Much has been written over the years about the transition of employees from pension plans to 401(k)s by private industry over the past decade or so, with pensions disappearing and the obligation to fund – and risk of underfunding retirement – passed to employees. There is much to be said both for and against this change, but the fact that it is underway and effectively irreversible cannot be disputed; the numbers document the former, and reality establishes the latter.

There are instances, as I suggested was the case with First Data the other day, where changes that transfer risk to employees clearly seem to be driven by the short term financial interests of investors and ownership, but generally speaking, those are outlier events when it comes to this shift in retirement funding. More often, in my view, what you have seen are viable companies that are serious about their talent pool nonetheless making shifts in this direction to ensure the long run health and future of those firms, which is at least as important to the future retirement opportunities of their employees as the continuation of pensions would have been. For a number of reasons, which I won’t discuss in detail here, companies have found such a change necessary to achieve the arguably greater good of ensuring that, in the long run, they can continue to provide good jobs at good wages, in the old formulation, having found that this socially important good is put at risk by promising to fund distant pensions.

Detroit’s bankruptcy, as has other municipal bankruptcies, demonstrates the importance of managing retirement risk for employers, and the manner in which the failure to do so in a timely manner can spell disaster down the road, for both the employer and its retired employees. Detroit’s bankruptcy is driven in large part by almost $9.2 billion (yes, that’s billion, with a B) in pension and other retirement benefits that the city cannot afford to pay – something which is putting its retirees, more than anyone else, in harm’s way. I acknowledge that comparing municipal pension problems with corporate, ERISA-governed retirement plans is a little bit of comparing apples to oranges, but the differences between the two scenarios can’t override the key similarity and take away: that ignorance by an employer of its ability long term to continue to make pension promises without regard to a future ability to pay is not bliss; that it is employees who suffer in the long run if companies don’t make changes necessary to create sustainable retirement plans rather than blindly promising pensions forevermore to employees; and that it is entirely appropriate for employers to find that elusive middle ground between contributing to retirement security for employees and the risk of taking on future obligations that the employer can’t promise it can meet, such as guaranteeing pensions.
 

There is a fascinating story in today’s Wall Street Journal, about First Data Corp. abandoning the practice of making cash contributions to employee 401(k) accounts, as part of cost cutting clearly designed to make the company more profitable (or at least profitable enough) to hold an IPO, which would allow an exit for the leveraged buyout group that had acquired First Data but has so far failed to improve the company’s prospects. As the article explains, First Data is instead going to make stock awards to all employees, but apparently outside of the retirement plan format. As best as one can tell from the article, the stock grants to employees won’t be made as part of an ESOP or some other type of retirement plan account, although the article is not entirely clear on this point.

We have seen for years the abandonment of pensions in favor of 401(k)s and similar plans that remove long term funding and investment risks from the sponsor/employer, and transfer those obligations and risks to employees. That is old news. What is new, however, and both interesting and troubling about the First Data story, is that it takes that transitioning of retirement risk from a company to its employees one step further, by replacing the cash contribution by the plan sponsor with the entirely speculative and risky grant of private stock, for which there is not even a current public market. In so doing, First Data has gone one step beyond simply the transitioning of employee retirement risk to employees by means of 401(k) plans, by removing the certainty – and cost to the company – of cash contributions in favor of paper awards that do not increase the employees’ current retirement assets. There are multiple problems with this step, viewed from the prism of retirement policy. First, we have all long counseled employees against excessive reliance on company stock in retirement planning, and in fact, it is a common refrain in defending against ERISA stock drop cases that employees in many cases could have and should have diversified out of company stock, but did not do so. This change by First Data effectively forces employees to have less cash to use for diverse investments in their 401(k) plans in favor of holding, apparently outside of the retirement plan, a concentrated amount of company stock. Second, and related to this, the company is reducing the cash in employee 401(k) accounts at the same time that the market is doing well as a whole (generally speaking), reducing the employees’ ability to invest broadly and keep up with the market; instead, they get company stock which, according to the article, is becoming less and less valuable each day.

