This is an interesting story on a number of levels. The article tells the tale of the Department of Labor suing the fiduciaries of an ESOP for failing to properly scrutinize and challenge an appraiser’s report valuing company stock, which was used to support the price paid by the plan for company stock. The article illustrates a significant problem in ESOPs that hold private company stock, which is the need to have appraisers set the price of the stock for purposes of the ESOP’s operations. This becomes a closed circle in valuation, consisting of the plan fiduciaries and the appraiser; no one else really plays a role or is involved. This absence of sunlight creates an environment in which, if the plan and/or the fiduciaries have a motivation to do so, the valuation of the ESOP holdings – i.e., of the portion of the company owned by the employees – can be distorted. Even in the absence of a motivation to do so, this closed process, in which there is no competing public market valuing the holdings or other outside check on the valuation, can result in a distorted valuation out of sheer error. The only check on that potential problem are the fiduciary obligations of the ESOP’s fiduciaries, and the enforcement tools, whether of the DOL or participants, provided by breach of fiduciary duty litigation, which allows participants and/or the DOL to pursue fiduciaries for problems that crop up in this process.

One of the most important takeaways from the article, as well as from my own experience in ESOP litigation, is the fact that the fiduciaries of ESOP plans should not assume they can simply obtain a valuation, treat it is correct, rely on it, and be safe from potential personal liability for a fiduciary breach. As the article points out, the fiduciaries, even when they rely on an appraisal report, can violate their fiduciary obligations, and be liable for doing so, if they do not properly analyze and vet the appraisal. ESOP plan fiduciaries should not simply receive an appraisal, use the numbers in it to run the plan, and put the report in a drawer; they need to analyze it, quiz the appraiser, and test its numbers. Only these later steps – and only when done well – will give those fiduciaries any real protection from breach of fiduciary duty litigation involving the valuation of ESOP assets.
 

An upcoming article of mine in the Journal of Pension Benefits argues that ERISA litigation and potential exposures are moving away from strict constructionism and technical legal arguments to fact based inquiries into potential harms to participants, and traces how we came to that place. This is a more significant change than it may appear to any of you who do not spend your time litigating ERISA disputes. This shift is going to make ERISA litigation more like other litigation, with a focus on factual development and discovery, and less on doctrinal argument. The Seventh Circuit’s recent ruling in George v. Junior Achievement of Central Indiana, Inc., discussed in this excellent synopsis here, is a perfect example of this phenomenon, with the Court rejecting a technical, statutory basis for rejecting a retaliation claim under ERISA in favor of a broader reading of the relevant statutory language, one that can allow for a fact-based inquiry into whether or not the participant actually was retaliated against. You can expect more and more of this kind of shift in the future, across the range of issues impacting ERISA plans, particularly with regard to retirement benefits, whether provided under defined contribution or instead defined benefit plans.

Here’s an interesting juxtaposition of two stories from over the weekend (if you consider a Monday morning story about football over the weekend to qualify temporally), the first this one from Saturday’s Wall Street Journal about the massive underfunding of state public employee pensions. If these were private pensions, the fiduciaries of the plans would have been under much more pressure to avoid falling into this level of a sinkhole. Forget the Department of Labor, the IRS and the PBGC, and focus just on the extent to which this scenario would be soundly characterized as a failure of fiduciary prudence, putting the fiduciaries at risk of personal liability. I have said it before and I am sure I will say it again after today, but the private attorney general nature of ERISA litigation, with its attendant potential personal liability of fiduciaries charged with making decisions for a plan, creates powerful incentives to not screw up as badly as those running public pension plans have over the past few years.

The real solution to this mess going forward (although it won’t clean up the massive underfunding to date)  will likely be moving public employees towards a defined contribution type system, rather than a defined benefit system, with a boost in pay that allows them to make appropriate retirement investments. This isn’t so much a solution targeted at a problem with the employees themselves, but rather at the tendency of the managers of these plans to overpromise pension benefits in contract negotiations and under-deliver by pushing the costs of those benefits off into the future as liabilities of the taxpayers. A move to a defined contribution system would push the costs into the present, requiring that the retirement costs be paid out during the employee’s work life.

