Reflections on the Second Circuit's Decision in Osberg v. Foot Locker

Posted By Stephen D. Rosenberg In Class Actions , Equitable Relief , Pensions
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I was being interviewed by a reporter the other day and casually noted that I keep my twitter open on my computer all day for no other reason than to follow Bloomberg BNA’s nearly instantaneous reporting of important new court decisions in the ERISA field. True to form, this morning I came into work to an article on, and a copy of the decision by, the Second Circuit yesterday in the long running pension class action case, Osberg v. Foot Locker, which concerns a claim for reformation of a pension plan to provide employees with the benefits they believed were promised in plan communications, rather than those actually provided under the plan’s express terms themselves. You can find the Bloomberg BNA article on it here, and the decision itself here.

The decision is worth reading for a number of reasons, a few of which I will briefly touch on here. First, anyone who litigates in this area knows that it is very hard – and most circuits have adopted a range of doctrinal hurdles making it so – to get courts to award, on equitable relief grounds, any benefits different than those expressly authorized under the plan’s terms, even where there is evidence that the plan communications to the employees did not spell out those benefits accurately. The Second Circuit, and the district court before it, granted the employees, through the tool of reformation, benefits beyond what the plan itself provides. The Second Circuit’s decision, in my view, immediately becomes the polestar for claims of this nature, to the extent that lawyers for participants will look to it for guidance and support, and lawyers for plans will have to steer around it anytime a plaintiff seeks benefits beyond those expressly provided under a plan’s terms.

Second, by ruling in favor of the employee class, the decision is actually a major setback for the defense bar and, in many ways, for plan sponsors' freedom of action in operating and, in particular amending, plans. Plan sponsors and fiduciaries have generally been very successful in limiting participants to recovering only the amount of pensions or other benefits authorized under the express, typically actuarially driven, terms of the formal written plan itself. This decision immediately becomes the leading support for the premise that courts should not so limit such recovery, and should instead look to what was promised to participants in deciding the amount of benefits owed to participants.

Third, from a pragmatic, educational perspective, if you have ever wanted a good description in plain English of cash balance plans and the concept of “wear away,” you won’t find a better one than the Second Circuit’s explanation of those topics here.

Fourth, the Court provides an excellent explanation of what must actually be proven to reform a plan to provide the more extensive benefits that, relative to the plan’s terms themselves, plan communications led participants to believe they would receive. For me personally, this is a very exciting development – having been a contracts geek in law school, I have longed for the day when reformation would become central to my practice, and thanks to the Second Circuit, that long awaited day has finally arrived. Hallelujah! The chorus of lawyer angels sing!

At the Intersection of the NFL Draft, ERISA, Divorce, Venue and Spousal Benefits

Posted By Stephen D. Rosenberg In Benefit Litigation , ERISA Statutory Provisions , Pensions
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Is there a more hyped sporting event with less substance than the NFL Draft? Does everyone on the internet drive traffic to their sites by linking to the draft if at all possible? Well, of course the answer to both questions is yes, and so I too will link a post to the NFL Draft.

How am I going to do that? By taking advantage of the fact that Judge Woodlock, in the United States District Court for the District of Massachusetts, just issued an order on venue and QDROs in ERISA litigation that is not only must reading as a tutorial on a number of ERISA issues, but that also concerns benefits due to a deceased former professional football player’s ex-wife under the NFL’s player retirement plan.

The ruling addresses in detail a number of issues that are dear to my heart, both because they come up so frequently and also because they present subtly complicated issues. First, he discusses in detail the standards governing proper venue of a claim for benefits under ERISA, and in particular the statutory language allowing venue to lie in any district where a plan can be found. In the view of plaintiffs’ lawyers, that allows venue to exist anywhere in the country that the plan administrator or the plan itself might be subject to jurisdiction under a minimum contacts test, while defense lawyers typically assert it must have a more limited effect. Judge Woodlock provides a detailed analysis of the issue, before adopting – as has consistently been done in this District but not always in others – a broad interpretation of the scope of venue under that provision. He then also provides a detailed analysis of the question of when venue should be transferred in such a case, giving great weight to the plaintiff’s choice of venue, even when the only real reason for picking that venue may have been that plaintiff’s counsel – and not the plaintiff or the defendant – is sited there. I would highly recommend the opinion for a tutorial on these issues.

But then he addresses one of the oddest issues, I think, in ERISA litigation over pensions, which is the post-hoc creation of QDROs by probate court judges. In that fact pattern, after the plan participant’s death, a probate court judge goes back to a prior divorce proceeding and enters an order retroactively granting the former spouse of the deceased participant the right to pension benefits, with the order backdated to a time when the participant was still alive and the divorce proceedings were ongoing. You would think this is a bizarre fact pattern, right? Something you would only see on a law school exam. That’s what I thought too, the first time I saw it happen years ago. But as this opinion discusses, this happens all the time, or at least often enough to have generated a substantial body of case law. The Court does an excellent job of surveying that case law in its opinion. If this issue appears in your practice sometime in the future, dear reader, and you haven’t seen it before, you should start by reading this opinion.

The Church Plan Cases at the Supreme Court: A Billion Here, A Billion There and Soon You Are Talking Real Money

Posted By Stephen D. Rosenberg In Class Actions , ERISA Statutory Provisions , Employee Benefit Plans , Pensions
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Several years ago, when the first of the class actions were filed alleging that medical institutions were improperly claiming church plan status under ERISA, I was speaking on a panel at one of the American Conference Institute’s ERISA Litigation conferences, where I found myself eating lunch with two of the lead lawyers on those class action cases. I raised for them – and someone else would eventually ask the same question during their presentation on the church plan class actions – the question of damages. In particular, I wondered what they would ask for, and whether the defendants could afford it. I assumed that part of the relief would be to have the plans made compliant with the full panoply of ERISA’s procedural, notice, plan communication, claims processing, funding and other requirements. But that, I noted, was the easy part; it would only require the defendants to essentially hire really good ERISA lawyers and administrators and fix the plans. But what about the money? Could the defendants fund the massive shortfalls that the plaintiffs were claiming existed in the plans?

Well, of course they could, was the answer. And the size of some of the settlements of those actions to date indicate that truer words were never spoken. As Jacklyn Wille of Bloomberg BNA notes in this article, some of these lawsuits have been settled with the defendants agreeing to contribute from $75 million to as much as $350 million to the challenged pension plans. The defendants in these actions can, it appears, generally afford to fund the plans on the level required by ERISA. The numbers at issue across all of the targeted plans are breathtaking, running into the billions across all of the targeted entities and plans, making the stakes of the Supreme Court’s upcoming consideration of the scope of the exemption and whether these types of entities have properly invoked it among the highest – from a purely financial perspective – of any dispute I can recall coming before the Court recently. As Ms. Wille writes, “the lawsuits claim that more than 300,000 hospital workers face a pension shortfall of about $4 billion because hospitals have wrongly designated their pension plans as ‘church plans’ exempt from the Employee Retirement Income Security Act.” Expect to see no expense spared in the briefing at the high court.

A Busy ERISA Week in the Ninth Circuit: Moyle v. Liberty Mutual and Rich v. Shrader

Posted By Stephen D. Rosenberg In Copyright Infringement , Design and Architecture: Protection of Rights , ERISA Statutory Provisions , Employee Benefit Plans , Equitable Relief , Intellectual Property Litigation , Patent Infringement , Pensions , Retirement Benefits
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Last week, I spoke on a panel with, among others, Trucker Huss’ Joe Faucher, who discussed some aspects of Ninth Circuit ERISA jurisprudence with a mostly East Coast-centric audience. A week later, that circuit has turned out two of the more interesting and potentially significant appellate decisions in ERISA that any court has produced in awhile.

