This is a great article in PlanAdvisor on the recent decision in Tolbert v. RBC. Tolbert is a truly fascinating, and wonderfully instructive, district court decision on one of my favorite topics, and actually favorite things to do (I know it’s a strange interest, so sue me) – which is the litigation of top hat cases. What’s instructive about the decision is that it lays out, quite clearly for anyone to understand, what are the elements of a top hat plan and what must be proven in litigation to establish that a plan is actually a top hat plan. What’s fascinating about the decision, in turn, is that it finds that at least three aspects of that test need factual development at trial: whether the plan was primarily for the purpose of providing retirement income/deferred compensation; whether that was provided only to a select group of highly compensated individuals; and whether the participants who would benefit from the top hat plan had the workplace power to substantially influence the top hat plan’s terms. Of great interest is the Court’s discussion of that last factor, and its recognition that the courts have not firmly established one way or the other whether it actually is a factor in determining whether a particular deferred compensation arrangement is, in fact, a top hat plan. Other than that last element, there is nothing in particular unique about the Court’s determination of the factors that need to be considered to decide if a particular deferred compensation arrangement qualifies as a top hat plan, but even with regard to those elements, the decision is fascinating, and here’s why: the decision finds that the existence of the relevant elements of a top hat plan were not established on summary judgment and must instead be determined at trial. I have litigated top hat plan cases before, and counseled parties on them outside of litigation, and the fascinating thing about them is that employers often think of them as straight forward and as not really open to dispute over whether the deferred compensation being offered is a top hat plan for purposes of ERISA. In reality though, it is not always that clear once a dispute arises whether the requirements of a top hat plan were met, because the elements noted above can require serious factual investigation to determine whether they can be proven in court. To some extent, the problem is that there is a clash between the “if it looks like a duck and walks like a duck, then it’s a duck” approach to top hat plans and the rigorous standards of proof often applied by courts. When employers offer deferred compensation plans to a small group of top of the scale employees to try to tie them more firmly to the company, they know they are offering deferred compensation to a select group of top tier employees, and thus feel quite certain that the plan involved is a top hat plan. To them, it looks like a top hat plan, walks like a top hat plan and quacks like a top hat plan, so it is a top hat plan. That, though, is not enough, as Tolbert shows, for a court applying rigorous standards of proof: instead, the elements are going to have to be proven by testimony, data comparing the recipients to the employee pool as a whole, and the like.

So, as I and dozens of other observers have pointed out (although I am confident I am the only one who quoted Shakespeare on the subject), the Supreme Court’s recent decision in Tibble drove home the importance of monitoring plan investments, as well as the fact that, dependent on the circumstances, the failure to do so, and where necessary to take corresponding action based on the monitoring, can constitute a fiduciary breach. Okay, okay, say all the ERISA lawyers: time to tell our clients to set up a monitoring schedule and to meet regularly to do so.

Well, as forensic economist, expert witness and blogger extraordinaire Susan Mangiero points out, not so fast. From a financial perspective, monitoring plan investments can be a complex enterprise, highly dependent on details of the investments themselves and their relationship to market stimuli. In this article for BNA, Susan explains in detail exactly what this means, illustrating the level of complexity that the type of monitoring that Tibble requires actually involves, and pointing out that plan fiduciaries are now going to have to carefully consider when to bring in – and pay for – still more outside expertise for these exact purposes.
 

You know, you live long enough and you see everything come back around again. Ties get skinny, then they get wide. Standardized testing is seen as the key to everything, then as evil incarnate, then as the key to everything again. Baseball is learning to again look at the quality of the player on the field, after ignoring it in the belief that numbers on a computer screen can tell you everything. And so on, and so on, and so on.

I could not help but think of this when I read this story this morning in the Wall Street Journal on whether certain 401(k) features infringe on patents held by others, an article in which my colleague, Marcia Wagner, played a featured role. Why couldn’t I help but think of this? Because in 2007, the folks at BNA were, as they often are, well ahead of the curve (in this instance by almost a decade), writing about the question of whether tax strategies should be patented. Why do I remember that so clearly? Because they interviewed me for the article and I was quoted in depth on the subject. I wrote about it here, and later returned to the subject a few months later when I wrote a post on whether patenting ERISA strategies had reached its end game.

Yogi Berra once famously said that its like déjà vu all over again. Its amazing how often that rings true if you practice law long enough.
 

