All right, I am getting back in the saddle after a couple weeks off from blogging to recharge my batteries and tie up some key end of the year issues in a few cases. Not wanting to do too much heavy lifting on my first day back on the blog beat, I thought I would pass along, with minimal comment from me, this nice little piece on cash balance plans, and particularly how they might fit in alongside 401(k) plans in a particular business’ benefit plan structure. Anyone who follows the field knows that the rise of cash balance plans and their implementation, especially in instances where they have supplanted traditional pensions, has been rife with problems, both real, imagined, and litigatory (I may have just made up that last word, but still). Amara, of course, jumps to mind, but so do many other examples. The story I am passing along today, though, does a nice job of showing how, properly used, cash balance plans can be a force for good, not evil, to borrow a cliché.
 

I have written before and no doubt will again that one of the most interesting aspects of insurance coverage law is that all the flotsam and jetsam of American economic life eventually washes up on its shores; by this, I mean that whatever issues of liability are working their way through the court system will eventually show up again, sometimes in Alice in Wonderland looking glass fashion, in court as an insurance coverage dispute over whether there is coverage for that particular type of liability.

It happened again here, in this case involving whether insurers have to cover Bear Stearns’ consent decree and disgorgement related to securities trades, with the court, as explained in this article here, finding that there was no coverage. Two points jumped out at me about the story, which I thought I would mention, the first substantive and the second of more academic interest. Substantively, what is of interest is the court’s firm ruling against insurance coverage of the disgorgement of ill-gotten gains. This is a common issue under many types of insurance policies and under different provisions of the policies, from the insuring agreement to definitions of covered damages to exclusions, and the court comes down firmly and cleanly on the side that disgorgement is not covered, basing the finding in part on the public policy impact of allowing coverage of such a loss. Of less substantive interest is the fact that this is one of those coverage cases where, as noted above, the past repeats itself, only in a through the looking glass kind of way. I say this because the coverage case turned on the court and the parties going back to issues that the insured must have thought were resolved by its consent decree in the original action, in which it specifically avoided any finding of knowing misconduct, and litigating them anew, with different and more comprehensive findings, to decide coverage. The coverage litigation, in many ways, required litigating an issue that the insured was able to avoid having decided in the underlying case in which liability was imposed on it, and which the insured probably hoped or perhaps even thought was closed after the original case ended, only to have the issue examined yet again, in a new light, in the coverage case.
 

Amidst all the commentary and lawsuits over excessive fees – or allegedly excessive fees – on 401(k) investment options comes this article pointing out all that advisors do to earn that money, and raising questions, at least implicitly, as to whether courts and critics are asking the wrong question when they inquire into the reasonableness of fees; perhaps the better question, suggests the author, is whether the administration of the plan involves more than enough effort to justify the fees that are being paid. I like the article, and found it both entertaining and thought provoking.

I thought I would point out three things that the article brings to my mind. First, the author points out that determining whether fees are reasonable by comparison to industry benchmarks isn’t really a good test, because all it is showing you is that everyone of similar size and shape looks the same. As the author points out, if everyone in the industry suddenly raised their fees substantially, would all their fees still be reasonable? They would be if the relevant test was to benchmark against the industry as a whole, since their fees would all still be reasonable in comparison to each other. This harkens back to a problem with the Seventh Circuit’s analysis in Hecker, in which the Court indicated that fees in a particular plan are reasonable if they are consistent with the retail market as a whole. As the author of the commentary suggests, doesn’t this just beg the question, which is whether the fees charged across the overall market as a whole are reasonable? I know that the Seventh Circuit answered that question in Hecker by concluding that the omniscient power of the marketplace will guarantee that the answer to the question that is begged is yes, but I can’t say that the panel, in its ruling in that case, provided much empirical support for that assumption. The tribal myth of marketplace discipline, divorced from empirical support establishing that market forces actually force the fees to a level that would be found reasonable if the fees were independently analyzed without regard to the existence or not of those marketplace forces, really should not be enough support for the creation of a legal rule.

Second, the author’s point makes clear why that sort of benchmarking is not the test, or should not be, and that instead the proper test of the reasonableness of fees should be more of a two step test, of whether the fees are realistic in relation to the marketplace as a whole and whether the process of establishing the fees was prudent; this is essentially what occurred in Tibble, and circumvents the problem the author identifies with relying on benchmarking to determine whether or not fees are reasonable and, in turn, whether a fiduciary breach has occurred with regard to charging those fees.