In the first one, Moyle v. Liberty Mutual Retirement Benefits Plan, the Ninth Circuit tackled an old chestnut in ERISA litigation, namely the argument that a plaintiff could not bring an action alleging both the wrongful denial of benefits and seeking equitable relief under ERISA as well. Many courts – and pretty much every defendant ever sued by a plaintiff making both claims – have taken the position over the years that Supreme Court precedent precludes bringing both claims, and that, if a plaintiff pled both claims, the equitable relief claim could and should be dismissed at the outset of the case. As a long-time commercial litigator who has litigated a range of cases from IP disputes to reinsurance cases to everything in-between, this always struck me as an odd proposition, because it ran contrary to the standard rule in the federal court system allowing a plaintiff to plead in the alternative, meaning that a plaintiff could allege multiple claims even if they were sufficiently inconsistent that, at the end of the day, the plaintiff could recover on only one of the claims. In Moyle, the Ninth Circuit, following the lead of an excellent analysis of the issue by the Eighth Circuit, found that, in light of the Supreme Court’s decision in Amara, a plaintiff could pursue denied benefits and equitable relief under ERISA in the same case. You can find what I hope is a cogent explanation of why, after Amara, it is clear that both such claims can be brought in the same action in this reply brief, which I recently filed in the First Circuit (the discussion begins at page 22 of the brief). The Ninth Circuit’s decision now reinforces the Eighth Circuit’s conclusion to this effect.

By the way, even aside from its significance to ERISA litigation, I took note of Moyle for a personal reason. In this profession of specialists – and I am one as well – people are often interested to find out that I have, over the years, maintained an active (sometimes more active, sometimes less active) intellectual property litigation practice, alongside my much larger ERISA practice. I have tried patent infringement cases, done more consumer product copyright infringement cases than I can count, and done a fair amount of software infringement litigation and counseling. It all goes back originally, though, to Golden Eagle Insurance Company, the once defunct California insurer whose employees are at the heart of the Moyle case. Through a client at Golden Eagle, I represented Golden Eagle’s California insureds in IP litigation from the Southern District of New York to Rhode Island and in Massachusetts (I don’t recall any of those cases going further north, and I know they didn’t go further south) starting in the 1990s, and my IP practice grew from there. Its funny to see these different sides of my practice come together in Moyle, with a major ERISA decision stemming from a client that was instrumental in building my IP practice.

The other case decided by the Ninth Circuit is less novel, but still important. In Rich v. Shrader, the Ninth Circuit held that a stock option program for officers was not subject to ERISA, because its intended purpose wasn’t to provide retirement income. Whether ERISA reaches particular stock grant or other compensation plans is often a hotly contested issue in disputes between companies and their former officers, and Rich is a fine example both of that circumstance, and of how to analyze whether ERISA is applicable. You can find an excellent summary of it in this Bloomberg BNA write up of the case.

Thoughts on Kaplan v. Saint Peter's Healthcare System and the Church Plan Exemption

Posted By Stephen D. Rosenberg In Class Actions , ERISA Statutory Provisions , Employee Benefit Plans , Pensions , Retirement Benefits
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Remember the Church Lady from Saturday Night Live? I have always wondered if she was covered by an ERISA governed retirement plan, or whether her retirement plan was exempt from ERISA as a church plan. I think the answer probably lies in the question of whether her retirement benefits were established and maintained by NBC, or instead directly by her church. I always thought SNL should do a skit on this topic; Chevy Chase would have been hysterical portraying the head of EBSA.

It’s a silly hypothetical, but its an interesting way to think about the Third Circuit’s recent decision in Kaplan v. Saint Peter’s Healthcare System, which is the first appellate decision addressing the recent wave of lawsuits claiming that a number of pension plans that always considered themselves exempt from ERISA on the grounds that they were church plans are, in fact, not church plans and instead are subject to ERISA. The Third Circuit found that such an exemption can only be claimed when the plan was directly established by a church itself, and not by an organization associated with a church. Although the Third Circuit buttressed its interpretation of the language of the exemption itself with other grounds for its ruling, the central aspect of its decision turned on the actual statutory phrasing of the exemption. This focus on the language used in the statute makes the Court’s decision seem straightforward, but it really isn’t; in fact, as the Third Circuit’s decision reflects, the IRS itself has interpreted that same language quite differently for many years.

The Third Circuit’s opinion is a great read, and very persuasive. And yet in some ways, while very compelling, it reads almost as much as a political document – in the sense of being written to persuade an audience – as it does as an inevitable outcome of sharp legal reasoning (which it clearly is as well). The Court provides a very plausible interpretation of the statutory language itself, but if that analysis stood alone, segregated from the supporting arguments relied on by the Court for its interpretation of the church plan exemption that are based on canons of statutory interpretation, on legislative history and on the public policy behind ERISA, that analysis would not be half as persuasive. The proper interpretation of the language in the exemption itself has been hotly disputed in the courts for a simple reason: the language doesn’t perfectly fit either the findings of the Third Circuit, nor those of the courts and parties who argue that the exemption applies more broadly than the Third Circuit found. But the Third Circuit, by buttressing its interpretation with very persuasive arguments that statements in the legislative record and the purposes of ERISA itself support its reading of the church plan exemption, created a heuristic environment in which the panel’s reading of the exemption seems almost inevitable, and in fact practically preordained (get it?).

And yet every student of the political process or experienced appellate lawyer knows that the only thing more malleable than canons of statutory interpretation is legislative history itself. As a result, despite the beautiful, almost cathedral like construction (hope you are enjoying the sustained metaphor as much as I am) of the Third Circuit’s opinion, I am not sold that it is the final word on the question, and would not be surprised at all if one or more other circuits came to an opposite conclusion. I have little doubt that another appellate panel, confronted by the same unclear statutory language, could find support in both legislative history and the public policy underlying ERISA for an entirely opposite interpretation of the exemption.


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.


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.

Seeking Shelter from the Storm: the Washington Post on Retirement Readiness

Posted By Stephen D. Rosenberg In 401(k) Plans , Class Actions , Conflicts of Interest , Pensions , Retirement Benefits
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Well, I am not sure how much new there is in this Washington Post article, “A Retirement Storm is Coming,” but I liked it nonetheless. It’s a good story on the problems in retirement financing people face and possible solutions. What I liked most about it are a few points. First of all, people cannot hear often enough that most of them are going to be on their own when it comes to retirement finances; too many people think that social security, the tooth fairy, or pensions of the types their parents had (but not they) are going to finance their retirement, when it is likely that none of these are any more likely than the next to do so. I lump social security in with two things that are seldom spotted – the tooth fairy and pensions – in this regard because, as the article points out, financial realities make it ill-advised for anyone mid-career or younger to assume a particular amount of social security payout in projecting retirement incomes.

I also like the article’s rejection of two things that are, in essence, wishful thinking by many future retirees – that traditional, private employer pensions will come back into vogue or that government programs will be created to solve the retirement crisis. As the author makes clear, the former isn’t coming back, ever, and the latter, given the political climate, is a barely more likely occurrence.

The author looks at these points and comes to the only conclusion that anyone weighing the evidence could come to: that each worker is responsible for his or her own retirement finances, and will have to self-finance retirement. This means a couple of things. First, people should not even begin to think they either can, will, or should be retiring in their early to mid-60s. Even leaving aside the question of whether it is a healthy thing for a healthy person to do, the finances won’t support it for almost every member of the 99%: the time in retirement that needs to be funded will, knock on wood, be too long for most people.

Second, successful retirement investing while working is crucial, and this makes the focus on the costs in 401(k) plans and the risk of conflicted advice by financial advisors important. Anything that makes it more likely that a working person saving for retirement will end up paying more than is necessary for a return on investment that is lower than it should be makes it even harder for people to prepare for retirement. This point could drive an article all on its own, covering topics ranging from fee disclosures mandated by the Department of Labor, to the proposed new definition of fiduciary, to class action litigation over the costs of investment options in 401(k) plans. A topic for another day, but for now, I wanted to pass along these macro level thoughts on the Post’s article.

(By the way, did you catch the allusion in the title of this post? Its our musical moment for Monday).

Do You "Work For" Uber?

