Boston ERISA Law Blog

Lanfear, Home Depot and Moench

If you like an extended metaphor – and anyone who has read this blog for awhile knows I do – you should enjoy the Eleventh Circuit’s decision this week in Lanfear v Home Depot, adopting the Moench presumption and explaining exactly how it is to be applied in that circuit. What’s a better analogy than the hard working ant who stores food up for winter, to stand in for plan participants?

But the decision has other things going for it that are much more useful than a nice analogy. In particular, it nicely synthesizes the current state of the case law among those circuits that apply the presumption, and explains exactly how, under its synthesis, a stock drop case needs to be analyzed. In so doing, it also explains how to plead one if you want to get around the barriers that the Moench line of cases has created. Its as good and workable an explanation of a standard as any of the cases offer, and one that, frankly, seems to grant participants as fair a shot at recovering on a stock drop claim as they are likely to see. In my view, it nicely balances the conflicting interests and obligations that come into play when you allow, as occurs in stock drop cases, corporate insiders, securities laws and ERISA to intersect.

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

Well, as if there weren’t enough barriers to successfully prosecuting breach of fiduciary duty actions under ERISA, it turns out that you also can’t do it if the fiduciary’s errors consisted of wrongfully withholding benefits and turning them over to the IRS as tax payments. A participant, according to this opinion fresh off the presses of the Northern District of Illinois, can only remedy that mistake by getting the IRS to refund the money to them.

Defense lawyers are always fond at trial of having an empty seat – i.e., a missing potentially culpable party – to point to while saying my client didn’t do it, the person that should be sitting in that other chair at the defense table did. For those of you old enough to remember it, this defense theory is similar to, but not exactly the same as, the famous “Plan B” of noted fictional defense lawyers Donnell, Young, Dole, & Frutt, who somehow always managed to make that strategy work. For a plan fiduciary charged with fiduciary breaches or other errors related to tax aspects of a plan, pointing to the IRS and saying the participant’s only recourse is to seek a refund from the IRS is an extraordinarily potent variation of this defense. It also, as the decision in Mejia v Verizon et al appears to make clear, has a sound foundation in the federal code.

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

I spent some time thinking about whether to even post on this subject today, not wanting to feel on any level that I might be either rushing to judgment too quickly, or even worse, exploiting a tragedy in any way to make a point. But the suicide of retired football star Junior Seau perfectly captures a point that I have been thinking through for years, as the concussion/head trauma issues have played themselves out in the NFL and the media. Way back in 2006, I wrote about the ERISA case brought by former Pittsburgh Steeler great Mike Webster, and the Fourth Circuit’s decision to overturn, as arbitrary and capricious, the decision of the plan administrator for the NFL’s retirement plan to award Webster “the lesser of two possible disability benefit awards available under the league’s retirement plan,” due to brain damage he apparently suffered as a player. At the time, the Fourth Circuit reviewed extensive evidence in the administrative record that soundly refuted the administrator’s determination, and concluded that the administrator’s determination was not supported by substantial evidence.

I have often thought about the Webster case and that blog post in the interim, because in many ways the actions of the administrator, at least in the snapshot provided by the Court, seem so questionable that it makes one wonder how the administrator could have reached the conclusion that it did. The evidence from the administrative record, although debatable in terms of how to interpret it, focused on by the Court ran strongly towards attributing the player’s mental incapacity to head injuries from playing and to have begun close to, if not during, his playing days, thus qualifying him for the benefits he sought. Yet, even under those circumstances, the plan administrator ruled against him.

Among the possible explanations for how this came to pass is one – incompetence by the plan administrator – that I have always ruled out. The second is a corporate decision by the plan and its administrator to hold the line against brain damage type claims, which is at least certainly possible, even if doing so on a broad level instead of simply testing the facts of each particular claim against the plan terms would be a clear cut violation of fiduciary obligations.

