Here is a neat little story that illustrates a bigger point. The article describes the resolution of a Department of Labor lawsuit brought against a small company to recover approximately $100,000 of participant holdings in a profit sharing plan that was diverted to other uses. Its own moral is clear – plan sponsors need to remember that plan assets belong to the plan, not them – but one that is too often forgotten in closely held, smaller companies. The bigger story, though, is the one this case illustrates. I have written before about the idea that ERISA is really a private attorney general statute, one that uses the awarding of legal fees to a prevailing participant as a means of allowing individual participants to retain counsel and enforce fiduciary discipline, even in cases where the amount at risk – such as the one hundred thousand at issue in the article – wouldn’t otherwise justify either a participant paying out of pocket to hire counsel or a lawyer taking the case on contingency. And yet, as this case shows, there are real breaches, real problems, and real losses in many plans that require legal redress; this remains true even when the amounts at issue aren’t particularly large, as the losses are still significant to the participants who incur them. The Department of Labor itself does not have the litigation resources, relative to the number of plans out there, to litigate each and every such case, and has to pick and choose. Allowing recovery of attorneys fees allows those participants whose cases are not pressed by the Department of Labor to still bring breach of fiduciary duty actions and thereby enforces a level of legal oversight on plan sponsors that might otherwise not exist. The ERISA structure is, to a certain extent, dependent upon – and assumes the existence of – such private enforcement actions; they impose a level of discipline on fiduciary conduct that would otherwise be absent.

Often when I chat with middle and upper level managers of mid-size and larger companies who have been assigned the job of administering their employer’s 401(k), ESOP or other benefit plans, I wonder if they are fully cognizant of the risks of personal liability they are taking on, and whether they have made sure that, through insurance or otherwise, they are protected against breach of fiduciary duty lawsuits. I particularly wonder this in those cases in which it appears that, while they are taking on the role, they are simultaneously not high enough up the corporate food chain to clearly have enough power to control for and avoid potential problems in the plans they have been charged with administering. This leaves those administrators in the situation of being exposed as fiduciaries to personal liability for problems in the plan, while not having enough power to avoid or cure the problems. As fiduciaries, of course, they risk personal liability for the plan’s losses, and, as this excellent piece here explains in detail, it’s a liability they will have trouble ever shaking, even if their employer goes belly up and leaves them sitting there holding the bag.

If you like an extended metaphor – and anyone who has read this blog for awhile knows I do – you should enjoy the Eleventh Circuit’s decision this week in Lanfear v Home Depot, adopting the Moench presumption and explaining exactly how it is to be applied in that circuit. What’s a better analogy than the hard working ant who stores food up for winter, to stand in for plan participants?

But the decision has other things going for it that are much more useful than a nice analogy. In particular, it nicely synthesizes the current state of the case law among those circuits that apply the presumption, and explains exactly how, under its synthesis, a stock drop case needs to be analyzed. In so doing, it also explains how to plead one if you want to get around the barriers that the Moench line of cases has created. Its as good and workable an explanation of a standard as any of the cases offer, and one that, frankly, seems to grant participants as fair a shot at recovering on a stock drop claim as they are likely to see. In my view, it nicely balances the conflicting interests and obligations that come into play when you allow, as occurs in stock drop cases, corporate insiders, securities laws and ERISA to intersect.
 

Well, as if there weren’t enough barriers to successfully prosecuting breach of fiduciary duty actions under ERISA, it turns out that you also can’t do it if the fiduciary’s errors consisted of wrongfully withholding benefits and turning them over to the IRS as tax payments. A participant, according to this opinion fresh off the presses of the Northern District of Illinois, can only remedy that mistake by getting the IRS to refund the money to them.

Defense lawyers are always fond at trial of having an empty seat – i.e., a missing potentially culpable party – to point to while saying my client didn’t do it, the person that should be sitting in that other chair at the defense table did. For those of you old enough to remember it, this defense theory is similar to, but not exactly the same as, the famous “Plan B” of noted fictional defense lawyers Donnell, Young, Dole, & Frutt, who somehow always managed to make that strategy work. For a plan fiduciary charged with fiduciary breaches or other errors related to tax aspects of a plan, pointing to the IRS and saying the participant’s only recourse is to seek a refund from the IRS is an extraordinarily potent variation of this defense. It also, as the decision in Mejia v Verizon et al appears to make clear, has a sound foundation in the federal code.
 

