Thoughts on Kaplan v. Saint Peter's Healthcare System and the Church Plan Exemption
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?
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
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!
Seeking Shelter from the Storm: the Washington Post on Retirement Readiness
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).
Thoughts on Rolling Stone, Matt Taibbi and "Looting the Pension Funds"
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.
The Lessons of Detroit for Private Sector Retirement Plans
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.
Pensions as a Moral Issue, and the Role ERISA Can Play
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.
A Focus on Facts in the Seventh Circuit: George v. Junior Achievement of Central Indiana
An upcoming article of mine in the Journal of Pension Benefits argues that ERISA litigation and potential exposures are moving away from strict constructionism and technical legal arguments to fact based inquiries into potential harms to participants, and traces how we came to that place. This is a more significant change than it may appear to any of you who do not spend your time litigating ERISA disputes. This shift is going to make ERISA litigation more like other litigation, with a focus on factual development and discovery, and less on doctrinal argument. The Seventh Circuit’s recent ruling in George v. Junior Achievement of Central Indiana, Inc., discussed in this excellent synopsis here, is a perfect example of this phenomenon, with the Court rejecting a technical, statutory basis for rejecting a retaliation claim under ERISA in favor of a broader reading of the relevant statutory language, one that can allow for a fact-based inquiry into whether or not the participant actually was retaliated against. You can expect more and more of this kind of shift in the future, across the range of issues impacting ERISA plans, particularly with regard to retirement benefits, whether provided under defined contribution or instead defined benefit plans.
A Perfect Storm, ERISA Style
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.
An Entertaining Little Primer on Cash Balance Plans
All right, I am getting back in the saddle after a couple weeks off from blogging to recharge my batteries and tie up some key end of the year issues in a few cases. Not wanting to do too much heavy lifting on my first day back on the blog beat, I thought I would pass along, with minimal comment from me, this nice little piece on cash balance plans, and particularly how they might fit in alongside 401(k) plans in a particular business’ benefit plan structure. Anyone who follows the field knows that the rise of cash balance plans and their implementation, especially in instances where they have supplanted traditional pensions, has been rife with problems, both real, imagined, and litigatory (I may have just made up that last word, but still). Amara, of course, jumps to mind, but so do many other examples. The story I am passing along today, though, does a nice job of showing how, properly used, cash balance plans can be a force for good, not evil, to borrow a cliché.
Governmental Plans, Annuities, and the Intersection of ERISA with the Securities Laws
I have discussed in many posts the idea that the plaintiffs’ class action bar has alighted on ERISA and breach of fiduciary duty claims as a preferable tactical alternative, in many cases, to proceeding under the securities laws. This approach was a particularly nice fit for stock drop cases, in which company stock held in employee benefit plans rendered ERISA, and its relatively - at least compared to the securities laws - more malleable breach of fiduciary duty doctrines, a viable approach to seeking recovery for precipitous declines in company stock prices. To date that tactic - which made sense as a legal and tactical theory in the abstract - has not really worked out all that well with regard to decline in the value of company stock holdings, because of the oft-discussed Moench doctrine, which provides a strong presumption in favor of plan fiduciaries when it comes to holding company stock.
This article here, however, discusses what has, at least in perfect hindsight, turned out to be an excellent example of taking a good idea - at least if you are a class action lawyer or a plan participant - a little too far, by choosing to proceed under ERISA in a large putative class action rather than under the securities laws, only to have the court subsequently conclude that ERISA cannot apply under the facts of the particular case, and that the participants should have gone forward under the securities laws in the first place. The case it discusses, Daniels-Hall v. National Education Association out of the Ninth Circuit, can be found here, and for the ERISA practitioner, it may be more significant for its detailed analysis of the government plan exemption in ERISA than for its conclusion that the plaintiffs had overreached by relying on ERISA rather than the securities law to proceed with their case. The issue of the choice of legal doctrine to pursue is one of tactics, and reasonable lawyers can disagree at the outset of a case as to which of many plausible lines of attack should be pursued; either way, over time, the current preference for ERISA over the securities laws as a matter of tactics will likely run its course. Debates over whether a particular plan is a government plan, however, will continue to pop up, and the Ninth Circuit’s decision provides a sound template for analyzing that issue.
When Does a Flaw in an Administrative Appeal Render an Administrator's Denial of Benefits Arbitrary and Capricious?
There have been a series of interesting ERISA decisions over the past several weeks out of the United States District Court for Massachusetts, whose Boston courthouse I can see through my office window as I type this post. The decisions have stacked up on my desk a little bit, like a leaning tower of paper. I am going to run a series of posts, some short and others perhaps longer, passing them on with my comments as to their value. The first is this summary judgment ruling in DiGiallonardo v. Saint-Gobain Retirement Income Group, which has to do with a challenge to a denial of disability retirement benefits. It is most interesting, and useful to other practitioners, for one specific point, namely its handling of an administrator’s procedurally poor processing of a claim and its appeal. The court found that the administrator had not considered the actual key term in the contract in ruling on the claim for benefits, and that this required remand to the administrator for a proper handling of the claim, because under those circumstances, the claimant had not received the “full and fair review of the administrator’s decision” to which a claimant is entitled under ERISA. The court found that this procedural irregularity rendered the administrator’s decision arbitrary and capricious.
Marx on 401(k) Litigation
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.
More Evidence that Including Company Stock in a Retirement Plan May Not Be Worth the Litigation Risk
A few months back, I discussed the broad conception of damages in stock drop type cases articulated in the case of Bendaoud, which essentially found that damages exist if the participant could have done better in an alternative investment option. This concept makes it fairly easy to construct a damages theory in 401(k) and ESOP cases that will survive the scrutiny of a motion to dismiss, and that can support a significant award of damages. A prerequisite to getting to the damages analysis, however, is a basis for attributing an actionable error in the plan to the fiduciaries; the fact that a participant could do better in a different investment is irrelevant if there was no mistake in offering the original investment option in the first place.
That, however, is not too hard to show either. The bar, for instance, is low when showing that offering company stock as an option is an actionable error. For instance, "a stock can be imprudently risky for an employee savings plan even in the absence of fraud or imminent collapse,” according to a federal judge sustaining an ERISA case against Ford alleging that the offering of company stock as an investment option was a breach of fiduciary duty, given the extensive problems in the industry at the time and the lack of broad disclosure of how those problems may affect the investment.
With numerous major industries heavily roiled, and a stock market that has tanked, I can’t say that it should really tax the imagination of any good lawyer to come up with both damages to participants and errors by plan fiduciaries in any case involving the inclusion of company stock in a retirement plan or ESOP.
Joshua Itzoe on Fixing the 401(k)
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?
You Can Run, But You Can't Hide From ERISA
Two interesting but different stories that both relate to the broad impact that ERISA has across the workplace. Here, in this first one, you find the story of the Third Circuit concluding that certain death benefits were not pension, but instead welfare, benefits, which did not vest and could be revoked, despite long time practice and the reliance of employees on the benefit as part of retirement planning. This story illustrates a theme that often arises on this blog, concerning the crucial importance of understanding what is really promised as retirement benefits under ERISA governed plans, and the trouble participants get into when they don’t grasp it prior to litigation and during the time they are active participants in the plan, which is something that seems to have clearly occurred, for instance, in this case here. In the second story, you see the potential reach of ERISA in an attempt, ultimately rejected by the court, to have it reach and protect what was otherwise allegedly illegal conduct in providing fringe benefits; even there, it was only the specifics of the intersection between the requirements of the allegedly violated compensation law and the obligations of ERISA that allowed the issue to fall outside of ERISA’s reach, rather than any sort of general assumption that this criminal proceeding was simply a separate area of the world than ERISA.