The third possible explanation that has rattled around in my head for the last few years, as more and more research has been done linking diminished mental capacity to the repetitive head trauma suffered by football players, has come to me to seem the most likely explanation. This is the idea that a decade and more ago, when the events at issue in the Webster case occurred, there was scant, if any, medical literature soundly tying post-playing mental impairment to playing-derived head trauma. That is not the case anymore, as Andy Staple’s piece here on Junior Seau’s suicide discusses, but it was then. Plan administrators are often faced, in many contexts, with disability claims in which there is little if any significant medical research that would allow a firm conclusion on causation with regard to the disability at issue. In those instances, it can be very difficult for a plan administrator to make a call on whether or not the plan terms governing disability benefits are satisfied. When one compares what we know now about the effect of repetitive head trauma in football – a knowledge level that is still limited – with the state of the research a decade and more ago, you can easily imagine the NFL plan’s administrator being trapped by the conundrum, and being unwilling to credit the evidence of impairment submitted by Webster because the medical literature lacked support for linking it to his playing days in the manner needed to award him the benefits sought by him. This, to me, is both the most benign and the most likely explanation for the long ago ruling against Webster, which it took an appeal all the way to the Fourth Circuit to set right. The state of medical knowledge though, as Staple’s current piece and many others in the past few years have made clear, no longer allows for that same possible mistake by a plan administrator.

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

An astute and clearly knowledgeable reader passed along the point that the recent Sixth Circuit decision in Pfeil v. State Street Bank implicitly rejected the structural barriers to bringing class actions over fiduciary breaches that had been created by the developing case law in other circuits and which were discussed in my recent article, Structural Impediments to Breach of Fiduciary Duty Claims. The Pfeil decision, in allowing the putative class action to proceed past the stage of motion practice, refused to allow a stock drop type case to be ended, prior to the full development of the facts needed for the plaintiffs’ case, by the early application of lowered – or merely altered and fact specific, depending on your point of view - fiduciary standards with regard to employer stock holdings in defined contribution plans, in circumstances in which the plaintiffs could not have, at the outset of the case, full and complete information about the fiduciary breaches at issue. In this way, the Sixth Circuit, deliberately or not, mitigated the difficulties for plaintiffs, identified in my article, that are caused by the intersection of the Iqbal and Twombly pleading standards with the limited information available to plaintiffs at the outset of the case.

Pfeil is interesting for a couple of other reasons as well. One is that, in some ways, it is not a pure stock drop claim, because the plan documents imposed an obligation on the fiduciary to divest under certain circumstances, and the question is whether the fiduciaries failed to comply with those plan terms, rather than simply being the question of whether the holding of the stock under the stock drop scenario in and of itself constituted a breach. Second, I have always felt that the stock drop case law reflected an attempt, implicitly at least and perhaps even subconsciously, to balance the obligations of a company under the securities laws and under ERISA when it comes to stock held in employee plans; Pfeil, by focusing on the liability of an outside fiduciary, does not have that dynamic. Three, I have written before about the evolutionary nature of plaintiffs’ class actions in ERISA, with the idea being that, over time and in response to early defeats – such as Hecker or the stock drop cases – the plaintiffs’ bar will craft more sophisticated and carefully targeted theories of liability, that will eventually pass muster. You see that here in Pfeil, in which a more nuanced approach to a fiduciary breach involving employer stock is able to leap a hurdle – a motion to dismiss – that earlier, less nuanced stock drop theories were not able to clear.

The Dam Breaks: Tussey v. ABB

Tussey v ABB, Inc., an excessive fee and revenue sharing case decided on the last day of March after a full trial before the United States District Court for the District of Western Missouri, is a remarkable decision, imposing extensive liability for acts involving the costs of and revenue sharing for a major plan, on the basis of extensive and detailed fact finding. It is hard to sum up in a quick blurb, and I recommend reading it in full. However, Mark Griffith of Asset Strategy Consultants has a terrific write up of its its import here on his blog, and here is a nice case summary from Dorsey. Beyond that, I would highlight a few key points about the case, viewed from 30,000 feet (the case itself is going to provide grist for tree level, finding by finding analysis for some time to come).