For those of you who have a professional or personal interest in the ACA, litigation arising from it and insurance coverage for litigation it is likely to spawn, I am speaking on a webinar this afternoon that covers those subjects. If you are interested in listening in (and/or amusing yourself by asking complex questions that will stump the panelists, which is how I amuse myself when I am in the audience),  the webinar, hosted by Strafford, is “Liability Insurance for ERISA Plan Sponsors: Maximizing Coverage Under Employee Benefits and Fiduciary Liability Policies – Securing Coverage for Civil Damages and Tax Assessments Arising From the ACA and Other Claims," and its at 1 pm this afternoon.  You can register here.

Sorry for the short notice, but I have been tied up with depositions and with trying to finish yesterday’s somewhat complex post on the intersection between Tibble and Shakespeare.

Years ago I moved from reading fiction for fun to mostly reading non-fiction, not long after reading The Corrections and spending the whole time hearing, in style, tone and manner, echoes in the back of my head of writers as recent as Martin Amis, as old as Norman Mailer, and as somewhere in-between as Don DeLillo. Even more though, I had begun to be struck by the fact that, with a few exceptions, most of what anyone had to say had long since been better said by William Shakespeare.

I thought of this as I reread the Supreme Court’s opinion in Tibble. After all of the years of litigation, the high profile appeals, the articles and panels discussing the case, the decision, from a practical perspective, can be best summed up by Shakespeare: its simply sound and fury, signifying nothing, at least not from either a practical or an academic perspective when it comes to either the law of ERISA or its practical application.

The Court was confronted with, in essence, this issue: when does ERISA’s statute of limitations begin running in the context of investment decisions made many years ago, where the investments continued to be held in a plan. ERISA’s statute of limitations for breaches of fiduciary duty is an odd little duck, in many ways unique to itself: its six year limit runs from the last act in a breach, and its three year limit runs from the plaintiff’s actual knowledge of a breach (I know, this is a summary). You can see the problem though, from the practical perspective of either a litigator or a plan fiduciary, or even as part of the completely academic exercise of developing a jurisprudence for this statute of limitations. It is essentially dependent on defining the date of fiduciary breach, establishing what constitutes knowledge of that breach and on defining the last act of the breach. The Supreme Court’s opinion in Tibble in no manner expanded upon our understanding of those issues or of how to apply that statute of limitations in that context. It instead, at least implicitly, continued to uphold the unremarkable, and effectively undisputed, proposition that the statute’s running cannot occur before the breach, but without telling us anything, really, about how to determine the relevant date of breach.

Instead, the Court declared what was, again, an essentially unremarkable proposition, which is that fiduciary duties don’t simply end with the selection by fiduciaries of plan investments, but instead continue throughout the life of the plan with regard to such investments. But as the Court’s unanimity and its broad citations of standard trust rules reflect, did anyone ever really think otherwise? As the Court noted in its opinion, even the parties had agreed on that point by the time the briefing and argument before the Supreme Court was concluded.

The Court then, from there, failed to take anyone the one step further and fill in what that continuing duty with regard to plan investments looks like, and wisely so. This is an issue best filled in on a detailed factual record, not in the abstract by an appellate panel. What type of continued monitoring is needed, what type of events should trigger a revision of investment choices by a fiduciary, what level of review is needed once those events occur, are all complex questions that can vary from case to case, particularly given the wide range of plan types that exist and the fact that different types of plans may be affected in different ways by different events. For instance, certainly employer stock of a publicly traded corporation is affected in different ways by the collapse of a Wall Street bank than are index funds in a 401(k) plan. Likewise, negative events in a particular and narrow industry might require revisiting the employee ownership held in the ESOP of a private company in that industry, but would be unlikely to raise any concerns with regard to a diversified pension plan.

So when all is said and done, what do years of litigation, a Ninth Circuit opinion and a Supreme Court opinion in Tibble leave us knowing? That there is a continuing duty to monitor plan investments, the breach of which can give rise to fiduciary liability, and that ERISA’s statute of limitations runs from the date of whatever breach is identified and proven. I am not sure any experienced ERISA litigator or academic didn’t already know that already, before the Supreme Court issued its opinion in Tibble.
 

So what does it mean if you are an ERISA litigator who writes a blog and you are too busy litigating to write a post on Tibble v. Edison (even though you have published a widely read article on the case) right after the Supreme Court issues its opinion on the case? I don’t know, but it does remind me of this old joke:

Q: What do you call one lawyer in town? A: Unemployed.
Q: What do you call two lawyers in town? A: Overworked.