The First Circuit on ERISA Standing
Permalink | Very interesting case out of the First Circuit the other day on the question of whether former employees satisfy ERISA standing requirements with regard to defined contribution plans. Short answer is they do, but the Court’s analysis and discussion is an interesting open field run across a range of issues that are both explicit and implicit to any consideration of this question. One particular point, basically noted in a footnote, was of particular interest to me. I have discussed frequently in past posts my thesis that much of the evolution in ERISA law is and will continue to be driven by the economic effect on employees of the replacement of the pension system by 401(k) plans; this is partly because employees have become the persons at risk from investment mistakes, which they generally were not - barring complete failure of the employer and its pension plan - when employees were instead covered by pensions. In an interesting footnote, the Court addresses the distinction between the two types of benefits, and hints at the impact of that difference on employees:
Under a defined benefit plan, participants are typically promised a fixed level of retirement income, computed on the basis of a formula contained in the plan documents. See 29 U.S.C. §1002(35). The formula generally accounts for an employee's years of service and compensation level at retirement. Graden, 496 F.3d at 297 n.10. In contrast with a defined contribution plan, where the amount of benefits is directly related to the investment income earned in an individual account, the investment performance of the portfolio held by a defined benefit plan has no effect on the level of benefits to which a participant is entitled, provided that the plan remains solvent. See LaRue,128 S. Ct. at 1025 ("Misconduct by the administrators of a defined benefit plan will not affect an individual's entitlement to a defined benefit unless it creates or enhances the risk of default by the entire plan.").
The case is Kerr et al. v. W.R. Grace, et al.
What Happens When ERISA and the Law of Insurance Coverage Collide?
Permalink | Wow, I guess this is really Seventh Circuit week here, with, I guess, a particular focus on the jurisprudence of Judge Easterbrook, whose opinion in Baxter I discussed in my last post. This time, I turn to his decision from Wednesday in Federal Insurance Co. v. Arthur Andersen, which strikes right at the intersection of the two subject areas in the title of this blog, insurance and ERISA. The Arthur Andersen opinion concerns the extent of coverage, if any, for Arthur Andersen’s massive settlement of lawsuits related to its retirement liabilities upon its well publicized, post-Enron collapse, under a policy covering breaches of fiduciary duty. The court found that there was no coverage, for a number of reasons, the most salient of which being that, first, the losses in question were the actual pension amounts, which the policy does not cover (it instead covers only other losses related to a pension plan, separate from the actual amount of the pension benefits in question), and second, that although the claims in question related to pension plans, they were not actually for breaches of fiduciary duty related to such plans, which is all that the policy actually responds to. There are some interesting lessons for plan sponsors and plan administrators in these findings: first, that it is important to remember that, in buying fiduciary liability coverage, this is not the same thing as insuring the benefits owed to pensioners themselves, and, second, that the exact scope of the coverage is narrow and limited by its exact terms, which may not extend coverage to the specific allegations of any particular lawsuit arising from the pension plan. What’s the take away? A close look by an expert is needed when selecting insurance coverage for pension plans and the people who run them, if for no other reason than to have an accurate understanding of the extent to which potential problems with the plans may actually be covered.
Beyond these lessons in the case for people on the ERISA side of this blog’s title, the decision provides a fascinating run through a number of complicated insurance coverage topics for those of you who are interested in the insurance coverage half of this blog’s title. The judge - or perhaps his clerk, I don’t know the practices in that particular court - writes fluidly on the law of estoppel, waiver, the duty to defend, and the respective rights of the insurer and the insured when it comes to control of the defense and settlement of a covered lawsuit.
What LaRue Wrought
Permalink | Suzanne Wynn has the story of the day when it comes to ERISA litigation, as she posts on the Seventh Circuit’s application of LaRue to exactly the type of case that, had the Supreme Court ruled otherwise, would have gone away without any potential liability on the part of the fiduciaries or, for that matter, recovery by the plan participant. The case, as Suzanne explains, concerns a single plan participant who charges plan fiduciaries with breaches of fiduciary duty related to the amount of company stock held in that particular participant’s account; the plaintiff’s theory holds that the fiduciaries breached their duties because they “allowed participants to invest in [company] stock despite knowing that the stock was overpriced and therefore was a ‘bad deal’.” The Seventh Circuit recognized that, after LaRue, a plan participant can move forward with such a claim, at least in terms of having standing to pursue relief that is not plan wide.
The Seventh Circuit’s decision touches on a number of themes that are not fully addressed in the opinion, but which really rest at the crossroads that the law of ERISA finds itself at today. The first has to do with the extent to which LaRue will or will not increase litigation. I have previously discussed that, in my view, the real impact of LaRue is that the types of cases, such as stock drop cases of the kind considered by the Seventh Circuit in this case, that in the past would only be brought if the scale was sufficient to attract the interest of the organized plaintiffs’ class action bar, will now be brought in many instances even if the scale is insufficient to give rise to class or plan wide litigation. Rather, as this case illustrates perfectly, these types of theories will be pressed now if even only one participant has enough loss to warrant the action, as LaRue expressly authorizes and as occurred in this case. This is where you will see the impact of LaRue with regard to expanding litigation, not necessarily in terms of a massive increase in numbers of suits, but rather in an incremental increase in the types and natures of suits brought against fiduciaries. And don’t kid yourself - as the baby boomer generation moves towards retirement, there are going to be a huge number of plan participants in 401(k) and ESOP plans and the like who have large enough accounts and holdings (for instance of company stock) for it to be worth their while to bring these types of suits if their accounts take a significant hit.
The second that I wanted to mention relates to something that is certainly not going to be news to any long time reader of this blog, and its certainly not an idea unique to me, namely, the fact that, in the aftermath of judicial and political responses to the growth - and some would say overuse - of class action securities litigation, the plaintiffs’ bar has begun using ERISA to prosecute what are in essence securities fraud claims of the kind that, in the past, would have been simply litigated under the securities laws. The plaintiffs’ bar has found that, given the evolution of the securities laws and of ERISA, ERISA may well be the better theory to prosecute in stock drop type cases. The swarm of litigation already being filed over the collapse of the Bear Stearns stock is a perfect example of the type of event that we have long been conditioned to expect to be litigated under the securities laws, but which is instead generating putative class actions under ERISA related to the company’s ESOP and other retirement vehicles. Among the many issues that this evolution in securities related litigation raises is how to integrate the securities laws and ERISA under these types of scenarios, to prevent ERISA from being distorted from its original purpose and transformed instead into simply some type of alternative securities law regime; Judge Easterbrook, writing for the Seventh Circuit, raises exactly these points, but doesn’t resolve them, noting instead that they will have to be developed in the future.
The case is Rogers v. Baxter International, and thanks to Suzanne for bringing it to my attention.
A Blog to Pass Along, and Some Thoughts About the Supreme Court's Interest in ERISA
Permalink | 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.
The Recent History of Subprime Litigation
Permalink | 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
Permalink | 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
Permalink | 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.
Roundup at the LaRue Corral
Permalink | More on LaRue in the wake of Monday’s oral argument, and the inevitable commentary from all sides - including this one - on Tuesday:
• My last two posts on the LaRue case, here on the briefing and here on the oral argument, assumed a certain prior level of understanding on the part of the reader as to the issues and statutory provisions involved in the case. Workplace Prof has a more soup to nuts review of those, in the wake of the argument, here, which is also cross-posted here.