A related and to me, fascinating, note on this is the fact that the stock grants, as noted above, may not be made as part of an ESOP or otherwise within the context and confines of an ERISA governed plan. If this is so, then the plan sponsors will avoid the obligations and potential liabilities that come with fiduciary status, when it comes to the granting of the stock and company decisions that impact the value of the employees’ stock holdings down the line. This is a very interesting and subtle point that should not be overlooked, particularly since the company is basically a creature, at this point, of the leveraged buyout industry and the real purpose of the changes in question are clearly directed at future transactions that would allow the current major investors to cash out. If they keep the employee stock obligations out of any ERISA governed plan, including an ESOP, the fiduciary obligations imposed by ERISA will not be implicated in or by any future transactions designed to unwind the stakes of current ownership. If those stock grants are instead placed in ERISA protected plans, in contrast, ERISA’s fiduciary obligations will serve as a check on any future complex transaction involving the company’s stock that might negatively impact the value of stock held by employees, in circumstances where those same events might positively impact those with control over the company and the majority of its stock. Those of you who recall the tortured history of theChicago Tribune’s ESOP and its role in a complex corporate transaction will recognize this point, and the risks and benefits incumbent in the decision to keep, or not, the stock grants within an ERISA governed plan.
 

One of the interesting developments that caught my eye recently, and likely many of yours as well, was the filing of class action complaints challenging whether certain plans were, in fact, church plans for purposes of ERISA and thus, exempt from many of its requirements. This excellent paper on this development, by Wilber Boies and a cast of thousands at McDermott Will, delves into this issue with great insight. It is worth a read in and of itself if you want to understand both this development, and the legal arguments being pressed to challenge the status as church plans of the defendants in those cases.

Separately, though, I wanted to comment on a few points that the article focuses on, and how it relates to some of the thoughts on ERISA litigation and class action litigation that I have developed in posts over the years. First, I have discussed over the years that ERISA, to a large extent, is based on a private attorney general approach to plan discipline. There are limits to the resources of the DOL when it comes to enforcing the fiduciary obligations, funding requirements, prohibited transaction rules, and other aspects of benefit plans. ERISA, primarily through its breach of fiduciary duty provisions and the availability of the class action mechanism, relies on private enforcement actions to enforce those rules and obligations in the many, many cases where problems with a plan arguably exist, but for one reason or another are not resolved by action by the designated regulator. No matter what one thinks of class action plaintiffs’ firms, the reality is that both the threat of breach of fiduciary duty class actions and the changes imposed by suits that are successful play a significant role in maintaining the standards and integrity of benefit and pension plans. I have often written that most plan sponsors and fiduciaries, in my experience, want to run a sound and successful plan. They don’t, however, always succeed, and there are enough exceptions to this rule to demonstrate that at least some plans aren’t run with that goal in mind. The threat of breach of fiduciary duty class actions serves as a kind of Damocles’ sword hanging over the heads of all fiduciaries – both those who are trying to do a good job and those who have other motivations – leading, in my opinion, to better run plans in the cases of those sponsors who mean well and less egregiously run plans in the cases of those sponsors who mean less well. Of course, successful class action cases alleging breach of fiduciary duty in instances where a plan truly is poorly run also have the effect of actually fixing, to one degree or another, problems in those plans.

Second, the article explains the theories being pressed by the class action bar in these cases, which can be summed up in a soundbite as: the regulators have given plans a free pass in this area for years; the plans in question should not rightly be considered church plans; and the courts should now actually look closely at this issue and narrow the scope of the exception for church plans. I am not sure how persuasive an argument this will be, given the decades of regulatory rulings the argument challenges. However, the argument itself is a perfect example of my first point, above, concerning the beneficial private attorney general role played in the system by the class action plaintiffs’ bar: here, they are testing whether the controlling standards for church plans are correct, and giving the courts an opportunity to address this in detail. Eventually, these cases and this argument will almost certainly end up in the appeals courts, giving rise to a body of modern, well-developed authority on the issue. In the end, this can only benefit everyone (even if it ends up being expensive for the particular plans who are sued and/or for their insurers); plan sponsors, participants, and their lawyers will have a much better sense at the end of the day of exactly where the borders of church plan status rightly rest. There is a perfect corollary for this in the run of employer stock drop class action cases prosecuted over the past several years, which resulted in a series of extensive, well-reasoned appeals court opinions discussing and adopting what has come to be known as the Moench presumption. If you think about it honestly, without a bone to pick dependent on which side of the “v” you normally sit, this was an important and beneficial development for ERISA plans, and not just for litigation, but also for designing and running benefit plans: we now know, but did not before, exactly the context in which holding employer stock in a falling market can and cannot give rise to fiduciary liability. This is a tremendous boon to anyone designing a plan going forward, or trying to advise a plan sponsor or fiduciary of its obligations with regard to employer stock holdings in an existing plan.
 