And third and finally, the author brings us back to a fundamental issue when it comes to fees, and also to revenue sharing claims, which is that administration of a plan costs money, and someone has to pay for it. You can’t avoid it, and liability theories premised on excessive fees or on the existence of revenue sharing have to account for this fact; fees have to be paid somewhere in the system, and at a level that pays for the work needed to run a plan.
 

You know, this is actually of more personal interest to me than it is probably of importance to insureds, insurers and their lawyers with regard to determining whether a duty to defend exists in a given case. That is because the rule reflected in the case I am about to tell you about is sensible, intuitive, and consistent with the direction that the case law has been trending for a number of years, and thus should be of no surprise to anyone working in the area of insurance coverage law. As this neat article, with its neat four paragraph synopsis of the case’s key holding, explains, the United States District Court here in Boston has issued a ruling holding that, where the facts between those alleged in the complaint against the insured and those offered to the insurer by the insured differ, the insurer must investigate those competing versions of events before deciding whether to deny a defense to the insured on the ground that the complaint only alleges an excluded claim. There is a practice tip in there, which is that, when representing an insured served with a complaint whose allegations are both inaccurate and uncovered, counsel for the insured should provide the insurer with evidence showing a different factual scenario, one which could be covered and which would at least trigger a duty to defend. There is nothing new in this, and the law in Massachusetts has provided this opening to creative coverage counsel for insureds for decades, going back at least as far as the question of insurance coverage for a dispute between Vanessa Redgrave and the Boston Symphony Orchestra in the 1980s. That said, though, I would suggest that for many years, lawyers for insureds did not come close to taking full advantage of that opportunity and tactic. This District Court case, Manganella v. Evanston Insurance, makes clear both that they should, and that the better lawyers now have begun fully exploiting that avenue for obtaining coverage.

I say this is of personal interest because, many years ago, I represented a party in a major coverage case involving whether particular allegations of sexual misconduct of an uncovered type alleged in a complaint, which were in turn denied by the insured, could be covered and require a defense. Courts at that time focused solely or at least heavily on the alleged misconduct in making that decision, and, as a general rule, would not have considered the insured’s argument or evidence that the truth was different than that alleged in the complaint in deciding the question. Manganella makes clear the extent to which the law has evolved since that time, as it reflects a belief that the actual facts, if different than that alleged in the complaint, should be considered by the insurer and then by the court in determining whether there is a duty to defend in that type of a situation.
 

The Second Circuit these days is the gift that just keeps on giving when it comes to ERISA litigation, and for that matter to blogging about ERISA litigation. Following up hard on the heels of its thorough and legitimately interesting opinion on employer stock drop litigation in Citigroup and McGraw-Hill, the court issued this much more low profile opinion in Novella v. Westchester County. Interestingly, while the employer stock drop cases received full blown press coverage – and while my own view is they essentially spelled the death knell for straight forward stock drop claims as a viable cause of action – I would bet a doppio that the much less noticed Novella case will be the far more cited case as time goes on. The Novella decision offers far more of relevance to the day in, day out run of ERISA cases than does Citigroup/McGraw-Hill, with its focus on one big ticket item, namely the exposure of major corporations to employer stock drop claims, and as a result, it is likely to be turned to by ERISA litigators and courts far more often over the years ahead than are its more high profile cousins.

Novella provides a thorough review and analysis of at least three key, and often encountered, issues in ERISA litigation, particularly denial of benefit cases; more than that, it provides the imprimatur of one of the country’s leading benches to a particular analysis of these issues, which are otherwise subject to some conflicting, and sometime unsettled, interpretations in various circuits. Here they are, in no particular order.

In the first instance, the court provides a clear example of how to determine the reasonableness of a plan administrator’s analysis of its plan terms, and gives some guidance to the proper use of long-accepted canons of contract construction in this context.