• Susan Mangiero was taken by the discussion in the oral argument of what powers may or may not have been identified in the summary plan description appended to LaRue’s complaint. I took this discussion by the Justices to be part of an inquiry into what are the constraining parameters of a claim such as the one brought by LaRue. As I have discussed before, I think the Court will allow this type of claim to be actionable, primarily because the law of ERISA is going to have to evolve to fit the brave new retirement world in which defined contribution plans, rather than defined benefit plans, rule, and establishing a right of remedy for the type of error alleged by LaRue is a necessary part of that evolution. However, I don’t expect, both for reasons related to the historically limited remedial reach of ERISA and the philosophy of various justices, that theory of liability and right of recovery to be unconstrained or left as simple as error by fiduciary plus loss to one account =s liability. Rather, although the Court may leave the parameters of the theory of liability to future cases for development, I expect the Court to at least indicate in dicta certain restraints and constraints on such claims. In this way, I think the eventual opinion will essentially walk the line between the concern of the respondent and its supporting amici that allowing claims of this nature will excessively increase the cost of providing plans to employees and the concern voiced by LaRue’s counsel that employees must be allowed a remedy for this kind of error.
• And here’s the New York Times’ highly readable account of the oral argument, by the excellent Linda Greenhouse.
• Finally for today, on a lighter and less substantive note, here’s the WSJ Law Blog’s post on the case, with a nice little profile of Tom Gies, who represented the respondent.
Thoughts on the Oral Argument in LaRue v. DeWolf, Boberg
Permalink | Just read the transcript of Monday’s oral argument in LaRue, which you too can read right here. Interesting argument, and interesting lines of questions from the court, although I am skeptical as to how much guidance as to the court’s thinking one can draw from the Justice’s questions themselves. In many ways, the lines of inquiry seemed to parallel my earlier post here on the arguments made by both sides. I had mentioned in my earlier post that the respondent focused heavily in its briefing on two points, the first being that prior jurisprudence of the Court concerning ERISA cases suggest that the narrow framework of ERISA remedies should not extend to encompass this type of claim, and the second that LaRue’s case itself was pled with holes that did not suggest it as a good vehicle for authorizing these types of claims. With regard to the first line of argument, questioning right off the bat of the respondent’s counsel targeted the fact that the prior jurisprudence relied upon by the respondent did not concern defined contribution or other retirement benefits and was based on a starkly different fact pattern; I mentioned in my earlier post on the parties’ briefing that I thought the earlier jurisprudence was too different in nature to provide much support for either side in the circumstances presented in the LaRue case, and after reading the argument, I think that remains the case. With regard to the second issue, LaRue’s counsel was peppered with questions concerning possible holes in the way he sought to recover for the alleged mistakes at issue, questioning that I thought was consistent with my earlier view that while the Court may well allow the type of claim at issue here to be actionable, the Court may well find that LaRue himself hasn’t placed himself in a position that he qualifies to go forward with such a claim. Perhaps the most interesting nugget to me in the transcript is that, with regard to the question of whether such a claim should be allowed at all - i.e., found to be authorized by the statute - the questioning seemed to consistently focus on one simple issue, namely that the only intelligible and consistently intellectually defensible position is that the plain language of the applicable statutory section would allow a loss to only one or a few plan participants’ accounts to be actionable, and would not require, as the respondent asserts, a loss to most or all of the plan’s participants before a claim for breach of fiduciary duty could exist.
Interestingly as well, the issue of whether a claim could proceed in the LaRue case as an equitable claim for relief under the Sereboff line of cases was discussed in only the most cursory terms by all involved, including the Justices. For various reasons, not the least of which is that the Court’s prior treatment of this issue has painted the Court into a bit of a corner from which it cannot back out without either repudiating prior holdings or engaging in intellectual gymnastics, I don’t see the Court advancing the ball on this issue in its opinion in this case.
LaRue v DeWolff, Broberg and the Concept of Administration Risk in ERISA Plans
Permalink | Oral argument at the Supreme Court is scheduled for Monday in LaRue v DeWolff, Broberg & Associates, which presents the technical question of whether a loss to only one participant’s 401(k) plan is actionable as a breach of fiduciary duty causing a loss to the plan, but which on a broader level concerns the question of who should bear the administration risk (defined as the problems of mistakes or malfeasance in the operation of a benefit plan) inherent in the operation of a 401(k) plan. Is it the participant or instead the plan fiduciaries who should bear that risk? To LaRue, who focuses his arguments around this idea, mistakes attributable to the administrators that harm the account balances of a particular plan participant represent a risk that should be borne by the erring administrator, and should therefore be actionable under ERISA even if the only losses in the entire plan from the mistake were suffered by one particular plan participant. The respondents reply, quite correctly, that ERISA provides limited remedies and some losses are simply - and quite intentionally under the terms of the statute - not actionable; to the respondents, LaRue’s loss, which stemmed from the administrator not following his specific investment instructions related to his specific account, is exactly such a non-remediable event under ERISA.
While the respondents are right that ERISA, presumably intentionally and certainly consistently with the general understanding of the statute and its history, provides only limited rights of recourse and leaves some losses to be borne by the affected plan participant, the statutory language itself at issue in the case - concerning whether an individual’s loss of the type described by LaRue qualifies as an actionable loss to the plan when only the individual was harmed - does not specifically leave in or leave out the circumstances of LaRue’s particular loss from the category of losses that are actionable under ERISA. And that is really where the Supreme Court’s involvement here comes into play, on the question of whether the type of administration risk described by LaRue belongs within or without the statute’s remedies; how the Court interprets the specific statutory language at issue will decide that question.
Personally, I’m of the view that the Court will find that the statutory language allows for the type of claim that LaRue is presenting. The language in question is capable, without any stretching of the language, of including the kind of claim at issue, and past jurisprudence doesn’t bar - or even present a significant impediment - to such an interpretation of the particular statutory language at issue. Moreover, and interestingly given the respondents’ - quite appropriate - tactical reliance on the general theme underlying past Court opinions on ERISA cases that suggest a claim such as LaRue’s is not actionable, the body of law that bears on this issue really was not created in response to one of the primary economic developments in American life over the last handful of years, namely the transition over to a regime of individual responsibility for retirement by means of defined contribution plans such as 401(k) plans and the accompanying transfer to individuals of the risks of retirement investing, and the corresponding disappearance of a defined benefit regime in which all such risks were borne not by individuals, but instead by their employers. Questions like the one presented by the petitioner in LaRue haven’t really been addressed at the high court level in the context of this new economic reality, and I am not convinced of the utility of past ERISA decisions concerning other contexts in resolving the statute’s application in the defined contribution context. I suspect that LaRue will present an early example of the Court accepting that the statutory language in ERISA that remains open to differing interpretations should be understood as transferring at least some of the administration risk inherent in the world of 401(k) plans from the individual saver and onto the party in the best position to avoid the risk, namely the administrator.
At the same time, I am not convinced that this is going to do much good for LaRue himself. The respondents take the tactical approach in their briefing of focusing on the particular flaws in LaRue’s presentation of himself as the poster boy for plan participants confronted by erring administrators, in an attempt to show that the particular claim he presented to the courts below does not justify interpreting the statutory language in a manner that would allow his claim to proceed. It’s a pretty good argument, and I wouldn’t be surprised to see a final opinion that opens up the type of claim he is arguing for, but puts him outside of its scope.
Is Subprime the New Stock Drops?
Permalink | 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.