For now, until I have time to sit down and write a comprehensive post on the decision, I will content myself with passing along articles of interest on the decision, along with some general comments of my own. A good place to start is with the article in today’s Wall Street Journal, and with this piece in the Washington Post. This piece in Forbes caught my eye as it grabs hold of the most important aspect of the decision, which is that the Court found that fiduciaries have an on-going duty to monitor and review investments, but without outlining the parameters of that duty. Frankly, I wouldn’t have expected the Court to do so, as that is a very fact specific question and the exact parameters of that duty – once you accept that it exists – can vary from one set of circumstances to another. Thus, the Supreme Court has found that such a duty exists and that a fiduciary is not off the hook forever simply because the original investment decisions were prudent when first made, but left it for future litigation to establish what that duty looks like in different circumstances. This will continue to put ERISA litigators, quite happily, within the second category of lawyers in that old joke.
 

Dismayed at the attention her father was receiving from her teenage friends over dinner in a Chinese restaurant, Sally Draper remarked to the table that her father’s joke about stray cats and slow restaurant service was one he had been making for years. I thought of this when I saw Mike Reilly’s interesting post last week on the test for determining whether a plan is a governmental plan or not, because I have been leading off stories about governmental plan and other exemptions from ERISA for many years with the story of a client who, in 1975, was assigned this “new law” to oversee for his employer, with the “new law,” of course, being ERISA. My client liked to say how, back then, with no case law to guide them, they would handle the exemption by means of an “if it looks like a duck and quacks like a duck, then it’s a duck” analysis. In other words, if they thought a plan looked like a governmental plan, and it was related to a governmental enterprise, then they would treat it as a governmental plan.

Of course, over the years, legal rulings have given some framework to the analysis of governmental plans, and my client accordingly moved on from the “ if it looks like a duck” school of analysis for handling plans related to government or quasi-government enterprises. The problem, though, is that determining whether to treat or not treat a particular plan as a governmental plan is not always cut and dried, because of the variety of circumstances in which a plan related to governmental functions can come into existence, in this era of quasi-governmental agencies, private contracting out of government functions, and the overlapping role of private, public and union entities in some areas of government services. Mike Reilly’s post was on governmental plan exemptions in just this type of a context, where the role of collective bargaining, a teacher’s union, and a school district overlap in a manner that impacts determining whether the plan in question is a governmental plan.

As you can see both from Mike’s post and, even more, from the District Court decision itself that he discusses, there can be a lot of moving parts – or more accurately perhaps, hands in the pot – with regard to the provision of plans in such circumstances, and all of those moving parts have to be accounted for and analyzed in deciding whether or not there is a governmental plan.

The somewhat amorphous nature of the analysis reminds me, to some extent, of the church plan exemption and the current litigation over it. That exemption likewise was subject to a somewhat rickety legal structure, based to some extent on the intersection of private letter rulings with assumptions made by courts and plan administrators as to what it takes to qualify as a church plan. Church plan status, of course, is currently under attack by the plaintiffs’ bar, and the eventual outcome is up in the air. However, it is worth noting that panelists on the church plan litigation at the recent ACI ERISA Litigation Conference in Chicago raised the question of whether governmental plans will be the next target if the plaintiffs’ bar succeeds in overturning various plans’ claims to the church plan exemption. One thing I can tell you is that if that happens, we are going to see an awful lot of briefs and court opinions that explain the difference between the two exemptions by making a pun about the separation of church and state.
 

This is great – I loved the idea of this Bloomberg BNA webinar the minute it popped up in my in-box, just from the title: “Just Say No: Why Directors Should Avoid Duties That Will Subject Them to ERISA.” I have written extensively on the idea of accidental fiduciaries, and the manner in which corporate officers find themselves dragged, unwittingly, into ERISA class actions because they played some role in the administration of a benefit plan, rendering them, at least arguably, deemed or functional fiduciaries for purposes of ERISA. Sometimes, they actually have played enough of an operational role to truly be proper defendants in an action; in others, they have only enough connection – such as having appointed the members of a committee that runs the plan – to be forced to litigate the question of whether they actually qualify as fiduciaries; and in other cases, their roles lie somewhere in between.