One of the more singularly interesting problems in ERISA litigation for anyone who, like me, greatly enjoys the complexities of civil procedure is the interplay of preemption (which, as we all know, is very broad under ERISA) and removal from state court to federal court. We all know that many plan participants would prefer to litigate disputes with plans under state laws rather than under ERISA, as such state causes of action may provide broader recoveries, easier burdens of proof, and the right to a jury; further, those same participants would, for various tactical reasons, prefer, if at all possible, to press their claims in state courts and not in federal courts. ERISA, and the body of jurisprudence that has built up around it, seeks to thwart these preferences by, first, broadly preempting state law claims that impact the duties imposed by or that exist under a plan, and, second, by allowing for removal to federal court of even purely state law claims if, in fact, they are really just ERISA claims in state law clothing; preemption is allowed under those circumstances by means of the doctrine of complete preemption.

But as participants and their lawyers often argue, there must be some limit on the scope of preemption and on the ability of defendants to remove purely state law claims and litigate them in federal court as ERISA claims (or else have them dismissed outright if the participant does not proceed with an alternative ERISA based cause of action). In many circuits, and under a fair reading of much of the case law on the issue, that limit may exist, but it resides far out there; few state law claims based on harms arising under or related to an ERISA plan will be deemed by courts to be so tangential to the plan as to avoid preemption and, where necessary, removal to federal court on the basis of the preempted status of the state law claim. However, the Sixth Circuit recently found that certain claims related to SERPs could fall outside those boundaries, and thus be neither preempted nor subject to removal to federal court. The Court found that the dispute over the SERPs concerned a decision to cancel them so as to smooth the sailing for a particular corporate acquisition, and the Court found that under those circumstances, the executives who were participants in the SERPs could prosecute a state law claim in state court, on the thesis that it does not affect the terms of the SERPs or the duties imposed by it. The Court found that the state law claims did not require interpreting the SERPs or applying duties owed under them, but only required reference to the SERPs for the specific purpose of determining the damages due the executives if the SERPs were, as alleged, canceled in violation of state law. The Sixth Circuit found that this reference to the SERPs to calculate the damages on the state law claim was not sufficient to invoke preemption to an extent needed to allow removal to the federal court on the basis of complete preemption. The decision is Gardner v. Heartland Industrial Partners, which is discussed in some detail in this recent article from Plansponsor.
 

I have written before, both in short form on this blog and long form for the Journal of Pension Benefits, on my view that it is not necessary to alter the regulatory definition of fiduciary to transform appraisers into fiduciaries. Simply put, there are so many parties who already bear the title of fiduciary and are therefore legally responsible for the impact on a plan of a deficient appraisal that transforming appraisers into fiduciaries is likely to do little more – when it comes to plan performance and governance – than create another party to name as a defendant in ERISA litigation, namely the plan’s appraisers. Moving the risk of fiduciary liability for a poor appraisal from the fiduciaries who run the plan – and selected the appraiser and accepted the appraiser’s findings – to the appraiser itself is unlikely to change the incentives and disincentives that impact the quality of a plan’s appraisal; it will simply move some of those incentives and disincentives from those who operate the plan to the appraisers they hire, or else will simply multiply those same incentives and disincentives so they are borne both by those who run a plan and by the appraisers they hire.