Choice Architecture, 401(k) Plans and Race: The Answer to a Conundrum?
Permalink | I have talked before on this blog about behavioral economics and choice architecture, which concerns the idea that how we structure retirement savings options will affect whether, and how successfully, people save for retirement. You can find a couple of my earlier posts on this issue here and here. In a provocative post - a phrase I don’t use lightly, as I suspect you, like me, are jaded from too many people in the blogosphere referring to every moderately interesting comment as “provocative”- Workplace Prof points out a potential, but not well-documented, problem with defined contribution plans as a model for retirement, which is that, at least anecdotally, African-Americans do not contribute to such plans at as a high a rate as do white employees. Now, two notes are important right off the bat. First, as the Prof points out, no industry wide study of this issue has ever been conducted, thus raising the question of whether this apparent problem is a real problem, or instead just something that a small sampling suggests exists. Second, even if evidence does bear out the existence of this problem, one should not jump to the conclusion that it means that all African-Americans participate in these plans at a lower rate than do whites. It may well be that, here, race is but a stalking horse for socio-economic status, and that the participation rates flow more directly from economic level than from race; it may well be the case that, in fact, African-Americans contribute at a comparable level as white employees when the comparison is controlled for educational status and/or salary. We just don’t know.
Either way, though, the Prof points out that the solution may be in the automatic enrollment provisions of the Pension Protection Act, which make participation in such plans a default. If this alone were to remedy such a problem, it would be a perfect example of choice architecture solving a problem: the mere structure of the retirement vehicle will have led to higher participation, the result that the authors of the Pension Protection Act presumably wanted to achieve.
Number of Suits + Questionable Practices = X
Permalink | 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.
Reinsurance and LaRue, All in the Same Post
Permalink | Instead of posting twice in the same morning, I am going to try to address two distinct substantive issues, one involving reinsurance and the other ERISA, all in the same post, hopefully without turning this post into some sort of Frankenstein monster combination of topics that instead should have been kept entirely separate.
On the first, ever wonder why so many reinsurance companies are domiciled in Bermuda? I thought so. The New York Times has an excellent article today explaining why, and as one might have guessed, it has to do with taxes. As the New York Times sums up the matter:
At issue are federal rules that allow insurance premiums to be shifted from the United States to offshore affiliates — which reduces taxes — and allow the proceeds to be invested tax free, increasing the profit to parent companies. . . .The core of the dispute is an unusual tax treaty with Bermuda. It allows insurance companies based on the island to deduct from their American taxes premiums that their subsidiaries in the United States collect from American customers and send back to the headquarters abroad. In Bermuda and other tax havens, the money is invested tax free. This money is moved, under the law, through the purchase of reinsurance by the affiliates from their parent companies.
Personally, I really like Bermuda and have long wanted to have reinsurance clients there that would justify my opening an office in Bermuda, which I suspect influences my views on this issue, and so I will therefore keep them to myself.
The second is an ERISA issue, involving the Supreme Court’s decision to hear LaRue v. DeWolfe, Boberg and Associates. This case, which I discussed here and here, involves whether a plan participant can sue under ERISA to recover losses suffered only in that participant’s account, and not across the plan as a whole. As I discussed here, it makes sense that a participant can do so and I expect the Supreme Court to rule to that effect. The defendants, in an attempt to avoid the Supreme Court ever reaching this issue, moved to dismiss the appeal as moot on the ground that the plaintiff had cashed out of the plan and therefore cannot proceed with a claim against the plan for losses incurred in the plaintiff’s now cashed out account; whether such cashed out participants can proceed with such cases is something of a hot topic that has been decided in differing ways by trial level judges in the federal system, including by judges sitting in the same federal district court, as I discussed here. Well, Workplace Prof and SCOTUSBLOG are reporting that the Supreme Court has denied the motion to dismiss on that ground and the Supreme Court will go ahead and hear the case.
There, I did it - two items on two different issues, all for the price of one admission.
401(k) Plans and Increasing Liability Risks for Fiduciaries
Permalink | Coming off the holiday weekend, I have a long list of items I want to pass on or talk about. I will try to put up as many as I can over the next few posts, to work through the backlog. I thought I would start with this one, because it ties two of the items together. Susan Mangiero of Pension Governance and the Pension Risk Matters blog, passed along this article on last week’s decision by Judge Tauro that I blogged about here, holding that cashed out participants in a 401(k) plan could sustain breach of fiduciary duty claims, a finding contrary to that of some courts - including at least one by another judge sitting in the same district as Judge Tauro - but supported by the holdings of some other courts.
What I liked about the article, aside from the fact that it adds some further discussion about the case and the issues it presents to that contained in my earlier blog post on the case, is the article’s comment that the case is likely part of “a trend that will result in most courts following suit.” An animating theme of my posts and thinking on ERISA litigation concerning defined contribution plans such as 401(k) plans is that we are in the process of watching the case law evolve to hand more protections to plan participants, with a corresponding growth in the potential liability exposure of plan fiduciaries. As the world shifts from a defined benefit world - read pensions - to 401(k) plans, the law of ERISA is going to shift with it to better protect investors in those latter types of plans. For the first thirty years or so of the development of ERISA jurisprudence, defined contribution plans were simply not that important and the unique concerns of those plans - such as what becomes of the rights of cashed out plan participants, the issue addressed by Judge Tauro last week - played a relatively peripheral role in the development of ERISA jurisprudence. That is all changing and changing quick. Moreover, we can expect that evolution in the law to proceed with real force for some time, given the expected exponential growth in assets held in 401(k) plans. On this last point, three economist authors have done the heavy lifting, and document this point in this paper, as summarized in the abstract of their article:
Over the past two and a half decades there has been a fundamental change in saving for retirement in the United States, with a rapid shift from employer-managed defined benefit pensions to defined contribution saving plans that are largely controlled by employees. To understand how this change will affect the well-being of future retirees, we project the future growth of assets in self-directed personal retirement plans. We project the 401(k) assets at age 65 for cohorts attaining age 65 between 2000 and 2040. We also project the total value of assets in 401(k) accounts in each year through 2040 and we project the value of 401(k) assets as a percent of GDP over this period. We conclude that cohorts that attain age 65 in future decades will have accumulated much greater retirement saving (in real dollars) than the retirement saving of current retirees.
Follow the money is always a safe bet. As the majority of Americans’ individual savings move into 401(k) plans, the law governing those plans is going to shift with it.
Another View on Whether a Cashed Out 401(k) Participant Has Standing to Sue for Losses Under ERISA
Permalink | Judge Tauro, of the United States District Court for the District of Massachusetts, has weighed in lately on some of the more cutting edge and currently unsettled issues in ERISA litigation, such as the impact of ERISA preemption on the powers of a state agency. This week, he ventured into the now hot topic of whether a plan participant who has cashed out of a 401(k) plan has standing to sue for breach of fiduciary duty, in this instance for imprudently investing in allegedly inflated company stock. In the decision, involving a putative class action against Boston Scientific, the judge surveyed case law from other jurisdictions on the issue and broke from the opinion of another judge of the circuit, who had found that such a participant, once cashed out, lacked standing to bring a claim for benefits. Judge Tauro reviewed case law from other circuits to the contrary, and elected to follow those rulings.
