamic. For instance, what are claims that companies breached their fiduciary obligations by excessively including company stock in a plan but instances in which a company, insufficiently afraid of its potential liability for breach of fiduciary duties, failed to either diversify investments on its own or bring in sufficient outside expertise to allow it to do so?

A good example of this dynamic at work can be seen in Judge Young’s just released ruling out of the United States District Court for the District of Massachusetts in Bunch v. W.R. Grace, in which the court found that the company was insulated from breach of fiduciary duty claims with regard to the retention and sale of company stock in one of its retirement funds by the company’s retention of and reliance on an outside investment manager to make those decisions. The court found that the investment manager had properly acquitted itself with regard to those issues, and therefore the company could not be liable on claims that it had breached its fiduciary duties by selecting and relying upon that advisor. The court explained that If the investment manager “did not commit a breach, then [the company] did not fail in the discharge of its duty to select and monitor” the manager.

But you can take that analysis one step further. The interesting aspect in this regard of the ruling in Bunch is that the company was absolved of liability by its reliance on an outside expert because the outside expert did not itself breach any fiduciary obligations by the actions it took and decisions it made in that role. But what if the advisor had violated fiduciary obligations in its handling of its delegated duties? What then of the company’s attempt to protect itself by retaining and relying upon an outside expert? The answer in general is that the company can probably still successfully defend itself against claims for breach of fiduciary duty, so long as it can show that its own steps in selecting and monitoring the outside advisor were prudent, even if the chosen advisor turned out, in hindsight, to be the wrong choice of advisor or investment manager. And in that lies the two real teachings of Bunch. First, that companies can protect themselves from fiduciary liability by selecting and delegating to an outside expert and, second, companies have to pursue that old cliche - best practices - in making that delegation if they really want to avail themselves of the protection that bringing in outside expertise can provide. By abiding by the second teaching, they should be protected even if the advisor they selected thereafter, unlike the advisors relied upon by W.R. Grace in the Bunch case, falls down on the job.

LaRue is Decided . . . Well, Sort of

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries
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In an opinion it issued on Monday, the United States Court of Appeals for the Sixth Circuit confronted essentially the exact same facts and issues as are at play in the LaRue case currently pending before the Supreme Court, and effectively entered its own prediction as to how the Supreme Court will rule in LaRue. Tackling the same arguments that were presented to the Supreme Court in LaRue, the Sixth Circuit concluded that individual participants could recover on their own behalf for losses solely to their accounts in the plan, and that breach of fiduciary duty claims under ERISA are not limited to actions brought on behalf of the plan as a whole or for recovery benefiting the entire class of plan participants as a whole. This, of course, is the primary issue presented to the Supreme Court by the LaRue case.

Interestingly, the Sixth Circuit even borrowed and relied upon Justice Breyer’s diamond hypothetical that he posed to the plan's counsel in LaRue in reaching its ruling in favor of the participants, a hypothetical that clearly caught many lawyers’ fancy after it was offered up by the justice during oral argument.

The decision is Tullis v. UMB Bank, N.A.

The Governance of Retirement Plans in the Aftermath of the Subprime Meltdown

Posted By Stephen D. Rosenberg In Fiduciaries , Pensions , People are Talking . . .
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Fellow blogger Susan Mangiero and I are quoted extensively in a very interesting article, available here, in the January issue of the Institutional Real Estate Letter. The article, titled Investing in Good Governance, focuses on one of - if not the only - potential silver linings in the whole subprime mortgage mess, namely the possibility that it will help to focus pension plan fiduciaries on the fiduciary obligations, particularly as related to protecting plan assets from ill advised and ill informed investments, that they owe to the plan itself and to plan participants.

Researching Pension Related Litigation

Posted By Stephen D. Rosenberg In Fiduciaries , Pensions
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Dying is easy, comedy is hard? No, ERISA is hard. I tell people all the time that there is almost no such thing as a simple answer to an ERISA related question, or at least no such thing as a straightforward answer. There are entire chapters in ERISA treatises dedicated to the seemingly, but actually not, question of the proper manner in which to request plan documents so as to invoke the statutory obligations, upon financial penalty, imposed on administrators to produce them. Or take the question of equitable relief in a cause of action brought under ERISA; in almost every other area of the law, we all know what equitable relief is, but in ERISA, we have to engage in a historical inquiry into the development of the law of remedies to know if a particular claim is equitable or not.

Now when you add in on top the fact that ERISA and its imposition of fiduciary obligations is beginning to supplant securities litigation theories as a method for suing corporations and investment banks for subprime, stock drop and other investment losses, as discussed here for instance, you can see just how complicated the topic becomes, as well as how potentially dangerous for fiduciaries and plan sponsors are the issues raised by ERISA. And of course, that’s what makes practicing in this area fun for those of us who handle these types of cases. But it also makes thorough and timely analysis of litigation risks and exposures crucially important, and what looks to be a promising new internet based research tool to help with this is now available. Pension Litigation Data is now up and running on line, and is meant to be a tool that will allow up to the minute research into the numerous pension related lawsuits pending in United States courts. The subscriber based site “debuts with over 1,500 retirement plan legal actions, each classified by nearly 100 fields, including court circuit, type of allegation, plaintiff, defendant and date [and provides a] continuously updated and searchable database” on the subject.  A joint venture of a couple of companies, including fellow blogger Susan Mangiero of Pension Governance LLC, I think it looks promising, and you may want to take a look.

SmartMoney on the Practicalities of Complying With ERISA

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries , People are Talking . . .
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This is a law oriented blog, obviously, and one of the things that is always worth remembering is that the complicated legal issues played out in the cases discussed here have real world implications for plan participants and for businesses trying to provide benefits to their employees. A nice reminder of that is here, in this article on SmartMoney.com, in which I and others are quoted on the question of how business owners should operate 401(k) plans in light of the potential for fiduciary liability being imposed under ERISA.

On Regulation of Fiduciaries and Pension Plan Vendors

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries , Pensions , Retirement Benefits
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I was interviewed by a reporter recently concerning the subprime mess and its implications for pension plan fiduciaries, and the issue came up as to whether further regulation was the answer, as she had heard from a number of others. To me, the ongoing problem we are seeing with fiduciary breaches - or at least allegations of them - arising from plan investments involve one type of flawed plan investment being replaced by another; first it was too much company stock in the plan, then when that problem worked its way out of the system, it was excessive fees being paid for investment options, with that quickly followed by the latest flaw du jour in investment selection, namely excessive exposure to subprime risk. Regulation can’t predict and thereby prevent whatever may turn out to be the next problematic interaction between the investment community and the obligations of pension plan fiduciaries to act prudently in selecting investments. Rather, regulation will inevitably target the last problem that popped up, not the next one that is coming down the pike. At best, one could improve things at the margins through further regulation by targeting not the fiduciaries themselves, but the vendors who provide investment products to them, and even then only by imposing more transparency, which may at least give pension fiduciaries a fighting chance at understanding the investments they are selecting and the risks or flaws inherent in them.

This news yesterday out of the Department of Labor, that it is proposing a regulation requiring further disclosure to plans by vendors of their compensation, fits this to a tee. The proposed regulation will require that “all compensation, direct and indirect, to be received by the service provider be disclosed in writing.” Well, excessive fees charged by mutual fund companies and others for the investments held by pension plans and 401(k) plans is last year’s litigation problem for fiduciaries, and the world has already moved on to the next problem. Indeed, I would speculate that many fiduciaries have already accepted the need to engage in due diligence as to all aspects of their vendors’ compensation arrangements, both hidden and not, simply out of awareness of the past lawsuits that focused on the issue. It’s a perfect example that regulation can’t predict and protect fiduciaries and the plans they serve from the next particular investment problem, but can instead only identify and prevent a reoccurrence of a past investment problem for retirement plans. At the same time, though, the regulation is focused on the transparency problem, and on obliging vendors to provide information openly to fiduciaries and plans; that’s the best avenue for using regulation to aid fiduciaries pro-actively, by adding to the information they have access to in evaluating vendors and proposed investment choices.

Talkin' With Tom Gies, Counsel for the Respondents in LaRue

Posted By Stephen D. Rosenberg In 401(k) Plans , Equitable Relief , Fiduciaries , Interviews
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I promised awhile back that I would run more interviews at some point on this blog, and we return today to our - granted, somewhat sporadic - series of interviews with movers and shakers in the worlds of ERISA and insurance. What provoked me to get back into the interviewing business, which I noted before are among the most difficult of posts to do well? The chance to provide more insight on the oral argument before the Supreme Court in LaRue v. DeWolff, Boberg, which was argued right after the Thanksgiving weekend. And with that lead in, here’s the blog’s interview with Tom Gies, a partner at Crowell & Moring in Washington, D.C., who was lead counsel for the respondents. Tom was gracious enough to provide some real thought provoking commentary on both the issues raised by the case and some aspects of the argument before the court:

Blog: How did you end up representing the respondents?

Tom Gies: We have represented the employer, and the plan, in a variety of employment, benefits, corporate and commercial litigation matters for years. They are longstanding valued clients of our firm. When this case was initially filed in the district court in South Carolina, we were retained to defend against the claim.

Blog: Many ERISA cases, particularly in the area of pensions and 401(k)s, never reach the merits, and instead are resolved by procedural motions addressed to whether there is even a cause of action or remedy available to the plaintiff. That’s what happened here. Would the law of ERISA be better developed, or the parties themselves better served, if courts were resolving questions such as those presented by LaRue after development of the facts of a particular case? On the merits, as it were, rather than on procedural issues?

Tom Gies: An interesting question. The case was pled and litigated in the district court solely as a Section 502(a)(3) claim. We moved for judgment on the pleadings because it was pretty obvious plaintiff sought compensatory damages that are not available under Section 502(a)(3), following the Supreme Court's "rather emphatic guidance" in Mertens, Great-West and Sereboff. Every court that has looked at this question so far agrees with us on this point. And, not to get too much into the prediction game, I think it is unlikely that the Supreme Court will use this case to reverse field on the question of what's appropriate equitable relief under Section 502(a)(3). Had plaintiff pled the 502(a)(2) claim in the district court, the litigation may well have proceeded differently. For instance, there may have been a more fully developed record after discovery, so that the case could be resolved on a motion for summary judgment. The Fourth Circuit was correct in observing that the 502(a)(2) claim was waived, having not been litigated in the district court. As with other types of litigation, the parties to ERISA actions are better served when the basic rules of engagement are followed and parties are not permitted to raise new issues for the first time on appeal. In our judgment, a more complete record in this case would have made it even easier for a reviewing court to understand that this is not a good vehicle for expanding the scope of Section 502(a)(2). A court looking at this fact pattern in response to a motion for summary judgment would readily conclude that this case does not present a triable claim for “losses to the plan” resulting from a fiduciary breach. More generally, I don’t think it’s wise to have some sort of special, more lenient, pleading rules in ERISA cases. The Supreme Court’s recent decision in Twombly recognizes the negative consequences, both to parties and the civil justice system, of the substantial costs imposed on defendants in having to go through discovery in complex litigation involving putative class claims. Those litigation costs are obvious in the 401k plan “stock drop” cases. The excessive fee claims present the same kinds of costs for employers and plan sponsors. The Court’s decision in Twombly wisely recognizes that bare allegations of a statutory violation, without more, should not subject a defendant to the tremendous cost of full-bore class action litigation. It shouldn’t make any difference whether such claims are brought by antitrust plaintiffs, Title VII claimants, or by lawyers representing ERISA participants.

Blog: Any particularly surprising questions or lines of inquiry at the oral argument directed at either you or LaRue’s counsel? What’s particularly interesting or surprising about it?