In the second, the court addresses one of the more enigmatic issues in denial of benefit claims, which is the question of whether a plan can defend against litigation by relying on an argument not raised in the administrative process before the plan during which the benefits were denied. The court’s words on this point are telling:

It is apparent from the record, however, that the defendants did not use Section 3.16 to calculate Novella’s pension in the first instance. As the district court noted, the defendants identified this section as justification for their calculation of Novella’s pension “for the first time in litigation.” They did not cite this section of the Plan in their letters to Novella explaining the calculation of his benefits. Nor did they indicate to Novella at any point during his administrative appeals that their two-rate calculation relied in any way on section 3.16. To permit them to assert this newly coined rationale in litigation despite their failure to rely upon it during the internal Fund proceedings that preceded this lawsuit would subvert some of the chief purposes of ERISA exhaustion: to “ ‘uphold Congress'[s] desire that ERISA trustees be responsible for their actions, not the federal courts,’ “ and to “ ‘provide a sufficiently clear record of administrative action’ “ should litigation ensue. It would also clearly be inequitable.

This item is a huge point that should not be overlooked. Lawyers for participants will often argue – whether calling it waiver, estoppel, or something else – that a plan cannot shift its grounds during litigation from what the plan administrator relied upon during the processing of the participant’s claim for benefits, including the participant’s appeal to the plan of an initial denial of benefits. Here, in this language from the court, is a striking, easily lifted passage supporting that exact argument. There is a proactive lesson to be learned from this, beyond just the question of how the court’s ruling on this point affects cases in litigation, and that lesson is that plan administrators must be careful to raise in their denials all plan terms and grounds they believe justify a denial. This requires more work and more attention during the claim processing and appeal stage, including – if the amounts at stake warrant it – getting the benefits lawyers involved.

And finally, I am fond of the court’s analysis of the application of ERISA’s statute of limitations, more specifically the court’s analysis of when the statute of limitations starts running on a claim involving the miscalculation of benefits. The events underlying such a claim occur over a broad swath of time, during which benefits are calculated, granted, appealed, recalculated, denied, and the like. The court narrows down the point in that run of events at which the statute of limitations starts to run, finding that “the statute of limitations will start to run when there is enough information available to the [plaintiff] to assure that he knows or reasonably should know of the miscalculation.” This is a fact based inquiry, but at least it is a standard one on which all parties can focus in litigating such disputes.
 

Some fun news to pass on today, which is that this blog has been named a LexisNexis top law blog for the third year running. Although I have certainly never made a Shermanesque proclamation against doing so, I have never campaigned for votes in the various top blog competitions out there, which makes recognition of this nature even more satisfying. I write this blog for many reasons, not the least of which is my endless fascination with its subject matter, and I am pleased to see that others share that interest in the topics I write on here. My thanks to LexisNexis for the recognition, and to all of you who wrote in to LexisNexis with comments recommending my blog for this honor.

Here is a well-done article, with data spoon fed by BrightScope, on the issue of having large employer stock holdings in defined contribution plans. The article points out the extent to which some plans have very large employer stock holdings in them, as well as the efforts being taken by some employers to educate participants on the risk of failing to diversify out of the employer stock holdings. That said, though, the real answer to the question posed by the article’s title – how much company stock is too much – is that, at this point, anything more than a small exposure is too much, if you are a participant looking to protect yourself. After the Second Circuit’s recent ringing endorsement of the Moench presumption, fiduciaries face relatively minimal legal risk from – or potential financial liability for – any significant decline in the value of the company stock held by the participants, at least under ERISA. This puts the onus further on participants to protect themselves proactively, by minimizing employer stock holdings in their defined contribution plans through intelligent investment decisions. If they don’t, when – note I leave out the word if in this day and age – the stock drops precipitously, the participants will end up stuck with the loss, as the wide spread adoption of the Moench presumption means that courts are not going to let the plaintiffs’ bar ride in on a white horse to recoup those losses by means of breach of fiduciary duty lawsuits.

Here is a little inside baseball for a Monday afternoon. No, not this kind of inside baseball – this kind. Its not really an ERISA story, at least not in any direct sense, but it is important to ERISA litigation nonetheless, for reasons I will get to in a moment. What I am referring to is this decision out of the First Circuit on the use of experts in a case that one of my colleagues, Robert La Hait, won the other day. Although it involves a dispute over an accidental death and dismemberment policy, a coverage some people obtain through their employers, the decision isn’t about ERISA rights or remedies, but rather about the extent to which an expert can testify at trial under the federal rules in a manner that deviates from the expert’s written report. Now, you have to remember that the rules themselves seem to suggest that, if something isn’t in an expert’s report, it can’t be said at trial, and there are certainly some district court judges who make clear that, at least in general principle, that is how they see it (I am not going to name names to protect the innocent, namely me). But the First Circuit ruling holds that there is some room for an expert to deviate from the written report disclosed to the other side, within reason and subject to the limits laid out in the decision. Its certainly worth a read, under any circumstance, for anyone who litigates expert intensive cases in the federal courts.