The cases relied upon by the judge are an instructive lot, and almost a road map for briefing this issue when arguing in favor of standing for such a cashed out participant:
More persuasive is the reasoning of the Seventh Circuit, which recently reached an opposite outcome and found that a plan participant did have standing, despite having cashed out of the plan. [The Seventh Circuit found that] "[b]enefits are benefits; in a defined-contribution plan they are the value of the retirement account when the employee retires, and a breach of fiduciary duty that diminishes that value gives rise to a claim for benefits measured by the difference between what the retirement account was worth when the employee retired and cashed it out and what it would have been worth then had it not been for the breach of fiduciary duty." The Third and Sixth Circuits have adopted this line of reasoning as well. Also instructive is the analysis by Judge Hall in the District of Connecticut: “[T]he court is puzzled by the . . . assertion that a claim for benefits lost due to imprudent fiduciary investment becomes a claim for damages once the plaintiff accepts a lump sum payment constituting the balance of her account with the relevant plan. . . . Regardless of whether [the participant] accepted or refused the balance of her account, her underlying claim would still be for the money lost by the Plan as a result of the defendants' imprudent investments. The court sees no logical reason why such a claim seeks an ascertainable benefit when the plaintiff refuses a lump sum, but the very same claim seeks an unascertainable damage award once the plaintiff accepts a lump sum.”
A Clear Signal on ERISA, the Mandatory Victims Restitution Act and Criminal Restitution Orders in the First Circuit
Permalink | Here’s a curious case out of the First Circuit yesterday that is, and isn’t, about ERISA, but hints at how the First Circuit would handle a particular issue of some importance with regard to ERISA’s protection of retirement benefits. I have talked in the past about a decision out of the Ninth Circuit a few months back, United States v. Novak, in which the court held that the criminal restitution requirements imposed by the federal Mandatory Victims Restitution Act (“MVRA”) trumped the anti-alienation provisions of ERISA. Here’s my earlier post on that case, and here's a post on an article in the National Law Journal in which I am quoted on the Novak case. In United States v. Hyde, decided yesterday, the First Circuit suggests its agreement with Novak, strongly indicating that in this circuit retirement benefits can be attached to fulfill criminal restitution orders entered in accordance with the MVRA. Discussing whether the bankruptcy code or homestead exemptions under Massachusetts law prevented attachment by the government of certain proceeds, the First Circuit concluded in no uncertain terms that the “MVRA's language is unambiguous [and its] provisions apply ‘[n]otwithstanding any other Federal law.’" The Court relied heavily on the Novak decision as support, noting that Novak held that the “MVRA provisions supersede the non-alienation provisions of ERISA.”
I Got Them Low Down No Good Pension Blues
Permalink | 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."
High Cost Investments, Payments to Sponsors, and the National Education Association
Been away from the desk for a few days, but not away from my reading, and there’s been a whole series of things in the media that may be of interest to those who read this blog that I have meant to pass along and comment on. I am going to try to post frequent but shorter notes for the next day or three until I cover them all, starting with one that most clearly and directly falls within the jurisdiction of this blog, concerning the payment of fees to a quasi-retirement plan sponsor. Many of you may have already seen the story, from the New York Times, which concerns payments received by the National Education Association from financial firms whose investment products it recommended to members. As the article explains:
A lawsuit filed last week in federal court in Washington State contends that the National Education Association breached its duty to members by accepting millions of dollars in payments from two financial firms whose high-cost investments it recommended to members in an association-sponsored retirement plan. The case was filed on behalf of two N.E.A. members who had invested in annuities sold by Nationwide Life Insurance Company and the Security Benefit Group. It contends that by actively endorsing these products, which carry high fees, the N.E.A., through its N.E.A. Member Benefits subsidiary, took on the role of a retirement plan sponsor, which must put its members’ interests ahead of its own. By taking fees from the two companies whose annuities N.E.A. Member Benefits recommended to its members, the N.E.A. breached its duty to them, the suit contends.
The article goes on to explain some tricks and twists that the plaintiffs face in trying to press their suit against the N.E.A. related to the payments and the high cost products, namely that the plaintiffs need to shoehorn the case into ERISA by arguing that “because the N.E.A. actively promoted the annuity products to its members, it essentially stepped in as a plan sponsor [thereby making] it subject to Erisa’s fiduciary duty requirements.”
With regard to this problem, concerning the plaintiffs’ need to figure out the best manner to structure their lawsuit, what you are really seeing is the problem of forcing a square peg into a round hole. I have argued in other posts that, as we move decisively from a defined benefit plan world to a defined contribution world, and thereby make plan participants the bearers of all the risks of their retirement investments, we need to simultaneously provide those plan participants with the legal protections and tools to manage those risks, including the types of risks alleged in this case, of misleading investment recommendations, undisclosed payments, and excessive costs.
I hope to keep an eye on this case going forward, as it may provide an excellent window on the question of whether, and if so how, the law can evolve to deal with these changes in the real world environment in which people now must prepare for retirement.
Me and LaRue, and Business Insurance Too
Permalink | There is an article in Business Insurance magazine this week, the June 25th issue, on the Supreme Court accepting review of the LaRue decision, in which I am quoted. The article is here - subscription required - and if you read it, you will note that it ends on my comment that I expect the Supreme Court to overturn the Fourth Circuit. A short article intended really just as a little news blurb on the subject for the benefit of the magazine’s business management oriented readership, the reporter did not have the space to go into why I think the Court will overturn the lower court decision, but I, obviously, have the space to do so here. So to the extent anyone is interested in the question, here’s my thinking.
First, I don’t really expect the Court to do much, if anything, with the question of the scope of equitable remedies issue. If anything, given the language of the statute, despite the fact that many people want the Court to expand individual remedies and available damages under ERISA - including, I have found in my litigation practice, many District Court judges who are displeased with the limitations of the statute but nonetheless consider themselves duty bound to enforce its restrictions on recovery - the Court has probably read the range of equitable relief that can be pursued in as broad and pro-plaintiff a manner as the language allows, with its test of whether the relief sought would be equitable or not way back in the days of the divided bench. There simply isn’t much more you can do with the statute’s restriction of recovery in certain circumstances to equitable relief unless you are simply going to ignore the actual language of the statute and rewrite it by judicial fiat, which this Court certainly isn’t going to do and arguably, the thinking of Ronald Dworkin and his heirs aside, no court should do.
In a way, this issue is a perfect parallel to a long running and common problem in the insurance coverage field, in which there was an oft litigated dispute over whether insurance policies, because they only cover claims for damages, cover lawsuits seeking equitable relief, the issue being that the policies only cover damages and equitable relief is something different than damages. In both insurance coverage and ERISA cases - such as LaRue - the simple fact of the matter is that equitable relief does mean something particular, something that is different than a claim for damages, and the question is what is the impact of that difference.
Second, with regard to the more fundamental question of whether the individual plan participant could recover just for losses to his account in the plan, yes, I do think the Court will overrule the Fourth Circuit and find that such an individual plan participant can bring such an action. I can never recall whether the saying is that the Court follows the election returns, or is that the Court doesn’t follow the election returns, so I looked it up, and in fact the saying is that they follow the returns, although every author who writes this then adds qualifiers to the comment, such as in this piece here. Either way, the kind of relief sought by the plaintiff in the LaRue case, to be able to enforce his investment instructions in his own retirement savings account, clearly fits with the current Zeitgeist and, more interestingly, is of a piece - and a natural fit with - the changes to retirement savings plans put into place by the Pension Protection Act. Beyond that, the statutory language that is at issue in this part of the case is completely open to either the interpretation selected by the Fourth Circuit, or that sought by the plaintiff, and thus the Court can realign this part of ERISA without doing any violence to the statutory language. Combine these things, and I get a reversal.