When it comes to the general opposition by the appraisal industry to such a change, however, I have to admit that I nonetheless have generally assumed it to be basically an act of economic self-interest: taking on fiduciary risk will increase potential liabilities and thus, at a minimum, the industry’s overall insurance and legal costs. Dr. Susan Mangiero, one of my favorite experts on business valuation, however, has published an excellent article explaining the complexity of appraising and valuing the holdings of pension plans, which illustrates another component to the industry’s opposition to turning appraisers into fiduciaries; the appraisal process for a particular plan can be particularly complex, with significant judgment calls. At the end of the day in any particular case, an appraiser, if a fiduciary to a plan and thus a defendant in ERISA litigation, may be found to have acted prudently in making those calls and thus not liable as a fiduciary under ERISA. However, that broad range of judgment calls leaves plenty of room for litigation over each of those calls, making it an expensive and long process for an appraiser to reach that point of exoneration. I am not certain that imposing fiduciary risk on each one of those calls by an appraiser is really likely to improve the analysis provided to plan fiduciaries – it seems to me it is more likely to simply create a “CYA” mentality when making appraisal calls, with one eye on the risks those calls pose down the road in a courtroom. I don’t see how creating that dynamic, rather than a dynamic that increases the accuracy and thoughtfulness of the information provided to those who operate a plan, is really likely to improve plan performance.
 

I can still remember the first hearing I argued at, close to twenty five years ago, in Massachusetts Superior Court, in the very quaint (realtor speak for old, but still) courthouse in Dedham – I can still see the dusty parking lot out back, the old wood banisters separating the lawyers from the public area, and the close quarters among the lawyers, clerks and judge that are typical of courthouses of that vintage. Sure, I remember the argument too, which I won – it was an insurance coverage dispute over whether a voluntary payments clause barred coverage of a settlement in a trade dress infringement dispute between two Boston area businesses.

But it is interesting to me that what I most remember of that day are the sights and smells, the sensations, and the like, of being in court that day (along with the fact that I won; like many lawyers, I suspect, I tend to forget the losses but remember the wins). Yet, what I remember most about the first time I appeared in court to argue an ERISA case, close to 20 years ago at this point, had nothing to do at all with any of those types of sensations: what I remember most is that the lawyer for one of my co-defendants, a young (though still senior to me at the time) partner at a major firm, showed up at the hearing with a trial bag full of ERISA treatises, which he then arranged on the table in front of him before his argument. Now I know most of those treatises, as I can look across my office at my bookshelf and see them sitting there, and many of them are very good, but for detailed research and analysis work; none of them are really suited to being flipped open for a quick, summary answer on a litigation question, such as the kind that might arise in a courtroom itself, or for a quick consult in the few minutes one has to respond quickly to a client’s e-mail.

For years, I have looked for the type of resource that would serve well in that role, and I have at least skimmed the marketing materials for most of the major ERISA works out there as part of my search, but I never found a real fit – until now. One of the many benefits of blogging is that, on occasion, I luck into receiving a review copy of a book on ERISA or insurance coverage, and this time around it was the ERISA Benefits Litigation Answer Book 2013, edited by Jenner & Block’s Craig Martin and Amanda Amert, that landed on my desk. Published by PLI, it truly fits that niche – the handy dandy quick answer guide to litigation issues that arise in ERISA cases. Now, I am not sure it is the right book for a neophyte ERISA litigator, in that it provides – deliberately so – summary answers to questions that arise in this area, and thus requires a certain level of experience and expertise on the part of the reader; without that background, a reader cannot place a short answer in context, and understand what further analysis is needed beyond the summary answer. However, for the experienced lawyer who needs a quick but clearly accurate answer under time pressure, or the general practitioner or in-house lawyer who needs a starting point before turning to an outside expert on the subject (for instance, to determine the nature and viability of a claim against the company and to form the necessary background to discuss the claim intelligently with outside counsel), I can think of no better book out there at the moment.