Beyond that, though, there is one specific hook in this case, that links it right back to ERISA litigation. Many areas of ERISA litigation raise significant issues that have to be addressed through expert testimony, including, for instance, financial expertise in breach of fiduciary duty cases involving investment selections, fees, and the like. The scope, accuracy and admissibility of expert testimony can become key, even outcome determinative at times, in ERISA cases, particularly breach of fiduciary duty cases. Several years ago, for instance, I was representing a third-party administrator charged by a plan sponsor with poor performance, and the case didn’t turn my client’s way until the eve of trial, when the court began seriously entertaining our challenges to the admissibility of the expert testimony proffered by the plan sponsor; it was the undercutting of that testimony that effectively ended the case. I tell this story for a reason, which is this: while the legal arguments about fiduciary standards and the like are important, it is equally important to pay attention in an ERISA case to the mechanical, nuts and bolts details of litigation (such as the admissibility of expert testimony) that lies at the heart of all federal court litigation. You can win or lose an ERISA case by falling down on either one of those points. This First Circuit ruling is a good example of one of the litigation details that cannot be missed while arguing over the complicated legal issues inherent in an ERISA case.
 

I like this case, and these two stories about it here and here, for a number of reasons, not the least of which is their focus on operational competency in operating defined contribution plans and the fact that an occasional act of incompetence can be a pricey breach of fiduciary duty. The case is the story of a participant in a profit sharing plan who did not receive rollover forms in a timely manner, which was deemed a breach of fiduciary duty; perhaps of more import to plan sponsors and fiduciaries is the remedy, which was an award of the market losses in the account during the time the money sat, without being rolled over, while the plan participant waited for the necessary paperwork.

One of the reasons I like the case and the story is that it brings us back, in a world in which we spend a lot of time focused on and writing about major potential exposures like excessive fees and stock drops, to the more mundane day to day events that both impact participants and place fiduciaries at risk. It reminds us that it is the little things (although there was certainly nothing little about this case to the participant whose money was lost) that have to be done right in running a plan, or else fiduciaries and plan sponsors are placed at financial risk.

Another reason I like the case is that it is a perfect illustration of one of the mantras of this blog, which is that, in running a plan, an ounce of prevention is worth a pound of cure. Posts I have written along the way that emphasize this theme focus on the fact that investing time and money in perfecting compliance and operations pays off many times over in exposures that are avoided, in litigation costs that are never incurred, and in awards to participants that are never paid. This case is the touchstone of that idea. One relatively minor seeming operational failure cost the plan hundreds of thousands of dollars in damages and defense costs, all because of something that many would construe as nothing more than a minor oversight in compliance. For want of a horse my kingdom was lost; here, for want of some paperwork, hundreds of thousands of dollars were lost.
 

I have worked over the years, formally or informally, with a number of third party administrators, investment advisors, and similar service providers to plans, and have always preferred those who bring to the table a real understanding of, and ability to communicate, the substantive issues that impact plan operation and performance. If you think of it in the framework of my rubric of defensive plan building (which is how I view most everything in representing plan sponsors and fiduciaries), hiring advisors who fit that description goes far towards protecting plan sponsors and fiduciaries from liability, because fiduciaries satisfy – in essence – their duty of prudence when they hire the expertise that they lack internally. By way of contrast to hiring people who know what they are doing – i.e., who can walk the walk – rather than those who can just talk the talk, there is the contrary option of just hiring the guy who takes you golfing, which probably isn’t going to satisfy the duty of prudence.

I have always liked Mark Griffith’s work for this reason and he shares his expertise on his (relatively) new blog, Fiduciary Advisor. In the first two parts of a three part series, Mark gives a thorough and thoughtful insider’s perspective on the impact of the fee disclosure regulations. They are worth a read, particularly for those of you who are ready for something above and beyond simply descriptions of what the regulations themselves require to be done.