Tom Gies: Although the questioning of Mr. Stris regarding Section 502(a)(1)(B) was not a surprise (we mentioned it in our brief, and one of our amici devoted considerable time to the issue), I was intrigued with the implications in some of the questions asked by three of the Justices about the potential interplay between 502(a)(1)(B) and 502(a)(2). These questions suggest the Court will provide a careful analysis of the inter-relations of the various subdivisions of Section 502. The Court’s subsequent denial of certiorari in Eichorn v. AT&T may be another indication of the Court’s approach to this corner of ERISA law.

Blog: Any answers you’d like to have back? Any questions you’d like another shot at?

Tom Gies: I would have liked the opportunity to engage Justice Breyer more fully, perhaps in response to his second diamond theft hypothetical, on his question of "why" 502(a)(2) should not be read to extend to a situation like this. A decision to expand the remedies available under Section 502 has significant consequences because it is contrary to ERISA’s goal of encouraging plan formation. Permitting such lawsuits would inevitably require someone to make judgments as to a variety of issues, including: should there be a limit on damages, whether there should be jury trials for such claims, whether there should be an obligation on the part of the plaintiff to do some due diligence before bringing a damages action years after the alleged mistake, whether employers and plan sponsors can require arbitration of these kinds of claims, what should be done about the consequences of such litigation to the fiduciary insurance industry, and how would such claims be fit into the current rules for certification of class actions under Rule 23. There are surely others. These kinds of policy judgments seem best left to Congress.

Blog: Play it out for us. What’s the negatives for the industry if the Court reverses the Fourth Circuit and allows these types of claims to go forward?

Tom Gies: Imagine you have a new employee who joins your law firm, which, we assume, sponsors a 401k plan. Four years after you hire her, you get a lawsuit seeking compensatory damages for a violation of ERISA’s fiduciary duty rules. Her lawyer claims she was not given enrollment forms when she was hired, because of a mistake made by your HR director, and, as a result, employee contributions into the 401k plan were not made. The complaint goes on to assert that, had the contributions been made, she would have invested in Google the day after its IPO, and that the plan fiduciaries are personally liable for more than $500,000 in lost profits. When you look into it, your HR manager has a vague recollection that the employee took the paperwork and said she’d “think about” whether she wanted to join the plan. Should that case go to trial? Before a jury? Justice Scalia’s comment during oral argument in LaRue seemed to appreciate our point – there would be no end to the type of damages claims that plan participants could devise if these types of claims are permitted to go forward.

Imagine another situation. One of your employees who participates in your 401k plan had 75% of her account balance invested in mutual funds heavily concentrated in real estate. Now that those investments have lost considerable value, she seeks counsel. You get a complaint for compensatory damages that includes the allegation that someone in HR told the employee to “stay with” the real estate investments because that sector of the market would be sure to turn around soon.

The considerable costs of defending against such lawsuits will be born ultimately by employer plan sponsors. Fiduciary insurance will become even more expensive. Permitting these kinds of claims would undercut one of the fundamental assumptions made by employers in deciding to offer DC plans, rather than DB plans – the ability to shift investment risk to employees. All in all, a bad idea if you believe, as we do, that it’s critical not to take steps that would discourage employers, particularly small employers, from continuing to offer DC plan.

Blog: Paul Secunda, at the Workplace Prof blog, and I have been going around and around for a bit about whether ERISA is properly understood as having been intentionally enacted by Congress with only limited rights of recovery and remedy for plan participants. Clearly, that idea underlies DeWolff’s arguments to a substantial degree and, in fact, the lower courts’ rejection of LaRue’s claims can be understood as a recognition of this principle and of the fact that, as a result, LaRue simply has no recourse at this point. What’s your view on this? Are those of us who treat ERISA as specifically and intentionally limited in this way right about that?

Tom Gies: I start with Pilot Life and Mertens where the Court is clear in stating that ERISA represents a series of political compromises, not all of which were in favor of plan participants. ERISA is thus fundamentally different from other employee protection statutes. Encouraging plan formation, through the tax laws and otherwise, seems to me to be a cornerstone of the statute. And, of course, it’s not accurate to say that people like Mr. LaRue have “no recourse” in a situation like this. From what we know from the record, this is a case that could have been avoided by a telephone call. If you want to sell 100 shares of stock, you probably call your broker and place the trade. If you don’t get a confirmation order pretty quickly, you’ll call back, and if you don’t get a satisfactory answer, you’ll call her boss. If the boss won’t help you, you’ll escalate the situation until you get your trade executed. People like Mr. LaRue who want to trade securities in their 401k plan accounts have a variety of remedies available to them; they just don’t have a cause of action for compensatory damages based on a lost profits theory.

Blog: I shouldn’t put you on the spot, but I will - want to hazard a guess as to the outcome of the LaRue case?

Tom Gies: The Fourth Circuit will be affirmed 5-4, with the majority concluding that it is up to Congress to decide whether to extend the remedies currently set forth in Section 502.

Protecting Corporate Officers from Fiduciary Exposure

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries , Pensions
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Here’s an interesting article on one particular aspect of ERISA breach of fiduciary duty cases, namely the targeting as defendants of executive officers of the company sponsoring a pension or 401(k) plan; the gist of the article is that there are tactical and psychological benefits that accrue to counsel representing plan participants when they name officers of a company as defendants in such actions and allege that they are plan fiduciaries. Discretionary authority of any nature, of course, can render someone a fiduciary under a company’s pension or 401(k) plan, and those individuals can thereafter be rightfully targeted as defendants in a breach of fiduciary duty action related to that plan. As the article points out, allowing senior officers or directors of the company to engage in such activities can leave them open to suit, a bad idea because of the distraction and injury to company reputation of having senior management named as defendants in any major piece of litigation. The article’s suggestion to solve this problem? The old ounce of prevention is worth a pound of cure approach. The authors recommend that, well in advance of any litigation and even with none hovering off, threateningly, on the horizon, companies return to the plan documents and make sure they are structured to keep senior management out of the operation and decision making of the company’s pension plans. In essence, delegate that job downward in the company, as far away from senior management as day to day operational concerns - as opposed to concerns of preventive lawyering - allow. In a company retirement plan structured in that manner, the ability to credibly assert that any member of senior management exercised discretionary authority over the company’s retirement plan - and to therefore charge them as fiduciaries - is very limited and possibly non-existent.

More on that Grand Irony Theory

Posted By Stephen D. Rosenberg In Benefit Litigation , ERISA Statutory Provisions , Equitable Relief , Fiduciaries , Standard of Review
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Does the fact pattern below allow for a remedy under ERISA, particularly as the Sereboff/equitable relief line of cases has been interpreted in the First Circuit to date? 

The plaintiff employee says that she purchased a life insurance policy on her husband through her employer's group coverage. When her husband was dying, she resigned her employment to care for him. She asked her employer for the proper forms to convert the group life insurance coverage to individual coverage, as she was entitled to do. Her employer refused or failed to provide the forms despite several in-person and telephone requests. In the meantime, the time for conversion (31 days) expired, her husband died, and now the life insurance company has denied her any benefits.

The United States District Court for the District of Maine just found in the case of Mitchell v. Emeritus Management that the fact pattern does not support a cause of action under any of ERISA’s remedial rights - for breach of fiduciary duty, for denied benefits and for equitable relief - available to a plan participant, a situation the court found “very troubling.” The court found that: (1) the participant could not recover the insurance benefits by means of an action for equitable relief because it was truly a claim for payment of the benefits at issue, rather than for equitable relief; and (2) the participant could not recover the proceeds on a claim seeking benefits because, under the facts at issue, there was no right to life insurance proceeds under the actual plan terms since there was no timely conversion, and therefore the administrator did not act arbitrarily and capriciously in denying the claim.

I guess two things jump out at me. One, the court rightly acknowledged that this result flows from the fact that ERISA simply leaves some harms incapable of remediation, something that is understood to have simply been part of the balancing act engaged in by Congress in enacting the statute, in which a decision was made to grant only limited rights of recovery in exchange for enacting a statute that would encourage the creation of employee benefits. Second, however, and at the same time, I think this is more what the Workplace Prof had in mind last month when he complained about what he considers the “grand irony” of ERISA, that a statute intended to protect employees can end up depriving them of a remedy, than was the case of the Wal-Mart equitable lien, that I discussed here, in which the Prof proffered the “grand irony” thesis, one which I took issue with in the context of that particular case.

Roundup at the LaRue Corral

Posted By Stephen D. Rosenberg In 401(k) Plans , ERISA Statutory Provisions , Equitable Relief , Fiduciaries , Retirement Benefits
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More on LaRue in the wake of Monday’s oral argument, and the inevitable commentary from all sides - including this one - on Tuesday:

• My last two posts on the LaRue case, here on the briefing and here on the oral argument, assumed a certain prior level of understanding on the part of the reader as to the issues and statutory provisions involved in the case. Workplace Prof has a more soup to nuts review of those, in the wake of the argument, here, which is also cross-posted here.

Susan Mangiero was taken by the discussion in the oral argument of what powers may or may not have been identified in the summary plan description appended to LaRue’s complaint. I took this discussion by the Justices to be part of an inquiry into what are the constraining parameters of a claim such as the one brought by LaRue. As I have discussed before, I think the Court will allow this type of claim to be actionable, primarily because the law of ERISA is going to have to evolve to fit the brave new retirement world in which defined contribution plans, rather than defined benefit plans, rule, and establishing a right of remedy for the type of error alleged by LaRue is a necessary part of that evolution. However, I don’t expect, both for reasons related to the historically limited remedial reach of ERISA and the philosophy of various justices, that theory of liability and right of recovery to be unconstrained or left as simple as error by fiduciary plus loss to one account =s liability. Rather, although the Court may leave the parameters of the theory of liability to future cases for development, I expect the Court to at least indicate in dicta certain restraints and constraints on such claims. In this way, I think the eventual opinion will essentially walk the line between the concern of the respondent and its supporting amici that allowing claims of this nature will excessively increase the cost of providing plans to employees and the concern voiced by LaRue’s counsel that employees must be allowed a remedy for this kind of error.

• And here’s the New York Times’ highly readable account of the oral argument, by the excellent Linda Greenhouse.

• Finally for today, on a lighter and less substantive note, here’s the WSJ Law Blog’s post on the case, with a nice little profile of Tom Gies, who represented the respondent.

Thoughts on the Oral Argument in LaRue v. DeWolf, Boberg

Posted By Stephen D. Rosenberg In 401(k) Plans , ERISA Statutory Provisions , Equitable Relief , Fiduciaries , Retirement Benefits
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Just read the transcript of Monday’s oral argument in LaRue, which you too can read right here. Interesting argument, and interesting lines of questions from the court, although I am skeptical as to how much guidance as to the court’s thinking one can draw from the Justice’s questions themselves. In many ways, the lines of inquiry seemed to parallel my earlier post here on the arguments made by both sides. I had mentioned in my earlier post that the respondent focused heavily in its briefing on two points, the first being that prior jurisprudence of the Court concerning ERISA cases suggest that the narrow framework of ERISA remedies should not extend to encompass this type of claim, and the second that LaRue’s case itself was pled with holes that did not suggest it as a good vehicle for authorizing these types of claims. With regard to the first line of argument, questioning right off the bat of the respondent’s counsel targeted the fact that the prior jurisprudence relied upon by the respondent did not concern defined contribution or other retirement benefits and was based on a starkly different fact pattern; I mentioned in my earlier post on the parties’ briefing that I thought the earlier jurisprudence was too different in nature to provide much support for either side in the circumstances presented in the LaRue case, and after reading the argument, I think that remains the case. With regard to the second issue, LaRue’s counsel was peppered with questions concerning possible holes in the way he sought to recover for the alleged mistakes at issue, questioning that I thought was consistent with my earlier view that while the Court may well allow the type of claim at issue here to be actionable, the Court may well find that LaRue himself hasn’t placed himself in a position that he qualifies to go forward with such a claim. Perhaps the most interesting nugget to me in the transcript is that, with regard to the question of whether such a claim should be allowed at all - i.e., found to be authorized by the statute - the questioning seemed to consistently focus on one simple issue, namely that the only intelligible and consistently intellectually defensible position is that the plain language of the applicable statutory section would allow a loss to only one or a few plan participants’ accounts to be actionable, and would not require, as the respondent asserts, a loss to most or all of the plan’s participants before a claim for breach of fiduciary duty could exist.