Common Misperceptions and The Obligations of Plan Sponsors
Permalink | I wrote, it seems to me, an awful lot over the last couple of weeks on the question of the fiduciary obligations of plan sponsors and others with regard to the investment selections made by pension funds and the investment choices offered in 401(k) plans. Susan Mangiero has a lot more to say about this in her series of posts - here, here, here and (most recently) here - on the due diligence obligations of fiduciaries when investing plan assets.
One particular issue that constantly comes up in this area is the belief of many employers and plan sponsors that they have satisfied any obligations they may have and have immunized themselves, for all intents and purposes, from liability for breach of fiduciary duty, by hiring an outside company to administer the plan and make investment decisions. Whenever I speak to people who offer investment and other assistance to plan fiduciaries, their need to disabuse fiduciaries, and particularly plan sponsors, of this belief is a constant topic of discussion. Quoting Rick Slavin, an attorney and former regulator, Susan nails down in three sentences why this is not the case:
In his overview of case precedent and enforcement actions, Slavin offered that sloppy, obtuse or incomplete paperwork is usually the beginning of trouble. He reiterated that the use of outside parties does not absolve plan sponsors of their fiduciary duties. Oversight obligations remain.
You know, the simple fact of the matter is that, in all the areas I have litigated cases in over the years, plan sponsors have the easiest ability to preemptively and pro-actively position themselves to defeat an action against them - due diligence, due diligence and more due diligence throughout the life of the pension fund or defined contribution plan will come as close to serving as a silver bullet to protect plan sponsors as exists anywhere in the world of litigation. But plan sponsors who forget that they still have to engage in due diligence in the form of oversight and instead elect to rely simply on the fact that they retained an outside manager effectively forfeit this safe harbor.
An Evolution in Fiduciary Standards Means an Increase in Litigation Risk
Permalink | My email inbox is often inundated with seminar pitches, book offers, and informational material, much of which, even if it looks valuable, I could never get to unless I decide to give up the practice of law and just read all this stuff full time. Fortunately, though, I can cut through the junk pretty quick and spot the diamond in it within minutes of sitting down at my desk in the morning (or, more often than not, while remotely surfing my inbox in the middle of the night).
And here is one such diamond, a really terrific paper on the rapidly evolving nature of the fiduciary standards affecting plan sponsors of defined contribution - most commonly 401(k) - plans and the steps they should be taking as a result. The paper, authored by Laurence Cranch and Daniel Notto of AllianceBernstein, is Evolving Fiduciary Standards for Defined Contribution Plan Sponsors - The Impact of New Thinking About Employee Participation and Investment Selection, and you can find it here.
In short, the authors argue, correctly I believe, that we are not only in an era of rapid change in the standards of care expected of fiduciaries, driven to a large extent by advances in knowledge in the area of retirement investing and the transition from pensions to defined contribution plans, but also in a time of vastly increased litigation threats to such fiduciaries. Perhaps the most interesting part of the paper concerns using the tools provided by the Pension Protection Act, in conjunction with the investment selection thinking that underlies the statute and its enabling regulations, to simultaneously demonstrate prudence on the part of the fiduciary and decrease the likelihood of litigation.
Just a terrific paper, and well worth the time to read it.
Divestment and Fiduciary Duties
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
Permalink | 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
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
Permalink | 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
Permalink | 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
Permalink | 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
Permalink | 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
Permalink | The current issue of the National Law Journal has an article providing an excellent overview of litigation over allegedly excessive fees charged on investments in 401(k) plans. The article notes the variations in the theories, and discusses what are likely to be large, class wide actions in the near future. There are those who think these types of claims are going away but, as this article suggests, that doesn’t actually look to be the case.
Now connect the dots between that story and the LaRue case, which I discussed here and about which more can be learned here, in which the Supreme Court is being asked to determine whether a single participant in a 401(k) plan can bring a breach of fiduciary duty claim for breaches that harmed only his account. Right now, with regard to the excessive fee issue, we are seeing, as the National Law Journal article reflects, the development of essentially plan wide suits. But if developments in the LaRue case establish that any individual plan participant can sue for breaches of fiduciary duty affecting that participant’s account, that will change. We will instead have a universe of individual participants, all with the capacity to sue over their own account balance and over any complaints they have that excessive fees drove down the balance of their own accounts over the course of years, and I suspect we will see plenty of lawyers appear who are ready and willing to represent individual account holders in such lawsuits. This will create a different litigation world for fiduciaries, plan sponsors, plan administrators and the like, then the current one in which the real risk is large plan wide actions by specialist plaintiff firms. In its place will be more of a death by a thousand cuts type of litigation regime that will confront plan fiduciaries and their allies.
I am not saying this is necessarily a bad thing, or a good thing. It is what it is. But in at least one way it may well be a good thing. We are all bombarded with the mantra that, in this defined contribution plan world we now inhabit, individuals are now responsible for their own retirement, as opposed to when companies provided it by means of guaranteed pensions. Well, I suppose if we are going to make individual plan participants the risk bearers and care takers of their own retirement funding, the least we can do is provide them with the legal tools to protect their investments.
LaRue v. DeWolff, Losses to the Plan and the Supreme Court
Permalink | SCOTUSBLOG is the NY Times, or maybe - given its focus on one particular field - the Wall Street Journal, of the legal blog world. With the backing of a major international law firm, it brings tremendous resources to its in-depth coverage of all things goings on at the Supreme Court. Cripes, the blog even has its own reporter, to supplement the work of the actual bloggers.
And of course that’s also why I read it, because you know you are not going to miss anything of importance to your own practice area that happens at the Supreme Court. And here, of interest, is their post on the United States Solicitor General’s brief recommending that the Supreme Court hear an appeal from the Fourth Circuit’s decision in LaRue v. DeWolff, Boberg & Associates, which presents the question of whether an individual participant in a 401(k) plan can sue to recover losses from errors by fiduciaries that affected only his or her account in the plan, rather than the accounts of all or most participants in the plan. In dispute is the question of whether it qualifies, first, as a loss to the plan, such that the participant can sue for breach of fiduciary duty, and/or second as equitable relief as the Supreme Court has interpreted that phrase for purposes of ERISA, such that the participant can recover on a separate equitable relief theory.
One thing’s for sure. If the Supreme Court puts its imprimatur on this theory, and makes clear that individual plan participants can sue for their own individual losses in their defined contribution accounts, there will be a whole range of new potential plaintiffs out there, and I am sure plenty of lawyers ready and willing to represent them. At the same time, to be fair, in a world of Enrons and the like, maybe there should be.
The Workplace Prof reads SCOTUSBLOG too, and here’s the prof’s take on these events.
Documenting the Death of Pensions
Permalink | 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
Permalink | 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.
Behavioral Economics and a Disincentive to Retire
Permalink | 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.
401(k) Plans and Breach of Fiduciary Duty Lawsuits
Permalink | I have written before, and frequently (such as here and here), about the coming boom in litigation against plan sponsors and fiduciaries over alleged excessive fees and other alleged malfeasance in the administration of 401(k) plans. One point I have tried to drive home in my posts, including here and here, is that the best defense to this litigation boomlet, possibly soon to be a boom, is a good offense, in the form of careful, regularly scheduled due diligence with regard to the funds offered in a plan and the fees charged for those funds.
This article, making the same points, by the lawyers at Littler Mendelson, crossed my inbox today. It provides a nice easy to digest overview of the issue, and recommends the same preemptive course of conduct, in the form of these recommendations for due diligence:
Sound advice in my book, and one I - and others - have been recommending for awhile.
