Albert Feuer, who writes frequently on the technical aspects of ERISA compliance, has published an interesting new article in Bloomberg Tax’s Tax Management Compensation Planning Journal on the latest proposed legislation to alter retirement savings. Albert points out that the changes would help in allowing employees to increase their retirement savings, but would fail to either address the complexity of the system or the extent to which it allows a small percentage of taxpayers to use retirement accounts to shelter massive amounts of wealth far beyond that needed to fund retirement. I am much more sanguine than is Albert about the inequity built into the system reflected in such sheltering, as it seems to me to be of a piece with innumerable aspects of the tax code that favor the already wealthy over those aspiring to someday reach that status. I do, however, share his concern about the complexity of the retirement system, which he believes proposed legislation will not only fail to reduce but will instead actually increase. If I had a dollar for every case I have handled where the underlying cause of the problem was simply the complexity of the system, which in turn gave rise to operational errors that had to be remedied, I could, well, retire.

More important in regards to the points Albert makes in his article, I think, is that the complexity reinforces and in many ways increases the inequities built into the system, by making it harder for smaller employers to provide retirement benefits and for employees, across the board and regardless of the size of their employer, to access and make use of them. For instance, time and again, I see cases where, through inadvertent oversight or simple ignorance, employees foul up the rollover timing or process, losing the ability to maintain their tax deferred retirement status, in circumstances where they simply want to be able to maintain the tax sheltered status of their retirement accounts. Why, in the name of encouraging good retirement outcomes, do we turn this process into a game of gotcha whereby employees can, through negligence or sheer ignorance, lose the tax deferral on their account balances because they fouled up the rollover process or timing, instead of just allowing employees a far greater degree of leeway in this regard than the rules currently do?

Similarly, it is probably only a slight exaggeration to say that there has never been a time where I haven’t had at least one dispute open on my desk involving a small employer trying to remedy operational errors in its retirement plan. It is simply too complex an area for small employers, who are not trying to do anything fancy but instead simply trying to provide industry standard defined contribution plans for their employees. Adding to the level of complexity, as Albert fears new legislation would do, would simply increase this barrier to adoption or operation of retirement plans by smaller employers.

Anyway, if I were to build on Albert’s article, or respond more directly to his thesis, I would suggest he worry less about the inequities and more on the complexity – which I think in and of itself plays a significant role in increasing the inequity in retirement preparedness that he is concerned about (after all, I have never seen someone with a so-called Mega IRA – meaning one vastly exceeding anyone’s retirement needs – who didn’t also have access to enough professional expertise to avoid the traps and risks in the operation of retirement accounts).

I had another conversation yesterday with a financial advisor about bitcoin and crypto in 401(k) plans, a subject on which I have written skeptically in the past. As I am wont to do, I again questioned whether the hunger to add crypto to defined contribution plans is in employees’ best interest, or whether instead someday, in hindsight, many will compare this aspect of crypto-lust to the now apparently forgotten era when employees, intoxicated from the spiraling increases in the price of their employers’ stock, overinvested in company stock in their retirement holdings and eventually lost their shirts. Regardless of what I may think, the train doesn’t seem to be slowing down in this regard, as this article from the Wall Street Journal yesterday seems to reflect.

Attorney fee awards under ERISA loom larger in the imagination of lawyers and, to the extent they note it at all, the public than they do in the real world. It’s likely due to the outsize coverage that the occasional very large fee award, usually entered as part of a class action settlement, receives in the media. In truth, though, while ERISA is one of the few areas of the law where a prevailing party has a right to a fee award, they aren’t actually granted all that often, simply because relatively few cases actually reach that stage of the proceedings. Most ERISA cases either end with a defense win (fees can technically be awarded to a prevailing defendant, but it seldom happens and when it does, only under very unusual circumstances) or settle without a fee proceeding ever occurring. As a result, there just aren’t nearly as many judicial decisions on fee determinations under ERISA, particularly in the non-class action context, as you would think, and there are particularly few in the First Circuit.