Interestingly as well, the issue of whether a claim could proceed in the LaRue case as an equitable claim for relief under the Sereboff line of cases was discussed in only the most cursory terms by all involved, including the Justices. For various reasons, not the least of which is that the Court’s prior treatment of this issue has painted the Court into a bit of a corner from which it cannot back out without either repudiating prior holdings or engaging in intellectual gymnastics, I don’t see the Court advancing the ball on this issue in its opinion in this case.

LaRue v DeWolff, Broberg and the Concept of Administration Risk in ERISA Plans

Posted By Stephen D. Rosenberg In 401(k) Plans , ERISA Statutory Provisions , Fiduciaries , Retirement Benefits
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Oral argument at the Supreme Court is scheduled for Monday in LaRue v DeWolff, Broberg & Associates, which presents the technical question of whether a loss to only one participant’s 401(k) plan is actionable as a breach of fiduciary duty causing a loss to the plan, but which on a broader level concerns the question of who should bear the administration risk (defined as the problems of mistakes or malfeasance in the operation of a benefit plan) inherent in the operation of a 401(k) plan. Is it the participant or instead the plan fiduciaries who should bear that risk? To LaRue, who focuses his arguments around this idea, mistakes attributable to the administrators that harm the account balances of a particular plan participant represent a risk that should be borne by the erring administrator, and should therefore be actionable under ERISA even if the only losses in the entire plan from the mistake were suffered by one particular plan participant. The respondents reply, quite correctly, that ERISA provides limited remedies and some losses are simply - and quite intentionally under the terms of the statute - not actionable; to the respondents, LaRue’s loss, which stemmed from the administrator not following his specific investment instructions related to his specific account, is exactly such a non-remediable event under ERISA.

While the respondents are right that ERISA, presumably intentionally and certainly consistently with the general understanding of the statute and its history, provides only limited rights of recourse and leaves some losses to be borne by the affected plan participant, the statutory language itself at issue in the case - concerning whether an individual’s loss of the type described by LaRue qualifies as an actionable loss to the plan when only the individual was harmed - does not specifically leave in or leave out the circumstances of LaRue’s particular loss from the category of losses that are actionable under ERISA. And that is really where the Supreme Court’s involvement here comes into play, on the question of whether the type of administration risk described by LaRue belongs within or without the statute’s remedies; how the Court interprets the specific statutory language at issue will decide that question.

Personally, I’m of the view that the Court will find that the statutory language allows for the type of claim that LaRue is presenting. The language in question is capable, without any stretching of the language, of including the kind of claim at issue, and past jurisprudence doesn’t bar - or even present a significant impediment - to such an interpretation of the particular statutory language at issue. Moreover, and interestingly given the respondents’ - quite appropriate - tactical reliance on the general theme underlying past Court opinions on ERISA cases that suggest a claim such as LaRue’s is not actionable, the body of law that bears on this issue really was not created in response to one of the primary economic developments in American life over the last handful of years, namely the transition over to a regime of individual responsibility for retirement by means of defined contribution plans such as 401(k) plans and the accompanying transfer to individuals of the risks of retirement investing, and the corresponding disappearance of a defined benefit regime in which all such risks were borne not by individuals, but instead by their employers. Questions like the one presented by the petitioner in LaRue haven’t really been addressed at the high court level in the context of this new economic reality, and I am not convinced of the utility of past ERISA decisions concerning other contexts in resolving the statute’s application in the defined contribution context. I suspect that LaRue will present an early example of the Court accepting that the statutory language in ERISA that remains open to differing interpretations should be understood as transferring at least some of the administration risk inherent in the world of 401(k) plans from the individual saver and onto the party in the best position to avoid the risk, namely the administrator.

At the same time, I am not convinced that this is going to do much good for LaRue himself. The respondents take the tactical approach in their briefing of focusing on the particular flaws in LaRue’s presentation of himself as the poster boy for plan participants confronted by erring administrators, in an attempt to show that the particular claim he presented to the courts below does not justify interpreting the statutory language in a manner that would allow his claim to proceed. It’s a pretty good argument, and I wouldn’t be surprised to see a final opinion that opens up the type of claim he is arguing for, but puts him outside of its scope.

ERISA, Subprime Lending and Mortgage Meltdown

Posted By Stephen D. Rosenberg In Fiduciaries
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One of the great things about writing this blog is that the technology of blogging - like links to other blogs and so-called trackbacks, showing who else on the internet is quoting a post - brings writers, topics and other bloggers onto my radar screen who I would otherwise miss out on. That cumbersome, semi-tech savvy sentence is an introduction to my real point, which is that my blog has introduced me over the past couple of weeks to some interesting blogs that I wanted to pass along, and to a particular website involving a unique and interesting insurance product. Barring being diverted by breaking news, I am going to try to discuss a few of those over the next handful of posts.

The one I wanted to mention today is the terrific (and wonderfully named) Mortgage Meltdown blog out of Wisconsin, by a handful of lawyers at the firm of Reinhart Boerner Van Deuren. The blog provides a lot of detail about the subprime mortgage problem as a whole, but what really stands out to me are several excellent posts by Ellen Brostrom on ERISA litigation arising from this problem. In addition to a discussion of my recent post on the ERISA breach of fiduciary duty litigation against State Street arising from plan investments that were exposed to subprime lending risks, she has a pair of interesting posts on ERISA class actions against subprime lenders themselves based on the inclusion in those companies’ benefit plans of company stock that was propped up by subprime lending; you can find those posts here and here. Her posts mirror my comment in my post on the State Street putative class actions that there are a lot of different avenues to target subprime losses through the mechanism of ERISA’s fiduciary obligations.

A Primer on Fiduciary Status Under ERISA

Posted By Stephen D. Rosenberg In ERISA Statutory Provisions , Fiduciaries
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I liked the recent opinion in Bonilla v. Bella Vista Hospital, Inc., out of the United States District Court for the District of Puerto Rico (not available online from the court, but here's a Lexis cite for it: 2007 U.S. Dist. LEXIS 79939) for really only one reason, namely this terrific overview of the law of fiduciary status and duty:

ERISA reserves fiduciary liability for "named fiduciaries," defined either as those individuals listed as fiduciaries in the plan documents or those who are otherwise identified as fiduciaries pursuant to a plan-specified procedure. 29 U.S.C. § 1102(a)(2); see also Beddall v. State St. Bank & Trust Co., 137 F.3d 12, 18 (1st Cir. 1998). However, the statute also extends fiduciary liability to functional fiduciaries, who are persons that act as fiduciaries (though not explicitly denominated as such) by performing at least one of several enumerated functions with respect to a plan. Beddall, 137 F.3d at 18. Under 29 U.S.C.S. § 1002(21)(A), a person is a fiduciary with respect to a plan to the extent (i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan.

The key determinant of whether a person qualifies as a functional fiduciary is whether that person exercises discretionary authority in respect to, or meaningful control over, an ERISA plan, its administration, or its assets (such as by rendering investment advice). See Beddall, 137 F.3d at 18; O'Toole v. Arlington Trust Co., 681 F.2d 94, 96 (1st Cir. 1982); see also 29 C.F.R. § 2509.75-8, at 571 (1986). The exercise of physical control or the performance of mechanical administrative tasks generally is insufficient to confer fiduciary status, a person is a plan fiduciary only "to the extent" that he possesses or exercises the requisite discretion and control. 29 U.S.C. § 1002(21)(A); see also Beddall, 137 F.3d at 18.

An ERISA fiduciary, properly identified, must employ within the defined domain "the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use." Id. (quoting 29 U.S.C. § 1104(a)(1)(B)). The fiduciary should act "solely in the interest of the participants and beneficiaries," and his overarching purpose should be to "provide benefits to the participants and their beneficiaries" and to "defray reasonable expenses of administering the plan." Id. (quoting 29 U.S.C. § 1104(a)(1)). A fiduciary who fails to fulfill these responsibilities is "personally liable to make good to [the] plan any losses to the plan resulting from... such breach." Id. (quoting 29 U.S.C. § 1109(a)).

Reads like a beautiful nutshell summation of the law of fiduciary duty under ERISA, doesn’t it?

Nutshells, by the way, for you non-lawyer readers, are relatively brief condensations of particular areas of the law that multiple generations of law students have read instead of law textbooks themselves, which not only often run the length of “War and Peace” but are also often as comprehensible as that classic - in its original Russian.

Is Subprime the New Stock Drops?

Posted By Stephen D. Rosenberg In 401(k) Plans , ERISA Statutory Provisions , Fiduciaries , Pensions , Retirement Benefits
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The consensus in the legal community, and I don’t think it is just because they are looking hopefully for a new flow of work, has for awhile now been that fund investment losses resulting from exposure to the subprime mortgage mess will eventually generate substantial ERISA related litigation. There are plenty of avenues for these cases, not the least of which is plans and their fiduciaries bringing suit against investment advisors or investment funds for losses suffered by the plans on the theory that the advisors and funds improperly exposed the plan to such losses. This article here, out of the Boston Globe, provides a good example of exactly this line of litigation, detailing extensive losses to pension plans from investing in what were supposed to be conservatively managed bond funds at State Street. Here’s the overview provided by the article: 

Institutional money manager State Street Corp. now faces three lawsuits over its management of bond funds that were touted for their conservative investment strategies, yet posted losses over the summer because of risky holdings tied to the subprime mortgage industry . . .The latest lawsuit was filed last week in federal court in Boston by Nashua Corp., a Nashua, N.H.-based maker of paper and imaging products, against State Street's investment arm, State Street Global Advisors. . . Nashua lost $5.6 million by investing company pension funds in State Street's Bond Market Fund, due to the fund's ’overexposure in mortgage-related securities,’ according to the lawsuit. Nashua's complaint seeks class-action certification, which could allow other companies that invested in certain State Street funds to join the case.

Perhaps of even more interest on this front is the complaint that was filed a few weeks ago in the Southern District of New York by Unisystems, Inc. Employees Profit Sharing Plan, an ERISA governed plan, alleging substantial breaches of fiduciary duties under ERISA by State Street related to the bond funds it managed that the Unisystems plan and other plans invested in. The complaint seeks to be certified as a class action, and was brought by the Keller Rohrback firm, which looks to be on its way to becoming the Milberg Weiss (sans the indictments) of ERISA class action litigation. The complaint itself in that case, which you can find right here, is a terrifically detailed, step by step overview of the subprime mortgage problem, how it impacts ERISA governed plans, and the fiduciary exposures which that credit crisis has created - at least in theory so far - for investment managers and other ERISA plan fiduciaries. If nothing else, it gives you the whole story of this line of potential liability for ERISA fiduciaries.

And the scope of this area of liability and potential litigation involving ERISA plans is as big as you would expect. State Street notes that:

the problematic [State Street] funds [at issue in these lawsuits] amounted to a small fraction of the $244 billion in fixed-income funds it manages. About $36 billion of that total is actively managed -- as opposed to passive funds that track indexes. The proportion exposed to subprime mortgages amounted to $7.8 billion as of June 30, and just $2.6 billion as of Sept. 30.

Well, you know what? That’s still billions of dollars of investments at issue, and that’s only involving one potential defendant in these cases. As the old saying in politics goes, a billion here, a billion there, and pretty soon you are talking about real money.