First, and to me most interesting, is that it confirms several conclusions about excessive fee litigation that I have come to in the past and written on extensively, including my insistence that the pro-defense ruling in Hecker was not the last word on this issue (despite the desire of much of the defense bar to believe it was) but was instead the high water mark in defending against such claims. I argued in the past, with regard to the Seventh Circuit’s handling of this issue in Hecker, that the entire issue of fees and revenue sharing would look different than it did to the court in Hecker once courts began hearing evidence and conducting trials on the issues in question, rather than making decisions on the papers, and this ruling bears that out. Like the trial court decision in Tibble, another key early excessive fee case to actually reach trial, the taking of evidence by the court on how fees were set and revenue shared has, in Tussey, resulted in a finding of fiduciary breach in this regard. Tibble and Tussey reflect a central truth: when courts start hearing evidence on what really went on, it becomes apparent to them that plan participants were not fully protected when it comes to the setting and sharing of fees in the design and operation of the plans in question. To deliberately mix my metaphors, what Tussey reflects is that when courts start looking under the hood of how plans are run, they are not liking how the sausage was made. They quickly (relatively speaking, of course, since it takes a long time to get a case from filing through to a trial verdict) conclude that the fees were set and shared in ways that did not properly benefit the participants.

This particular aspect of Tussey is very important. Tussey involved a major plan and a market making investment manager and recordkeeper, applying what the court characterized as standard industry practices in some instances. It is therefore unlikely that the scenarios found by the court in Tussey to be problematic are unique to that case. Other excessive fee and revenue sharing cases that, like Tibble and Tussey, get past motions to dismiss and into the merits are therefore likely to uncover factual scenarios and problems similar to those identified by the court in Tussey.

What also jumps out at me about Tussey is the extent to which revenue sharing, which has often been characterized in the professional literature as harmless in theory, is strongly depicted as problematic as practiced with regard to the particular plan and by the sponsor and service providers at issue. I would have real question, going forward as a plan sponsor, as to whether it makes any sense at all to continue with revenue sharing. Better to just pay a fixed cost, than to risk extensive liability for engaging in revenue sharing. Absent that choice, the treatment of revenue sharing in Tussey makes clear the need for extensive, on-going, documented analysis by the plan’s fiduciaries of whether the level of compensation generated by the revenue sharing was, and remained at all times, appropriate.

Other aspects of Tussey worth noting include these two. First, the opinion provides as good an explanation, in detail, of what revenue sharing really is and how it works as you are going to find. If you want to understand what all the hullabaloo about revenue sharing is about, this opinion is as good a place to start as any.

Second, the opinion contains a nice analysis of one of the most misunderstood issues in ERISA breach of fiduciary duty litigation, namely the six year statute of limitations and how it applies to the implementation of a fiduciary’s decisions related to plan investments. A decision to change a plan investment takes time, starting with an analysis of whether to do so, followed by the steps needed to effectuate it, and eventually resulting in the final steps needed to permanently conclude the change. As the court explained in Tussey, the statute of limitations in that scenario does not start to run – for any of the losses related to that event – until the last act in that run of conduct occurred.

Structural Impediments to Breach of Fiduciary Duty Claims

As many of you know, I write a regular column on ERISA litigation for Aspen’s Journal of Pension Benefits, usually focused on whatever issue has my attention at the moment, although I try to balance that against what readers might have an interest in as well. When it came time to write my article for the publication’s winter issue, I was musing on what seemed to me to be a contradiction in a webinar I had listened in on, in which two prominent experts – who shall remain nameless to protect the innocent – discussed liabilities arising out of the operation of defined benefit and defined contribution plans. The contradiction resided in the fact that they discussed the range of problems and difficulties facing such plans, and the seemingly incongruous fact that, nonetheless, plan sponsors and fiduciaries were unlikely to face liability in a courtroom for their handling of such problems and difficulties. How could that be, I wondered? So I fleshed out an answer, which became this article, titled Structural Impediments to Breach of Fiduciary Duty Claims.