I spent some time thinking about whether to even post on this subject today, not wanting to feel on any level that I might be either rushing to judgment too quickly, or even worse, exploiting a tragedy in any way to make a point. But the suicide of retired football star Junior Seau perfectly captures a point that I have been thinking through for years, as the concussion/head trauma issues have played themselves out in the NFL and the media. Way back in 2006, I wrote about the ERISA case brought by former Pittsburgh Steeler great Mike Webster, and the Fourth Circuit’s decision to overturn, as arbitrary and capricious, the decision of the plan administrator for the NFL’s retirement plan to award Webster “the lesser of two possible disability benefit awards available under the league’s retirement plan,” due to brain damage he apparently suffered as a player. At the time, the Fourth Circuit reviewed extensive evidence in the administrative record that soundly refuted the administrator’s determination, and concluded that the administrator’s determination was not supported by substantial evidence.

I have often thought about the Webster case and that blog post in the interim, because in many ways the actions of the administrator, at least in the snapshot provided by the Court, seem so questionable that it makes one wonder how the administrator could have reached the conclusion that it did. The evidence from the administrative record, although debatable in terms of how to interpret it, focused on by the Court ran strongly towards attributing the player’s mental incapacity to head injuries from playing and to have begun close to, if not during, his playing days, thus qualifying him for the benefits he sought. Yet, even under those circumstances, the plan administrator ruled against him.

Among the possible explanations for how this came to pass is one – incompetence by the plan administrator – that I have always ruled out. The second is a corporate decision by the plan and its administrator to hold the line against brain damage type claims, which is at least certainly possible, even if doing so on a broad level instead of simply testing the facts of each particular claim against the plan terms would be a clear cut violation of fiduciary obligations.

The third possible explanation that has rattled around in my head for the last few years, as more and more research has been done linking diminished mental capacity to the repetitive head trauma suffered by football players, has come to me to seem the most likely explanation. This is the idea that a decade and more ago, when the events at issue in the Webster case occurred, there was scant, if any, medical literature soundly tying post-playing mental impairment to playing-derived head trauma. That is not the case anymore, as Andy Staple’s piece here on Junior Seau’s suicide discusses, but it was then. Plan administrators are often faced, in many contexts, with disability claims in which there is little if any significant medical research that would allow a firm conclusion on causation with regard to the disability at issue. In those instances, it can be very difficult for a plan administrator to make a call on whether or not the plan terms governing disability benefits are satisfied. When one compares what we know now about the effect of repetitive head trauma in football – a knowledge level that is still limited – with the state of the research a decade and more ago, you can easily imagine the NFL plan’s administrator being trapped by the conundrum, and being unwilling to credit the evidence of impairment submitted by Webster because the medical literature lacked support for linking it to his playing days in the manner needed to award him the benefits sought by him. This, to me, is both the most benign and the most likely explanation for the long ago ruling against Webster, which it took an appeal all the way to the Fourth Circuit to set right. The state of medical knowledge though, as Staple’s current piece and many others in the past few years have made clear, no longer allows for that same possible mistake by a plan administrator.
 

An astute and clearly knowledgeable reader passed along the point that the recent Sixth Circuit decision in Pfeil v. State Street Bank implicitly rejected the structural barriers to bringing class actions over fiduciary breaches that had been created by the developing case law in other circuits and which were discussed in my recent article, Structural Impediments to Breach of Fiduciary Duty Claims. The Pfeil decision, in allowing the putative class action to proceed past the stage of motion practice, refused to allow a stock drop type case to be ended, prior to the full development of the facts needed for the plaintiffs’ case, by the early application of lowered – or merely altered and fact specific, depending on your point of view – fiduciary standards with regard to employer stock holdings in defined contribution plans, in circumstances in which the plaintiffs could not have, at the outset of the case, full and complete information about the fiduciary breaches at issue. In this way, the Sixth Circuit, deliberately or not, mitigated the difficulties for plaintiffs, identified in my article, that are caused by the intersection of the Iqbal and Twombly pleading standards with the limited information available to plaintiffs at the outset of the case.

Pfeil is interesting for a couple of other reasons as well. One is that, in some ways, it is not a pure stock drop claim, because the plan documents imposed an obligation on the fiduciary to divest under certain circumstances, and the question is whether the fiduciaries failed to comply with those plan terms, rather than simply being the question of whether the holding of the stock under the stock drop scenario in and of itself constituted a breach. Second, I have always felt that the stock drop case law reflected an attempt, implicitly at least and perhaps even subconsciously, to balance the obligations of a company under the securities laws and under ERISA when it comes to stock held in employee plans; Pfeil, by focusing on the liability of an outside fiduciary, does not have that dynamic. Three, I have written before about the evolutionary nature of plaintiffs’ class actions in ERISA, with the idea being that, over time and in response to early defeats – such as Hecker or the stock drop cases – the plaintiffs’ bar will craft more sophisticated and carefully targeted theories of liability, that will eventually pass muster. You see that here in Pfeil, in which a more nuanced approach to a fiduciary breach involving employer stock is able to leap a hurdle – a motion to dismiss – that earlier, less nuanced stock drop theories were not able to clear.
 