But there is also the question of the extent to which directors should deliberately place themselves in harms way by being the overlord of the company’s benefit plans, rather than leaving that in the hand of a lower level employee. I have represented officers who have taken on that role, and I have also sued officers who have taken on that role, and I have to say that, consistently, having a director actually be a plan fiduciary, intentionally, seldom appears, in the hindsight of litigation, to have been the best idea. Moreover, it has often appeared to be the case that a company officer or director took on the role because of its seeming importance but without any real analysis as to whether or not it made sense to take on that role. In many instances, there was almost a default, knee jerk reflex that something that important should be on a senior officer’s radar screen, but at the same time, that same officer did not really have the time or expertise to focus on it, leaving the officer exposed to potential liability if a problem arose with the plan and, further, leaving the plan open to more suits based on poor oversight than would have been the case if the oversight had been assigned to a lower level executive for whom the assignment was more of a central focus and possibly even one that could raise his or her profile.

In the end, litigation teaches that it isn’t so much the question of whether directors should ever be a plan fiduciary – accidentally or deliberately – that is important, but rather the act of thinking logically in advance about who best in a company should have what roles with regard to a plan. Doing the latter not only protects against unanticipated litigation exposures, but also decreases the likelihood of litigation by increasing the probability that the plan will be in the hands of the executives best placed to run it well.
 

Chris Carosa at Fiduciary News highlighted this New York Times article in his twitter feed the other day, in which the author argued that there is no reason, from the point of view of a participant/employee, to hold large amounts of company stock in a retirement portfolio (as opposed to, say, as part of a bonus plan or other compensation supplement that is external to a 401(k) plan or other retirement account). The author of the article makes a very persuasive case that, as a participant, holding company stock of their employer is a mistake, and violates basic, elementary rules of diversification and investment philosophy that any competent financial advisor would insist their clients live by. So, the author asks, how can it possibly make any sense to have company stock holdings in a 401(k) plan or to have company matches to retirement savings be in the form of company stock? The author’s answer, as you can tell from the summary above, is it doesn’t.

But if it doesn’t make any sense from the perspective of a participant, then how can it ever be a prudent decision for a fiduciary to offer it in the first place? A fiduciary is supposed to be acting as a knowledgeable expert and in the best interest of the participants, so if one accepts the premise that someone knowledgeable about retirement investing would not hold company stock in a 401(k) plan, then it would seem to never be in the interest of participants – and therefore compliant with a fiduciary’s obligations – to offer company stock in a retirement plan. Note that this question concerns general retirement savings of employee participants, and not ESOP holdings, which we know are deliberately and intentionally overweighted to holding company stock.

Now, this analysis needs one qualification. We all know that some companies do so well that employees and participants would be ill-served by not holding employer stock, and the returns on their retirement accounts would be severely reduced absent large holdings of company stock. All have heard the story of Microsoft millionaires (or Apple, or Facebook, or Google, or fill in the name of the tech company) but we also know that sometimes this has been true of employers in less glamorous industries as well (even if not to the same extent with regard to the appreciation of their stock). But these events are outliers in a bell curve, and are not the experience of most participants or of most employers offering company stock, just as the instances of company stock holdings going south, i.e., a stock drop, are outliers as well. For most participants in most plans in most companies, the potential gain certainly doesn’t outweigh the general risk, accepted in investment theory, of the accompanying excessive concentration of stock of any one company, which in this instance is the employer.

So, if this is the case, how can it ever be prudent to offer company stock in a 401(k) plan, and, if the stock falls in value, not have it be a fiduciary breach? Such an analysis would suggest that even holding or offering the company stock as an option is a fiduciary breach, as it is not prudent to offer it at all. But this is where ERISA meets the real world. The statute was not enacted in a vacuum, but was instead created by balancing competing interests. And the answer to the question, and the reason why such an argument would not succeed in a stock drop case, is that ERISA allows, to a certain extent, such holdings, so their very existence alone, without more, cannot constitute a fiduciary breach. The statute allows for it, so doing it can’t breach the statute.

And this, to a certain extent, is what Dudenhoeffer was about – the idea that a plan sponsor gets the protection of being allowed to do, without being accused of imprudent conduct, what the statute specifically allows, but is not insulated anymore than that from scrutiny of its conduct. So here, with regard to company stock, despite the idea that it is probably never prudent, as an individual retirement investor, to hold an excessive concentration of one company’s stock and in particular that of one’s employer, that alone cannot support a breach of fiduciary duty claim against a plan sponsor; instead, to impose fiduciary liability, that plan sponsor must have done something more than just offering that stock to employee participants.
 

