Well, the oral argument in Heimeshoff v. Hartford Life & Accident Insurance Co. is fascinating, in that the Court’s questioning and counsels’ argument all focus on practicalities, in the sense of when should the time period run and how, and when, will any particular rule actually impact, in a negative way, either the plan administrator or the participant. Much of the discussion circles around the fact that, no matter how few times it happens, we really cannot have a system that could bar the courthouse door to a participant who is waiting for an administrator to conclude the internal appeal process before suing, by having the statute of limitations expire while waiting. At the same time, as the Justices’ questioning makes clear, there are a number of ways to go after that problem, running from Department of Labor regulatory efforts that would preclude that outcome by means of its detailed claims processing regulations, to courts applying tolling and estoppel doctrines to prevent such an egregious outcome.

I don’t know, but it seems to me it is easier just to have a bright line rule which would effectively preclude that outlier event once and for all, and the Court has the opportunity to put that into place right now. Of course, past experience with Supreme Court opinions on ERISA demonstrate the old adage that “no good deed goes unpunished,” or perhaps instead the adage that “the road to perdition is paved with good intentions,” in that every Supreme Court decision on one particular issue under ERISA seems to open up a Pandora’s box of other issues under ERISA, that then get litigated throughout the lower courts for many years thereafter (this last sentence, by the way, may set a personal record for mixing metaphors and assimilating similes in a single sentence of a blog post). Of course, that is also one of the things that makes this the most interesting of practice areas.
 

If one theme has emerged from my numerous blog posts over the last seven years and across the various articles I have written on ERISA litigation during that time span, it is the centrality of operational competence in sponsoring and administering ERISA plans. I have, for instance, often argued that, when it comes to ERISA litigation, the best offense for plan sponsors and company officers is a good defense, in the form of what I have taken to calling defensive plan building; defensive plan building is the idea that taking careful and precise steps in building out, and then running, pensions, 401(k)s, ESOPs, and other plans creates the optimal environment for defending against lawsuits down the road related to those plans. When one can document a careful process for selecting vendors, for picking funds, for the fees attached to plans, for the handling of float income, and for all the other myriad choices that must be made with regard to how a plan will operate, it becomes relatively easy to defend fiduciaries and company officers alleged to be fiduciaries against breach of fiduciary duty actions, because these types of documents and steps demonstrate a prudent process.

Likewise, there has been a clear trend in the case law over those years, directly reflected in my posts and writings, towards the loosening of the procedural and substantive advantages held by plans, sponsors and fiduciaries. These shifts run from the subtle – such as a tendency for courts to now look much more closely at medical evidence in benefit cases, even where arbitrary and capricious review applies – to the bold, such as the Supreme Court’s expansion of equitable remedies in Amara. All of these shifts have this in common: they decrease the likelihood of a fiduciary or sponsor winning early in a case on procedural grounds, and increase the likelihood that a court will eventually reach the merits of a claim. Excessive fee litigation provides a ready example, as we have shifted, in just a few years, from early and relatively easy procedural victories for defendants in those types of cases to substantial settlements and the occasional outright trial victory for participants. What does this have to do with operational competency in operating a plan? It makes competency in running the plan ever more important, because it increases the likelihood that a court will someday consider the merits in a lawsuit targeting those actions, rather than the case ending, as it often would have in the past, at an early point in the litigation on procedural or highly technical grounds.

My latest published article, “Opening Up the Courthouse Door: The Second Circuit
Weighs in on Exhaustion of Administrative Remedies,” addresses this idea in another context, namely the weakening, in a recent Second Circuit opinion, of the requirement of administrative exhaustion as a defense against ERISA actions. As I discussed in the article, for many years, this defense was a solid bulwark against many ERISA claims, one that could often stop a suit long before the parties or the court would get to the merits of an action. Indeed, historically, participants who tried to argue their way around this requirement rarely succeeded. The Second Circuit, however, as I discuss in the article, substantially weakened that defense and opened up a new line of attack for participants faced with the claim that they had not exhausted their administrative remedies before the plan administrator. As I discuss in the article, it is yet another example of courts making it easier for participants to prosecute ERISA claims and, in particular, to leapfrog the type of early procedural defenses that defendants used to be able to use to stop many such claims in their tracks at a very early stage. Anything that makes it easier for participants to get the merits of a lawsuit in front of a court increases the importance of competence in running the plan, because it is the level of operational competence that will be on trial once a court gets to the merits of an action.
 