Posted By Stephen D. Rosenberg In 401(k) Plans , Class Actions , Employee Benefit Plans , Long Term Disability Benefits , Pensions
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You know, the Uber decision out of the California Labor Commission is fascinating, even if it isn’t directly on point with the subject of this blog. It immediately brought me back to the first appeal brief I ever wrote, as a young associate, which concerned, at its heart, the question of whether the plaintiff was an employee or instead an independent contractor. In Massachusetts, at least at that time, there was significant authority laid out in published cases as to the test for determining whether someone was an independent contractor, but essentially no such statements in the published decisions defining what makes someone an employee. I wrote the brief from the perspective of whether the plaintiff in that case qualified as an independent contractor under the standards laid out in the case law, demonstrated that the plaintiff did not satisfy those standards and thus was not an independent contractor, and that the plaintiff was therefore, by definition, an employee. What stands out to me, though, and creates my lens for viewing the Uber decision, is that the partner I turned the brief into read it once and then immediately said to me that I had shown the plaintiff was not an independent contractor, but that he did not see why that made the plaintiff an employee. I can remember explaining to him that under Massachusetts law, and really anywhere in the country, someone has to be one or the other, either an employee or an independent contractor, and that the case law analyzed the issue in that way: if the relevant legal test does not demonstrate independent contractor status, than the person in question is by definition an employee.

It has never struck me that Uber drivers and similar “workers,” for lack of a better word, fit comfortably within those traditional understandings, that one is either an independent contractor, as we have traditionally understood the phrase, or an employee. They are clearly entitled to more protections and benefits than the society at large and employment law in general extend to independent contractors, as they don’t really fit the traditional understanding of that term, no matter the clever machinations of Silicon Valley lawyers, but it is not clear that they qualify as employees under any traditional sense of the word either. There may, perhaps, have to be evolutionary movement in the case law that will allow the legal structure to incorporate these types of sharing economy worker bees into the system somewhere in a middle ground, and there may have to likewise be a similar movement in statutory provisions that control access to and administration of 401(k) plans, disability benefits and the like for these purposes. But as this article points out – featuring Boston lawyer Shannon Liss-Riordan (Bostonians always want to be the first ones to fire the first shot for liberty, in any context, see, e.g., the Battle for Bunker Hill, which was actually fought on Breed’s Hill, but why ruin a good story) – the first steps in this process will be class action and other litigation, and I just wonder whether that is too blunt an instrument for this process. Would we, and the workers of the sharing economy, be better served if state legislatures and Congress tackled the problem of their job classification and their rights under employment law in the type of thoughtful way that created ERISA forty years ago (if you think I am kidding with that last characterization, I am not; take a look at Professor Jim Wooten’s work on the Congressional development of ERISA, part of which you can find here)?

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.

What's the Difference Between Public Pensions and Union Pensions?

Posted By Stephen D. Rosenberg In Pensions
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In the ways that matter right now, not that much. Here is a more detailed look, by focusing on certain union pension plans, at the move towards cutting benefits in multiemployer pension plans that I talked about in my last post. It’s interesting for the details it provides on these particular circumstances, but it is also noteworthy for a few broader points it brings out. First, note the high return on investment that was assumed for purposes of one of the funds in question becoming solvent. This mirrors a problem that has come to light over the past few years with public pensions: way overly aggressive assumptions with regard to returns as a basis for projecting future solvency. Second, note the demographic problem of too few workers and solvent employers supporting too many retirees: that’s a death spiral problem for any pension fund that doesn’t already have the money in place to cover future liabilities and instead must rely on incoming cash flow to meet those obligations. Third, note the fact-based skepticism about a federal political solution being reached, mirroring the extent to which the public pension crisis is linked to a long term lack of political will, as I noted in my last post. And finally, fourth, note the same key dynamic that is at play in the public pension crisis: do you invest public funds to protect benefits or cut the benefits?

Coming Soon to a Private Pension Near You: Benefit Cuts?

Posted By Stephen D. Rosenberg In Pensions
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So, I have discussed before – many times, actually, in the wake of Detroit and similar experiences with municipal finances across the country – that public pensions pose a moral, political and economic dilemma. They are underfunded (even many of the ones that aren’t in the news) and something, someday, is going to have to give on them. Either benefits will be reduced, even for those already retired, or the taxpayer, in some form or another, is going to have to bail out those pension funds. With regard to public pensions, it is as much a question of political will – and expediency for politicians – as it is a question of anything else (as I discussed here, nothing about recent developments makes me believe that the political arena really has the gumption to solve this and is instead likely to leave it to lawyers and courts to sort out), but this is not a new development at all. Leaving all names out of the story – including even of the state involved – I can recall how, regularly, right before a particular state held its gubernatorial elections, state employee unions would suddenly conclude negotiations with the existing administration over their new contracts, and would receive generous boosts to salary and benefits. This occurred decades ago -I didn’t think it was a coincidence then, and I don’t think it’s a coincidence now. Multiply that by a thousand fold when you think about the current public pensions in crisis (and the many more to come) and you understand both how we got in this mess and how unlikely it is that political entities will deal with the problem proactively, rather than wait until things are too bad to ignore, such as occurred with regard to Detroit.

Well, now it looks more and more like the same calculus is coming into play with troubled private pensions as well, with Congress looking at potentially allowing benefit cuts for retirees under troubled multi-employer pensions. Once again, you have underfunded pension plans and the question becoming whether to cut benefits or rely on the taxpayer to fix the problem, and I probably don’t have to tell you which approach seems to have the upper hand right now (if you can’t guess, read this article). There has been much moaning over the years about the death of the American pension, and this is just the latest act in that long running drama.

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.


Public Pensions After Detroit and Stockton

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

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

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

Should the DOL Further Regulate Derisking?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Imposing Discipline on Promises of Public Pensions

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

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

CalPERS and Passive Investing: A Couple of Thoughts

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

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

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

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

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

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

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

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

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

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

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

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

The Lessons of Detroit for Private Sector Retirement Plans

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

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

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

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

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

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

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

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

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

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

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

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

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

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 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.

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

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

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

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

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

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

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

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

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.

Ask Not for Whom the Bell Tolls

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

Pricey Investments, Poor Outcomes

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

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

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

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

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

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

A Perfect Storm, ERISA Style

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

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

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

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

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

The Very Interesting Lessons of Novella

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

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

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

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

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

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

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

Zen and the Art of Pension Plan Maintenance

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

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

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

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

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

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

On the Ticking Time Bomb of Public Pension Plans

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

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

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

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

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

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

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.

On Fiduciary Liability Insurance

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

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

The Case of the Billion Dollar Typo

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

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

Divorce Me for My Money, Or Love, Continental Style

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

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

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

Conkright, Discretion and the Supreme Court

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

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

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

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

QDROs Down the Drainville?

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

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

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.


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.

GM and the Viability of Pension Plans

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

The Longer Term Impact of the Last Several Weeks on Pension Plans

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

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.

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.

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?

The End of the Pre-History of Retirement

Posted By Stephen D. Rosenberg In Pensions
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Here is an entertaining history of retirement in a nutshell, at least up to the new world we inhabit today, in which defined contribution plans govern and employees bear all the risk. What is interesting to note is that this conventional version of the story basically ends with the - effectively, in any event - death of pensions. The world of retirement and the law that governs it in the new world of defined contribution plans is the story we see playing out in the rulings, such as this one and this one, that are beginning to open up liability for those who are responsible for the operation of defined contribution plans; how and where that evolutionary line proceeds is the gazillion dollar question for all those who may end up with fiduciary liability for any errors that occur as this process plays out.

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.

There's A Public/Private Sector Distinction For a Reason

Posted By Stephen D. Rosenberg In 401(k) Plans , Pensions
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Two of my favorite bloggers ended up at the same place on a topic of interest over the past week, although from different directions and apparently unwittingly. The WorkPlace Prof posted last week on the idea being floated in a number of state legislatures that the states or their pension plans manage private sector 401(k) (or equivalent) plans and funds, and noted that this simply didn’t sound like a good idea. I nodded my head in agreement at the time, but didn’t think much more of it till today, when Susan Mangiero, who blogs at the cleverly named Pension Risk Matters, posted this piece on financially dubious plans in Massachusetts to increase public sector pension payouts, raising questions about both the financially irresponsible nature of the plan and the “smoke filled room” nature of the decision making. Implicitly, the post leads you to the place where the Workplace Prof’s recent post left off, with the idea that state pension plans aren’t necessarily the place to put private sector 401(k) money.