That said, and to some extent partly for that reason, I wanted to note this recent fee decision under ERISA out of the United States District Court for the District of Massachusetts, Holt v. Raytheon. I think it’s notable for a few reasons, which I wanted to mention in passing:

• The hourly fee awarded to plaintiff’s counsel is reasonably commensurate with the hourly rates of much of the ERISA defense and compliance bar. The legal skill needed to actually win a case for a participant shouldn’t be underestimated, and it is good to see the Court recognize that with a corresponding billable rate.

• The Court unequivocally recognizes remand to the plan administrator as sufficient relief to warrant a substantial fee award. Defendants often challenge substantial fee requests when the relief awarded was remand by arguing that the level of success didn’t warrant the amount of time invested or the amount of fees sought. Remand, however, in this context, is a difficult relief to obtain and often has nearly or the same value to a plan participant as does obtaining an outright award of benefits from the court. This is partly because remand, for various reasons, often leads to a settlement rather than to the continuation of the dispute.

• Defendants often argue to the court that the hours invested by plaintiffs’ counsel were excessive and the accompanying fees should be reduced accordingly. However, in my experience (which encompasses both representing defendants and plaintiffs, as well as both defending against and prosecuting fee requests), both defense counsel and courts often underestimate just how much time it takes to properly and effectively prosecute a claim on behalf of a plaintiff. The decision in Holt reflects a reasoned and conservative approach to reduction of the hours claimed by plaintiff’s counsel.

I am quoted in an excellent article in Pensions & Investments by Robert Steyer on the use of independent fiduciaries when providing employer stock in company retirement plans. As many of you probably know, the Supreme Court’s decision a few years back in Fifth Third Bancorp vs. Dudenhoeffer raised the pleading bar substantially for plaintiffs seeking to recover under ERISA from plan fiduciaries when the value of employer stock drops dramatically due to a downturn in corporate fortunes. Interestingly, when Dudenhoeffer was decided, it wasn’t immediately clear to what extent the decision was good or instead bad for the plaintiffs’ class action bar and, in a mirror image, bad or instead good for plan sponsors. Over time and as fleshed out in further litigation in the lower courts, it became clear that the decision, and the increased pleading standard it adopted for these types of cases, was overwhelmingly good for plan sponsors and simply terrible for plaintiffs.

A recent decision by the Seventh Circuit concerning employer stock held by participants in a Boeing retirement plan gives an excellent overview of the issue and its history. As I noted in the Pensions & Investments article, the decision “almost reads like a law review article” on the subject. The article focuses on one particular aspect of the decision, which is the weight given by the Seventh Circuit to the fact that Boeing delegated decision making authority with regard to that employer stock to an independent fiduciary, who was walled off from the internal dynamics of Boeing and from any potentially relevant inside information that could affect the market price of those stock holdings. The decision, consistent with other case law, makes clear that plan sponsors who use an independent fiduciary in this way effectively insulate themselves from these types of claims.

In my view, the biggest value to using an independent fiduciary in this context is that it dramatically increases the likelihood that a plan fiduciary, sued for the drop in value of employer stock held by employees in a benefit plan, can end the case at the motion to dismiss stage. As I discussed in the article:

The appeals court’s ruling plus the Supreme Court’s Dudenhoeffer decision build an even tougher defense against stock-drop lawsuits, improving the odds that a complaint will be dismissed, he said. “After you get past the dismissal stage, you can spend a fortune in discovery — or you settle,” said Mr. Rosenberg, referring to the data-gathering and data-sharing process that is necessary if a judge rejects a motion to dismiss.

In class action defense, particularly with excessive fee, stock drop or other types of suits against ERISA plan sponsors and fiduciaries, the key is to end the case at the motion to dismiss stage – otherwise, the cost of litigation, combined with the potentially sizable exposure if the plaintiffs prevail at either summary judgment or trial, almost always makes settlement the best option for defendants. As a result, for a defendant, anything that increases the likelihood of ending the case at the motion to dismiss stage is significant and, as the Seventh Circuit has made clear, using an independent fiduciary in a retirement plan dramatically increases that possibility.