And in this story about locked out NFL referees, who are fighting with the NFL over the league’s attempt to move them from a pension plan to a 401(k) plan, you see the underlying problem. As Peter King wrote in an on-line column today on Sports Illustrated:

Many of you think for 120 part-time officials to get an average of $38,250 per year in pension contributions is excessive. But the regular officials are simply trying to keep a benefit they’ve had for the last several years. The league contributed $5.3 million to officials’ pensions last year and propose to contribute $2 million this year; the cut, the league says, is in keeping with pension plans around the country going to a 401k pension plan, subject to the whims of the stock market, rather than guaranteeing retirees a fixed return on their investments. What’s $3 million to the NFL? That’s only partially the point. The league has made many full-time employees take the lesser pension, so how can they give part-timers a better deal?

But here’s the thing about the NFL’s complaint that they have moved their other, full-time employees to defined contribution plans, and that there is no reason for the referees to not be moved as well. The difference is that the referees, unlike most of the full-time NFL employees who have been transitioned to defined contribution plans – and indeed unlike almost every private sector employee who has been forced to give up a pension in this way – don’t need the job, have other economic resources beyond just their work for the employer (in this instance the NFL) seeking to end their pensions, and have a vigorous union. They, unlike the other NFL employees who have already suffered this fate, are in a position to fight that change, and they are and will do that. No employee in America has willingly accepted this change, but the referees are some of the few in a position to fight back against it. That is what makes them different than the other NFL employees who have given up their pensions, and why the league’s argument that the referees should be treated like all other NFL employees in this regard is pure sophistry; if the other employees had been in a position to fight it, like the referees, they would have done so too.

And this, oddly enough, circles us right back around to the problem with municipal and state pensions. These are highly unionized employees who have the political power to fight back against efforts to eliminate pensions, and as such are some of the few employees left in this country who both have a pension and have the ability to push back against changes to their pensions. This sentence could just as easily describe the NFL’s referees.

There are many lessons that one can draw from the juxtaposition of these two stories, and I will leave you free to draw your own. I already know what mine are.
 

Tidal Wave! Landslide! Look out below!

Pick out the metaphor of your choice, because Unum just got taken out behind the woodshed by the Ninth Circuit and spanked hard. Frankly, the Ninth Circuit’s opinion is a rout in favor of the participant, and participants in general. In many ways, the case presented a perfect storm for such an overwhelming opinion against a long term disability carrier. The case involved: a very sympathetic plaintiff who suffered a horrible, fluke injury that most readers could sympathize with; a lot of money; and a long term disability carrier with a documented history of claim disputes that the court could point to in further support of its ruling. I have to tell you that the facts painted by the Ninth Circuit in this opinion, related to both the claim and the carrier, are clearly of an outlier event, one not representative of the handling of most claims by most long term disability carriers, or of most long term disability carriers at all, for that matter. Twenty years of experience tell me most attorneys representing participants would, even if only off the record, agree with that assessment.

Frankly, despite Unum’s own documented history with regard to claims handling, cited by the Ninth Circuit to support its opinion, I am not sure that the depiction of the carrier in this opinion is even representative of that carrier at this point in time, but I don’t know enough to comment knowingly in that regard.

More importantly though, and moving away from the overflowing kettle of clichés with which I deliberately chose to fill the first couple paragraphs of this post, it would be a shame if courts, participants, companies and their lawyers allowed the unusual nature of the case to become the focus of their attention. This is because there are several key takeaways from this case, some specific to long term disability cases and others, even more important, to ERISA litigation in general.

