What Would Alexander Hamilton Say About Excessive Fees in 401(k) Plans?
Oceans rise, empires fall . . . This line from the musical Hamilton has been ringing in my ears for a few days now, since I saw the show on Broadway last week. There is just something about that particular line and the music beneath it that has kept it on constant repeat in my head as I have returned to work.
As it turns out, though, that line is a perfect fit for the topics discussed by Chris Carosa of Fiduciary News in this great article on the increased attention being paid by fiduciaries to the risks posed by excessive fees in 401(k) plans. As Chris explains, with the help of a very astute group of observers who are quoted in the article, the perfect storm of years of excessive fee class actions, the Supreme Court deciding Tibble, media coverage of large settlements of excessive fee claims, and mandated fee disclosure by regulatory fiat, have combined to make plan fiduciaries highly focused on the costs of their plans.
And so what does all this have to do with Hamilton, and the line “Oceans rise, empires fall?” You know those vast empires of wealth that have been built across the retirement industry by taking large fees out of 401(k) plans? That empire’s fallen. Making a lot of money out of servicing 401(k) assets is now going to have to come from doing a better job, not from charging more for the same job. There’s just too much risk in it for plan fiduciaries if they allow people to keep making a lot of money simply by charging a lot of fees to place or hold retirement assets, without providing additional benefit that warrants additional fees.
Although the real point of this post today is to, one, have some fun with the lyrics of Hamilton and, two, pass along an article that you should definitely read if you are interested in the question of fees in 401(k) plans, I also wanted to mention a broader point. If you have been a long time reader of this blog, you have actually seen this issue building up in exactly the way that Chris presents it in his article. Blog posts I have written, articles discussed in this blog and judicial decisions analyzed in this blog have covered this issue from its early days and, if you were to sit down and read them all now, reflect exactly the development that Chris discusses in the article: namely, the slow but eventually dramatic transition of the issue from an outlier about which no one – including often the courts – gave much thought, to a central aspect of ERISA jurisprudence and practice. You can actually see this illustrated in shorthand in just two posts, just by noting how the issue went, over the course of only a few years, from an issue that, as I discussed in this article back in 2011, was roundly rejected by the courts to one that, only four years later, the Supreme Court was discussing in Tibble.
Thoughts on the World's Simplest ERISA Decision: Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan
Interestingly enough, the Supreme Court’s decision last week in Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan is about the least complicated ERISA decision any court has issued in years. You know how I know that? The number of posts, tweets and articles published within days by law firms and others addressing it: there were so many, it could not have been a complicated decision to make sense of (for what its worth, I am partial to this post summing up the decision).
And it really isn’t, although partly that is because at this point we all have seen and digested a number of decisions, including out of the Supreme Court, addressing the odd question under ERISA of when a plan administrator can recoup monies from a participant, particularly out of a settlement fund paid to a participant. In Montanile, the plan had paid for the participant’s medical care; the participant thereafter received a settlement in a case he brought over the accident in which he was injured and that gave rise to the need for that medical care; the plan sought reimbursement of the amounts it paid for his medical bills from the settlement; and the participant refused to reimburse the plan and instead went out and spent all the money before the plan could get reimbursed. The Supreme Court, following its prior case law on equitable tracing in this type of a scenario, concluded that the plan was not entitled to reimbursement, because the general assets of the participant were the only funds available from which reimbursement could be obtained and reimbursement could not be obtained out of a dedicated settlement fund traceable to the settlement of the claim.
This outcome must seem silly to lawyers who practice personal injury law and are used to having to pay off workers compensation and other liens out of a settlement, but in the context of ERISA, it’s the natural outcome of the road taken by the Supreme Court in earlier cases in evaluating such claims, where it found that reimbursement constituted equitable relief for purposes of ERISA where the pot of money from which reimbursement was sought was independent of and segregated from the participant’s general assets; the natural corollary to that holding is the holding of Montanile, which is that, in turn, reimbursement isn’t available where there is no such independent fund, because this would mean that reimbursement would have had to come out of other funds and accounts held by the participant, which is not allowed.
I have three points that I want to emphasize about the decision in Montanile. First, as Mike Reilly hinted at in Boom, his blog on ERISA litigation, the practical impact of this decision is simple: if you are a plan administrator, never sit on your hands and instead pursue reimbursement before the participant can squander the settlement fund. This may mean, for instance, bringing an immediate action for reimbursement just as soon as the participant brings suit against a tortfeasor or starts discussing settlement with a tortfeasor, and may require seeking to have a constructive trust placed over the settlement fund -or other equitable relief preventing the dissipation of the settlement fund - until resolution of the plan administrator’s claim for reimbursement. This would maintain the sanctity of the independent settlement fund, from which reimbursement could be enforced, and preclude it from being intermingled with other assets or otherwise dissipated in a manner that would preclude a plan administrator from enforcing a right of reimbursement.