This is a great article by Chris Carosa in Forbes, on the history of developing business by inventing a new subcategory in an existing field and then filling it. Although the article is in Forbes, Chris is probably better known as the force behind the retirement industry publication Fiduciary News, which to my recollection, he founded sometime around when I first launched this blog sixteen years ago.

The article is worth a read, partly for the substance and partly for the fun of it – who doesn’t want to read an article that includes the invention of the hamburger and the first entrepreneurs to sell gas grilled sausages at carnivals – but I can sum up its central thesis for my purposes. Chris explains that the key to developing a business isn’t to invent a whole new area and attract buyers into it (as Chris nicely puts it, that’s a hill too high for most of us to climb) but to instead go where the money already is and create a new subcategory in that market that hasn’t been mined yet. In other words, find a business area where there is already a lot of money and fill an open niche in it. As Chris nicely puts it, everyone knows where the money is in a particular marketplace and “there will no doubt be a long line waiting to get to that money. That’s why it’s critical that you find the void.”

So why I am writing about this on a blog about ERISA and insurance? It’s because you should think about this every time someone wants to bring a new financial product or investment option or other alleged breakthrough to 401(k) plans and immediately complains about regulatory or other barriers to entry. I am thinking of the complaints about the Department of Labor pushing back on the rush to include crypto in plans, but also of older events, like the push to add target date funds to plans. Some, like target date funds, turn out fine; I have my doubts whether the same will be true about crypto.

But my point isn’t to forecast whether a particular new product in this area will or won’t bear fruit. Instead, it is to be a gentle reminder that no one is pushing new investments or products or innovations into the retirement market except because it gives them a new void to fill in a market where there is already massive amounts of money being spent by customers, and the provider of the new product is looking for a way to get some of that money. It’s a perfect match for Chris’ discussion in his article – only here, we are talking about large investment providers, not sausage makers, looking to create and fill a new niche. It’s worth remembering what is really going on when a new product or innovation is pressed into the defined contribution market in particular, to not just blindly accept claims that the new development is a boon for participants, and to instead bring a healthy skepticism to any new product that is chasing the investment dollars of plan participants or the distribution dollars of retiring participants.

There is nothing wrong with this dynamic – that’s how capitalism is supposed to work. But it’s also not wrong for regulators, plaintiffs’ lawyers or others to push back against new products, and to insist that their role in the defined contribution space actually be to the benefit of the participants.

Not long after I first started writing this blog, the Seventh Circuit began trying to preemptively squelch excessive fee litigation by, at heart, insisting that the invisible hand of the market would never have allowed the type of overcharging of fees claimed by the plaintiffs in those cases and that plan fiduciaries therefore could not have acted imprudently if they offered market rate products in a plan. At the time, I took objection to this line of thinking (see here, here and here, for instance) and eventually the world would move on from the belief that, somehow, the invisible hand was all that was necessary to protect plan participants from paying far too much for the privilege of buying mutual funds in a 401(k) plan.

But although then and still now – as you can see – I make some fun of the premise, the Court was on to something, although it would require more nuance and the further refinement of judicial thinking on the excessive fee theory to get there. I pointed out at the time that the problem with the Court’s thesis was that it needed to be tested by the evidence, by the clash of experts, and by what – to quote a cliché – Wigmore called “the greatest legal engine ever invented for the discovery of truth,” cross-examination. My point was that it might actually have been the case that the investment products at issue were not overpriced because the market had acted upon them already, but one could only learn whether that was true by testing the thesis through discovery and, if necessary, testimony at trial: you could not properly do it simply by relying on blind faith in the alleged power of markets, as the Court did initially.