With regard to these types of benefit claims, one should look closely at the Court’s handling of the structural conflict of interest issue. The Court not only points toward significant discovery and even a possible bench trial over this issue, but also demonstrates how to use the contents of an administrative record in support of proving the impact of such a conflict. This is all strong stuff, and for many who thought the Supreme Court’s structural conflict of interest ruling in Glenn opened up a Pandora’s box or put us all on a slippery slope towards ever expansive, and more expensive, benefits litigation, here is the proof for that hypothesis.

To me, the most worrisome aspect of the decision, and one that sponsors and companies need to pay very careful attention to in terms of planning their benefit operations and obtaining legal services, is the Court’s very broad application of the fiduciary exception to the attorney-client privilege. The issue here isn’t so much the conclusion that the exception makes internal legal discussions related to a claim subject to disclosure, but the line drawing it demonstrates with regard to when legal advice is, and is not, subject to disclosure. In short, plan administration – including benefit determination issues – are subject to disclosure and not protected. At the same time, though, what is protected is advice related to the protection of fiduciaries against personal liability, civil or criminal, when that advice is clearly distinct from the handling of claims under a plan and the administration of a plan.

Now the interesting thing about that distinction is that, as anyone who litigates breach of fiduciary duty or other ERISA cases knows, there is clearly some overlap between the two types of legal advice and there is not always a clear separation between the two. Certainly a fiduciary sued for misconduct is being sued because of events involving a claim and a plan’s administration, and thus legal advice rendered to the fiduciary falls somewhere in the middle of those two extremes. Further complicating this issue is a fact that the Ninth Circuit points out, which is that plan sponsors and plan fiduciaries often rely on the same lawyers and law firm for advice on all aspects of their plans, from formation to termination and everything in between, including the handling of claims and the representation of officers sued as fiduciaries.

In that latter instance of breach of fiduciary duty litigation against officers, it is crucially important for numerous reasons, as every litigator knows, to have a safe, secure and fully privileged attorney-client relationship. The standards enunciated by the Ninth Circuit, however, place that privilege at some risk in instances in which the same firm that has represented the plan in general is also representing fiduciaries or other company officers with regard to their personal potential liability. The best answer, for numerous reasons, to protecting those fiduciaries and officers, and maintaining the attorney-client privilege that is crucial to their protection, is going to be separating out the representation of such individuals from the routine legal work related to the plan’s formation, operation, administration and claims handling, and using independent, distinct counsel for the representation of such individuals. By segregating out and using separate, independent counsel for any issues related to their potential exposures, you make clear that the legal advice at issue involves privileged issues concerning the potential liability of officers and fiduciaries, which should still be privileged after the Ninth Circuit’s ruling, and is not intermingled with or otherwise part of the broad range of legal services typically required by a plan, which the Ninth Circuit’s opinion holds is likely to be subject to disclosure.

In short, the pragmatic solution is to continue to use one firm for the overall handling of a plan’s various needs, but separate, independent counsel for any and all needs – whether involving litigation or only the potential risk of litigation or exposure – of a plan’s fiduciaries or the officers of the company sponsoring the plan.

That’s my two cents for now. The case is Stephan v. Unum, and you can find it here.
 

Here is a great fact pattern that illustrates a number of recurring problems in ERISA litigation. In this case (Tocker v. Kraft Foods North America, Inc. Retirement Plan), decided by the Second Circuit last week, a mid-level benefits manager worked on accommodating the needs of a terminally ill plan participant, by working out an arrangement by which the participant could first receive long term disability benefits and then receive workforce reduction payments, rather than having to choose one or the other. Naturally, of course, since it turned into litigation, the arrangement did not work out without a hiccup, as it affected the participant’s pension credits. The participant sought to remedy that problem by use of a breach of fiduciary duty claim. The breach of fiduciary duty claim failed, however, because the benefits manager was found to have only been engaged in ministerial duties, and not fiduciary duties, and thus a breach of fiduciary duty action was not viable.