ERISA, Investment Strategies and the Duty to Investigate

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries , Pensions
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ERISA litigation, particularly in the area of retirement benefits, is one of those areas of the law that can be particularly complicated because both the governing body of law and the underlying fact pattern to which it is applied can be tremendously complex. Take, for instance, the example of disputes over whether the fiduciaries of a retirement plan erred in selecting investments for the fund. This example, as you have probably guessed, is not chosen at random, but instead because Susan Mangiero has this interesting post here on a particular equity investment strategy involving short selling, and on the question of whether such an investment strategy by a retirement fund would be prudent or instead a breach of fiduciary obligations. The strategy itself is relatively complicated, at least to anyone approaching it from outside the investment world, and so too is the question of how it compares to other investment tools the fund could have selected. Fortunately for those of us who litigate such questions, the rules of evidence allow those questions to be answered in court by the use of experts who actually know these points inside and out and can comment on them in depth. These underlying factual details are ones that must be considered in passing on whether a fiduciary breach has occurred before even getting to the question of how a particular investment strategy fits within the fiduciary obligations imposed by ERISA.

After mastering the details of the investment strategy at issue, one then still has to evaluate whether its use was a breach of fiduciary duty under the law of ERISA. I am quoted in Susan’s post on the fact that this in turn depends heavily not so much on whether the investment strategy itself was sound, but more on whether the approach taken by the fiduciaries to selecting that investment strategy was sound. As Susan discusses in her post, this in turn depends very much on whether the fiduciaries sought sufficient outside expertise on the particular type of investment strategy at issue to allow a third party looking in on the decision making after the fact - such as a judge or a jury - to say that the fiduciaries fully considered the merits of the particular type of investment in question before investing and thus did not breach their fiduciary obligations, even if the investment went south.

What struck me about this duty to investigate, for lack of a better phrasing, is that the obligations of the fiduciaries in this regard in many ways mimic the approach of the ERISA litigator handed a case after the fact involving the particular investment strategy and the question of whether its use was a breach of fiduciary duties: the ERISA litigator at that point brings in independent experts to advise on the appropriateness relative to the market of using that particular investment strategy, and bases a defense to a large extent on testimony from such experts that the investment strategy was sound. The fiduciaries themselves, however, could have effectively deflected claims of breach of fiduciary obligation in selecting the investment strategy in the first place by doing the same thing before ever making the investment; retaining outside experts to render this opinion prior to making the investment provides a strong defense against claims that the fiduciaries breached their obligations by making the investment. Indeed, contemporaneous reliance on outside, independent expertise to evaluate investment strategies is perhaps the best steps a retirement plan can make to head off potential claims of breach of fiduciary duty involving the selection of investments.

In this way, the question for fiduciaries and the plans they serve becomes as much as anything one of pay me now, or pay me later. They can avoid problems by paying for independent advice and investigation before making investments, or they can pay for the same advice later in defending themselves if they are sued. As a litigator, obviously, I am happy to retain experts and resolve the problem after the fact; as a counselor, though, I would always recommend the preemptive approach of obtaining such expertise before selecting a particular investment strategy.

Determining Fiduciary Status: And the Computer Says . . .

Posted By Stephen D. Rosenberg In Fiduciaries
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Fiduciary status is the touchstone of the law of ERISA. From that status flows many of the obligations that ERISA can impose on a party, as well as extensive potential liability. For those of you wondering about who is a fiduciary and when for these purposes, Susan Mangiero has found a really fun (well, if you like this stuff, anyway) toy, the Department of Labor’s ERISA Fiduciary Advisor, an on-line tool for identifying whether or not someone has achieved fiduciary status for purposes of ERISA. Kind of like computer gaming for the ERISA set.

Number of Suits + Questionable Practices = X

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries , Pensions , Retirement Benefits
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I have talked, certainly more than once, about the fact that the law governing fiduciary obligations in the realm of retirement plans is evolving, and most recently I commented on how it looks as though the Supreme Court is poised to weigh in on the direction of this evolution in the case law. Some of the evolution of the law in this area, it seems, is being driven simply by numbers. Susan Mangiero, author of the blog Pension Risk Matters, pointed out in a recent interview that we are seeing somewhere around 250 to 300 new lawsuits filed per quarter involving the liabilities of pension fiduciaries, mostly involving private company plans. As numbers of suits go up, simple experience tells us the courts will face new issues, or old issues under new fact patterns, and will issue rulings that advance the ball on what the shape of the law should look like in this area as a result. But the evolution is also driven, I think, by another issue I have commented on before, which is that, with pensions being replaced by 401(k) plans in which the employee bears all the risk, plan participants are motivated by that change to protect themselves against poor practices and oversights by those in charge of their retirement investments. And experts on the subject of pension governance suggest that they have good reason to concern themselves with these issues: Susan Mangiero points out in the same interview that pension governance practices quite simply leave a lot to be desired.

If there has ever been a roadmap to the evolution of a particular body of law, its right here in this scenario: more suits plus questionable practices by the targets of the suits.

More on Whether Socially Conscious Investing Is a Breach of Fiduciary Duty

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries , Pensions
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I have raised before the question of whether so-called socially conscious investing would be a breach of fiduciary duty if undertaken by a pension plan or 401(k) fiduciary. The National Law Journal has a neat opinion piece by law professor Edward Zelinsky right now to the effect that it would be. Here’s a link, although you may have to be a subscriber to access it. Either way, I think I am going to exercise my fair use rights under copyright law, and quote the professor’s conclusion on this particular point:

Inconvenient truth no. 3: Social investment dilutes fiduciary standards. Divestment for worthy causes, like other forms of social investing, opens the door to less noble uses of public pension funds by diluting the fiduciary standards governing pension trustees' investment decisions. Suppose that a group seeks to use public retirement assets to support the Hamas-dominated regime in Gaza. There are, of course, persuasive distinctions between an anti-Sudan investment policy and a pro-Hamas policy. However, politicizing public pension investments for good causes will invariably turn such pensions into battlegrounds as others seek support for their causes, not all of which will be attractive.

Instructive in this context are the traditional standards of fiduciary conduct including, in Benjamin N. Cardozo's famous formulation, "the duty of undivided loyalty." The insight animating this formulation is convincing: It does not matter if a fiduciary (like a public pension trustee) dilutes his loyalty to beneficiaries' welfare for a commendable cause. Once fiduciaries weaken that loyalty by considering any objective other than the well-being of their beneficiaries, the door is opened to causes that may not be meritorious. Even if trustees only pursue estimable objectives, they pursue such objectives with others' money, i.e., retiree's retirement resources.

I discussed in an earlier post an academic paper by a different professor arguing to the contrary, and you can find that here. So now you have both sides of the coin, and can make your own call. For me, though, I will return to my own roots - and initial instincts - as a litigator, and repeat something I have said before: if representing a client sued for breach of fiduciary duty, I’d rather be in the position of defending an investment strategy that called for maximum possible returns than one calling for only the maximum possible returns available by investing in good doobie companies.

Reinsurance and LaRue, All in the Same Post

Posted By Stephen D. Rosenberg In 401(k) Plans , Benefit Litigation , Fiduciaries , Industry News , Reinsurance , Retirement Benefits
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Instead of posting twice in the same morning, I am going to try to address two distinct substantive issues, one involving reinsurance and the other ERISA, all in the same post, hopefully without turning this post into some sort of Frankenstein monster combination of topics that instead should have been kept entirely separate.

On the first, ever wonder why so many reinsurance companies are domiciled in Bermuda? I thought so. The New York Times has an excellent article today explaining why, and as one might have guessed, it has to do with taxes. As the New York Times sums up the matter: 

At issue are federal rules that allow insurance premiums to be shifted from the United States to offshore affiliates — which reduces taxes — and allow the proceeds to be invested tax free, increasing the profit to parent companies. . . .The core of the dispute is an unusual tax treaty with Bermuda. It allows insurance companies based on the island to deduct from their American taxes premiums that their subsidiaries in the United States collect from American customers and send back to the headquarters abroad. In Bermuda and other tax havens, the money is invested tax free. This money is moved, under the law, through the purchase of reinsurance by the affiliates from their parent companies.

Personally, I really like Bermuda and have long wanted to have reinsurance clients there that would justify my opening an office in Bermuda, which I suspect influences my views on this issue, and so I will therefore keep them to myself.

The second is an ERISA issue, involving the Supreme Court’s decision to hear LaRue v. DeWolfe, Boberg and Associates. This case, which I discussed here and here, involves whether a plan participant can sue under ERISA to recover losses suffered only in that participant’s account, and not across the plan as a whole. As I discussed here, it makes sense that a participant can do so and I expect the Supreme Court to rule to that effect. The defendants, in an attempt to avoid the Supreme Court ever reaching this issue, moved to dismiss the appeal as moot on the ground that the plaintiff had cashed out of the plan and therefore cannot proceed with a claim against the plan for losses incurred in the plaintiff’s now cashed out account; whether such cashed out participants can proceed with such cases is something of a hot topic that has been decided in differing ways by trial level judges in the federal system, including by judges sitting in the same federal district court, as I discussed here. Well, Workplace Prof and SCOTUSBLOG are reporting that the Supreme Court has denied the motion to dismiss on that ground and the Supreme Court will go ahead and hear the case.

There, I did it - two items on two different issues, all for the price of one admission.

Some Thoughts on Behavioral Economics, 401(k) Plan Architecture and the Potential Liabilities of Fiduciaries

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries
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I have blogged before about behavioral economics, and the question of whether how we structure retirement investment choices will affect whether plan participants successfully save for retirement. Two recent articles really drive home this point. In the first one, “Choice Architecture and Retirement Savings Plans,” the authors posit that the design of 401(k) plans will in fact affect retirement savings and investment choices. Here is the abstract, which lays out their thinking: 

In this paper, we apply basic principles from the domain of design and architecture to choices made by employees saving for retirement. Three of the basic principles of design we apply are: (1) there is no neutral design, (2) design does matter, and (3) many of the seemingly minor design elements could matter as well. Applying these principles to the domain of retirement savings, we show that the design of retirement saving vehicles has a large effect on saving rates and investment elections, and that some of the minor details involved in the architecture of retirement plans could have dramatic effects on savings behavior. We conclude our paper by discussing how lessons learned from the design of objects could be applied to help people make better decisions, which we refer to as “choice architecture.”

In the second, "Individual Account Investment Options and Portfolio Choice:
Behavioral Lessons from 401(K) Plans
," the authors present the honestly fascinating finding that as 401(k) plans disproportionately add higher cost actively managed funds to their menu selections, plan participants move disproportionately into those funds instead of into less expensive alternatives that are also present in the menu of investment choices available to them in their plans, with the result that plan costs increase and participants’ returns on investments decrease. Here is the abstract from their paper, more extensively describing the authors’ findings:

This paper examines how the menu of investment options made available to workers in defined contribution plans influences portfolio choice. Using unique panel data of 401(k) plans in the U.S., we present three principle findings. First, we show that the share of investment options in a particular asset class (i.e., company stock, equities, fixed income, and balanced funds) has a significant effect on aggregate participant portfolio allocations across these asset classes. Second, we document that the vast majority of the new funds added to 401(k) plans are high-cost actively managed equity funds, as opposed to lower-cost equity index funds. Third, because the average share of assets invested in low-cost equity index funds declines with an increase in the number of options, average portfolio expenses increase and average portfolio performance is thus depressed. All of these findings are obtained from a panel data set, enabling us to control for heterogeneity in the investment preferences of workers across firms and across time.

In other words, the architecture - or layout of investment choices - in a given 401(k) plan actively affects how participants invest, with the result that adding too much of the wrong kind of choices - in the view of these papers, actively managed high cost funds - negatively affects performance, even though the plans do not preclude participants from investing in better choices that are available to them in the plan and which would reduce expenses to them and increase the return in their portfolios.