Last week, Thomas Clark was kind enough to point out in his FRA PlanTools blog that, in a series of posts and an article a few years back, I had guessed right on the future of excessive fee litigation in the courts. At the same time that he was writing that post, I was in the midst of what I have now come to call “public pensions week” on this blog, in which I put up a series of posts on that problem, which is on everyone’s front burner and the cover of media from the NY Times to Rolling Stone.

Now it is my turn to point out some very educated and well-informed prognosticating, this time by Susan Mangiero, who writes the Pension Risk Matters blog. Susan predicted the current spate of public pension problems, and the nature of the on-going debate over them, in a post six years ago. As she explained then, the question to be played out was whether, and how, governments – read taxpayers – would continue to fund public pensions at their prescribed benefit levels, or whether benefits would end up being cut. As she cleverly put it way back in 2006, “Is a modern Boston Tea Party soon to come? Will taxpayers say "enough" to what they perceive as generous municipal pensions while they struggle to save?”

This is, of course, in a nut shell exactly what the public pension crisis is today. The pensions are underfunded, and the question is whether the taxpayers will be forced to make up the difference or whether, instead, the participants will be forced to take a haircut. Susan was right on the money way back then in predicting the problem, so perhaps we should heed her thoughts then on what the outcome of this dilemma might be – as Susan said then about how this may play out, “How will politicians respond? After all, grumpy taxpayers tend to vote.”
 

One of the first long articles I wrote on ERISA (I had already penned some opuses on patent infringement litigation and insurance coverage disputes) was on excessive fee litigation, and was based, at heart, on the Seventh Circuit’s then recent decision in Hecker v. Deere. Titled “Retreat from the High Water Mark: Breach of Fiduciary Duty Claims Involving Excessive Fees After Tibble v. Edison International,” the article set forth my view that, in Civil War parlance, the decision in Hecker, which was being highly trumpeted by the defense bar at the time as a major victory, was, in fact, little more than the high water mark for plan sponsors and vendors in defending against excessive fee class actions. My thesis was that, when the decision was broken down and analyzed in its constituent parts (and particularly with a focus on the Court’s reasoning), it was unlikely that the decision would be replicated, and more likely that other courts would come to different conclusions in the future that would validate excessive fee claims and invigorate the theory as a basis for class action litigation.

From where I sit, four years of court decisions, settlements and courtroom results appear to have borne out my prognosis. Humble scribe that I am, I don’t believe I have ever pointed out before that I was right in this regard, but, as Thomas Clark pointed out earlier this week in an excellent post on the FRA PlanTools Blog, the recent $30 million settlement entered into by International Paper is solid evidence that I was right.

My real purpose for writing today, though, was to pass along his post on the settlement, which does an excellent job of breaking down the issues, the claims, the alleged breaches, and the settlement of the International Paper case. It comprehensively covers everything any outsider to the litigation would want to or need to know about the case.
 

Well, I did not really set out to write “public pensions” week on my blog, although it ended up working out that way, solely because two different articles on the fiscal crisis impacting government pensions caught my eye earlier this week. Having, for better or worse, gone down that rabbit hole, though, I now feel obliged to discuss Matt Taibbi’s new article in Rolling Stone on the municipal pension crisis, which, serendipitously, appeared on-line this week.

Taibbi, for those of you who don’t know his work, is, at a minimum, whether you agree with him or not, a talented polemicist. And that is not to damn with faint praise: this country was founded, in part, by great polemicists. And to be fair, there is certainly no doubt that you can take the facts of the public pension crisis and paint any of a number of pictures, all of them accurate to some degree; Taibbi presents his own impressionistic take on those facts, and his portrayal, like many other views of this problem, has some truth to it. Indeed, in many ways, the public pension crisis reminds me of one of those old trick pictures, that if looked at one way you see one thing (like an old woman’s face) and looked at another way, something else (like a young woman’s face).