Although I didn’t spell it out explicitly, the article focuses on the barriers to prosecuting such claims as class actions, because that is the forum in which these issues and impediments really manifest themselves, although the issues apply as well to breach of fiduciary duty claims brought by individuals solely on their own behalf. I also used ESOP class actions as an exemplar, for several reasons, running from my own experience with litigation over them to my somewhat morbid fascination – as a lover of newspapers - with the legal morass that the ESOP of the Chicago Tribune (and other affiliated papers) tumbled into.

Pricey Investments, Poor Outcomes

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

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

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

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

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

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

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

Sorry, I couldn't resist that relatively timely, but already essentially clichéd headline. That said, its still an interesting way to consider the question of top-hat plans, and their status under ERISA. In particular, there is an open question in most jurisdictions with regard to whether a claim for benefits owed under such a plan proceeds in much the same way, and with the same protections for the participants, as does any other claim for benefits under any other type of ERISA governed plan (i.e., one that, unlike a top-hat plan, does not provide significant deferred compensation for senior executives). There is a significant argument that, as a general rule, the same obligations that ERISA and the Department of Labor impose on administrators in any other circumstance also apply in the circumstance of top-hat plans, with the only exception being areas where the statute or the Department’s regulations expressly exempt top-hat plans.

In this regard, I wanted to pass along this very good synopsis of a recent decision from the United States District Court for the District of Massachusetts in which the court took that exact approach. You can find the case itself here. When the decision was issued in December, I decided not to comment on it because I was litigating a similar top-hat plan dispute at that time, and felt the decision was a little too on-point to a case I was handling for me to comment on, for a number of reasons, running from not wanting to tip my hand to the other side to being a little too close to the issue to be completely objective on the ruling. That case has since resolved, so I thought I would now use the opportunity of the publication of the synopsis to pass it along.

There is also an important trap for the unwary lawyer reflected in the decision and the synopsis, which is the impact of ERISA rights and remedies, as well as procedures and procedural protections, on what are in essence employment agreements, if they are deemed ERISA governed top-hat plans. If a particular agreement might be a top-hat plan, it is important to recognize that at the outset and litigate any dispute over it accordingly. As the synopsis and the decision show, the application of ERISA based rules will dictate the outcome, and failing to know that a particular agreement is a top-hat plan and will be governed by such rules at the outset of handling a dispute is a recipe for disaster, or at least for losing; one has to be aware right at the outset that the dispute cannot be litigated as a traditional contract or employment dispute, but instead as an ERISA dispute. Otherwise, you are bringing a knife to a gunfight, to borrow a favored cliché.

The court's decision itself, by the way, is a terrific road map through the current state of the law on benefit litigation under ERISA, particularly in the First Circuit, for both top-hat and regular old employee benefit claims.

The Tin Man's Heart

I spoke last week at the New England Employee Benefits Council on the Department of Labor’s efforts to redefine the word fiduciary by regulation, so as to capture within that rubric more of the vendors, providers and advisors involved in the retirement industry. Overall, my sense is the regulatory effort is over-expansive, and risks divorcing the regulatory definition of fiduciary from the statutory provision that creates fiduciary status under ERISA. My comments when I spoke ran in this direction. I also have an article in for publication in the Journal of Pension Benefits to the same effect.

That said, though, there are clear problems that the regulatory effort is directed at, and it is fair to say that, at a minimum, the Department’s heart is in the right place, as this interview with Phyllis Borzi makes clear. It is important to remember both of those things, even in criticizing particular redrafts of the relevant regulations. I mention this now partly because the issue is not going away, and the Department of Labor will be coming back later this year with a new, revised proposed rewrite of the regulatory definition of fiduciary, as explained here.