Actuarial Assumptions and Problem Pensions

Posted By Stephen D. Rosenberg In Pensions
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Maybe, rather than three, there are actually four kinds of lies: lies, damn lies, statistics, and actuarial assumptions relied upon for public pensions. A little harsh, perhaps, but that is certainly what this article in the New York Times today suggests. Less flippantly and more substantively, the article’s discussion of underlying actuarial problems with public pension plans and the corresponding un- or underfunded nature of their liabilities points out in bas-relief something that is often lost when discussions turn to the transformation of retirement funding from a defined benefit world of pensions to the defined contribution world that we currently live in, namely that, although concerns about defined contribution plans as the centerpiece for retirement funding are both numerous and legitimate, defined benefit retirement plans come with their own problems as well. The major difference, though, is that most of those problems in the defined benefit context stay with the provider of the pension, i.e. the prior employer, while most problems with defined contribution plans fall on the pocketbooks of plan participants.

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.

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?

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.

A Blog to Pass Along, and Some Thoughts About the Supreme Court's Interest in ERISA

Posted By Stephen D. Rosenberg In 401(k) Plans , Benefit Litigation , Health Insurance , Pensions , Retirement Benefits
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Lots going on, lots to talk about. Let’s start with this one, which, coincidentally, allows me to kill two birds with one stone. You may recall that some time back I mentioned that I had come across two interesting blogs that I wanted to pass along, one of which was The Float, covering primarily investment related issues and their intersection with ERISA. I mentioned I would pass along the other blog in a subsequent post, which, almost inevitably since I had promised to do so, I never did, as breaking news and a pending trial shunted it to the side. Well, that other blog is this one, Benefits Biz blog, by the benefits and executive compensation lawyers at Baker & Daniels, which I have found to be a consistently interesting read. Moreover, I return to it today to pass that link along because of a very interesting post they have concerning a case that the Supreme Court has now elected not to add to its docket, concerning the relationship of age discrimination laws and employer provided health insurance benefits. As many already know and as I have discussed in the past here on this blog, the Supreme Court has shown a continuing interest in all things ERISA, with three cases either already decided or added recently to its docket. The Supreme Court’s lack of interest in this particular case perhaps hints - I am reading tea leaves here now, in the august tradition of Kremlinologists and other students of secretive institutions - at the outer limits of the Court’s interest in the subject of ERISA. The cases accepted for review to date by the Court emphasize litigation issues and, in particular, the effect of the evolution of retirement benefits from pensions to 401(k) plans on the litigation environment. This is not a fair reading of the case passed on by the Court that the Baker & Daniels’ lawyers discuss in their post; we may be able to infer that if you want to attract the Court’s interest in an ERISA case right now, you better make it about litigation and defined contribution type plans.

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.

Supreme Court and Qualified Domestic Relations Orders

Posted By Stephen D. Rosenberg In ERISA Statutory Provisions , Pensions
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Interestingly, right after I posted about Albert Feuer’s detailed analysis of the proper role of Qualified Domestic Relations Orders (“QDRO”) in the ERISA scheme, the Supreme Court granted cert in a case on that exact issue (although I don’t intend to imply a causal relationship between the two events). The Court granted cert yesterday in the case of Kennedy v. DuPont Plan Administrator, but only on Question number 3 raised in the petition, which was whether ERISA’s QDRO provisions are the only manner in which an ex-spouse can waive rights to a former spouse’s pension benefits. SCOTUS blog has the story here, and the petition (as well as the opposition) here.

This order continues a trend I suggested we would see, namely the Supreme Court, having concluded its efforts to redirect the path of patent law after substantial criticism in the business, legal and academic communities that the governing body of law in that area was veering wildly off course, turning to another statutory body of law, ERISA, that has likewise come under significant criticism, in this instance because of the stress points that have erupted as the law of ERISA has attempted to cope with the transition from a defined benefits world of pensions - where employees bore little risk - to a defined contribution world, in which employees bear most of the risk and thus place more demands on ERISA and the case law interpreting it. Still, even under those circumstances, the focus on QDROs seems a slightly unusual point of emphasis for the Court, given the range of ERISA related issues that the Court could select from. The case and the issue presented do, however, concern pension benefits and the impact of ERISA on employee’s rights under them, fitting with the theme I identified above, plus QDROs themselves are being interpreted in some interesting ways at the district court level, as I suggested in this post, ways that may not be an exact fit with the statutory requirements.

Alienation of ERISA Governed Benefits

Posted By Stephen D. Rosenberg In Benefit Litigation , ERISA Statutory Provisions , Pensions
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I’ve had an interesting collection of educational materials and seminars piling up on my desk for awhile now, a number of which may be of interest to various readers of this blog. In the hope of both clearing up that backlog and passing along useful information, I am going to start a short series of - or maybe a series of short - blog posts on them, until they are exhausted. I expect I won’t run through them all seriatim, as I suspect breaking news or new court decisions will interpose themselves, but we will see.

The first one I wanted to pass along is something you can blame the Workplace Prof for, whom I have fingered in the past as the filter I use to screen law review articles and decide which ones might be worth reading. Some of you know from past posts that I don’t put a lot of stock in most law review publications, but some fit my criteria for being useful, which revolves heavily around whether they break any new ground in an area or manner that makes them useful to courts and practitioners. This one here, a 142 page analysis of when ERISA governed benefits can be transferred to anyone other than the participant or the participant’s selected beneficiary, fits this criteria to a tee. The Workplace Prof passed along the abstract of the article a little while back, which is:

This Article argues that a beneficiary designation made by a participant pursuant to the terms of an ERISA plan determines who is entitled to survivor benefits from that plan. Such designation may not be superseded by

(A) an agreement made in a marital dissolution or separation whereby a participant promises to make or retain a different designation (such agreements are not qualified domestic relations orders, "QDROs," because QDROs are limited to orders directed not at participants but at ERISA plans);

(B) an agreement made in a marital dissolution or separation whereby a participant's former or separated spouse "relinquishes" any interest in the participant's ERISA plan benefits; or 

(c) a state law or federal common-law principle whereby killers of a participant are deprived of the entitlement to the participant's survivor benefits from an ERISA plan.

ERISA pension plans must incorporate the only two ERISA required beneficiary designations, QDROs and spousal survivor benefit designations. Neither statutory designation applies to an ERISA plan that is not a pension plan, such as a life insurance or disability plan. Thus, neither statutory designation may supersede a beneficiary designation made pursuant to the explicit terms of an ERISA life insurance or disability plan.

ERISA voids both (A) a direct benefit claim against an ERISA plan that is not based on a designation that was made pursuant to the terms of the plan, and (B) an indirect benefit claim against the recipient of plan benefits that is not based on a designation that was made pursuant to the terms of the plan.

What jumped out at me from the article itself is the author’s discussion of the application and impact of Qualified Domestic Relations Orders (known in common parlance as QDROs), which can supercede a participant’s designation of the party to whom plan benefits should be paid. The author gives QDROs a far narrower scope of application and power under ERISA than it appears to me courts have been giving to them, and in fact his position on their impact runs counter to what appears to me to be the trend at the trial level in the federal system in applying QDROs. He makes a fascinating and well-supported argument, although at this point, I reserve judgment on the ultimate issue he raises, of exactly how QDROs should be understood under ERISA. At a minimum, however, for anyone arguing the point in a case, there is a wealth of information in the article, as well as support for arguments that a party might make in court over that issue.

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 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.

The Recent History of Subprime Litigation

Posted By Stephen D. Rosenberg In 401(k) Plans , Benefit Litigation , Pensions , Retirement Benefits
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Kevin LaCroix, at his D&O Diary blog, has a tremendous history of the recent filing of subprime litigation, including class actions, many filed under ERISA. While I don’t necessarily agree with each of his interpretations of that history, it’s as good an overview of the subject as a whole that I have seen in any media. Perhaps my primary point of departure from his presentation would concern his view that these cases are very different from other types of class action litigation, such as the stock drop cases, that are often criticized as lawyer-driven suits warranting reform, because these are cases instead being brought by “very large institutions [who are] suing other very large institutions.” Perhaps, and certainly to some extent, but there is also an aspect to at least some of these cases that reflect that the class action bar has, for reasons of legal developments, public sentiment, and the winds of politics, moved towards using ERISA in circumstances where they would have previously used the securities laws, as well as towards the representation of large retirement plans, rather than individuals, as plaintiffs.