The one consistent fact that holds true across all of the competing narratives, however, is this: public pensions are in a whole lot of trouble, and truly are, as a general rule, facing a fiscal crisis. The narratives vary on who is to blame for this, on how to fix it, and who should bear the costs of fixing it, but they don’t vary on that basic fact. Taibbi points to decades of pension underfunding by politicians as the primary cause, and argues that the proper solution to that is not to cut benefits back to a level that can be funded by the amounts left in the plans. His diagnosis and solutions, unfortunately, essentially fall in the category of locking the door after the horse has run off; although he targets the fact that, legally, state and municipal governments were able to avoid funding pension plans properly for years, there is no magic trick nor time machine that will allow anyone to go back and fix that. It falls into the category of what’s done is done, and the question becomes what to do now: absent some sort of massive federal bailout of underfunded public pension plans, the choices become reduce benefits below what was promised or tax the living heck out of current taxpayers to make up the difference. I am not even going to pretend to have a ready answer on how to address that problem.

Going forward, though, is a little easier, when it comes to prescribing a fix, and Taibbi feints toward it in his article, when he references ERISA and the ability of state governments over the years to underfund pension plans. Certainly a federal law, perhaps modeled on ERISA, that obligates appropriate funding by states and municipalities going forward with regard to future pension obligations is a necessary start. However, there are at least two (and probably many more, but these are the ones that jump out at me right off the bat) problems with such a scheme. First off, how will it be enforced? It certainly cannot be done by assigning, under any such new statute, personal liability as a fiduciary to state elected or appointed officials, in much the same way that ERISA assigns fiduciary liability to those who run private pensions. It is hard to picture a law with such a measure in it ever passing, and even harder to picture who would agree to run state pension plans, with all their potential issues, under those circumstances. Perhaps a stick, in the form of withholding some types of federal funds from states or municipalities that violate the law might work, in much the same way that the federal government withholds highway funds or education funds or the like from states that don’t comply with federal wishes in those realms.

Second, though, is a problem I identified in my prior posts on the public pension crisis. The moment you do anything like that, and make state governments account in real time for future pension liabilities, you will see the end of pensions in the public sector, replaced by defined contribution plans instead. It will only be a matter of time. Is that a good or a bad thing? I don’t know, and all have their own ideas on that. I have been in the private sector my whole career, and have never seen hide nor hair of a pension, other than when it is the subject of a case I am litigating, so I have my own biases in that regard.
 

Interestingly, when I wrote yesterday on the question of imposing discipline on public pension financing, the NY Times had not yet published – at least on the on-line version that I skim each day – this detailed, and frankly harrowing, article on the pension obligations faced by San Jose and the problems it is causing for the municipal budget. As the article notes, in an almost scare mongering opening:

San Jose now spends one-fifth of its $1.1 billion general fund on pensions and retiree health care, and the amount keeps rising. To free up the money, services have been cut, libraries and community centers closed, the number of city workers trimmed, salaries reduced, and new facilities left unused for lack of staff. From potholes to home burglaries, the city’s problems are growing.

What is more interesting, in some ways, is the discussion of what caused the problem – excessive pension promises of a kind that one would never see from an employer forced to account, in real time, for future pension promises – and the proposed solutions. The proposed solutions mirror what has occurred in the private sector, which is changing future benefits (read reducing them) beyond those already accrued for current participants, reducing the retirement benefits outright for new employees, and  changing overall to a defined contribution type system. Interestingly, the latter is what I predicted, in yesterday’s post, would almost certainly occur if municipalities, like private employers, were placed in a position that they must account, in the here and now, to at least some degree for promises to provide pensions in the future.
 

I am not sure there is anything in this article that will surprise anyone who is a regular reader of this blog, or who follows the issues raised by public and private pensions, including their financing. More than that, I doubt there is anything in it that anyone knowledgeable about the subject will disagree with: writing about the crisis in public pensions, the author suggests that the proper response is to impose a legal structure, possibly similar to ERISA, that will force municipalities to fund their pensions as they go, rather than promising benefits and leaving them for future taxpayers (many, frankly, too young to vote – or even read – when the pensions are promised) to fund. Nothing too shocking there, although, in truth, I think what you would see in the public sector if that were enacted is exactly what you have already seen in the private sector: the replacement of pensions with some type of defined contribution type structure.

The article is aptly titled “The Long, Sorry Tale of Pension Promises,” and, despite the somewhat lukewarm introduction above to the article, I have to say that I liked the article and greatly enjoyed it, including its excellent presentation of the history of pension busts that led up to ERISA’s enactment. Its certainly worth a few minutes of your morning.
 