Since that time, discovery and trials have established that sometimes, the pricing of 401(k) investment options is appropriate, even when it was only marketplace pressures that were holding down the price rather than any thoughtful engagement by a plan’s fiduciaries, but that other times, plan fiduciaries should have acted to get a better price and that in those instances it was imprudent not to have done so. There is no blanket rule one way or the other, as the earliest judicial rulings in this area suggested that there might or should be, and instead time has shown that fiduciaries do sometimes act imprudently because a better priced product that would serve the same investment purpose was available and the fiduciary failed to learn and act upon that knowledge.

I think of this today because one of the themes of many excessive fee suits is that the inclusion of particular products in plans is, in and of itself, evidence of a fiduciary breach, when the real question in such a suit, even if a product was overpriced, should be whether it was imprudent for the fiduciary to have included that product. As the cliché goes, you get what you pay for, and a plan fiduciary’s job is to assemble a prudent collection of investment options, not to just assemble the cheapest one possible.

The Fid Guru blog has a detailed analysis of whether, as recent cases have begun alleging, it was a fiduciary breach to include BlackRock LifePath target-date funds in plans, arguing that allegations to that effect should not be enough to sustain a plaintiff’s burden. What I like about the post is that it relies on a deep dive into the evidence to make a detailed case to that effect, which I have long advocated is the only proper way to determine whether a fiduciary erred by including a particular product in a plan’s investment options.

Anyway, I like both the approach and the thoughtful conclusions reached by the post for that reason, and recommend it to anyone interested in the sort of broader question of what is and is not an actionable fiduciary breach in the area of investment selection.

Here’s an excellent client alert, out of Holland and Knight, on the question of mandatory arbitration provisions in ERISA benefit plans. The alert discusses a recent federal district court decision out of Arizona requiring the participant in an ESOP to arbitrate her claim, rather than bring a putative class action case in federal court, based on a mandatory arbitration clause in the plan document. What’s interesting to me about the decision and the alert is the manner in which the discussion focuses on hyper-technical, almost granular issues to conclude that the arbitration clause is enforceable.

We saw essentially this same approach in the development of the jurisprudence over the propriety of including contractual statutes of limitations in benefit plans, which had the effect of substantially reducing the window for participants to litigate, as well as over venue selection clauses in ERISA governed plans, which often have the effect of forcing employees in one part of the country to only bring suit in an entirely different part of the country. These issues, when litigated, were also addressed by means of technical legal doctrines, such as, for instance, applying, to the specific situation of ERISA governed benefit plans, general standards for allowing contracting parties to select forums.

In each instance – contractual statutes of limitations, venue selection clauses and arbitration clauses – courts have often approached the issue as though it were just another instance of private contracting and applied doctrinal approaches developed in the context of private contracts entered into at arm’s length by the contracting counterparties. But to see the parties to an ERISA plan in that light requires imposing an extensive legal fiction. Employees have effectively no say in the terms of ERISA plans or the details of the benefits (leaving aside executives operating under top hat plans and similar scenarios). Furthermore, they cannot even realistically opt not to participate, without effectively surrendering a substantial part of their compensation, their ability to invest for or afford retirement, or their ability to access health care.

Under those circumstances, it is not necessarily reasonable for courts to think about these types of issues in the hyper-technical ways of contract lawyers, rather than approaching the questions from the broader perspective of whether they represent appropriate outcomes in the ERISA context. For instance, I have made the case time and again on this blog (and I do not claim that this is a novel idea) that ERISA has to be understood as invoking a private attorney general regime, in which the plaintiffs’ bar, and class action lawyers in particular, serve as the means to enforce its goals and requirements. Certainly, government regulators do so as well, but the breadth of ERISA plans across the scope of the massive United States economy makes it impossible to rely solely or even primarily upon regulatory enforcement action to protect participants and beneficiaries. While defenders of including these types of clauses in ERISA plans can provide a variety of different justifications for doing so – many of them entirely legitimate – it would be disingenuous to argue that making it harder for plaintiffs’ lawyers to access the court system is not one of them.