The First Circuit on an Administrator's Discretion in Determining the Amount of Retirement Benefits

Posted By Stephen D. Rosenberg In Benefit Litigation , ERISA Statutory Provisions , Pensions , Retirement Benefits , Standard of Review
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Oddly, this appears to be “calculating benefits” week among the courts of the First Circuit. In addition to the LeBlanc case I discussed in the last post, the First Circuit just ruled on a case involving a challenge to the calculation of pension benefits. Just as in the LeBlanc case, where a district court found that the method of calculation would stand because the administrator had discretion in conducting that effort under the terms of the plan and the calculation method was reasonable, so too does the First Circuit conclude, in Gillis v SPX Corporation, that the administrator’s determination of certain factors in calculating retirement benefits would not be overturned because the administrator had discretion and the determinations made were reasonable given the plan’s terms and purposes.

Appellate Law & Practice, who chronicle all rulings out of the First Circuit regardless of topic, has this somewhat more tongue in cheek take on the case here. While the Gillis case, as the Appellate Law & Practice post reflects, concerns certain issues beyond just the reasonableness of the calculation approach, there isn’t much to the court’s analysis of those issues; the real take away is in the requirement of reasonableness in the calculation activity, and then proceeding from there, the court finds, without too much in-depth analysis of the issues, that the other issues raised by the participant simply don’t support a challenge to that reasonable approach to calculation that was applied by the administrator.

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.

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.

Looking Under the Hood of Pension Plan Investments

Posted By Stephen D. Rosenberg In Pensions , People are Talking . . .
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Word comes to me today from Susan Mangiero, who pens the Pension Risk Matters blog (that phrase reminds me just a little of one of my favorite move phrases of all time, “a lot of alliteration from anxious anchors”), that I am quoted in an interesting article by Liz Peek in the New York Sun today, titled “Pension Fund Litigation Could Slow Investments.” The gist of the article? That there is a lot of hidden risk in pension assets that fiduciaries and plan sponsors aren’t fully cognizant of, and that this reality is placing fiduciaries at risk of litigation. The article, relying on data from Susan’s new company that tracks pension related litigation, points out the swelling numbers of lawsuits being filed over this issue.


Posted By Stephen D. Rosenberg In Pensions
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You know, people often get bogged down when talking about ERISA with the limitations of the statute and the protections it provides on the individual level; that is, to an extent, what the hullabaloo about the LaRue case is about, as it concerns the question of whether investment losses in a 401(k) plan are actionable if they only injure an individual, or instead only if they have a macro effect on the plan as a whole. But a look at the bigger picture on occasion reflects why we have ERISA, why its an important statute, and why it matters, despite the cottage industry of criticism that the statute and its interpretation by the courts has created. A story in the New York Times today jumped out at me as demonstrating the importance of ERISA’s imposition of fiduciary obligations on pension plans on a macro basis, as imposing a regime in which the interests of the plan participants whose retirements are at stake must be placed at the forefront of all considerations related to the management of a pension plan. The article concerns investment fund problems in a state government fund in Florida, created by the subprime lending mess. Before anyone yawns into their third cup of coffee of the day over yet another story on subprime lending (as the people at Mortgage Meltdown astutely pointed out recently, if you follow the mass media, you would end up with the erroneous impression that everything is, and everybody is holding, subprime debt), take a look at the part of the article where the elected officials who oversee the fund discuss possible remedies, and the first thing they think of is to raid the massive amount of cash in the state pension plan. And that, on a macro level, is the point of ERISA’s protection of pension plan participants, and its imposition of obligations on those who run such plans to act in the best interest of the participants in managing the plans: they represent huge piles of cash that can be tempting targets in the worst of times, and the obligations imposed by ERISA exist to counter that temptation. That’s a good thing, if you ask me, no matter how much criticism the details of the statute’s application provoke.

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.

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.

Would Increasing Taxes on Hedge Fund Managers Harm Pension Plans?

Posted By Stephen D. Rosenberg In Pensions
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Just a quick note on something you may not want to miss, while I work on something more elaborate and, to me, thought provoking to post either later today or on Monday; those of you interested in hedge funds and pension investments may want to take a look at this article in today’s New York Times on Congressional hearings into taxation of hedge funds. The point of the article is whether increasing tax rates on hedge fund income will affect pension plan returns. The tone of the article is skeptical that it would have any significant effect, and much of the testimony at the hearing appears to have been along those lines. Obviously, though, as you can see from the article, many of those who would get hit with the higher tax rate think otherwise.

I’m really not enough of a tax expert - and I don’t play one on the internet either - to comment on this issue in any depth, although I do think the truth is probably in the comments of Russell Read, the chief investment officer of Calpers, who noted that “[i]t’s hard to tell what the effect [on returns by pension plans] would be” as a result of a change, but who “hopes” - I would substitute the word expects for the word hopes - “that it would be small.”

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.

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."


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.

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.

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.

Criminal Restitution, Alienation of Retirement Benefits and the Supreme Court

Posted By Stephen D. Rosenberg In 401(k) Plans , ERISA Statutory Provisions , Pensions , Retirement Benefits
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We return, as promised, to America today, to two particular, but certainly not unique, American obsessions, the Supreme Court and criminals. As discussed here and here, the Supreme Court has refused to hear an appeal presenting the question of whether pension and retirement benefits governed by ERISA can be attached in the criminal context. As I discussed in this post, in at least some instances courts are finding that retirement funds can be attached as part of the penalty for criminal conduct, including to pay criminal restitution.

It is interesting - although there is probably nothing more to read into it other than that the Court agreed with the Solicitor General’s office that there was no circuit split warranting review of the precise issue presented by the particular case at issue - that the Supreme Court passed on this one, as they have taken on a fair number of ERISA cases, most recently accepting the LaRue case, which I discussed here and here, and which presents questions as to whether or not a single plan participant can sue for breach of fiduciary duty. And just a short time ago the Court reached out to address questions related to mergers and terminations of pension plans, as discussed here.

But I guess the question of whether or not criminals lose any protection provided by ERISA to their retirement benefits as a result of conviction doesn’t rate as high as those other issues on the Court’s agenda. And perhaps it shouldn’t. That’s an issue for another day, and one I will not voyage into today. But it is important to remember, however, that, as I discussed in a National Law Journal article a few months ago concerning one circuit that does allow attachment of a felon’s retirement benefits, alienating retirement benefits doesn’t necessarily punish only the wrongdoer, but may well seriously impoverish possibly innocent spouses, who may have expected to rely on those funds in retirement, and adult children, who may end up with no choice but to subsidize the so-called golden years of that innocent spouse. Of course, it is also fair to say that victims who have suffered financial losses as a result of the criminal conduct may have an equal, or even superior, claim to the funds. Either way, what is clear is that there is plenty of collateral damage to go around in the situation presented by this type of case, enough that it would certainly be worthwhile to at least have an authoritative decision out of the Supreme Court as to whether those courts that do allow attachment of those funds to pay criminal restitution or other similar sums are correct about it or, for that matter, that those jurisdictions who don’t allow it are correct.

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?

More Recommended Reading: The Cavalcade of Risk

Posted By Stephen D. Rosenberg In Alternative Energy: Law, Regulation and Policy , Health Insurance , Industry News , Pensions , People are Talking . . . , Retirement Benefits
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The Cavalcade of Risk: 1st Anniversary Edition, is now up at Insure Blog. Noting that “it was a year ago this week that we published the first Cav,” Insure Blog explains that the Cav is intended as a round up “of interesting/unusual risk-related posts from around the blogosphere.” One of my posts is up on the Cavalcade, but perhaps of more interest to those of you who already read my posts, so are a number of other, interesting posts on insurance, employee benefit, and pension issues from some of my favorite bloggers. I recommend you take a quick gander, and hope you enjoy it.

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.