I have had a couple of interesting conversations recently about CalPERS considering going to index/passive investing. As I have noted in the past, if a major and highly influential pension fund goes that route, how long will it be until others follow, seeking both safety in numbers and the potential defense to breach of fiduciary duty claims of pointing to CalPERS’ decision as reflecting an industry-wide standard of reasonableness?

Two questions have come up in that event, however, in recent conversations I have had. First, how long will it be until fiduciaries who switch their plans to index and passive funds are sued by participants claiming they would have done better under actively managed funds, and that, given the make up of the particular participant base for that plan and their investment objectives, active investing was the prudent course? Second, and more fun/theoretical, is this: what happens when everyone follows along and goes index only? Who do you trade with on the other side of the deal, and what – if everyone is just moving along with the market index – drives the price one way or the other, when there is no one out there buying and selling in the hope of beating that index?

Both are simply theoretical concerns to a certain extent, and mostly entertaining thought experiments. But still, one has to wonder whether index investing can really be the answer to everything, in all circumstances. Seems to me that once upon a time all the funds in my 401k all held internet stocks at the same time to boost their returns, even when their stated investment objectives wouldn’t have called for those holdings, and that uniformity of approach didn’t work out too well for anyone. Maybe let a thousand flowers bloom in investment choices and approaches, anyone? Isn’t that what diversification is supposed to be – holding different categories of investments, selected in different approaches, rather than all holding the same portions of an index, all moving in lock step? One has to wonder.
 

I absolutely love this story on the Fifth Circuit asking the Texas Supreme Court to consider the scope of insurance coverage for claims arising out of the Deepwater Horizon oil spill loss; the case itself is fascinating as well. The reason is that insurance coverage law is an odd little area, in that massive numbers of decisions in that area are issued each year, and yet most do little more than move the chains a little bit in terms of refining or redefining the law in this area. This point is well-illustrated, for those of you who like support for a proposition, by Randy Maniloff’s on-going series of excellent coverage newsletters, aptly titled Coverage Opinions, which details the continuing flow of judicial decisions in this area.

At the same time, though, the history of insurance coverage law is written in big letters, by the big dollar cases that bring out the best lawyers and arguments that the industry and the policyholder bar have to offer; it is these cases that drive the development of the case law in new directions, and often rewrite the framework in which insurance coverage disputes are analyzed and decided for the next few decades. It was the big money exposures of asbestos and Superfund – issues now so old that they could have been referenced in a retro-movie like Argo, in the same way it featured rotary phones to add period authenticity – that gave rise to much of the case law that currently governs most disputes over trigger and allocation. Likewise, the issues at the heart of the Deepwater Horizon coverage dispute are additional insured and coverage for contractual indemnity obligations that have been floating around insurance coverage law for the entire length of my career, with often inconsistent results; a major decision in a high profile case like Deepwater Horizon is almost certain to reframe those discussions for many years going forward.
 

Here’s a great piece – and not just because I am complimented in it – by Susan Mangiero on the continuing problem of workforce participation, and the impact on retirement financing of a less than robust job market. As Susan has pointed out in other posts, less workers, in a nutshell, equals fewer taxpayers and current employees to support social security and private company retirement packages, thus hastening the cycle towards funding problems on those fronts. In a way, this gives rise to a hidden and subtle bias towards 401(k) and similar programs that, despite complaints about them such as their fees, at least have the virtue of being one worker/one funder/one beneficiary systems. I know that is a gross simplification, when you consider such issues as company matches, spousal distributions, etc., but the point is simple: such retirement plans rely on the participant in the workforce to plan ahead and fund it, and not on a shrinking labor pool to fund it in the future for that worker.

There are a lot of costs to a shrinking and/or severely curtailed job market, from the personal costs to those who can’t get jobs, to the long term reduction in earnings for those who must wait years beyond graduation to really get started on a profitable work life, to the inability of many to retire after job losses and stock market losses struck them in the latter part of their work lives. There is no getting around the fact, however, that, as Susan points out, a shrunken workforce puts financial pressure on the retirement structure across the board, from a reduction in tax rolls for the funding of public pensions to a distortion of the worker/retiree leverage upon which social security rests.

It is, in the end, important to remember the linkage between jobs and the retirement scheme, whether that is pensions, social security, 401(k)s or some as yet undreamed of replacement. The latter does not exist in a vacuum and, as Susan has pointed out, is closely tied to the former.