The first question that jumps out at me from all of this concerns why such higher cost funds are added to menu choices more often than are lower cost, less actively managed choices. Is it because, given the fee structure, the fund companies have a greater incentive to sell those funds, and to convince the administrators and sponsors of 401(k) plans to include those funds in their roster of choices? And the second question that pops up is, if adding such funds is known to decrease returns even if the administrators also include less expensive choices in the investment menu, then is it a breach of fiduciary duty to overload the menu selections with higher cost choices? In essence, if the design of the plan itself will subtly affect the returns in this way, then don’t sponsors, advisors and administrators -at least those who rise to the level of a fiduciary, functional or otherwise, for purposes of ERISA - commit a breach of fiduciary duty if they don’t push back against fund companies’ pitches to include a disproportionate number of costly investment choices and don’t prevent the architecture of their plans from becoming distorted in this manner?

These questions raise a multitude of issues, including how far plan fiduciaries should really have to go to protect plan participants from themselves. For instance, if the plan gives the participants the choice to invest in lower cost funds, isn’t that enough? Should the plan’s fiduciaries really be responsible for decisions by participants to allocate their investments into other, higher cost options? But at the same time, one can certainly argue that it is proper for the fiduciaries to bear the responsibility of making sure that menu selections will not lead to reduced performance because they include a disproportionate amount of high cost options, when: (1) it is a given that most participants will not be sophisticated enough to effectively allocate across both low cost and high cost choices in the most effective manner possible; (2) it is known that inclusion of too many high cost investment choices in a menu will drive down returns; and (3) it is the fiduciary who is in the best position to avoid overloading menus with higher cost products, and who has the ability to bring in advisors to prevent this type of overloading of the investment selection menu to the detriment of participants and their return on investments.

More Education is Always Better than Less: American Conference Institute's Upcoming Seminar on 401(k) Risks

Posted By Stephen D. Rosenberg In 401(k) Plans , ERISA Seminars and other Resources , Fiduciaries
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I mentioned in yesterday’s post that my goal for the week was to move rapidly through several items that had caught my attention over the last week or so, and that I wanted to pass on to readers of this blog. I thought the next one I would mention is this conference in New York in December, sponsored by the American Conference Institute, on litigation and regulatory issues related to 401(k) plans. The subject matter of the conference ranges across the hottest topics in litigation and potential exposures for sponsors and fiduciaries of 401(k) plans, including stock drop litigation, excessive fee issues, and in a topic that hits both primary subjects of this blog, insurance coverage for fiduciary liability risks. Here’s the brochure for the conference.

401(k) Plans and Increasing Liability Risks for Fiduciaries

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries , Pensions , Retirement Benefits
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Coming off the holiday weekend, I have a long list of items I want to pass on or talk about. I will try to put up as many as I can over the next few posts, to work through the backlog. I thought I would start with this one, because it ties two of the items together. Susan Mangiero of Pension Governance and the Pension Risk Matters blog, passed along this article on last week’s decision by Judge Tauro that I blogged about here, holding that cashed out participants in a 401(k) plan could sustain breach of fiduciary duty claims, a finding contrary to that of some courts - including at least one by another judge sitting in the same district as Judge Tauro - but supported by the holdings of some other courts.

What I liked about the article, aside from the fact that it adds some further discussion about the case and the issues it presents to that contained in my earlier blog post on the case, is the article’s comment that the case is likely part of “a trend that will result in most courts following suit.” An animating theme of my posts and thinking on ERISA litigation concerning defined contribution plans such as 401(k) plans is that we are in the process of watching the case law evolve to hand more protections to plan participants, with a corresponding growth in the potential liability exposure of plan fiduciaries. As the world shifts from a defined benefit world - read pensions - to 401(k) plans, the law of ERISA is going to shift with it to better protect investors in those latter types of plans. For the first thirty years or so of the development of ERISA jurisprudence, defined contribution plans were simply not that important and the unique concerns of those plans - such as what becomes of the rights of cashed out plan participants, the issue addressed by Judge Tauro last week - played a relatively peripheral role in the development of ERISA jurisprudence. That is all changing and changing quick. Moreover, we can expect that evolution in the law to proceed with real force for some time, given the expected exponential growth in assets held in 401(k) plans. On this last point, three economist authors have done the heavy lifting, and document this point in this paper, as summarized in the abstract of their article: 

Over the past two and a half decades there has been a fundamental change in saving for retirement in the United States, with a rapid shift from employer-managed defined benefit pensions to defined contribution saving plans that are largely controlled by employees. To understand how this change will affect the well-being of future retirees, we project the future growth of assets in self-directed personal retirement plans. We project the 401(k) assets at age 65 for cohorts attaining age 65 between 2000 and 2040. We also project the total value of assets in 401(k) accounts in each year through 2040 and we project the value of 401(k) assets as a percent of GDP over this period. We conclude that cohorts that attain age 65 in future decades will have accumulated much greater retirement saving (in real dollars) than the retirement saving of current retirees.

Follow the money is always a safe bet. As the majority of Americans’ individual savings move into 401(k) plans, the law governing those plans is going to shift with it.

Another View on Whether a Cashed Out 401(k) Participant Has Standing to Sue for Losses Under ERISA

Posted By Stephen D. Rosenberg In 401(k) Plans , Benefit Litigation , ERISA Statutory Provisions , Fiduciaries , Retirement Benefits
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Judge Tauro, of the United States District Court for the District of Massachusetts, has weighed in lately on some of the more cutting edge and currently unsettled issues in ERISA litigation, such as the impact of ERISA preemption on the powers of a state agency. This week, he ventured into the now hot topic of whether a plan participant who has cashed out of a 401(k) plan has standing to sue for breach of fiduciary duty, in this instance for imprudently investing in allegedly inflated company stock. In the decision, involving a putative class action against Boston Scientific, the judge surveyed case law from other jurisdictions on the issue and broke from the opinion of another judge of the circuit, who had found that such a participant, once cashed out, lacked standing to bring a claim for benefits. Judge Tauro reviewed case law from other circuits to the contrary, and elected to follow those rulings.

The cases relied upon by the judge are an instructive lot, and almost a road map for briefing this issue when arguing in favor of standing for such a cashed out participant: 

More persuasive is the reasoning of the Seventh Circuit, which recently reached an opposite outcome and found that a plan participant did have standing, despite having cashed out of the plan. [The Seventh Circuit found that] "[b]enefits are benefits; in a defined-contribution plan they are the value of the retirement account when the employee retires, and a breach of fiduciary duty that diminishes that value gives rise to a claim for benefits measured by the difference between what the retirement account was worth when the employee retired and cashed it out and what it would have been worth then had it not been for the breach of fiduciary duty." The Third and Sixth Circuits have adopted this line of reasoning as well. Also instructive is the analysis by Judge Hall in the District of Connecticut: “[T]he court is puzzled by the . . . assertion that a claim for benefits lost due to imprudent fiduciary investment becomes a claim for damages once the plaintiff accepts a lump sum payment constituting the balance of her account with the relevant plan. . . . Regardless of whether [the participant] accepted or refused the balance of her account, her underlying claim would still be for the money lost by the Plan as a result of the defendants' imprudent investments. The court sees no logical reason why such a claim seeks an ascertainable benefit when the plaintiff refuses a lump sum, but the very same claim seeks an unascertainable damage award once the plaintiff accepts a lump sum.”


I Got Them Low Down No Good Pension Blues

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries , Pensions , Retirement Benefits
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On the first Monday morning in August I expect things to lighten up with lots of people on vacation and the like, so I scheduled a breakfast meeting this morning right in the middle of one of Massachusetts’ most congested highways (well, not really in the middle of the highway, more like at a restaurant off an exit off of one of the most congested highways), on the theory traffic would be lighter than usual. It wasn’t. But I still think August should be a lighter month, so today’s blog posting is musical. Here is a link to the song “Pension Tension Blues,” courtesy of Pension Governance. What is “Pension Tension Blues”? Pension Governance describes it thusly: 

Inspired by those who bring attention to serious issues through humor, Dr. Susan M. Mangiero, [Pension Governance] president and founder, and Mr. Steve Zelin, the Singing CPA have co-created a (hopefully) memorable ballad about the state of affairs in pension land. Mangiero adds "Pension Governance, LLC is committed to helping fiduciaries do a better job of identifying, measuring and managing financial risk. We hope the song is a friendly reminder of the hard work ahead."


Functional Fiduciaries in the First Circuit

Posted By Stephen D. Rosenberg In Fiduciaries
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I am kind of fond of this recent disability benefits case out of the United States District Court for the District of Maine for one particular reason, namely its discussion of functional fiduciaries, and thought I would pass it along as a result. Confronted with the question of whether Metropolitan Life, the administrator, was a fiduciary or possessed fiduciary authority with regard to benefit determinations, the court explained that although Metropolitan Life was not the Plan Administrator or a "named fiduciary" within the meaning of ERISA, the plan language clearly gave it authority that would render it a fiduciary. While there is nothing particularly out of the usual or fascinating about that finding, I liked the court’s further citation of the First Circuit’s recognition of the doctrine of functional fiduciaries as further support for its finding. The court noted that: 

The First Circuit has recognized that ERISA's fiduciary duty provisions extend to "functional fiduciaries--persons who act as fiduciaries (though not explicitly denominated as such) by performing at least one of the several enumerated functions with respect to a plan." Beddall v. State Street Bank and Trust Co., 137 F.3d 12, 18 (1st Cir. 1998). "The key determinant of whether a person qualifies as a functional fiduciary is whether that person exercises discretionary authority in respect to, or meaningful control over, an ERISA plan, its administration, or its assets." Id.

In the disability benefits field, where many of the insurers and administrators are highly experienced, plan documents are usually clear as to who is playing what fiduciary role and who has discretionary authority, but in other cases, such as smaller self-managed plans or involving smaller third party administrators, the controlling plan documents often do not address the role of every person or service provider involved in the operation of the plan. In those cases, the functional fiduciary analysis can be quite handy in understanding the role of the players involved in the administration of the plan, and the possible liabilities of each as well.

The Interrelationship of Suits for Benefits and for Breach of Fiduciary Duty Under ERISA

Posted By Stephen D. Rosenberg In Benefit Litigation , ERISA Statutory Provisions , Equitable Relief , Fiduciaries
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If it seems like I have been digressing a lot these past couple of weeks off of the primary topics of this blog and into other areas that interest me - such as the billable hour system - or that I practice in, like intellectual property litigation, it is because the courts of the First Circuit have been fairly quiet with regard to ERISA issues since the First Circuit issued its opinion in this case a few weeks back in which I represented the prevailing parties. Things change quickly in the forest, though, and the courts in this circuit have begun speaking again on ERISA issues. The United States District Court for the District of Puerto Rico has now provided this nice, handy summary of why an individual plan participant whose benefits have been terminated must bring solely a claim for benefits, and cannot press forward with an alternative theory for breach of fiduciary duty. In the words of the court: 

ERISA recognizes two avenues through which a plan participant may maintain a breach of fiduciary duty claim: (1) a Section 502(a)(2) claim to obtain plan-wide relief, see 29 U.S.C. § 1132(a)(2); and (2) an individual suit under Section 502(a)(3) to obtain equitable relief, see 29 U.S.C. § 1132(a)(3). Cintron [the plaintiff] does not seek plan-wide relief. Consequently, ERISA authorizes her breach of fiduciary duty claim only if she seeks "appropriate equitable relief." 29 U.S.C. § 1132(a)(3); Varity Corp. v. Howe, 516 U.S. 489, 512, 116 S. Ct. 1065, 134 L. Ed. 2d 130 (1996); Watson v. Deaconess Waltham Hosp., 298 F.3d 102, 109-10 (1st Cir. 2002); Larocca v. Borden, Inc., 276 F.3d 22, 27-28 (1st Cir. 2002). The Supreme Court of the United States has described Section 502(a)(3) as a "safety net" that provides appropriate equitable relief for injuries that Section 502 does not elsewhere adequately remedy. Varity, 516 U.S. at 512. Section 502(a)(3), therefore, does not authorize an individualized claim where the plaintiff's injury finds adequate relief in another part of ERISA's statutory scheme. Id. at 512, 515; see also Watson, 298 F.3d at 112-13; Larocca, 276 F.3d at 27-28; Turner v. Fallon Cmty. Health Plan, 127 F.3d 196, 200 (1st Cir. 1997). Following Varity, "federal courts have uniformly concluded that, if a plaintiff can pursue benefits under the plan pursuant to Section [502(a)(1)(B)], there is an adequate remedy under the plan which bars any further remedy under Section [502(a)(3)]." Larocca, 276 F.3d at 28.