For many years, I argued on this blog that courts, when it came to ERISA breach of fiduciary duty cases, were too slow to decide cases on the facts and too quick to decide them on the basis of judicial assumptions or, worse yet, legal presumptions. I criticized this roundly in my article "Retreat from the High Water Mark," where I discussed the different outcomes in excessive fees cases between those where the courts made certain assumptions about the mutual fund marketplace and those where the courts took evidence on that issue before deciding the case. As I have often written, both on this blog and elsewhere, the world often looks much different after evidence is taken than it does before.

Certainly, particularly after Iqbal and Twombly – which were needed correctives to certain aspects of federal practice – there is room for dismissing poorly pled or weakly supported breach of fiduciary duty cases right at the get go, by means of motions to dismiss. The problem, though, came when courts went beyond simply considering whether the acts alleged in the complaint were sufficient to describe a breach of fiduciary duty claim under generally accepted principles concerning such claims, for instance whether the complaint alleged fiduciary status and facts indicating a lack of prudence, and instead moved onto dismissing claims that satisfied those standards by creating presumptions that established separate and additional pleading barriers to prosecuting such a claim, as occurred with the Moench presumption, or by assuming knowledge of the investment practices and world at issue as a basis for dismissal that could not be found in the record at the time the motion was decided, as the Seventh Circuit arguably did in Hecker.

For those of you who have been paying attention, I haven’t written much on that theme lately, and there is a reason for it: presumably independent of anything I have written, courts have begun doing exactly what I argued for, and the pendulum has now firmly swung towards courts deciding such cases on their merits after considering the evidence. Indeed, Fifth Third Bancorp v. Dudenhoeffer, with its rejection of the Moench presumption, may have signaled to lower courts the need to decide all breach of fiduciary duty cases on their merits and not on the creation of legal presumptions or judicial assumptions based on sources beyond the ERISA statute itself or the evidence in a given case.

This jumped out at me when I read this Bloomberg BNA article on the Northern District of Illinois’ decision the other day (actually, while I was at depositions in Chicago, around the corner from the court, metaphorically speaking) in Teamsters Local 710 Pension Fund v. The Bank of N.Y. Mellon Corp., followed by a reading of the decision itself. The Bloomberg BNA article nicely sums up the events that gave rise to the lawsuit, explaining that:

In 2006, the Teamsters plan authorized BNY Mellon to lend securities from the plan’s accounts in return for collateral that would then be invested in certain approved investments. The goal was to provide the plan incremental returns without exposure to the substantial risk often present in speculative investments.

As part of this securities lending program, BNY Mellon purchased almost $25 million in Lehman-backed floating rate notes.

As Lehman’s financial condition deteriorated and ultimately collapsed, the Teamsters plan suffered a $24.5 million deficiency from the note held by BNY Mellon.

The plan filed suit against two BNY entities, accusing them of fiduciary imprudence and disloyalty under the Employee Retirement Income Security Act.

BNY Mellon sought to have the case resolved on the pleadings by arguing that Dudenhoffer established legal rules that bar the claim, on the thesis that the defendants, after Dudenhoffer, could not be liable for breach of fiduciary duty for having failed to “[recognize,] based on publicly-available information alone, that Lehman’s debt was over-valued.”

The Court, though, rejected this argument, ruling that:

Defendants’ argument about the impact of Fifth Third is based upon a reading of the complaint that is too narrow. The Court does not read the plaintiffs’ complaint as alleging that the defendants lacked prescience or that they should have recognized from the information available in the market that the Lehman bonds were over-valued. Rather, the plaintiffs allege that, under the circumstances as they existed in the market at the time, no reasonably prudent securities lending fiduciary would have concluded that Lehman debt was a sufficiently safe investment for a securities lending client and no reasonably prudent securities lending fiduciary would have maintained the collateral investments in the Lehman Notes through Lehman’s bankruptcy filing. Thus the claim is not that the defendants were imprudent in failing to recognize that Lehman would file for bankruptcy and not pay out on the notes, but that it was imprudent to hold the Lehman debt, given the circumstances existing in the market and given the plaintiffs’ investment profile. Nothing in Fifth Third forecloses such claims.

In short, the Court concluded that the complaint pled the standard elements to show a breach of fiduciary duty, namely a lack of prudence under the then prevailing circumstances, and that such a claim was entitled to proceed to an adjudication on its merits, after discovery. This is a far cry from the day, not too long ago, that many such claims never made it past the pleading stage and into discovery, at which point a court could decide whether a fiduciary breach occurred by looking at all of the evidence, learned during discovery, of what was actually done, and under what circumstances, by the fiduciaries of a plan. As I have said before, the world often looks different in that light than it does when early, preliminary motions in a case are filed.