Documenting the Death of Pensions

Posted By Stephen D. Rosenberg In 401(k) Plans , Pensions , Retirement Benefits
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I have written before about the question of whether we are creating a more litigious environment by switching employees from defined benefit plans to defined contribution plans, and we all generally know that companies are overwhelmingly shifting employees from the former to the latter. Those of you in the retirement industry certainly already are aware of studies actually documenting that change and establishing that, in fact and not just anecdotally, pensions are going by the wayside and 401(k) plans are replacing them across the board. For the rest of us, Suzanne Wynn has this study, from Watson Wyatt, documenting that this change has, in fact, occurred over the past twenty years.

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.

Blogging on the Pension Protection Act

Posted By Stephen D. Rosenberg In Pensions
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I have been meaning to mention this for some time now, but other things always come up. So before the week takes me on to other issues that I want to post about, I thought I would take a moment and recommend to you Suzanne Wynn’s Pension Protection Act blog, which I have been reading for awhile now. In particular, Suzanne has taken on the burden of launching and hosting a weekly Carnival of Employee Benefits, which surveys posts on ERISA, pension and related issues from the preceding week.

Behavioral Economics and a Disincentive to Retire

Posted By Stephen D. Rosenberg In 401(k) Plans , Pensions , Retirement Benefits
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We have talked a fair amount on this blog about “choice architecture” and how the new structure of the retirement system, with its move from pensions to 401(k) plans, may be affecting behavior in unintended ways, such as by encouraging litigation. At his blog, the RiskProf has an excellent post on another negative behavioral change that the transition to defined contribution plans, such as 401(k)s, may be inadvertently creating: namely, a disincentive for older workers to retire, driven by the uncertainty in these types of retirement plans as to whether the worker actually can fund a decades long retirement. In the RiskProf’s personal case, involving the graying of university faculties, he presents the argument in his post that combining this dynamic with tenure is likely to lead to an aging university faculty population hanging on well past its prime. I suspect I made enough faculty members angry with my post on the increasing irrelevance of law review articles, so I won’t stick my two cents in on this issue and will instead let the RiskProf’s post speak for itself.

Behavioral Economics, the Pension Protection Act and 401(k) Litigation

Posted By Stephen D. Rosenberg In 401(k) Plans , Benefit Litigation , Pensions , Retirement Benefits
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I have written before about my thesis that 401(k) litigation, and the tendency of individuals to pursue such suits, may be driven in part by the psychology of retirement benefits and the uncertainty for employees as to whether they will be able to fund their retirement that these types of retirement savings vehicles create, particularly as opposed to pensions, which, on anecdotal evidence, seem to generate far less litigation than 401(k) plans. Along these lines, this article out of today’s New York Times about behavioral economics and the impact of consumer choice on 401(k) contributions caught my eye. The article compares retirement savings to research into the strange behavioral distortions that appear to underlie overeating, and discusses how the Pension Protection Act is written in a manner intended to remove certain behavioral distortions from the decision to make 401(k) contributions. Is there a linkage between the security of retirement and the tendency to sue over retirement benefits, and if so, can restructuring the benefit programs, such as in the manner pursued by the Pension Protection Act, reduce the extent of litigation over such benefits?

I certainly don’t pretend to know the answer, and I suspect academic research doesn’t provide an answer to this question at this point either. But the article sums up the research into consumer behavior as follows: “[w]hether it’s 401(k)’s or food, the way choices are presented to people — what the economist Richard Thaler calls ‘choice architecture’ — has a huge effect on the decisions they make.” If we are presenting 401(k)s to employees in a way that makes for retirement uncertainty and for doubt (or at least fears, founded or unfounded) as to the abilities and fidelity of those managing them, the question becomes whether we are creating a “choice architecture” that points people towards litigation, rather than away from it. If, on the other hand, we can create an environment of greater trust in the operation of those types of retirement vehicles, perhaps employees will tend away from trying to resolve concerns over retirement funding through the blunt instrument of litigation.

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?

Introducing Pension Governance LLC

Posted By Stephen D. Rosenberg In 401(k) Plans , ERISA Seminars and other Resources , Pensions , Retirement Benefits
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I have talked before about my tendency to veer from my appointed rounds when something more interesting appears on the horizon than that which I had planned to work or post on, and today is another one of those days. I came in full of grand hopes to discuss insurance coverage for intellectual property risks and discovery issues in insurance bad faith cases, using two upcoming seminars on those topics as a foundation from which to riff. Those can wait for another day, and I will return to them, either over the weekend or next week, but something more interesting appeared on the horizon this morning that I wanted to post on, and that is likely to be of interest to those of you who read this blog out of a professional interest in ERISA and how it applies to 401(k) plans and pensions, namely, the launching of Pension Governance LLC, a subscriber website providing independent advice and information for pension investment fiduciaries. Among other features, the website,, provides analysis, research and commentary on issues affecting defined contribution and defined benefit plans; interviews with industry leaders; annotated online articles from a variety of news sources; access to research team members; original content from expert practitioners; and educational webinars.

Readers of this blog who have been curious enough to peruse either the “About Stephen Rosenberg” part of this blog or the what’s new section of my firm’s website already know that I am a member of the website’s editorial board; I have already submitted one article for the site, and am looking forward to contributing still more to it.

While I am excited about the launch of the website, that’s not the only reason I write about it today. The more urgent reason for writing about it today, and to introduce Pension Governance to you right on the heels of its launch, is that the site is currently offering a free two week trial subscription, and I think the information that it makes available will be of interest to many who read this blog.

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 evidence demonstrated that the changes to the plan did not detrimentally alter the benefits available under the plan to the complaining participant.

The case is Gillis v. SPX Corp. Individual Retirement Plan.

Unfunded Pensions and Green Mountain Captives

Posted By Stephen D. Rosenberg In Industry News , Pensions
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Interesting collection of articles across the mainstream business press today for those interested in the subjects covered by this blog. Two interesting pieces - one factual, one commentary - on the rickety condition of state and municipal pensions, and their impact on the fiscal health of states and local governments. Still more interesting, at least to me, is this article from the New York Times on how Vermont is the new Bermuda, only sans golf courses, and the new Cayman Islands, only sans beaches, at least when it comes to domiciling captive insurers.

Illusory Benefits and the Small Employer

Posted By Stephen D. Rosenberg In ERISA Statutory Provisions , Employee Benefit Plans , Pensions
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I have written before, including here and here, about the elements that must exist for a particular employment benefit to fall under ERISA and be deemed part of an ERISA governed employee welfare benefit plan. The requirements that must be met can become problematic with small employers, where compensation and benefit packages are often assembled on an ad hoc basis, often vary greatly from one employee to the other, and frequently are not well documented, as I discussed here.

Workplace Prof had another perfect example of this the other day, which the Prof discussed in this post, involving a pension benefit allegedly promised by a small employer that was, in fact, never established by the employer. The Prof points out something that all employees of smaller employers should do, which is make sure to take a gander at the employee benefit documents to make sure they really exist in the expected form; you don’t want to be trying after a particular employee benefit is denied to prove that the elements of an ERISA governed plan existed, and then find out the employer never actually funded the benefit or created any supporting paperwork at all.

Novak and the National Law Journal

Posted By Stephen D. Rosenberg In 401(k) Plans , ERISA Statutory Provisions , Pensions , Retirement Benefits
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I guess this is me and the media week here at the blog. There is an excellent story in the National Law Journal this week on the Novak decision out of the Ninth Circuit, which I talked about here, in which the court allowed attachment of ERISA governed retirement benefits as part of criminal restitution. I am interviewed in the article, which, unfortunately, is only available online to subscribers, so I cannot provide a link here to the actual article, and my fear of the copyright laws dissuades me from uploading the whole article here for you to read.

I think, though, that the fair use exception to the copyright act allows me to quote myself from the article, in which I mention that the ruling in Novak is kind of draconian, and in particular that “it almost goes to the level of 19th century debtor’s prison issues: do we bankrupt the spouse of a white collar criminal?” Beyond that, I am quoted in the article on the decision’s ramifications for future cases, and I note that there are issues raised in the court’s decision that will need to be resolved in future cases. I also point out, as do others quoted in the article, that it is important, going forward, to try to separate out pension benefits from the restitution amounts when negotiating resolution of criminal charges.