Interestingly – to me anyway, because I have never noticed it before – there are two separate book groupings in my office. Across the room, on a bookshelf that I have to get up from my desk to reach, are the major treatises, copies of the “Annual Review of Banking Law” that I edited in law school (so long ago that, believe it or not, we published it on a Wang word processing system), and author copies of journals in which my work has been published. Right behind me though, on a credenza for easy reach, are books that I refer to all the time, such as the state and federal rules of civil procedure, an excellent summary of the federal rules of evidence from a seminar I attended many years ago, and Randy Maniloff’s great handbook on General Liability Insurance Coverage (the last, I just noted, rife with sticky notes on multiple pages). I have already put Martin and Amert’s PLI book with them.
 

The equitable remedies prong of ERISA was, for many years, a place where theoretically good claims went to die: courts were wary of providing expansive recovery under it, and thus a plaintiff who could not fit a claim within the confines of the denial of benefits or breach of fiduciary duty causes of action under ERISA was unlikely to recover by relying on the equitable remedies prong, no matter how factually compelling the plaintiff’s case. As I explained in my recent article, “Looking Closely at Operational Competence: ERISA Litigation Moves Away from Doctrine and Towards a Careful Review of Plan Performance,” recent case law, including from the Supreme Court, has completely changed this dynamic, and made equitable relief a viable manner of targeting harms arising from ERISA governed plans when those harms could not support claims for denied benefits or for fiduciary breach.

A decision last week out of the United States District Court for the District of Rhode Island, Blue Cross & Blue Shield of Rhode Island v. Korsen, provides an outstanding roadmap for making out an equitable relief claim under ERISA in 2013, after the lay of the land for such claims was revamped by the Supreme Court in Amara. You can do worse – much worse – than to follow the judge’s framework to determine whether you have a viable equitable relief claim and, if so, the best way to present each element.

In addition, though, the Court touched on a fundamental issue in equitable relief litigation under ERISA, which has engendered some controversy over the years, namely, is the outcome of equitable relief claims under ERISA dependent solely on whether the precise elements of such claims as set forth in Supreme Court decisions exist, or can courts go beyond those and rely on the general and long standing principles of equity to decide such claims? In short, do such claims rise or fall only on whether the exact principles detailed in the Sereboff line of cases and Amara are met (such as the recovery is one allowed in the days of the divided bench, and a designated fund is being targeted)? Or can the court, even if these elements are satisfied, still reject such claims if needed to “do equity,” in the old vernacular – i.e., to be fair?

The Court in Korsen gives a compelling argument for the latter.

And finally, by the way, in the old – and I was hoping by now discarded – vernacular, a hat tip to @Jon Pincince for bringing the case to my attention.
 

There is much uproar at the moment over the possible expansion of fiduciary status to include appraisers, whose work includes valuing the assets held by the participants in ESOPs. Appraisers understandably do not want to assume that status, with its potential to turn them into defendants in ESOP breach of fiduciary duty litigation under ERISA; at a minimum, it opens them up to incurring defense costs (or the premium costs of insuring against that risk) from being named as a defendant. Personally, though, the risk seems to me to be overstated: appraisers will have to price that risk into their services, driving up the costs of operating an ESOP somewhat, but they are certainly not going to abandon the business, as some critics of this possible change have claimed. It’s a substantial business, providing appraisal services to ESOPs, and it is hard to imagine all the appraisers in America walking away from that work simply because of this risk, and the need to factor it into their pricing.

That said, however, I don’t believe it is necessary, or warranted, to expand the definition of fiduciary to capture appraisers of ESOP assets. I discussed this issue in depth in a presentation over a year ago to the New England Employee Benefits Council, as well as in a latter article in the Journal of Pension Benefits. Put simply, the structure of fiduciary responsibilities and liabilities that currently exists under ERISA is, in my view, sufficient to protect participants against problems with appraisals, and protecting participants from any such problems does not require turning appraisers into fiduciaries. I discussed this point, and my reasoning, in detail in this article.
 

Years ago, I worked with a client who liked to tell the story of having begun working with ERISA governed plans right after ERISA was enacted. He had been told by his bosses that there is this “new law,” and you are in charge of issues arising under it. That “new law,” of course, was ERISA. Little could he have known at that time that this “new law” would grow up, by force of preemption and the size of the benefits market, to control and govern an overwhelming slice of American life.