Section 502(a)(1)(B) provides Cintron the opportunity to obtain redress for the injury she alleges to have suffered--a wrongful termination of her benefits. If the defendants wrongfully stopped paying her benefits, Section 502(a)(1)(B) provides an avenue through which she may recover benefits due. She may not seek relief for the same injury under Section 502(a)(3). . . .Thus, she may not maintain a claim for breach of fiduciary duty under Section 502(a)(3).

As some of you know from other posts, I like to collect handy summaries like this to insert into future briefs in appropriate spots, and I pass this one along to anyone who may want to do likewise. The case is Cintron-Serrano v. Bristol-Myers Squibb P.R., Inc.

High Cost Investments, Payments to Sponsors, and the National Education Association

Posted By Stephen D. Rosenberg In Conflicts of Interest , Fiduciaries , Retirement Benefits
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Been away from the desk for a few days, but not away from my reading, and there’s been a whole series of things in the media that may be of interest to those who read this blog that I have meant to pass along and comment on. I am going to try to post frequent but shorter notes for the next day or three until I cover them all, starting with one that most clearly and directly falls within the jurisdiction of this blog, concerning the payment of fees to a quasi-retirement plan sponsor. Many of you may have already seen the story, from the New York Times, which concerns payments received by the National Education Association from financial firms whose investment products it recommended to members. As the article explains:

A lawsuit filed last week in federal court in Washington State contends that the National Education Association breached its duty to members by accepting millions of dollars in payments from two financial firms whose high-cost investments it recommended to members in an association-sponsored retirement plan. The case was filed on behalf of two N.E.A. members who had invested in annuities sold by Nationwide Life Insurance Company and the Security Benefit Group. It contends that by actively endorsing these products, which carry high fees, the N.E.A., through its N.E.A. Member Benefits subsidiary, took on the role of a retirement plan sponsor, which must put its members’ interests ahead of its own. By taking fees from the two companies whose annuities N.E.A. Member Benefits recommended to its members, the N.E.A. breached its duty to them, the suit contends.

The article goes on to explain some tricks and twists that the plaintiffs face in trying to press their suit against the N.E.A. related to the payments and the high cost products, namely that the plaintiffs need to shoehorn the case into ERISA by arguing that “because the N.E.A. actively promoted the annuity products to its members, it essentially stepped in as a plan sponsor [thereby making] it subject to Erisa’s fiduciary duty requirements.”

With regard to this problem, concerning the plaintiffs’ need to figure out the best manner to structure their lawsuit, what you are really seeing is the problem of forcing a square peg into a round hole. I have argued in other posts that, as we move decisively from a defined benefit plan world to a defined contribution world, and thereby make plan participants the bearers of all the risks of their retirement investments, we need to simultaneously provide those plan participants with the legal protections and tools to manage those risks, including the types of risks alleged in this case, of misleading investment recommendations, undisclosed payments, and excessive costs.

I hope to keep an eye on this case going forward, as it may provide an excellent window on the question of whether, and if so how, the law can evolve to deal with these changes in the real world environment in which people now must prepare for retirement.

Why You Can Never Generalize When Considering Whether Brokers Are Plan Fiduciaries

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries , Pensions
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A couple of loyal blog readers have commented that I have veered off a good bit on digressions this past couple weeks, and I can’t deny it - maybe it’s a lawyer’s version of a summer fling. Anyway, today I return to a central focus of this blog, ERISA and, in particular today, investment advisors and their potential liability as fiduciaries. This law firm newsletter, passed on by the Workplace Prof, has a nice discussion of the question of when a broker or other investment advisor to a defined contribution plan (and I suppose a defined benefit plan as well) crosses the line, by rendering professional services to the plan, into the dangerous realm of being deemed a fiduciary. The Prof highlights the following discussion from the newsletter:  

[T]here are lawsuits and NASD arbitrations claiming that brokers have become ERISA fiduciaries. They are, in the main, based on allegations that the brokers gave investment advice. The cases are usually filed by the plan sponsor or its fiduciaries (e.g., the responsible officers, the committee or the trustee) to recover investment losses. Some of those cases are won by the plans and others are won by the brokers. The legal issue is whether the broker made investment recommendations that rose to the level of ERISA-defined “investment advice,” which is different than either the securities law definition or the conversational meaning of those words. Stated slightly differently, ERISA did not make every broker a fiduciary, nor did it turn every investment recommendation into fiduciary advice. Instead, ERISA and the DOL regulations crafted a specific and limited definition of fiduciary investment advice.

This is a nice summary of the point addressed in the newsletter, but as one of my law school professors liked to say whenever someone stopped after the first part of a holding, you need to read on. When you go the newsletter itself, you find that the summary really reflects simply the holding under a particular, and detailed, set of facts from one particular case. And that is exactly as it should be. The determination of whether a particular broker or other financial advisor to a plan became a fiduciary as a result of investment advice rendered to the plan is highly fact specific, and should turn on exactly what events occurred in any one particular case. As a result, one neither can nor should jump to any particular conclusion about the fiduciary status - and accompanying potential exposure - of any particular broker or advisor (or of brokers or advisors as a class) from the newsletter, the case discussed in the newsletter, or the Prof’s post. Instead, it is important to analyze the status of a particular broker on the basis of the exact role played by that particular broker or advisor with regard to a particular plan.

Me and LaRue, and Business Insurance Too

Posted By Stephen D. Rosenberg In 401(k) Plans , Coverage Litigation , Duty to Indemnify , ERISA Statutory Provisions , Equitable Relief , Fiduciaries , People are Talking . . . , Retirement Benefits , Rules of Policy Interpretation
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There is an article in Business Insurance magazine this week, the June 25th issue, on the Supreme Court accepting review of the LaRue decision, in which I am quoted. The article is here - subscription required - and if you read it, you will note that it ends on my comment that I expect the Supreme Court to overturn the Fourth Circuit. A short article intended really just as a little news blurb on the subject for the benefit of the magazine’s business management oriented readership, the reporter did not have the space to go into why I think the Court will overturn the lower court decision, but I, obviously, have the space to do so here. So to the extent anyone is interested in the question, here’s my thinking.

First, I don’t really expect the Court to do much, if anything, with the question of the scope of equitable remedies issue. If anything, given the language of the statute, despite the fact that many people want the Court to expand individual remedies and available damages under ERISA - including, I have found in my litigation practice, many District Court judges who are displeased with the limitations of the statute but nonetheless consider themselves duty bound to enforce its restrictions on recovery - the Court has probably read the range of equitable relief that can be pursued in as broad and pro-plaintiff a manner as the language allows, with its test of whether the relief sought would be equitable or not way back in the days of the divided bench. There simply isn’t much more you can do with the statute’s restriction of recovery in certain circumstances to equitable relief unless you are simply going to ignore the actual language of the statute and rewrite it by judicial fiat, which this Court certainly isn’t going to do and arguably, the thinking of Ronald Dworkin and his heirs aside, no court should do.

In a way, this issue is a perfect parallel to a long running and common problem in the insurance coverage field, in which there was an oft litigated dispute over whether insurance policies, because they only cover claims for damages, cover lawsuits seeking equitable relief, the issue being that the policies only cover damages and equitable relief is something different than damages. In both insurance coverage and ERISA cases - such as LaRue - the simple fact of the matter is that equitable relief does mean something particular, something that is different than a claim for damages, and the question is what is the impact of that difference.

Second, with regard to the more fundamental question of whether the individual plan participant could recover just for losses to his account in the plan, yes, I do think the Court will overrule the Fourth Circuit and find that such an individual plan participant can bring such an action. I can never recall whether the saying is that the Court follows the election returns, or is that the Court doesn’t follow the election returns, so I looked it up, and in fact the saying is that they follow the returns, although every author who writes this then adds qualifiers to the comment, such as in this piece here. Either way, the kind of relief sought by the plaintiff in the LaRue case, to be able to enforce his investment instructions in his own retirement savings account, clearly fits with the current Zeitgeist and, more interestingly, is of a piece - and a natural fit with - the changes to retirement savings plans put into place by the Pension Protection Act. Beyond that, the statutory language that is at issue in this part of the case is completely open to either the interpretation selected by the Fourth Circuit, or that sought by the plaintiff, and thus the Court can realign this part of ERISA without doing any violence to the statutory language. Combine these things, and I get a reversal.

Common Misperceptions and The Obligations of Plan Sponsors

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries , Pensions , Retirement Benefits
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I wrote, it seems to me, an awful lot over the last couple of weeks on the question of the fiduciary obligations of plan sponsors and others with regard to the investment selections made by pension funds and the investment choices offered in 401(k) plans. Susan Mangiero has a lot more to say about this in her series of posts - here, here, here and (most recently) here - on the due diligence obligations of fiduciaries when investing plan assets.

One particular issue that constantly comes up in this area is the belief of many employers and plan sponsors that they have satisfied any obligations they may have and have immunized themselves, for all intents and purposes, from liability for breach of fiduciary duty, by hiring an outside company to administer the plan and make investment decisions. Whenever I speak to people who offer investment and other assistance to plan fiduciaries, their need to disabuse fiduciaries, and particularly plan sponsors, of this belief is a constant topic of discussion. Quoting Rick Slavin, an attorney and former regulator, Susan nails down in three sentences why this is not the case:  

In his overview of case precedent and enforcement actions, Slavin offered that sloppy, obtuse or incomplete paperwork is usually the beginning of trouble. He reiterated that the use of outside parties does not absolve plan sponsors of their fiduciary duties. Oversight obligations remain.

You know, the simple fact of the matter is that, in all the areas I have litigated cases in over the years, plan sponsors have the easiest ability to preemptively and pro-actively position themselves to defeat an action against them - due diligence, due diligence and more due diligence throughout the life of the pension fund or defined contribution plan will come as close to serving as a silver bullet to protect plan sponsors as exists anywhere in the world of litigation. But plan sponsors who forget that they still have to engage in due diligence in the form of oversight and instead elect to rely simply on the fact that they retained an outside manager effectively forfeit this safe harbor.

An Evolution in Fiduciary Standards Means an Increase in Litigation Risk

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries , Retirement Benefits
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My email inbox is often inundated with seminar pitches, book offers, and informational material, much of which, even if it looks valuable, I could never get to unless I decide to give up the practice of law and just read all this stuff full time. Fortunately, though, I can cut through the junk pretty quick and spot the diamond in it within minutes of sitting down at my desk in the morning (or, more often than not, while remotely surfing my inbox in the middle of the night).

And here is one such diamond, a really terrific paper on the rapidly evolving nature of the fiduciary standards affecting plan sponsors of defined contribution - most commonly 401(k) - plans and the steps they should be taking as a result. The paper, authored by Laurence Cranch and Daniel Notto of AllianceBernstein, is Evolving Fiduciary Standards for Defined Contribution Plan Sponsors - The Impact of New Thinking About Employee Participation and Investment Selection, and you can find it here.