Mike Webster to Ted Johnson: Are the NFL and the New York Times Kidding?

Posted By Stephen D. Rosenberg In Benefit Litigation , Employee Benefit Plans , Long Term Disability Benefits , Pensions , The Hidden Law of ERISA
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I don’t want to turn this blog into a soapbox, and as someone who really likes newspapers, I also don’t want to join the Greek chorus of self-appointed media watchdogs that seems to make up much of the blogosphere. Some things, however, such as this article in the New York Times, call out for a skeptical and critical reaction. The article explains how the NFL has now created a program to provide some funding for long term, home or facility, care for former pro players who “have various forms of dementia,” even though the NFL insists that football injuries to the brain - multiple concussion syndrome, anyone, for those of you who follow the sport? - are not the cause. The article seems to credit the NFL for providing this help to former players - help that, despite the vast wealth of the league, is capped at $88,000 a year - and praises the idea that this problem is being resolved through this program rather than by litigation, i.e. by former players suing the NFL. Astoundingly, the article describes the program as addressing an unmet need because, and I quote the Times here on this, “former players who have dementia do not qualify for the N.F.L.’s disability insurance program, because neither the league nor the union consider their conditions football-related, a stance that has been cast in doubt by several scientific studies.”

And yet, as I discussed in this post several months ago, the family of the late Pittsburgh Steelers center Mike Webster litigated that exact issue for years, finally defeating the NFL, the players association and the plan before the Fourth Circuit court of appeals, to recover benefits under the league’s ERISA governed pension and disability system for exactly this type of injury. The Fourth Circuit’s opinion, in fact, was a pretty powerful condemnation of the roadblocks that had been tossed in Webster and the estate’s path in their attempt to obtain the benefits.

Which brings me to a couple of points that should be kept in mind in reading the Times article and considering the value of the NFL’s new program that the article praises. First, I suspect that the pension plan/disability plan system that the Webster family targeted provides far greater benefits than does this separate plan discussed in the article. If so, the idea that former players should pursue help under that program, rather than through the pension plan, is a disservice to retired players. Second, again if I am right about the greater benefits available under the pension/disability plan, then one has to wonder whether the separate NFL plan discussed in this article, although commendable for providing some help to aging players, actually serves as something of a Trojan horse (not a perfect analogy, I know) that, intentionally or otherwise, draws retired players away from seeking the larger payouts of the pension/disability system and instead to this plan. And third, given that a leading federal court of appeals with a significant track record in ERISA cases has already found that the NFL’s pension and disability plan actually does cover brain injuries of this type, the article is simply off-base in stating that dementia falls outside of the plan.

The article notes the relevance of this issue to some high profile recent players, such as Ted Johnson of the Patriots, 34, whose doctors”said he was exhibiting the depression and memory lapses associated with oncoming Alzheimer’s.” Those players should, notwithstanding this article, first be looking to the NFL’s pension and disability plans, particularly in light of the Fourth Circuit’s ruling in the Webster case, for compensation and care, before settling for the limited assistance provided by this alternative plan.

And finally, this whole matter brings me back to an issue I have talked about in the past, about questionable decision making by courts concerning what decisions to publish and what ones not to publish in the ERISA context. The Fourth Circuit’s decision in the Webster case, to my recollection, was not marked for publication (you can locate it, however, at my earlier post on that case). Yet, really, the scope of NFL plan benefits for this type of mental injury had never been resolved before, and it remains, as this article in the Times reflects, not well understood, making this an opinion that probably should have been published, and should not have been part of what I have called in the past “the hidden law of ERISA.”

Insurance Coverage for Pension Plan Fiduciaries

Posted By Stephen D. Rosenberg In 401(k) Plans , Coverage for Professional Services , Exclusions , Fiduciaries , Pensions , Professional Liability Policies , Retirement Benefits
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There is an interesting interrelationship between the two primary subjects of this blog, ERISA litigation and insurance coverage, and one that I had not really thought much about until Rick Shoff, who works with Mike Pratico over at CapTrust Financial Advisors, raised it in a conversation recently. As I have mentioned in the past, Mike and his colleagues at CapTrust serve as fiduciary advisors to retirement plans and their sponsors, and he and Rick commented to me about the issue of errors and omissions insurance and the necessary amount of coverage for fiduciary advisors.

Two points came out of our conversation that I thought I would pass along. First, what is the appropriate amount of coverage for a fiduciary advisor under its E&O insurance? What should the relationship be between the limits selected and the amount of assets in the plans that the advisor works with? Obviously, the limits can’t match the asset amounts, as any good advisor is likely advising on plans with assets far higher than the amount the advisor could purchase in E&O insurance, at least not without paying every penny the advisor earns over to the insurance company as premiums (and even then, I doubt limits that high could be obtained). It also would not be necessary, since an advisor’s potential exposure to a lawsuit undoubtedly would never equal the total amount of the assets in a particular plan, but instead would equal only some portion of it that was supposedly affected by an error by the advisor. My own take is that the proper policy limit is somewhere around the amount that would make a plaintiff in a hypothetical claim consider settlement within the policy limits, without trying to obtain an excess verdict that the advisor itself would have to pay.

The second issue that popped up is the range of actors out there who are involved in providing advice to retirement plans, participants and the like. It may well be that not all such companies and consultants, even if they have professional liability or general liability insurance coverage, are actually covered for claims arising out of their role in providing such advice. Many policies, unless they are specifically underwritten to cover a professional engaged in ERISA related activities, contain exclusions for ERISA related claims that would preclude coverage of claims involving ERISA governed plans. As a result, a plan sponsor cannot assume that all advisors to a plan actually have coverage for claims arising out of their activities, and the sponsor must instead actually examine their advisors’ insurance coverage to know whether or not this is the case.

What Happens When Reimbursement of Overpaid Benefits Is Equitable for Purposes of ERISA, but Nonetheless Inequitable?

Posted By Stephen D. Rosenberg In 401(k) Plans , Equitable Relief , Fiduciaries , Pensions , Retirement Benefits
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Here is an interesting little twist on the common scenario of a plan overpaying retirement benefits and then seeking reimbursement, as allowed under the plan’s terms, of the overpayment from the plan beneficiary. Normally, these cases are focused on whether the reimbursement qualifies as equitable relief that the fiduciary is allowed to pursue. In this case out of the District Court for the District of New Hampshire, however, the court simply assumed the plan fiduciary could legally obtain that recovery as equitable relief under ERISA, even though the judge commented in the opinion that “the scope of this court’s equitable authority in an ERISA context is not well-defined.”

However, the court then went on to let the beneficiary off the hook (or at least to find a question of fact that precluded an award of summary judgment to the plan), on the theory that the beneficiary could have reasonably believed that he was entitled to receive the overpayments, even though they amounted to many thousands of dollars a month for a number of months beyond the one time lump sum he had elected to receive as his pension benefit, and had changed his position, by spending those funds, in reliance on that belief. The court found that ordering reimbursement from the beneficiary, under those circumstances, could be inequitable, and that the plan could not recoup the overpayments if that were the case.

Of interest, there was one factual quirk that made the case somewhat different than the usual recoupment case where the overpaid beneficiary argues that he or she already spent the money and it would be inequitable to order repayment as a result. There was actually evidence showing that the beneficiary, prior to the time of the request for reimbursement, had performed rough calculations that showed him entitled to a sum significantly larger than he was actually entitled to receive. Although the math was grossly incorrect, the court found that even if his “calculations are inaccurate, the mere fact that he prepared the estimate suggests that he may have reasonably believed that he was entitled to the erroneous payments.” Most of the published decisions where beneficiaries claim they didn’t know they were receiving large payments in error and thus should not have to repay them involve fact patterns where that assertion is simply hard to believe; the court here, rightly or wrongly, was clearly swayed by evidence that placed this case outside of that mainstream.

The case is Laborer’s District Council Pension Fund for Baltimore v. Regan.