I would argue that under those circumstances, analyzing the propriety of venue selection, contractual limitations periods or arbitration clauses in ERISA plans by means of doctrines developed in the context of the realm of private contracting is the wrong prism for viewing these issues, and that the right prism is to instead ask whether those types of barriers to judicial access fit properly with both the contract of adhesion nature of ERISA plans as well as the private attorney general format for the enforcement of rights under ERISA.

This doesn’t necessarily mean that they should not be valid under ERISA, or that they should in fact be allowed to restrict participants’ access to the court system. It does, however, mean that the validity of such terms should be considered by comparing the legitimate rationales for their inclusion in plans against the harm to the private attorney general model they engender, rather than by simply considering whether such clauses are legal when analyzed under traditional doctrines developed in the private contracting model.

One of my partners, Mark Poerio, an expert on executive compensation, has written a client alert discussing what companies can consider doing proactively to encourage executives to stick around rather than move onto greener pastures. In short, they are all different ways to make the current position “greener,” so to speak, than competing pastures. (I promise – no more of this extended metaphor, which I have already stretched much farther than I should have). They are predominately compensation based efforts, such as retention bonuses and deferred compensation awards that require what one might consider “long termism” in the executive ranks to collect, and similar ideas.

Unlike Mark, who gets to stay on the sunny side of the street by typically addressing executive compensation issues proactively, when the company and the executives are still looking for ways to maintain – and in fact guarantee – their continuing relationship, I typically see these same issues – and these same efforts at retention – only after the fact, when an executive has left and the question of payout, and any disputes over it, has arisen.

For instance, Mark rightly notes the important role that deferred compensation or equity-based awards can play in encouraging long-term employment. Both, however, can lead to disputes later, often dependent, in my experience, more on the good faith of the company after the executive’s departure than on anything the departing executive did or did not do. I have had multiple cases where, after departure, the value of the equity grant turned out to be different than the executive believed it was and, sometimes, different than it was represented while the executive was being wooed to stay.

Mark also references the role of using claw backs for disloyal or corrupt employees, something that I have often seen tied to deferred compensation and top hat payouts so as to control executive behavior both during and after departure. The obvious rub here is that what looks disloyal – for instance, wrongful competition after departure – to one side doesn’t look that way to the other, often leading to litigation over whether the payout is required.

Likewise, Mark discusses one of the most – to me, anyway – interesting aspects of executive loyalty, which is the use of severance and change in control agreements to encourage executives to remain in place in uncertain corporate environments. In concept, these types of agreements work well for these purposes, although I think it is fair to say that they can sometimes encourage executives to stay only so long as is necessary to trigger payouts under such agreements, which to some extent at least undercuts their purpose. The sort of mirror image problem exists as well, which is that I have also seen companies suddenly become very grudging on the question of whether payment under those agreements is triggered once it becomes clear that a relatively sizable number of executives may have had their rights to payout under the agreements triggered by the same set of circumstances.

All of this is a long way of saying that probably the most important suggestion in Mark’s piece – from a litigator’s perspective – is his recommendation that companies proactively “refine plan documents and agreements in a manner that defuses litigation risks.”  All of the (real life) examples of disputes that I mentioned above had more than one precipitating cause, but each also had a similarity without which no dispute would have been possible: a poorly written agreement that left room for the parties to later argue over its meaning. Pay attention to avoiding that problem, and the odds of any litigation at all related to an executive’s departure fall dramatically.