One of the stories I remember him telling me is about early attempts to determine whether something was or was not a governmental plan. Governmental plans, you may recall, are not subject to ERISA. Back then, as he told the story, he and others in the industry applied an “if it looks like a duck, walks like a duck and talks like a duck “ test, meaning if it looked and felt like the plan related to a governmental entity, than it was a governmental plan. It was as good a standard as any, as you have to remember that, at the time, the extensive body of case law that now exists concerning ERISA plans had yet to be created.

Well, now we know better, after years of court decisions concerning ERISA plans, including whether or not a plan constitutes a governmental plan. Mike Reilly, over at the Boom blog (I just like writing Boom blog, for some reason), has the latest word on the subject, and on how, today, we determine whether or not a plan is a governmental plan. Hint: it’s a lot different and more technical than seeing if it walks like a duck.
 

I don’t want to turn this into a sports law blog, or – heaven forbid – an NFL blog (heaven knows, there are more than enough of those), but the latest work of the Washington Post on player injuries was too good to ignore. I promise, after this one, I will go back to ERISA and insurance blogging. However, those of you who have read me for awhile on the real subjects of this blog know that I am a fan of data. You want to convince me of something, show me data, and your reasoning, sources and the methodology behind it; I have little use or interest in argument by anecdote.

In “Do no harm: Retired NFL players endure a lifetime of hurt,” their latest article on the NFL’s problem with seriously injured players, the Washington Post’s Sally Jenkins, Rick Maese and Scott Clement detail survey findings as to the post-career injuries and physical conditions of retired NFL players. You should read it – the findings should be enough to dissuade anyone from continuing to think that retired NFL players with serious health issues are the outliers, rather than the norm. I often think that the articulate, well-dressed, well-off, clearly not that injured retired players on ESPN’s pregame shows and the other network’s football shows leave us with the impression that they, and not the injured and complaining retired players, are representative of the population of retired players. The Post’s survey data should make clear that is not the case.

To me, the most interesting aspect of the story is the players’ refrain that they constantly felt it necessary to play while injured (and with injuries serious enough that most of the general population would be out on long term disability benefits if they suffered from them) out of fear they would lose their jobs otherwise. The reason for this, they consistently explain, is the fact that NFL contracts are not guaranteed, and thus, if they lose their roster spot, they lose their livelihood. The Post quotes one former player thusly: “If you don’t play, they don’t pay. You will get cut if you are not on the field. That is why we play through injuries: we have to feed our families.”

Frankly, the fear that ownership will terminate them if they are injured and can’t work sounds more like an issue from late nineteenth century mining in this country than from a modern workplace (if you have ever read J. Anthony Lukas’ “Big Trouble,” than you know what I am talking about; if you haven’t read it, you should). And its easily fixed – just make NFL contracts guaranteed, like they are in other major sports, and the fear of losing their paychecks that drives players to play while seriously injured disappears.

In the Post’s series of articles and in articles elsewhere on the subject, NFL representatives claim they are working to make the game safer and to better take care of players and retired players, but point out that it is slow work. The Post’s article includes a discussion of this point:

The league is also conducting an ongoing campaign to reform what executives say is a “culture” of playing through pain.“That culture has existed and it needs to change,” said NFL Executive Vice President Jeff Pash. “That is a big part of what Commissioner [Roger] Goodell is trying to do. We’re trying to move toward a player safety culture. It’s going to take time, but I think we’re making progress, seeing them being more honest about their injuries.”

Making contracts guaranteed can be done almost instantaneously, and would significantly alter the culture of “playing hurt.” The NFL often likes to hide behind the collective bargaining agreement (“CBA”) as a reason why certain things can or cannot be done: I have little doubt though, that even to the extent changing to guaranteed contracts might relate to the CBA, that the players would agree pretty much immediately to amend the CBA to allow them, or even better, to mandate them.

I will tell you one thing. If I was representing the retired players in any of the class actions being prosecuted against the league for safety related issues, the first thing I would do when the Commissioner or anyone else testified that they were working to improve the situation, is cross them on why, if that’s true and the jury should believe them on that, they still don’t have guaranteed contracts that would give players some security in deciding to sit out when injured.