A Perfect Storm, ERISA Style

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

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

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

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

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

On ERISA and the Potential Liability of Senior Executives

Susan Mangiero of FTI Consulting, who blogs at Pension Risk Matters (as well as at Good Risk Governance Pays) and is one of my favorite sources of information concerning the investment and risk management realities that lie behind the façade of ERISA governed plans, is, along with a few other worthies, presenting a webinar on Wednesday, March 7, on “The ERISA and Securities Litigation Snapshot: Things You Can Do Now to Minimize CFO and Board Liability.”

The webinar is scheduled to cover:

•Why ERISA litigation claims against top executives and board members continue to grow
•How securities litigation and ERISA filings are related and what it means for corporate directors and officers
•What ERISA liability insurance underwriters want clients to demonstrate in terms of best practices
•What steps the Board and top executives can take to minimize their liability
•When to Get the CFO and board members involved

My quick thoughts on each of these topics, and why they mean this webinar is worth a listen if you have any responsibility for the financial and liability risks generated by ERISA governed plans? Lets go in order.

Why do ERISA litigation claims against top executives and board members continue to grow? There a number of reasons, but here are three quick ones in a nutshell. First, the market losses suffered over the past few years by participants has highlighted the investment risks faced by participants, and made them look closely at others’ possible responsibility for those losses. Second, decisions such as LaRue and Amara, while not opening a floodgate, have nonetheless created an environment in which it is easier to structure and prosecute claims against fiduciaries on behalf of participants. Three, plans are where the money is; there is more potential damages sitting in a company stock plan than you can shake a stick at. Remember what Willie Sutton said about banks? None of this is changing anytime soon, and ERISA litigation claims against senior officers will continue to be a growth stock as a result.

How are securities litigation and ERISA filings related and what does it mean for corporate directors and officers? Short answer: over the past several years, court decisions and congressional action have made it harder to recover in securities cases, while the same is not true for ERISA cases. In many instances, ERISA theories allow another way to target stock losses without having to jump through the hoops that exist in a securities case. For directors and officers, this means they will face more ERISA suits down the road, including against them personally. They need to have the right business structures in place to protect them against such claims, and the right insurance in place if they are found liable.

What do ERISA liability insurance underwriters want clients to demonstrate in terms of best practices? Underwriting needs in this area in many ways overlap with the same steps that should be put in place to protect the fiduciaries against suits, to reduce the risk of a judgment, and to minimize the likelihood of a suit being brought in the first place, regardless of the insurance issues. These steps are what I have often called defensive plan building, which is the need for due diligence, active understanding of the plan, accurate communications with participants, developing expertise and/or hiring it as needed, and following the same level of sophistication and investigation that would be applied to any other crucial part of a company’s operations.

What steps can the Board and top executives take to minimize their liability? This pretty much concerns taking the same steps, mentioned above, that the company’s insurance underwriters will appreciate. Interestingly, this is an area of the law and of insurance where all of the incentives line up well. The same steps reduce the risk of liability, reduce the risk of getting sued, and likely reduce premium dollars all at the same time. There is one other key step that should be looked at closely though, when considering how to protect senior executives and Board members against liability under ERISA, which is to carefully think about who will be involved in the plans and in what manner; the selected ones will be at risk for ERISA breach of fiduciary duty claims, while the others can be carefully and deliberately kept out of harms way. This means, though, that this has to be considered in advance and the proper structures put in place to accomplish it; if you do this after the fact, you are bound to end up with a lot more potentially liable fiduciaries among the executives and board members than anyone at the defendant company ever expected would be the case, due to ERISA’s concept, embedded in statute, of the functional, or deemed, fiduciary.

When should you get the CFO and board members involved? Yesterday, if possible, and right now, if not, for all the reasons noted above.