Second, in dissent, Justice Ginsburg pointed out that the decision was correct but, in layman’s terms, silly. (She didn’t actually say it was silly, and instead used fancy legal terminology to make the same point). Justice Ginsburg was driving at the fact that, as noted above, the Court’s ruling is the natural outcome of following prior precedent in this area of the law (namely, concerning equitable relief under ERISA), but that doing so results in the imposition of the wrong rule, one that can only serve to create (unearned) windfalls for participants, increased litigation costs for plan sponsors and administrators who now have to act aggressively through the court system to obtain reimbursement, and increased benefit costs as a result of sticking plans with health care costs that rightly should have been the responsibility of a tortfeasor (and yes, I know that the tortfeasor still ends up paying for them in this scenario when the case is settled, but the fact that those medical costs never get from the tortfeasor to the administrator – and instead get spent by the participant - means that the plan still ends up with health costs it should never have had to bear).
And the third is a personal note, something of which I am very proud but that only true ERISA geeks have understood in the past when I have discussed it. My bio on the firms’ web page, like most experienced lawyers’ web bios, has what I have come to call a humblebrag wall, where a representative sample of cases I have handled is discussed. Like me, you have probably noted over the years that these listings always describe successful outcomes as “representative” examples of the lawyer’s good work over the years, and never seem to include cases that went south on the lawyer. I am no different, and certainly plead guilty to that. But if you look at my representative past ERISA engagements, you will see that one of them is described as “Represented the retired general counsel of a publicly traded financial and insurance company in a dispute concerning claims for reimbursement of excessive pension payments due to company errors in calculation of benefits combined with dispute over interpretation of relevant plan terms.” This was many years ago, and I convinced the plan sponsor to give up on the demand for reimbursement by arguing that the funds had long since been spent or intermingled with other, general assets of the beneficiary, and that the natural outgrowth of the law on reimbursement under ERISA as it existed at that time had to be that there was no legal right on the part of the plan sponsor to enforce reimbursement in the courts under that circumstance. The Court’s opinion in Montanile makes clear, these many years later, that we were always right on this point, and that’s a very satisfying thing.
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.
Follow the Money: What Happens to the Proceeds of Class Action Settlements
When you read in the paper about a large settlement in an excessive fee case or other claim involving a 401(k), ESOP or other ERISA governed plan, do you think about what happens next, and about how to distribute the money among the plan participants? I do, in cases where I have represented the class, but also in cases where I have defended the plan or its fiduciaries. As this article from Plan Advisor discusses, there are a lot of issues that go into deciding how to distribute the settlement among current plan participants and those who have left the plan. The article gives a good overview, and drives home a key point: there is a lot of complexity behind the scenes in figuring out how to distribute the money, which the media, reporting on the large figures of the settlement itself or on the large award to class counsel (which are both sexy subjects), tend to ignore or simply be unaware of, because it just isn’t that interesting to the public as a whole. But in real life, this part of a settlement is crucially important, and creates a fair amount of work for those who administer class action settlements and those who administer plans themselves.
Here are a few things I have observed and lessons I have learned over the years. First, the class definition in the litigation and which is used by the court in approving the settlement is hugely important. In class action litigation involving these types of plans, the class of affected participants is typically defined by the litigants and eventually approved by the court. If the parties and the court really focus on the definition, its terms can provide a great deal of guidance to the administrator with regard to exactly which current and former plan participants should receive distributions. Often, though, the class may have been superficially defined, in a manner that the lawyers feel will be sufficient to win court approval, but which may not, in fact, be precise enough to guide distribution of the proceeds and provide real guidance in that regard to the plan administrator. A focus on this issue by the lawyers negotiating the terms of a class action settlement can make a real difference when it comes time for the administrator to do the hard work of allocating the settlement proceeds.
Similarly, settlement documents in a class action, negotiated by the parties as part of closing a deal and obtaining court approval of the settlement, are usually replete with detailed explanations of as many facets of the settlement as the lawyers for both sides can think to cover. This is often, I hate to say, more often due to self-interest of the lawyers involved than to any higher motivation, as a detailed, comprehensive explanation of the settlement is often crucial to winning court approval of the settlement and to defeating objectors to the settlement who are part of the settlement class. There is nothing wrong with that per se, in that the class action system, with its awards of attorneys fees out of settlement proceeds and the checks and balances imposed by court oversight, is designed both to be driven by self-interest and to tamp down its unchecked excesses (I should note here that unlike many of its critics but like many of those who, like me, actually toil in the orchards of class action litigation, I find that this aspect of the system works pretty well in the vast majority of cases). A focus in these papers on settlement allocation – perhaps by including a subsection expressly directed at describing allocation of the proceeds in as exquisite of detail as possible - can greatly aid the administrator later on in distributing the settlement proceeds.
The International Paper Settlement and the Continued Vitality of Excessive Fee Claims
One of the first long articles I wrote on ERISA (I had already penned some opuses on patent infringement litigation and insurance coverage disputes) was on excessive fee litigation, and was based, at heart, on the Seventh Circuit’s then recent decision in Hecker v. Deere. Titled “Retreat from the High Water Mark: Breach of Fiduciary Duty Claims Involving Excessive Fees After Tibble v. Edison International,” the article set forth my view that, in Civil War parlance, the decision in Hecker, which was being highly trumpeted by the defense bar at the time as a major victory, was, in fact, little more than the high water mark for plan sponsors and vendors in defending against excessive fee class actions. My thesis was that, when the decision was broken down and analyzed in its constituent parts (and particularly with a focus on the Court’s reasoning), it was unlikely that the decision would be replicated, and more likely that other courts would come to different conclusions in the future that would validate excessive fee claims and invigorate the theory as a basis for class action litigation.