Tussey v ABB, Inc., an excessive fee and revenue sharing case decided on the last day of March after a full trial before the United States District Court for the District of Western Missouri, is a remarkable decision, imposing extensive liability for acts involving the costs of and revenue sharing for a major plan, on the basis of extensive and detailed fact finding. It is hard to sum up in a quick blurb, and I recommend reading it in full. However, Mark Griffith of Asset Strategy Consultants has a terrific write up of its its import here on his blog, and here is a nice case summary from Dorsey. Beyond that, I would highlight a few key points about the case, viewed from 30,000 feet (the case itself is going to provide grist for tree level, finding by finding analysis for some time to come).

First, and to me most interesting, is that it confirms several conclusions about excessive fee litigation that I have come to in the past and written on extensively, including my insistence that the pro-defense ruling in Hecker was not the last word on this issue (despite the desire of much of the defense bar to believe it was) but was instead the high water mark in defending against such claims. I argued in the past, with regard to the Seventh Circuit’s handling of this issue in Hecker, that the entire issue of fees and revenue sharing would look different than it did to the court in Hecker once courts began hearing evidence and conducting trials on the issues in question, rather than making decisions on the papers, and this ruling bears that out. Like the trial court decision in Tibble, another key early excessive fee case to actually reach trial, the taking of evidence by the court on how fees were set and revenue shared has, in Tussey, resulted in a finding of fiduciary breach in this regard. Tibble and Tussey reflect a central truth: when courts start hearing evidence on what really went on, it becomes apparent to them that plan participants were not fully protected when it comes to the setting and sharing of fees in the design and operation of the plans in question. To deliberately mix my metaphors, what Tussey reflects is that when courts start looking under the hood of how plans are run, they are not liking how the sausage was made. They quickly (relatively speaking, of course, since it takes a long time to get a case from filing through to a trial verdict) conclude that the fees were set and shared in ways that did not properly benefit the participants.

This particular aspect of Tussey is very important. Tussey involved a major plan and a market making investment manager and recordkeeper, applying what the court characterized as standard industry practices in some instances. It is therefore unlikely that the scenarios found by the court in Tussey to be problematic are unique to that case. Other excessive fee and revenue sharing cases that, like Tibble and Tussey, get past motions to dismiss and into the merits are therefore likely to uncover factual scenarios and problems similar to those identified by the court in Tussey.

What also jumps out at me about Tussey is the extent to which revenue sharing, which has often been characterized in the professional literature as harmless in theory, is strongly depicted as problematic as practiced with regard to the particular plan and by the sponsor and service providers at issue. I would have real question, going forward as a plan sponsor, as to whether it makes any sense at all to continue with revenue sharing. Better to just pay a fixed cost, than to risk extensive liability for engaging in revenue sharing. Absent that choice, the treatment of revenue sharing in Tussey makes clear the need for extensive, on-going, documented analysis by the plan’s fiduciaries of whether the level of compensation generated by the revenue sharing was, and remained at all times, appropriate.

Other aspects of Tussey worth noting include these two. First, the opinion provides as good an explanation, in detail, of what revenue sharing really is and how it works as you are going to find. If you want to understand what all the hullabaloo about revenue sharing is about, this opinion is as good a place to start as any.

Second, the opinion contains a nice analysis of one of the most misunderstood issues in ERISA breach of fiduciary duty litigation, namely the six year statute of limitations and how it applies to the implementation of a fiduciary’s decisions related to plan investments. A decision to change a plan investment takes time, starting with an analysis of whether to do so, followed by the steps needed to effectuate it, and eventually resulting in the final steps needed to permanently conclude the change. As the court explained in Tussey, the statute of limitations in that scenario does not start to run – for any of the losses related to that event – until the last act in that run of conduct occurred.
 

As many of you know, I write a regular column on ERISA litigation for Aspen’s Journal of Pension Benefits, usually focused on whatever issue has my attention at the moment, although I try to balance that against what readers might have an interest in as well. When it came time to write my article for the publication’s winter issue, I was musing on what seemed to me to be a contradiction in a webinar I had listened in on, in which two prominent experts – who shall remain nameless to protect the innocent – discussed liabilities arising out of the operation of defined benefit and defined contribution plans. The contradiction resided in the fact that they discussed the range of problems and difficulties facing such plans, and the seemingly incongruous fact that, nonetheless, plan sponsors and fiduciaries were unlikely to face liability in a courtroom for their handling of such problems and difficulties. How could that be, I wondered? So I fleshed out an answer, which became this article, titled Structural Impediments to Breach of Fiduciary Duty Claims.