Fiduciary Prudence? 9.5 Million Reasons to Care.

Here’s something very interesting, which I thought I would pass along with a couple of comments. It is the Court’s order concerning the proposed settlement of the class action at issue in George v. Kraft Food. George, which I discussed here, involved a particularly minute attack on the stock fund structure in a company 401(k) plan and on the decision making process by which the recordkeeper’s fees were determined. A panel of the Seventh Circuit found those claims viable as presented at the summary judgment stage, and allowed them to move forward. I discussed at the time of the Seventh Circuit’s ruling the fact that the decision ran counter to a wide spread sentiment that the Seventh Circuit’s earlier decision in Hecker v. Deere, which threw out an excessive fee and revenue sharing case with great vim and vigor, effectively foreclosed breach of fiduciary duty claims premised on the expenses of running a plan. What George showed, however, is that all Hecker precluded were broad, sweeping attacks on the fee structure and design of a plan; precisely targeted criticisms, with factual support for them, addressed to specific issues concerning the fiduciary’s conduct regarding the plan’s pricing and structure, can still move forward, as it did in George. And to what end? The settlement order in George indicates a settlement fund being paid out to the plan participants of $9.5 million.

So what to make of that? Here’s a good start. First, carefully targeted and supported breach of fiduciary duty claims targeting plan expenses, fees and structures are not guaranteed to go away through motion practice, as though a motion to dismiss or for summary judgment is akin to a wand at Hogwarts. Many, many, many fiduciaries – or at least their lawyers - have become convinced in recent years of the opposite, in my view. Second, if they don’t go away, their settlement value becomes significant, because of the sheer amounts at risk in a breach of fiduciary duty case involving a plan of any meaningful size. Third, breach of fiduciary duty cases, especially class actions, targeting the design and expense structures of plans are going to continue, no matter what lesson anyone hoped to take from the outcome in what was one of the earliest cases, Hecker. They are simply going to have to be better targeted and designed, and more carefully grounded in facts, than were the earliest cases, for this line of litigation to continue.

Speaking of New Department of Labor Regulations . . .

By the way, I and a cast of thousands (no, not really a cast of thousands; more like a very knowledgeable cast of several) will be speaking on “New Retirement Plan Regulations and Legislation Impacting 401(k) and 403(b) Plans” on Friday, March 9th. Ed Lynch of Fiduciary Plan Governance and I will be speaking on the Department of Labor’s effort – now in abeyance – to expand the definition of fiduciary by regulation. Earlier speakers will be covering the new fee disclosure regulations, and later speakers will cover target date funds, among other issues. The program is part of the Strategic Connection series hosted by the New England Employee Benefits Council, and you can find details, as well as registration information, here.

At the Intersection of Insurance and Plan Fiduciaries

Well, given the title of this blog, I couldn’t exactly let this decision pass unnoticed. In this decision from the Court of Appeals of New York, Federal Insurance Company v. IBM, the Court denied insurance coverage for IBM under an excess fiduciary liability (apparently) policy, for a settlement by IBM of a claim that amendments to benefit plans in the 1990s violated ERISA. The Court, in short, found that the claim did not invoke IBM’s status as a fiduciary under ERISA, essentially because it involved settlor, rather than fiduciary, functions. The Court applied standard rules of policy interpretation, under which insurance policy language must be given a reasonable construction under the circumstances, to conclude that policy language that applied to claims against a fiduciary involving ERISA meant claims where the insured qualified as a fiduciary under that statute, and did not, contrary to IBM’s arguments, involve any broader meaning of the word fiduciary.

Three points about the case interested me, which I thought I would mention. The first is the case’s status as an exemplar of a phenomenon of insurance work that I have frequently mentioned in the past, which is that all major litigation disputes end up in court twice: the first time as against the insured, and the next time as against the insurer, involving the question of whether that first dispute is covered under the insurance policies held by that insured.