The case nicely illustrates and establishes the dividing line between fiduciary and non-fiduciary acts by executives of a company involved in running a company’s benefit plan, and the opinion’s first and best use will be in cases where that point must be established, particularly cases where one side or the other needs to prove that someone was, or was not, a fiduciary for purposes of a particular dispute. The decision is particularly on point with regard to the question of when does the provision of information about benefits render someone a fiduciary (the answer according to this decision is, effectively, never, although I am engaged in a purposeful bit of overstatement there).

However, it also illustrates a point I discuss in detail in an upcoming article in the Journal of Pension Benefits, which is the difficulty, under ERISA, of redressing problems in plan administration that are not merely denials of benefits clearly owed under a plan (and thus can be remedied under the denial of benefits prong of ERISA) and cannot be shown to involve fiduciary conduct. The dispute at issue in Tocker was exactly that type, and the plaintiff, despite having possibly been harmed by an operational misstep in implementing the agreed upon arrangement to coordinate the participant’s disability benefits and workforce reduction award, was unable to construct a viable cause of action under ERISA to address that problem and possible loss. The statute’s remedial rigidity had long been a problem in ERISA litigation over the years, impacting the ability of participants to address these types of problems. As I discuss in my upcoming article, this problem has likely been solved by the surcharge remedy recognized by the Supreme Court in its recent decision in Cigna v. Amara: the best approach open to the plaintiff in Tocker today would have been to structure his claim as one for equitable relief based on the surcharge remedy, rather than as a breach of fiduciary duty claim. When his case began, though, well before the decision in Amara, this option would not have been open to him.
 

Here’s a handy-dandy, one shot, easily referenced statement of the law in the First Circuit governing the statute of limitations applicable to LTD claims, and thus, by extension, all denial of benefit claims. It comes from the First Circuit’s decision last week in Santaliz-Rios v. Metropolitan Life Insurance:

Congress has not established a limitations period for ERISA claims brought pursuant to 29 U.S.C. § 1132(a)(1)(B). Island View Residential Treatment Ctr. v. Blue Cross Blue Shield of Mass., Inc., 548 F.3d 24, 27 (1st Cir.2008). Therefore, in adjudicating ERISA claims, federal courts borrow the most closely analogous statute of limitations in the forum state. Id. (citing Edes v. Verizon Commc’n, Inc., 417 F.3d 133, 138 (1st Cir.2005)). In Puerto Rico, the default limitations period applicable to contract claims is fifteen years. P.R. Laws Ann. tit. 31, § 5294; Caribbean Mushroom Co. v. Gov’t Dev. Bank for P.R., 102 F.3d 1307, 1312 (1st Cir.1996) (“[C]ontract claims that are covered by the Commerce Code but are not designated for special prescriptive treatment automatically fall under the Civil Code’s fifteen-year catch-all provision.”). This period has been applied to ERISA claims where no alternative limitations period was agreed upon by the parties. See Nazario Martinez v. Johnson & Johnson Baby Prods. ., Inc., 184 F.Supp.2d 157, 159–62 (D.P.R.2002).

However, where the contract at issue itself provides a shorter limitations period, that period will govern as long as it is reasonable. See Island View, 548 F.3d at 27 (applying a contractually agreed-upon limitations period to ERISA claim); Rios–Coriano v. Hartford Life & Accident Ins. Co., 642 F.Supp.2d 80, 83 (D.P.R.2009) (“Choosing which state statute to borrow is unnecessary, however, where the parties have contractually agreed upon a limitations period, provided the limitations period is reasonable.”)

The plaintiff was barred by the contractual limitations period, as the court gave little weight to the plaintiff’s attempts to argue around the contractual limitations period, which were basically limited to tolling arguments made, apparently, without significant factual support. Attacks on statute of limitations bars need to be well-grounded in factual support to have any traction in this circuit, in my view, and that clearly didn’t occur in this instance. I can picture fact patterns involving contractual limitations periods, however, that could more readily sustain an assault on their application.
 