Although I didn’t spell it out explicitly, the article focuses on the barriers to prosecuting such claims as class actions, because that is the forum in which these issues and impediments really manifest themselves, although the issues apply as well to breach of fiduciary duty claims brought by individuals solely on their own behalf. I also used ESOP class actions as an exemplar, for several reasons, running from my own experience with litigation over them to my somewhat morbid fascination – as a lover of newspapers – with the legal morass that the ESOP of the Chicago Tribune (and other affiliated papers) tumbled into.
 

All I can think of is the cliche from Casablanca: I am shocked, shocked. The whole story, if you don’t want to use up one of your free articles on the NY Times website, is summed up on the front page of the website and the paper today:

Pensions Find Riskier Funds Fail to Pay Off
By JULIE CRESWELL
Pension funds that have increased expensive investments in private equity, real estate and hedge funds have been outperformed by stocks and bonds in the last five years.

Think about that. The article is about public pension plans, but probably only because of the size, relative ease of access to information, and public impact. What if we assume though, as is likely the case, that the story holds true across the private sector as well? What would that mean for the named fiduciaries of those plans, who were responsible for operating the pensions like a prudent expert? They would have clearly paid more than was necessary to invest a plan’s assets, depressing returns and reducing the asset base, raising real questions of whether they lived up to this standard.

If that is the case, did they take steps to protect themselves, and by extension the plan participants, from this outcome, at the time they pursued these investments? For instance, did they make sure that the advisors who put them into those investments were also fiduciaries? Did they have them sign on the bottom line expressly as fiduciaries? If not, did the advisors act as one or instead sufficiently insulate themselves from that status? If they are not fiduciaries, then they are unlikely to be the targets (or at least not successful targets) of breach of fiduciary duty suits over the effect on pension plans of these investment strategies, leaving only the named fiduciaries (and any others at the sponsor who acted as functional fiduciaries) as likely targets for such suits.

If the advisors were not fiduciaries, then what did the named fiduciaries do to protect themselves and the plan participants from this type of an outcome from the investment advice that they were being given? Did the management agreements they reached with the advisors who put them into these investments give the named fiduciaries a contractual ability to hold them accountable and, if so, are they going to do so? If the answer to either of those questions is no, the named fiduciaries may be the ones left holding the bag, as the ones responsible for the error, if breach of fiduciary duty lawsuits are pressed over this outcome.

You know it’s a funny thing, in a way. Investors always talk about an exit strategy – maybe fiduciaries, at the time of investment decisions, ought to be looking ahead as to what their exit strategy is going to be if the investment is a dud, and who is going to be responsible for that outcome. In my mind, if ERISA’s fiduciary duties themselves don’t impose an obligation of this nature on the named fiduciary (and perhaps they do), simple self-preservation alone ought to invoke that approach.
 

Sorry, I couldn’t resist that relatively timely, but already essentially clichéd headline. That said, its still an interesting way to consider the question of top-hat plans, and their status under ERISA. In particular, there is an open question in most jurisdictions with regard to whether a claim for benefits owed under such a plan proceeds in much the same way, and with the same protections for the participants, as does any other claim for benefits under any other type of ERISA governed plan (i.e., one that, unlike a top-hat plan, does not provide significant deferred compensation for senior executives). There is a significant argument that, as a general rule, the same obligations that ERISA and the Department of Labor impose on administrators in any other circumstance also apply in the circumstance of top-hat plans, with the only exception being areas where the statute or the Department’s regulations expressly exempt top-hat plans.

In this regard, I wanted to pass along this very good synopsis of a recent decision from the United States District Court for the District of Massachusetts in which the court took that exact approach. You can find the case itself here. When the decision was issued in December, I decided not to comment on it because I was litigating a similar top-hat plan dispute at that time, and felt the decision was a little too on-point to a case I was handling for me to comment on, for a number of reasons, running from not wanting to tip my hand to the other side to being a little too close to the issue to be completely objective on the ruling. That case has since resolved, so I thought I would now use the opportunity of the publication of the synopsis to pass it along.

There is also an important trap for the unwary lawyer reflected in the decision and the synopsis, which is the impact of ERISA rights and remedies, as well as procedures and procedural protections, on what are in essence employment agreements, if they are deemed ERISA governed top-hat plans. If a particular agreement might be a top-hat plan, it is important to recognize that at the outset and litigate any dispute over it accordingly. As the synopsis and the decision show, the application of ERISA based rules will dictate the outcome, and failing to know that a particular agreement is a top-hat plan and will be governed by such rules at the outset of handling a dispute is a recipe for disaster, or at least for losing; one has to be aware right at the outset that the dispute cannot be litigated as a traditional contract or employment dispute, but instead as an ERISA dispute. Otherwise, you are bringing a knife to a gunfight, to borrow a favored cliché.

The court’s decision itself, by the way, is a terrific road map through the current state of the law on benefit litigation under ERISA, particularly in the First Circuit, for both top-hat and regular old employee benefit claims.