In short, the authors argue, correctly I believe, that we are not only in an era of rapid change in the standards of care expected of fiduciaries, driven to a large extent by advances in knowledge in the area of retirement investing and the transition from pensions to defined contribution plans, but also in a time of vastly increased litigation threats to such fiduciaries. Perhaps the most interesting part of the paper concerns using the tools provided by the Pension Protection Act, in conjunction with the investment selection thinking that underlies the statute and its enabling regulations, to simultaneously demonstrate prudence on the part of the fiduciary and decrease the likelihood of litigation.

Just a terrific paper, and well worth the time to read it.

Divestment and Fiduciary Duties

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries , Pensions , Retirement Benefits
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Apparently there is something in the air these days about socially responsible investing and the fiduciary obligations of pension fiduciaries.  I discussed here, just the other day, the argument that it is not a fiduciary breach to utilize a particular social agenda in investing and the litigation implications of that approach.  Susan Mangiero has more to say on the same subject at her blog, Pension Risk Matters, here.   I don't know about this one, frankly.  I know, as I discussed in my last post on this issue, that the more defensible position, if sued as a fiduciary, is to have stayed out of socially responsible investment in preference for a focus on maximum return investing.  But geez, who wants to be the one who says fiduciary obligations preclude avoiding, in the scenario Susan discusses, investments in so-called terrorist countries?

Criminals and terrorists in my last two posts.  I don't know, maybe I better get off the ERISA beat and over to the digressions section of this blog, to write about intellectual property for a bit, a subject where, I don't think, I can find any reason to write about such things.

Socially Responsible Investing and Fiduciary Duties

Posted By Stephen D. Rosenberg In Fiduciaries
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Here’s a little twist on an issue we have often discussed on this blog, namely the fiduciary obligations of plan sponsors and other fiduciaries. To what extent does the fiduciary obligation to properly manage and invest fund assets leave room to consider social, environmental or political agendas in selecting investments? This article, by Benjamin Richardson of York University in Canada, concludes that there is room, within fiduciary obligations, to engage in socially conscious investing. Here is the abstract with his conclusions:

In recent years, pension funds and other institutional investors have begun to give more attention to the environmental and social behaviour of the companies in which they invest. A recent movement for socially responsible investment (SRI) seeks to exclude companies that pollute or ignore human rights, for example, and to champion those that behave ethically and responsibly. However, some confusion among investment decisionmakers persists about the extent to which their fiduciary duties to beneficiaries allow policies that may sacrifice financial returns for environmental or other philanthropic causes. This is compounded by the belief that they cannot secure the best returns in respect of their fiduciary obligations with current socially responsible companies. With reference to the main common law jurisdictions, this article critically examines whether the fiduciary duties of pension fund investors hinder SRI. Contrary to some commonly held beliefs, SRI can often sit comfortably with fiduciary duties to invest prudently. However, legal reforms to improve the climate for SRI would help, as evident by some recent initiatives in several jurisdictions.

Interesting points. But I will tell you, that as a litigator, its always an easier case to make that returns were as high as possible if plan members sue, than to argue that they were as high as possible while still consistent with a reasonably appropriate social agenda. On the other hand, disinvestment movements, of which socially responsible investing can be seen as an heir, have a respected and valued social history, one that, whether or not it can be easily reconciled with fiduciary obligations, should not be disregarded.

Further Thoughts on Beck v Pace

Posted By Stephen D. Rosenberg In Fiduciaries , Pensions , Retirement Benefits
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There are a number of reasons I don’t, as I mentioned yesterday, play the game of first to post, in which bloggers race to be first on the scene with a post about a particular subject, not the least of which is that I just plain can’t type as fast as the Workplace Prof, whose detailed and intelligent analysis of yesterday’s ruling by the Supreme Court in Beck v Pace can be found here. Also of interest is this detailed description of the ruling at SCOTUSBLOG by a guest blogger, a summer associate at the firm that sponsors that blog.

Beck presented the question of the extent to which the fiduciaries of a pension plan, that rapidly vanishing dinosaur of the employee benefits world, were obligated to consider merging the pension into a different pension plan instead of terminating the pension by the option of purchasing annuities that would provide the benefits to the participants. The two writers both focus on the fact that the Supreme Court handled the dispute by finding that the fiduciaries actually could not have considered merger, rather than termination, and that the Court, in essence, concluded that this finding resolves the issue presented by the case. As SCOTUSBLOG puts it:

The issue before the Court was whether the decision to terminate a pension plan by purchasing an annuity, rather than merge the plan with another, was a decision subject to ERISA’s fiduciary obligations. This issue, however, was ultimately not decided by the Court, which found that merger is not a permissible method of termination and therefore did not reach the question of what constitutes an “implementation of a business decision to terminate.” Because merger was not a viable option under the statute, Crown [the employer terminating its pension plan] did not need to fully investigate the merger as an option in implementing the termination. In so finding, the Court deferred to the PBGC and the Department of Labor’s view that merger is not a method of termination but rather an alternative to termination, explaining that “to attempt to answer these questions without the views of the agencies responsible for enforcing ERISA[] would be to embar[k] upon a voyage without a compass.” <

For me, what I take away in particular about the ruling is a particular underlying fact, one that didn’t play a central role in the Court’s reasoning but that the author focused on late in the opinion as additional support for the conclusion that the fiduciary acted within its rights in terminating the plan, and was not subject to the additional merger related obligations that the union sought to impose on it; this was the fact that the employer had diligently and fully funded its pension plans, and its method of termination, although it had the side benefit of freeing up an extra $5,000,000 that would revert to the company and could be used to pay creditors, guaranteed the participants’ retirement benefits. In this day and age, where every day we see companies cutting back on pensions and we regularly see underfunded plans dropped in the lap of the Pension Benefit Guaranty Corporation, I am hard pressed to see how the company in this case could rightfully be faulted for terminating a properly funded pension plan in a manner that would protect plan participants. Too often, the law of ERISA is about cases in which participants are not fully protected, and the question is what remedy they do, do not, or should have - see, for example, the LaRue case. Here we have the reverse - fiduciaries who have fully acted to protect the plan’s participants, even if, by means of the surplus funds being taken out of the plan afterwards, some incidental benefit to doing so flowed to the sponsoring company. The underlying purpose of ERISA - to encourage and protect employee benefits - has been satisfied, so imposing possible exposure on the fiduciaries for not considering still some other approach to the ending of the pension strikes me as fundamentally inconsistent with the statute’s purposes.

The Supreme Court's opinion itself is here.

Supreme Court Rules on Beck v Pace

Posted By Stephen D. Rosenberg In Fiduciaries , Pensions , Retirement Benefits
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I don’t generally like to play first to post, and would rather wait to see what I can add to the discussion of any particular issue before posting on a breaking story. But as I have been watching and waiting for the Supreme Court’s opinion in the ERISA fiduciary duty case of Beck v. Pace International to be issued, I was quick to read it today when it hit my in box and thought I would pass it along. Hopefully, I will return to it in the next few days - after a hearing tomorrow and a deposition on Wednesday - and talk more about it, because there are some interesting aspects to the Supreme Court’s opinion. In the meantime, here is a quick summary of the opinion from SCOTUSBLOG:

Continuing the pattern of unanimity, the Court ruled in Beck v. PACE International Union (05-1448) that a company that sponsors its own pension plan for workers has no duty to consider merging it with another plan as a method of ending the plan while carrying on the benefits. In this case, the bankruptcy trustee opted to buy an annuity rather than consider merging with an ongoing plan. Justice Antonin Scalia authored the opinion.

You can find the opinion itself here, and some news coverage summing up what the case was about here. My prior posts on the case are here and here.

More on Amaranth and Fiduciaries' Due Diligence Obligations

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries , Pensions , Retirement Benefits
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In a post on Friday, I discussed how a large pension fund’s large losses from a hedge fund investment had given rise to litigation between the pension and the hedge fund, as discussed in this post in the WSJ Law Blog, and how it further raised the question of whether the pension plan’s fiduciaries might be liable to plan participants for their failure to properly vet and monitor that investment prior to the large loss. In essence, the question raised by the loss is whether the pension plan simply blindly - or at least half-blindly - invested the plan’s assets in the hedge fund without really understanding why or what they were doing, and was instead simply seeking to goose the pension plan’s returns without sufficient analysis of the risks, in much the same way individual mutual fund investors are often said to simply follow the latest investing trend without really knowing much about it or whether it is right for them.

Interestingly, I am clearly not the only one concerned whether pension fund fiduciaries and others charged with the management of pension assets are sufficiently knowledgeable about hedge fund investing and the ins and outs of any particular hedge fund, as the good folks at Pension Governance have now rolled out a series of webinars intended to educate retirement plan decision makers about hedge fund investing. Information about the series, called the Hedge Fund toolbox, can be found here.

A Thought About Litigation Against Fiduciaries For Hedge Fund Losses

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries , Pensions , Retirement Benefits
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We’ve talked a lot on this blog about the due diligence obligations of fiduciaries and other advisors to pensions, 401(k) plans and the like when it comes to investment choices. A story yesterday offers the opportunity for a little thought experiment demonstrating why it matters, and why anything less than stringent oversight and investigation of investment choices will put fiduciary advisors front and center as potential targets of lawsuits.

The WSJ Blog yesterday had this description of litigation by a public employee pension fund against a hedge fund in which it had invested that managed to lose literally billions of dollars, in spectacular and newsworthy fashion: 

Amaranth, the hedge fund that lost $6.4 billion in a few days last fall in the worst debacle in the industry’s history, responded today to a lawsuit filed against it in March by the San Diego County Employees Retirement Association, or SDCERA. SDCERA is the only investor to have filed suit against the hedge fund. . . At the time it filed the lawsuit, SDCERA said Amaranth’s collapse resulted from “excessive and unbridled speculation in natural gas futures that was directly contrary to statements made to SDCERA that Amaranth would be diversified and risk controlled.”
Amaranth says SDCERA knew exactly what it was getting into. In its motion, it quotes the funds private-placement memorandum, which read in big bold letters: THE FUND IS A SPECULATIVE INVESTMENT THAT INVOLVES RISK, INCLUDING THE RISK OF LOSING ALL OR SUBSTANTIALLY ALL OF THE AMOUNT INVESTED.
[A lawyer for Amaranth] said in a statement that he hopes “SDCERA will now withdraw its suit and stop wasting the resources of its 33,000 county employees and pensioners on this misguided and ill-fated litigation.”

So here’s the thought experiment to play out, the line of dots to connect. We know we are currently watching the rise of a pension/401(k) investment plaintiffs bar, clearly modeled after the securities litigation class action bar, ready and waiting to sue pension advisors and anyone else in the line of fire for excessive fees, poor investment choices, and anything else that affects returns in the plans. We see here as well in this blog post from the WSJ Blog that Amaranth’s defense to litigation by a pension plan is that the plan and its advisors knew exactly what they were getting into and should take responsibility themselves for the risks they took. Now here is where we connect the dots - if the hedge fund’s lawyers are right, then aren’t the plan’s fiduciaries and other advisors potentially liable for breaching their own obligations to the plan and its participants to properly select and monitor plan investments? And if so, then their best defense should the newly forming class action bar come after them for this mess would be that, contrary to what the hedge fund’s lawyers say, they actually did full and complete due diligence, and therefore lived up to their obligations and cannot themselves be liable for the fact that the investment went south.

And at the risk of sounding like a scold, that, I suppose, is what I would like fiduciaries to take away from the story of the Amaranth collapse, that hedge fund issues can come back on them, and they need to take steps in advance to insulate themselves. Just something to muse over on an early summer weekend at the beach, right?

Excessive Fee Litigation, 401(k) Plans and LaRue

Posted By Stephen D. Rosenberg In 401(k) Plans , ERISA Statutory Provisions , Equitable Relief , Fiduciaries , Pensions , Retirement Benefits
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The current issue of the National Law Journal has an article providing an excellent overview of litigation over allegedly excessive fees charged on investments in 401(k) plans. The article notes the variations in the theories, and discusses what are likely to be large, class wide actions in the near future. There are those who think these types of claims are going away but, as this article suggests, that doesn’t actually look to be the case.