I often think of the story of the cobbler’s kids having no shoes when I read about problems in a law firm’s benefit plan; lawyers spend their time fixing other people’s business problems, often to the exclusion of paying attention to their own business issues. Festering problems in a law firm’s 401(k) or other benefit plans fit this rubric well. This story, about a small Philadelphia law firm sued by the Department of Labor for operational problems in its 401(k) plan, illustrates the point nicely. As the story makes clear, the law firm does not seem to have engaged in any nefarious conduct, but to instead have dropped the ball on various technical, operational aspects of running a defined contribution plan, such as segregation of assets, timing of deposits, and the like. I have represented smaller and mid-sized law firms in disputes over their defined contribution plans, and I can tell you that, as this story likewise reflects, smaller law firms face the same burdens and problems in running profit sharing and 401(k) plans as do most other mid-sized and small businesses: the technicalities, the time demands and the complexity of doing it correctly are often beyond their internal capacities, and certainly outside of their core competencies. I have preached many times that the key to not getting sued, whether by the Department of Labor or plan participants, is an obsessive focus on compliance in plan operations; for many smaller businesses, as this story about the Philadelphia law firm reflects, this can only be accomplished by outsourcing to a competent vendor.

It is actually amazing, if you really step back and think it through, the amount of energy and analysis that goes into the question of determining who is, and who is not, a fiduciary under ERISA in various scenarios. There is a reason for this, though, and it is that acquiring – or being assigned – the status of fiduciary when the assets or operations of an ERISA governed plan are at issue can be highly fact dependent, and someone who is a fiduciary in one context may not be one in another. The Department of Labor has tried, through rulemaking, to simultaneously expand and make more consistent who is a fiduciary and when, a project I have expressed some doubts about both in speaking engagements and in a recent article in the Journal of Pension benefits. The issue becomes even more complicated, though, if and when you try to coordinate that issue under ERISA with similar, but not identical, obligations imposed by the SEC, a point addressed in detail in this article here, which emphasizes that the different roles and obligations of advisors and consultants operating in one sphere as opposed to those operating in the other argue against trying to create one consistent, overriding fiduciary definition applicable in both spheres. As a wit once noted, a foolish consistency is the hobgoblin of little minds, and I am not sure that isn’t the case here: rather than trying to shoehorn two different regulatory and legal regimes into one supposedly consistent fiduciary definition, it may make at least as much sense to allow different fiduciary standards to apply to different statutory bodies of law.

I used to be a fan, back in the old days when The New Republic was actually meaningful and influential, of its zeitgeist table, as it really did, in a glance, sum up what people were thinking and talking about, albeit in a humorous way. I couldn’t help but think of that this morning when I read Chris Carosa’s “FiduciaryNews Trending Topics for ERISA Plan Sponsors: Week Ending 7/27/12.” Its like a college survey course on one page of what everyone in the retirement industry either is or should be thinking about right now, from the costs of plans to fee disclosure to the coming tax wallop you are going to suffer to fix the public pension system to the misinformation, non-disclosure and outright confusion rampant in the knowledge base of plan sponsors and participants.

Looks like everybody knows a good story when they see it. Here’s a nice CCH piece on the same Sixth Circuit decision I discussed in my last post, concerning the fiduciary status of a depository institution under ERISA.

Interestingly, the whole deconstructionist/critical legal studies movement (I know I am dating myself by at least decades here by this reference; what’s next for me, a link to an article about Bruce Springsteen, or the 1980 Olympics?) had at its heart the idea that if you trace back a thought to its earliest formulation you can learn a lot about how the current conception came to be, and whether the current conception should be accepted at face value. I bring this up because I have done enough work on the fiduciary status of commercial banks to know the judicial history of the assumption – and of the case law to the effect – that they should not normally qualify as fiduciaries for purposes of ERISA. If you trace the history back far enough, you find that what is, in essence, a prevailing presumption against finding such entities to be functional fiduciaries isn’t all that well-founded.