What to Do? We believe that there are some actions that employers and plan fiduciaries can take to protect themselves:
•Continually monitor all plan and fund expenses and assure that they have negotiated the best deal for participants, but keeping in mind that fees are only one piece of the fiduciary puzzle; the others include risk, rate of return, and historical performance.
•Periodically review all aspects of the fund selection and monitoring, and document these efforts.
•Be sure that all plan expenses can be determined from documentation provided or made available to participants, and consider providing participants with a separate summary of those expenses.
•Review your service provider agreements, make sure you get legal counsel involved in negotiating those agreements. It is recommended that all 401(k) plan service provider agreements prohibit any undisclosed revenue sharing.
•Ask your plan service providers to provide you with a detailed written description of all plan fees – hard dollar and soft dollar.
•If you believe you may be vulnerable, consider having a legal audit performed on your 401(k) plan.
Behavioral Economics, the Pension Protection Act and 401(k) Litigation
Permalink | 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
Permalink | 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
Permalink | 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
Permalink | 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, http://www.pensiongovernance.com/home.php, 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.
Merger and Anti-Cutback Provisions of ERISA, and a Handy Rule of Thumb
Permalink | 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.
Novak and the National Law Journal
Permalink | 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.
Insurance Coverage for Pension Plan Fiduciaries
Permalink | 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.
Congressional Hearings on 401(k) Plan Fees and What They Mean for Plan Fiduciaries
Permalink | Wow. Don’t think the heat is on for company 401(k) sponsors and other fiduciaries of employee retirement benefit plans who may not have done enough benchmarking and due diligence to make sure that mutual fund and advisor fees are as low as possible? Then take a look at this article out of the Washington Post about congressional hearings into the issue. The gist of the testimony is to the effect that fees are too high, are not disclosed fully or understood by plan participants, and have a significant impact on returns in the plans. While the mutual fund industry disputes this characterization, anecdotal evidence certainly suggests that at least some significant portion of company sponsored plans suffer from these problems. It would certainly be nice if the sponsors of plans investigated right away whether or not their plans suffer from these defects and, if so, promptly remedied the problems. But for reasons I have discussed before in other posts, doing so would not only be good business and the right thing to do for company employees who participate in such plans, but is also necessary to protect the plan’s fiduciaries from legal exposure. It clearly appears at this point that conducting due diligence to root out these problems and then remedy them - or even better, to find out that the particular plan in question does not suffer from these problems and that there is nothing to remedy - is an essential element of satisfying a fiduciary’s obligations in the operation of these plans, and that the failure to do so is an open invitation for a breach of fiduciary duty lawsuit.
What Happens When Reimbursement of Overpaid Benefits Is Equitable for Purposes of ERISA, but Nonetheless Inequitable?
Permalink | 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
Permalink | 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
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.
More on Top Hat Plans and the Alexander Decision
Permalink | Just a brief note today on something interesting that caught my eye concerning a topic, top hat plans, that we have discussed a fair amount recently. Here is a nice detailed technical discussion of top hat plans from the BNA Pension and Benefits Blog. The discussion is centered around the Alexander case out of the federal district court that I talked about here, and on which the post’s author apparently served as a non-testifying expert.
The Effect of the Savings Rate on 401(k) Fee and Other Retirement Benefit Litigation
Permalink | Now here’s a curious little article from the New York Times on the question of whether mutual fund companies, including in their retirement calculators, deliberately overestimate the amount that people must save and invest to be able to afford to retire. The article notes that a number of respected economists find this to be the case, and the article notes that the mutual fund companies themselves obviously have much to gain if employees believe they must increase their retirement savings. As the article bluntly puts it, “financial firms have a pointed interest in persuading people to save much more than they need because the companies earn fees on managing that money.” Specifically - although without analyzing the data behind these conclusions, one can’t be sure whether these numbers fall into the old saw that the three types of lies are lies, damn lies and statistics - one of the economists claims that “Fidelity’s online calculators typically set the target of assets needed to cover spending in retirement 36.4 percent too high. Vanguard’s was 53.1 percent too high. A calculator offered by TIAA-CREF, one of the largest managers of retirement savings, was 78 [percent] higher.”
The article engenders a couple of thoughts. For one, would 401(k) fee and other breach of fiduciary litigation related to retirement savings be quite as wide spread if the working/retirement saving public believed they were saving enough already for retirement, rather than having been taught that they are behind the eight ball in accumulating enough money for retirement? This raises something of a behavioral question, or maybe a chicken and the egg question. Would people care enough to sue over these types of issues if they thought they were safely prepared for retirement, and to what extent does the fear that they are not drive decisions regarding litigation? Or are these suits really driven by the imagination of plaintiffs’ lawyers, and thus it really wouldn’t make any difference at all what the actual world view is of employees as a whole with regard to whether they are on track for a secure retirement or should instead be very, very afraid of what the future will bring?
And finally, would it be a breach of fiduciary duty if plan administrators overstated the amount that employees should save for retirement when they educate employees? And if it was, what would the damages be, particularly if the oversavings produced significant investment gains for the plan participant?
More on Top Hat Plans
Permalink | I have been meaning to return to this point for the last several days, but the crush of business has kept me from it. I discussed in a recent post a case that I think has the potential to be very influential on the subject of proving or disproving top hat status, involving surgeons and top hat plans that were created to deal with caps on compensation at the hospital. The focus of this blog is on the law on ERISA and insurance issues, naturally enough as I am a lawyer and the blog is, after all, called the ERISA and Insurance Litigation blog. But sometimes the technical aspects of a particular type of benefit plan could use more discussion than one can often find in the case law, and it can be helpful to place them in the context of the benefits field as a whole. Maybe no one does that better than Jerry Kalish, who at the end of last week had this terrific post providing further details on the nature of top hat plans.
Top Hat Plans and ERISA
Permalink | One of the most interesting and potentially influential of the ERISA decisions rendered by the courts in the First Circuit during the holiday season that just closed is Eben Alexander v Brigham and Women’s Physician Organization, in which the court issued its findings, after a trial, on whether two particular deferred compensation plans for highly compensated surgeons qualified as top hat plans which are exempt from certain restrictions and controls imposed by ERISA. The plaintiff, a neurosurgeon, had his balance in the plans reduced to account for certain practice expenses, as allowed under the terms of the two plans, but which could only be appropriate if the plans were top hat plans; otherwise, the reductions would violate ERISA. After a trial, the court explained in detail why the evidence added up to a finding that the plans were top hat plans, thus defeating the plaintiff’s claims. What is particularly noteworthy, and which puts the case in position to influence other courts’ decisions concerning top hat plans in the future, is the court’s detailed analysis of the case law and statutory provisions governing the issue and of how that law should be applied to the type of detailed fact finding relied upon by the court.
And as an added bonus, if you are of any sort of a voyeur, the case has the added benefit of opening up a window into just how much money is earned by so called “highly compensated” (for purposes of analyzing whether or not a plan is a top hat plan) surgeons at prominent Boston medical institutions.
Health Savings Accounts, Summary Plan Descriptions and Other Things
Permalink | A few short notes of interest from a weekend of reading:
• Jerry Kalish has nice things to say about (and agrees with) my recent post concerning the Second Circuit’s decision - correct in my view - precluding summary plan descriptions from trumping the actual plan terms.
• I don’t know quite what to say about this article from yesterday’s Boston Globe about town retirement boards and their travel expenses, other than to note that if you don’t want to face exposure as a fiduciary, this type of conduct probably isn’t the way to go about it.