Now connect the dots between that story and the LaRue case, which I discussed here and about which more can be learned here, in which the Supreme Court is being asked to determine whether a single participant in a 401(k) plan can bring a breach of fiduciary duty claim for breaches that harmed only his account. Right now, with regard to the excessive fee issue, we are seeing, as the National Law Journal article reflects, the development of essentially plan wide suits. But if developments in the LaRue case establish that any individual plan participant can sue for breaches of fiduciary duty affecting that participant’s account, that will change. We will instead have a universe of individual participants, all with the capacity to sue over their own account balance and over any complaints they have that excessive fees drove down the balance of their own accounts over the course of years, and I suspect we will see plenty of lawyers appear who are ready and willing to represent individual account holders in such lawsuits. This will create a different litigation world for fiduciaries, plan sponsors, plan administrators and the like, then the current one in which the real risk is large plan wide actions by specialist plaintiff firms. In its place will be more of a death by a thousand cuts type of litigation regime that will confront plan fiduciaries and their allies.

I am not saying this is necessarily a bad thing, or a good thing. It is what it is. But in at least one way it may well be a good thing. We are all bombarded with the mantra that, in this defined contribution plan world we now inhabit, individuals are now responsible for their own retirement, as opposed to when companies provided it by means of guaranteed pensions. Well, I suppose if we are going to make individual plan participants the risk bearers and care takers of their own retirement funding, the least we can do is provide them with the legal tools to protect their investments.

LaRue v. DeWolff, Losses to the Plan and the Supreme Court

Posted By Stephen D. Rosenberg In 401(k) Plans , Benefit Litigation , ERISA Statutory Provisions , Equitable Relief , Fiduciaries , Retirement Benefits
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SCOTUSBLOG is the NY Times, or maybe - given its focus on one particular field - the Wall Street Journal, of the legal blog world. With the backing of a major international law firm, it brings tremendous resources to its in-depth coverage of all things goings on at the Supreme Court. Cripes, the blog even has its own reporter, to supplement the work of the actual bloggers.

And of course that’s also why I read it, because you know you are not going to miss anything of importance to your own practice area that happens at the Supreme Court. And here, of interest, is their post on the United States Solicitor General’s brief recommending that the Supreme Court hear an appeal from the Fourth Circuit’s decision in LaRue v. DeWolff, Boberg & Associates, which presents the question of whether an individual participant in a 401(k) plan can sue to recover losses from errors by fiduciaries that affected only his or her account in the plan, rather than the accounts of all or most participants in the plan. In dispute is the question of whether it qualifies, first, as a loss to the plan, such that the participant can sue for breach of fiduciary duty, and/or second as equitable relief as the Supreme Court has interpreted that phrase for purposes of ERISA, such that the participant can recover on a separate equitable relief theory.

One thing’s for sure. If the Supreme Court puts its imprimatur on this theory, and makes clear that individual plan participants can sue for their own individual losses in their defined contribution accounts, there will be a whole range of new potential plaintiffs out there, and I am sure plenty of lawyers ready and willing to represent them. At the same time, to be fair, in a world of Enrons and the like, maybe there should be.

The Workplace Prof reads SCOTUSBLOG too, and here’s the prof’s take on these events.

Pension Performance, 401(k) Plans and Breach of Fiduciary Duty Litigation

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries , Pensions , Retirement Benefits
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This is an interesting paper, that comes to us via Workplace Prof, and which provokes further thought on the issue of the litigation boom involving 401(k) plans. The paper finds that pension plans outperform mutual funds, and attributes that differential to costs buried within mutual funds, as well as to the size of pension funds, which allows them to negotiate better deals on cost and related issues than would otherwise be the case. If you think about it, exactly that type of action is likewise what is expected of the fiduciaries of 401(k) plans, that they will assert themselves so as to avoid performance being affected by unreasonable fees or by other asset management decisions (such as overloading with company stock). One can think of lawsuits by participants against company 401(k) plans as being, at heart, driven by the failure of plans and their fiduciaries to live up to that high standard. Lawsuits involving excessive fees paid by 401(k) plans are in essence claims for failing to do what this article shows pension plans routinely doing: protecting participants against excessive costs impacting the plans’ returns.

401(k) Plans and Breach of Fiduciary Duty Lawsuits

Posted By Stephen D. Rosenberg In 401(k) Plans , Benefit Litigation , Fiduciaries , Retirement Benefits
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I have written before, and frequently (such as here and here), about the coming boom in litigation against plan sponsors and fiduciaries over alleged excessive fees and other alleged malfeasance in the administration of 401(k) plans. One point I have tried to drive home in my posts, including here and here, is that the best defense to this litigation boomlet, possibly soon to be a boom, is a good offense, in the form of careful, regularly scheduled due diligence with regard to the funds offered in a plan and the fees charged for those funds.

This article, making the same points, by the lawyers at Littler Mendelson, crossed my inbox today. It provides a nice easy to digest overview of the issue, and recommends the same preemptive course of conduct, in the form of these recommendations for due diligence:  

What to Do? We believe that there are some actions that employers and plan fiduciaries can take to protect themselves:
•Continually monitor all plan and fund expenses and assure that they have negotiated the best deal for participants, but keeping in mind that fees are only one piece of the fiduciary puzzle; the others include risk, rate of return, and historical performance.
•Periodically review all aspects of the fund selection and monitoring, and document these efforts.
•Be sure that all plan expenses can be determined from documentation provided or made available to participants, and consider providing participants with a separate summary of those expenses.
•Review your service provider agreements, make sure you get legal counsel involved in negotiating those agreements. It is recommended that all 401(k) plan service provider agreements prohibit any undisclosed revenue sharing.
•Ask your plan service providers to provide you with a detailed written description of all plan fees – hard dollar and soft dollar.
•If you believe you may be vulnerable, consider having a legal audit performed on your 401(k) plan.  

Sound advice in my book, and one I - and others - have been recommending for awhile.

Beck v Pace International Union

Posted By Stephen D. Rosenberg In Fiduciaries , Pensions , Retirement Benefits
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Well, my trial’s still ongoing, and I find myself short of time to really comment in any detail on the latest details in the always percolating and never quiet world of ERISA and insurance law. However, I do still find time to continue my own reading on the subject, and so I am able to pass along for your review items that I find particularly interesting. Head and shoulders above anything else on that list right now is this excellent analysis by Workplace Prof blog of the Supreme Court hearing in Beck v. Pace International Union, which concerns the issue of fiduciary obligations with regard to the distribution of a terminated plan’s assets. The analysis is timely, interesting, and probably, in a nutshell, all you need to know about this case until the time the Court actually issues an opinion on the case.

Defined Benefit, Defined Contribution, and The Psychological Effect on Litigants

Posted By Stephen D. Rosenberg In 401(k) Plans , Benefit Litigation , Fiduciaries , Pensions , Retirement Benefits
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Here is a very neat and interesting paper contrasting defined benefit plans - i.e. pensions - with defined contribution plans - i.e. 401(k) plans - and addressing, in particular: (1) the decline in the former in the workplace and replacement by the latter; and (2) the problems engendered by that change. In essence, the authors argue that the defined contribution plans, as they currently are regulated and operated, simply are not satisfactory replacements for the vanishing pension system, and cannot be counted on to provide an appropriate stream of retirement income for most retired workers. The authors provide suggested changes for both types of plans that, they hope, will make pensions more palatable to employers and 401(k) plans more beneficial to employees.

I have spent a couple days musing on the paper, which was first brought to my attention in this post last week on Workplace Prof, and have a few thoughts to offer, mostly about how the facts and arguments in this paper fit in with the litigation climate involving, in particular, 401(k) plans. What jumps out at me is the central theme of the paper, that pensions are overly regulated and employee contribution plans like 401(k) plans insufficiently regulated, with the result that the latter plans are unlikely to meet the needs of the prototypical employee. And this leads to two thoughts about excessive fee, breach of fiduciary duty and other types of lawsuits against companies sponsoring 401(k) plans and the advisors they retain. First, are the suits driven, at core, by the defined contribution plans' absence of overarching regulation and government protection, placing the onus for policing them on employees and their lawyers, who can be seen to have been forced into serving almost in a “private attorney general” role with regard to such plans? And would this be the case if, like pensions, they were more heavily regulated and backstopped by the government, much like pensions are by the Pension Benefit Guaranty Corporation? And second, echoing a theme I have commented on in the past, to what extent is the litigation driven by the exact problem emphasized in the article, namely that workers cannot confidently assume an appropriate retirement income by relying on 401(k) plans and therefore may rightfully be afraid for their long term economic security? If they didn’t have that fear, and instead were confident in their retirement income, much as - sometimes wrongly - they generally are in pensions, would they be so quick to authorize lawyers to sue in their names?

The Supreme Court's Next Words on Fiduciary Duties and Pension Plans

Posted By Stephen D. Rosenberg In ERISA Statutory Provisions , Employee Benefit Plans , Fiduciaries , Pensions
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Here is a terrific and in-depth review of the underlying facts and issues in the pending Supreme Court case of Beck v. Pace International Union, which is scheduled to be argued later this month, and which involves the extent, if any, to which fiduciary obligations apply to a decision to terminate a pension plan by purchasing an annuity rather than by merging the plan into other existing plans. Thanks to Workplace Prof for the heads up about this on-line publication out of the Cornell Law School, a source that I don’t regularly follow (but of course, that is what I rely on the Prof to do, to follow academic sites like that in my stead).

On a side note, one of the things that I simply really enjoy about ERISA is that whenever the Supreme Court weighs in on an ERISA issue, we can look forward to years of - usually conflicting - district court and circuit court decisions trying to apply the Supreme Court’s ruling, giving us great material for litigating cases and for blog discussions.

Merger and Anti-Cutback Provisions of ERISA, and a Handy Rule of Thumb

Posted By Stephen D. Rosenberg In Benefit Litigation , ERISA Statutory Provisions , Fiduciaries , Pensions , Retirement Benefits
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This case, out of the United States District Court for the District of Massachusetts, provides a nice little rule of thumb for amending, merging or otherwise altering retirement benefit plans - namely, that it makes it hard to get sued and lose if you make the changes in a way that avoids altering the actual benefit amounts of any given participant. In this case, an employee complained about changes to the company’s retirement plan made as part of a corporate acquisition and about a later change intended to protect other participants’ participation in the plan. The court found that the changes did not violate ERISA’s merger or anti-cutback provisions, as the evidence showed the changes had no adverse impact on the plaintiff’s benefits. In an interesting discussion of the merger and anti-cutback provisions, the court explained that:  

Pursuant to ERISA § 208 and I.R.C. § 414(1), when benefit plans are merged, each plan participant must receive benefits immediately after the merger that are equal to the benefits he would have received had his plan terminated immediately prior to the merger. . . .At its core, this merger rule is a simple one, intended to prevent companies from eliminating an employee's previously accrued benefits when merging one benefit plan with another. . . . Much like the merger rule, the purpose of the anti-cutback provisions of § 204(g)(1) of ERISA is to prevent an employer from "pulling the rug out from under employees" by amending its benefit plan to eliminate or reduce a previously accrued early retirement subsidy. Specifically, the anti-cutback rule provides, with certain exceptions not relevant here, that "[t]he accrued benefit of a participant under a plan may not be decreased by an amendment of the plan." 29 U.S.C. § 1054(g)(1). . . .The Act requires that the merger or amendment of retirement plans does not result in a plan that has the effect of reducing an employee's previously accrued benefits.

The court ruled across the board in favor of the defendant, not just on the merger and anti-cutback counts but on all counts pled by the participant, with the decision driven in large part by the fact that the evi