There is an interesting new decision by the Massachusetts Appeals Court concerning the liability of insurers under Massachusetts law for wrongful failure to settle a claim. Under the Massachusetts rubric, an insurer has an obligation to make at least reasonable efforts to settle a claim against its insured once the insured’s liability has become reasonably clear, and the failure to have done so can expose the insurer to an award of multiple damages of as much as three times the amount of the judgment awarded against the insured in the underlying tort action. Overall, insurers sued on such claims typically argue some combination or variation of the following defenses: the disputed facts about the incident precluded liability from becoming reasonably clear, and therefore no duty to settle ever came into existence; the insurer’s investigation established that the insured was likely to prevail; and the amount offered in settlement, even though it did not resolve the claim, was sufficiently reasonable to preclude bad faith liability. Interestingly, over the years, decisions by the Commonwealth’s appellate courts have zeroed in on these defenses, fine tuning the circumstances in which they are useful and those in which they are not, in ways that, in my opinion, have made it harder to rely on any of those arguments. To be clear, they are all still valid defenses and defense strategies for insurers, but my point is simply that developments in this area of the law have reduced them from the proverbial “get out of jail free” cards for insurers facing such claims that they once were to fact intensive strategies that require subtlety in deploying them.

The new decision, Terry v. Hospitality Mutual Insurance Company, discusses each of these defenses, and applies very nuanced bases to reject them, with the Court then affirming the underlying multiple damages judgment against the insurer for having failed to settle the underlying action. What’s somewhat new, however, in the development of the doctrines in this area of the law, is the Court’s focus on and nuanced discussion of the insurer’s investigation into the claim, and the central role the Court’s criticism of that investigation plays in the Court’s holding. Massachusetts law imposes on insurers not just a duty to settle where liability is reasonably clear, but also a duty to reasonably investigate claims before making a settlement decision. For many years, the question of the propriety of the insurer’s investigation was but a poor stepchild to the question of whether the insurer had failed to settle where liability was reasonably clear – the courts and litigants focused on the latter in addressing whether liability should be imposed on the insurer for bad faith failure to settle, without much focus on whether the insurer’s investigation of the claim was appropriate.

Over the past few years, this has changed somewhat, as litigants and judges began focusing on the relationship between an insurer’s investigation of a claim and the insurer’s determination of whether to settle and how much to offer in settlement. In Terry, the Court closes the circle on this issue, with the duty to investigate serving as the key element in deciding whether to impose liability on the insurer for bad faith failure to settle. The Court found that the insurer’s investigation, upon which its settlement decisions were based, was not objective and was essentially self-serving; the Court found that the settlement offer made by the insurer, which was based upon that investigation, was, under that circumstance, unreasonable and gave rise to liability for bad faith failure to settle. It is hard not to conclude, when reading the opinion, that the Court would have found the exact same offer to have not been in bad faith if the preceding investigation, upon which the offer was premised, had not itself been conducted in bad faith.

Of interest, the Court goes to some length in its discussion to explain what constitutes a proper investigation and what instead constitutes an investigation that violates the insurer’s good faith claims handling obligations. The Court found that the insurer had breached its obligations with regard to investigation, leading to bad faith settlement decisions, because its investigation focused on disproving the insured’s liability rather than on an objective discovery into and evaluation of the events giving rise to the claim. The Court made clear that the former is a violation and supports liability for bad faith failure to settle where that deficient investigation is linked with an inappropriately low settlement offer, and that an insurer who wants to defend against a bad faith claim by citing its investigation and relying on the fact that its decisions were made in reliance on that investigation can only do so if its investigation was, in fact, an objective study of the circumstances of the claim.

There are two interesting and practical takeaways from the decision. The first is that any good plaintiff’s lawyer suing an insurer for bad faith failure to settle in Massachusetts will focus both his case and her discovery on the details of the insurer’s investigation, as a flawed investigation will now be an easy hook for arguing that the insurer did not act reasonably in its settlement decisions. The second is that insurers need to, and will eventually if they haven’t already, make it a best practice to document in their files an objective and evenhanded investigation into a claim, recording both the good and bad learned in the investigation in the file, and to clearly tie their settlement offers to the findings of that investigation. Many insurers already do objectively investigate claims, but even for those carriers, the decision is a reminder that not only do they have to do so, they also have to make sure that objectivity is reflected in their claim files.