The second is that the case illustrates one of the most important aspects of another theme of this blog, which is the importance of what I have come here to call defensive plan building, which is a fancy way of saying developing benefit plans and affiliated structures that protect plan sponsors and fiduciaries from liability. Having liability insurance in place to protect them from the costs and potential liabilities of litigation is crucial. While in this case IBM can easily afford the uncovered exposure, this will not be the case for the vast majority of plan sponsors. Careful attention to the scope of, and holes within, insurance coverage for benefit plan operations is crucially important.

And finally, the humorous aspect of the decision is the third item, consisting of IBM being put in the position, to seek coverage, of having to argue for a broad definition of fiduciary in the context of a plan dispute. As we know from the controversy over the Department of Labor’s recent attempt to expand the definition of fiduciary under ERISA to catch more fish, most entities run from the label of fiduciary like a groom from a shotgun wedding.

The ERISA Decision of the Year?

If you were going to read just one ERISA decision this year – or were starting from scratch, with a blank slate, and wanted to know the law governing breach of fiduciary duty claims under ERISA – I would read this one, Judge Holwell of the Southern District of New York’s opinion in Prudential Retirement Insurance and Annuity Co. v. State Street Bank and Trust Company. To set the stage in a nutshell, one can do worse than to borrow the opening paragraph of the Court’s opinion:

Plaintiff Prudential Retirement Insurance and Annuity Co. ("PRIAC"), brought this action pursuant to sections 409(a) and 502(a)(2) and (3) of the Employee Retirement Income Security Act of 1974 ("ERISA") against defendant State Street Bank and Trust Company ("State Street") on October 1, 2007. PRIAC commenced this suit as an ERISA fiduciary on behalf of nearly 200 retirement plans (the "Plans") that invested, through PRIAC, in two collective bank trusts managed by State Street—the Government Credit Bond Fund ("GCBF") and the Intermediate Bond Fund ("IBF") (collectively, the "Bond Funds"). This Memorandum Opinion and Order follows a seven day bench trial on the issue of whether State Street breached its fiduciary duty to the Plans by (1) failing to manage the Bond Funds prudently, (2) failing to manage the Bond Funds solely in the interest of the Plans, and (3) failing adequately to diversify the Bond Funds' assets.

In the process of awarding over 28 million dollars in damages to the plaintiff, the Court’s opinion roams in an orderly manner (can you roam in an orderly manner? I am not sure) across the most important issues in breach of fiduciary duty litigation, presenting detailed explanations of the relevant legal standards, including an excellent explanation and analysis of a fiduciary’s duty to act prudently, of the fiduciary’s duty to act with loyalty and of the same fiduciary’s duty to diversify. One particular issue that the opinion handles with great subtlety and depth concerns damages, with the Court presenting an excellent and thoughtful analysis of the burden of proof on this issue and of the relevant standards for calculating damages in this context. As the Court’s analysis reflects, this aspect of breach of fiduciary duty litigation is not fully fleshed out in the case law and is subject to real dispute, but the opinion addresses the issue masterfully.

One reason, by the way, that the damages issues are not fully developed in the case law at this point is the relative infrequency with which they arise in court, in comparison to the liability issues raised by a breach of fiduciary duty claim. There are a number of reasons for this. One is the trend in many circuits, post-Iqbal, towards deciding such claims at the motion to dismiss stage, resulting in many cases being decided at an early stage on liability in a context in which the legal issues governing damages never become relevant and never get aired. Another is the tendency of liability to be decided at the summary judgment stage, leading – more often than not – to settlement before the damages issue is ever presented to a court, if the summary judgment ruling finds a breach of fiduciary duty to have occurred. The combination of these events means that liability is far more written about by the courts than is damages in the context of ERISA breach of fiduciary duty litigation. As the opinion in Prudential makes clear, though, the subtleties of the damages determination become very important when the breach generates extremely large losses.