From where I sit, four years of court decisions, settlements and courtroom results appear to have borne out my prognosis. Humble scribe that I am, I don’t believe I have ever pointed out before that I was right in this regard, but, as Thomas Clark pointed out earlier this week in an excellent post on the FRA PlanTools Blog, the recent $30 million settlement entered into by International Paper is solid evidence that I was right.
My real purpose for writing today, though, was to pass along his post on the settlement, which does an excellent job of breaking down the issues, the claims, the alleged breaches, and the settlement of the International Paper case. It comprehensively covers everything any outsider to the litigation would want to or need to know about the case.
Grand Irony, or Just a Need for Better Litigation Tactics: Protecting the Severely Injured Plan Participant Against Reimbursement Claims under ERISA
Roy Harmon and the Workplace Prof have the story of a severely injured worker whose settlement with the tortfeasor was effectively taken, in its entirety, by the plan administrator - Wal-Mart - on a reimbursement claim in accordance with the administrator’s rights under Sereboff. Roy Harmon has a nice factual discussion of the problem demonstrated by the case, and the Prof raises the ante, pointing out the injustice this is working for the particular individuals involved in the case. No disagreement there. But what concerns me is a point that the Prof makes, in which he effectively characterizes this as a problem driven by ERISA; sayeth the Prof:
In short, a truly horrible situation under ERISA, and not that far-fetched when one comes to understand the manner in which the scope of equitable relief under ERISA and ERISA preemption work together to create what I call the "Grand Irony of ERISA": that employers now use ERISA as a shield against employees; the same employees whose benefits ERISA was supposed to protect.
A Kafka-esque scheme [if] there was one and yet another publicity black eye for Wal-Mart.
But, although I am speaking almost third hand with little knowledge of the actual facts of this exact case, it seems to me this is not an ERISA problem, but a litigation tactics problem. It seems to me that the first obligation of a plaintiff’s lawyer in this type of a situation is either to obtain a waiver or compromise from the plan of its right of reimbursement that will keep the bulk of the recovery in the hands of the severely injured plan participant, or if that is not possible (perhaps because the plan administrator refuses to do so), to include in valuing settlement the amount that will have to be paid back to the plan on a reimbursement claim. If that makes the settlement value so high that the case can’t settle, then so be it, and it becomes a case which simply has to be tried and the amount of medical bills that must be reimbursed to the plan becomes just one part of the damages that go up on the blackboard in front of the jury in calculating the damages that the plaintiff claims should be awarded to him; in this way, if the jury returns a verdict, the amount that must be paid back to the plan is only one portion of the money recovered by the plan participant, with the participant free to retain the remaining amounts, which ought to encompass awards for future care, future loss of earnings, and the like.
One can fairly ask whether this places the participant at risk of losing at trial and taking nothing, and the answer to that question is, of course, that this risk exists and is significant; avoiding that exact risk is, after all, why a plaintiff settles a case for less than full value. But the fact is that a settlement, such as the one involved in the case Roy and the Prof discuss, that does not significantly exceed the reimbursement owed to the plan- after or without compromise by the administrator -can leave the participant in the exact same spot as a loss at trial would, holding no money at all after the plan is reimbursed.
Litigation is a dynamic and ever changing organism, and, much like Newton's third law of physics, for every action during the course of a lawsuit there is a corresponding, if not necessarily equal and opposite, reaction. The situation presented by the admittedly horrible circumstances detailed by Roy and the Prof is one that needs to be resolved as part of playing out the end game of a lawsuit, not after the fact as a dispute over ERISA rights and remedies.
Given the tragic nature of the events in question, I don’t delve into this point lightly, or just because it looks like good blogging fodder. But in the discussions I have seen so far of this issue, and on the impact of ERISA on it, I haven’t seen this particular aspect discussed in detail, and I think it’s a point that simply cannot be overlooked by any plan participant or lawyer stuck in the same situation in the future.
Settle the claim, don't revise the plan
My colleague, Carl Pilger, firstname.lastname@example.org, who counsels companies and others on the design, implementation and operation of employee benefit plans at Miller & Martin PLLC, http://www.millermartin.com/, in Atlanta, notes that in settling lawsuits brought by plan participants, one should avoid establishing a pattern of revising a particular plan term or requirement in a particular manner. Doing so may allow for the argument that the plan itself has, in effect, been revised in that manner on that particular point. Instead, as I make sure to do in my own practice when litigating cases on behalf of plans and administrators, the settlement papers should make clear that the particular claim is a unique situation, and no agreement has been reached as to the particular meaning that should be given to the plan term that was the subject of the dispute. Make the settlement a one off, but not a regular event.