• And finally, WorkPlace Prof collected this information about whether health savings accounts constitute employee benefit plans governed by ERISA. He cites a report to the effect that they do not. Of particular interest, the post points out that employer contributions to the accounts will not necessarily transform them into ERISA governed plans, because employer contributions alone do not in and of themselves render a plan an ERISA governed plan. I have discussed before the totality of factual circumstances that are to be considered in the First Circuit to determine whether a benefit is an ERISA governed plan, and the fact that the source of funding alone is not determinative.
401(k) Plans and Pensions: Are They Enough?
I wanted to pass along today a fascinating law review article by one of the better ERISA scholars, Susan Stabile, on the retirement benefit system. In the article, "Is It Time to Admit the Failure of an Employer-Based Pension System," to be published in the Lewis & Clark Law Review, Professor Stabile raises the question of whether, given recent developments concerning pensions and 401(k) plans, it is time to give up on the current system for funding employee retirement and instead create a new paradigm for it. She starts from the premise that incremental changes to the system are not sufficient to achieve retirement security, which is interesting to me because, at a minimum, it is fair to say that the stock drop and other ERISA and pension benefit litigation chronicled on this blog, and the judicial responses to them, really are exactly that - incremental changes to how 401(k) plans and pension benefits are governed and provided. She proposes that a much more radical response to the problem of providing Americans with retirement security is needed, such as the provision of a government pension for everyone or mandatory employer pensions with more stringent regulation than currently exists.
These are obviously radical departures from what currently exists, and from the ERISA governed system I discuss regularly in this blog, which is why the article is particularly interesting. But as a side benefit to those of you who are interested in the ERISA issues regularly chronicled here, Professor Stabile provides a nice presentation of the impact of ERISA's fiduciary duty and other obligations on the problem addressed in her article.
ERISA and Retirement Benefits
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.
Retirement Benefits and Fiduciary Duties under ERISA
There is a nice and complimentary write up of this blog at Workplace Prof Blog, one of my favorite sources for a wide range of information related to employee benefits, including ERISA, such as this post on a petition for writ of certiorari arising out of a recent Ninth Circuit ruling concerning the fiduciary obligations of the administrator of an employee deferred profit sharing plan. The petition is itself interesting reading, and is available here (thanks to the efforts of the Workplace Prof), and details what the petitioner views as a split among the circuits on two specific points concerning the law of ERISA. The first is whether a plan participant can sue a fiduciary for breaches of fiduciary duty that harmed only a subset of a plan's participants and not the plan as a whole, while the second concerns the extent to which the administrator of a retirement plan can follow, or instead must decline to follow, a plan sponsor's directive that is not prudent from an investment perspective.
Tough choices that these types of cases present, as to where to draw the line between the sponsor's right to operate its plan and the protection that should be extended to the participants. Perhaps the question of whether the participant can protect herself within the structure of the plan, seperate from what the administrator or sponsor does, might act as a guide post on where that line should be drawn.
Nice informative story out of the National Law Journal on the so-called stock-drop suits, which allege breaches of fiduciary duty under ERISA by trustees charged with managing company 401(k) plans. The lawsuits in question were "filed on behalf of employees who lost money in their 401(k) and other retirement plans because of the declining price of their employer's stock." In those cases, the "[p]laintiffs allege that companies and trustees they hire to manage their retirement plans had a fiduciary duty to shift employee investments out of their stock after learning of an impending decline in the share price." The law may be turning against such theories. As the article summarizes:
The so-called "stock-drop" suits, which were filed under the Employee Retirement Income Security Act of 1974, or ERISA, were brought alongside hundreds of shareholder class actions following the demise of Enron Corp.
In the past year, several rulings -- coupled with an action by the U.S. Department of Labor -- have put limits on the liability of directed trustees, who are hired by an employer to manage employee retirement plans.
The article does allow, however, that plaintiffs' lawyers will respond by shifting their targets, and possibly their theories, rather than abandon this line of litigation.
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.
More on Termination of Retirement Benefits
Updating my post the other day concerning the ramifications, under ERISA and otherwise, of retiree medical benefits and attempts to terminate them, a recent post in BenefitsBlog documents why, for those of us still working today, it may well be a non-issue. Citing a report from Watson Wyatt, BenefitsBlog notes that future retirees will be bearing most and perhaps all of the costs of their medical benefits. The Watson Wyatt report notes, of particular salience:
The trend away from employer-provided retiree health benefits will continue as a result of rising health care costs, growing retiree populations, uncertain business profitability and federal regulations that provide only limited opportunities for funding retiree medical benefits.
The benefits provided to future retirees will be significantly less generous than those current retirees receive today, as employers are cutting back, capping or completely eliminating their retiree health benefits programs. Eight out of 10 employers that still offered retiree medical benefits in 1999 had reduced their retiree medical expense per active employee from the level reported for 1993, according to Watson Wyatt research.
Future retirees will shoulder substantially more - if not all - of the costs of their health care in retirement. Watson Wyatt estimates that the level of employer financial support will drop to less than 10 percent of total retiree medical expense by the year 2031, under plan provisions already adopted by many employers.
Terminating Retirement Benefits
The problem of companies reneging on promises to provide medical and other benefits to retirees is in the news pretty much every week, if not every day. Company after company, retirement plan after retirement plan, benefits that beneficiaries believed were theirs for life are being significantly reduced, or even terminated. In some industries, most prominently the auto industry, the promise to pay such benefits to retirees has become, at least according to the companies and to many independent analysts, an unsustainable cost that threatens the industry's ability to compete on price in the marketplace.
The problem isn't going away. An article today in the National Law Journal provides an excellent overview of the problem, noting in part that "[a] recent report by Standard & Poor's found that post-retirement benefits, mostly medical costs, were underfunded by nearly $300 billion among the firms in the S&P 500 stock index," and that "[t]he trend in industry after industry is to eliminate retiree benefits."
ERISA obviously impacts attempts by companies and their employee benefit plans to reduce or end benefits that the recipients believed were a lifetime retirement commitment. The National Law Journal article provides a summary of the state of the law on this impact, noting:
In 1974 Congress created the Employee Retirement Income Security Act to establish fiduciary standards to protect retiree pensions and other benefits. Although pensions were vested under the law and difficult to alter, health benefits were not and could be changed more readily.
The 7th Circuit has one of the toughest standards for retirees attempting to block loss of benefits. The court has said that a company had to have misled plan participants about the terms in order to have breached its fiduciary obligation.
In the case of 347 CNA Financial Corp. retirees whose early retirement health care allowance was cut off, the court found the promise of "lifetime" coverage meant "good for life unless revoked or modified," Vallone v. CNA Financial Corp., 375 F.3d 623 (2004).
By contrast, the 2nd Circuit has provided a more expansive interpretation of ERISA's fiduciary standard by focusing on the plain meaning of the word "lifetime." The court found that a company might violate its fiduciary duty if it provides a lifetime benefit, but the right does not vest. Abbruscato v. Empire Blue Cross & Blue Shield 274 F.3d 90 (2001).
And the 3rd Circuit, in In re Unisys Corp. Retiree Medical Benefit "ERISA" Litigation, 58 F.3d 896 (1995), said that a plan administrator who knows but fails to provide information, to the detriment of beneficiaries, breaches its fiduciary duty.
Lastly, the 6th Circuit has said that if a company misleads the retirees, regardless of whether it was negligent or intentional, a breach of fiduciary duty exists. James v. Pirelli Armstrong Tire Co. 305 F.3d 439 (2003)