Restitution, Anti-Alienation and ERISA

Posted By Stephen D. Rosenberg In 401(k) Plans , ERISA Statutory Provisions , Pensions , Retirement Benefits
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Although I am diligent about covering in this blog ERISA decisions coming out of the courts in the First Circuit, I also keep an eye on ERISA decisions elsewhere in the country and discuss them when there is something particularly interesting about them that catches my eye. The Ninth Circuit has just done exactly that, luring me into the realm of the intersection of criminal law and ERISA by its en banc decision in USA v. Novak, and giving me an opportunity to use this blog to make my pitch to any readers in Hollywood for my proposal for a new and thrilling television show, CSI:ERISA. Can’t you just see it? Ripped from the headlines, a husband and wife resell stolen telephone equipment, fail to report the millions of dollars they earn from that to the government on their tax returns, and are caught (these are the real underlying facts of Novak, and that gave rise to the ERISA issue before the court); in tonight’s exciting episode, what happens to their retirement benefits after the conviction? Well, I don’t know, maybe that’s going a bit far, but the Novak decision is pretty interesting, on a few levels.

In Novak, the Ninth Circuit addressed the impact of ERISA’s anti-alienation provision on a federal criminal restitution order that attempted to attach the garnishee’s retirement benefits. Recognizing that ERISA itself contains an anti-alienation provision that would appear to bar such attachment, the Ninth Circuit held that the federal Mandatory Victims Restitution Act of 1996 (“MVRA”) overrode the prohibition and allowed attachment of the retirement benefits for purposes of satisfying criminal restitution orders. There is much that could be said about this opinion, but I’ll limit myself today to a few points.

First, as the court recognized, the two statutes themselves - ERISA and the MVRA - do not expressly resolve the issue of whether, despite the anti-alienation provision in ERISA, retirement benefits can be attached to pay restitution. The court presents a very persuasive and well reasoned exercise in statutory construction to reconcile the two statutes and conclude that the MVRA controls the issue and allows such attachment. To a certain extent, the court provides really a mini-tutorial on the rules underlying statutory interpretation, and the opinion is useful reading for anyone who ever has to argue a case involving construction of a previously unaddressed statutory provision. At the same time, though, the analysis reflects a real problem with trying to reach a final decision over rights and obligations by means of statutory construction, in that there is no real definitive basis in the legislative history or statutory language relied upon by the court that mandates reaching the particular conclusion accepted by the court, and instead one can argue that the opposite result could just as credibly be reached in the case.

Second, and building off of the point that the statutory language itself is not determinative of the proper result here, the court’s analysis and approach rings true, even if the result might be arguable. Conceptually and intellectually, the court’s opinion reminded me of nothing so much as Ronald Dworkin’s mythical Judge Hercules, who, when presented with a particular statute whose meaning is open to debate, sees himself as the next of a series of authors - a series that began with the legislature - and who tries to interpret the statute by adding the necessary additional layers of meaning to it that are needed to effectuate its purposes. The Ninth Circuit’s analysis reads exactly like that, with the court taking a complicated statutory text - two of them, actually, ERISA and the MVRA - and adding more meaning to the statutory text to allow it to deal with this particular fact pattern, one not addressed by the congressional drafters of the statutes.

And third, on a more prosaic basis, it is interesting how the court resolved the question of exactly what could be attached - all the assets of the retirement plan itself that are attributable to the garnishee, or only the payments due to the garnishee as they come due. The court resolved this in a quite sensible manner, concluding that what can be garnished are only those assets the garnishee himself has a current right to receive.

Fiduciary Advisors, Due Diligence, and Avoiding Fiduciary Liability

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries , Pensions , Retirement Benefits
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Michael Pratico, a fiduciary advisor to retirement plans throughout New England for Captrust Financial Advisors, and one of my favorite touchstones for real world - i.e. non-lawyer - information about the actual operation of retirement benefit plans, pointed out an interesting conundrum to me the other day concerning the operations of retirement plans and the fiduciary obligations of those who operate them. As I have discussed in other posts, the fiduciary obligations of those who sponsor or administer such plans clearly require, at this point in time and in light of current developments in the law, a certain level of due diligence, requiring at a minimum a regular comparison of fees and other aspects of a 401(k) or other retirement plan to the broader market as a whole.

Michael points out an interesting side effect of this, however, which is that once a plan sponsor or other fiduciary undertakes such due diligence, the plan becomes obliged, for all intents and purposes, to act on any bad news uncovered by the due diligence. What this means is that, yes, the plan sponsor is obligated to do the due diligence, and it seems to me is a sitting duck for a stock drop or excessive fees type suit if it fails to do so based simply on that failure.  But that is certainly not the end of it.  Instead, it means as well that once the sponsor has done that, if the due diligence shows a disjunct between better results or costs in the market as a whole and what the particular plan is earning or paying in expenses, the plan sponsor or other fiduciary becomes obligated to act on that information and change the plan to address those problems, with the failure to take that step likewise then becoming a legitimate basis for a breach of fiduciary duty lawsuit.

This is what Michael and other fiduciary advisors of his ilk do, take the existing plan, see where it is off base relative to the mutual fund world as a whole, and then recommend how to fix it. Taking both steps, and not either playing ostrich and skipping the due diligence entirely or else doing the due diligence but skipping the action it points out is needed, is really the best way to avoid incurring liability from excessive fee and similar types of claims.

ERISA and Retirement Benefits

Posted By Stephen D. Rosenberg In 401(k) Plans , Pensions , Retirement Benefits
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I guess one could say that I have taken issue with some recent legal scholarship concerning the standard of review that should apply to judicial review of benefit denials, such as in this post and in this one. Perhaps part of that is that at the end of the day, I think standard of review is a litigation issue, and one that is best understood in the context of the day to day progression of benefit litigation; I am not sure it is well considered outside of that context and from outside of the courtroom.

But that is not to say that there aren't many, many ERISA issues that are far more complicated than that one, and which could certainly benefit from a deeper and more thorough analysis than that which the litigation prism can provide. The Spring issue of the John Marshall Law Review is a benefits symposium, with a series of papers on exactly those issues that are on the front burner and can use a thorough review, such as, in particular, pension and stock issues in the aftermath of the stock manipulation scandals (which I have talked about here, for instance), and the shaky status of retiree medical benefits (talked about here and again here).

I know I will be reading the whole thing, and I will likely toss out on this blog highlights and comments about the articles over the next few months, so once again, if you have better uses of your time than reading law review articles, you can just skip reading this law review issue as well and just check back here later.

Investment Advisor Insurance

Posted By Stephen D. Rosenberg In Pensions
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This is neat. Here's a nice little story right smack at the confluence of this blog's topics, ERISA litigation and insurance coverage problems. The story describes a new insurance product being released by Travelers providing investment advisors and similar entities with expanded coverage for the risks associated with providing investment services; the policy will cover claims for things such as breaches of fiduciary duties owed to pension plan participants.

As discussed frequently on this blog and elsewhere, ERISA claims alleging the types of conduct that it appears this product is intended to encompass - claims often seeking many million of dollars -have become a regular part of the landscape in the past couple of years. It looks like this is exactly the kind of insurance product that these types of claims call for. Granted, I haven't seen the policy itself. Still, the article points towards one of the more interesting things about the insurance industry, which is its capacity to adapt to changes in the litigation environment and to provide revised or even entirely new forms of coverage to account for those changes.

Pension Reform

Posted By Stephen D. Rosenberg In Pensions , Retirement Benefits
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I have talked before about the depressing topic of the termination of retirement benefits, and the role of ERISA in that scenario. As almost no one failed to notice, the Senate just passed the Pension Protection Act of 2006, which makes "significant changes to practically every retirement plan," as Jerry Kalish notes. I am fond of the detail on this statute provided by Jerry, and also here by B. Janell Grenier, who quickly recognized that "[t]he 907-page Pension Protection Act of 2006 passed last week by Congress is sure to keep benefits lawyers busy for years to come." I highly recommend both blogs for details on the statute.

And as if to provide a nice counterpoint on the question of whether the statute is needed, the New York Times reminds us yet again today of the precariousness of pensions and the entire pension system, in this timely and darkly entertaining article. Of course, there is another way, separate from relying on new legislation and other legal remedies, to protect oneself against the loss of pension benefits in retirement, as these people clearly know.