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.
 

Not unexpectedly, the Second Circuit has just adopted the Moench presumption, in this ruling here and this one here involving stock drop cases. For those with less time on your hands, here is an excellent news media summary of these stock drop rulings out of the Second Circuit yesterday. I have long posited that, given the trend in the case law, such an adoption of this approach by the Second Circuit would essentially spell the death knell for this theory of liability; I have essentially always been of the view that, should the Second Circuit apply the Moench presumption approach to these types of cases, the stock drop theory vanishes. It’s a strange legal structure, in a way, that an area of plan management involving vast sums of employee wealth can essentially be subject to no court oversight whatsoever, even to the minimal extent of the actions getting past the motion stage and into a court review of whether, on the actual facts, the fiduciaries’ conduct was prudent, simply because the company wasn’t on the precipice of outright collapse (which is the layman’s language version of what the Moench presumption requires for a stock drop case to get past the motion to dismiss stage). Now, this isn’t the same as saying the outcome at the end of the day in stock drop cases should be different, and that the fiduciaries shouldn’t walk under these fact patterns; it may well be a fair statement, given the ups and downs of the market and the potentially conflicting duties imposed by the securities laws, that the exact conduct made not actionable at the pleading stage by means of the Moench presumption should also pass muster on their actual facts after a review of whether the behavior was prudent under all the circumstances. But the Moench presumption is essentially a get out of jail free card that insulates the conduct without such review, simply on the basis that the plaintiffs cannot plead that the company was in near fatal financial distress; as a result, the propriety or lack thereof of holding employer stock in the stock drop scenario becomes free of any review – and of the healthy discipline imposed by the risk of court review – under pretty much all other circumstances. That’s a weird little outcome, really, if you think about it. It essentially consists of the courts making a decision to divest themselves of any jurisdiction to oversee the propriety of fiduciary conduct in the circumstances presented by stock drop cases.

So half the parties interpreting a possibly ambiguous plan term that is subject to discretionary review come out one way in reading the term, and the other two the other way. Who wins? Well, this is a trick question to some extent, because it doesn’t matter the numbers – all that matters is who gets the last say. This means, of course, that the side who wins that split is whichever one the appeals court agrees with.

And that is a roundabout lead in to this story here – from Michael Rigney’s excellent blog on Seventh Circuit appeals – that crossed my desk, about a Seventh Circuit opinion in September concerning the interpretation of the offset provisions in a pension plan where the plan terms invested the administrator with discretionary authority; in that case, the appellate bench concluded that the administrator’s interpretation was reasonable enough to pass muster and thus controlled the question.

More than the outcome, though, what I liked about the case was the panel’s explanation of the law of plan interpretation under ERISA, which was described as:

As a general rule, “federal common law principles of contract interpretation govern” the interpretation of ERISA plans. Swaback v. Am. Info. Techs. Corp., 103 F.3d 535, 540 (7th Cir. 1996). In this context, we have said that the fiduciary, in interpreting the plan, is not free, by virtue of its discretion, “to disregard unambiguous language in the plan.” Marrs v. Motorola, Inc., 577 F.3d 783, 786 (7th Cir. 2009); Swaback, 103 F.3d at 540. On the other hand, the fiduciary’s “use of interpretive tools to disambiguate ambiguous language is . . . entitled to deferential consideration by a reviewing court.” Marrs, 577 F.3d at 786 (emphasis omitted). In using such tools, the fiduciary may not, of course, rewrite or modify the plan. See Ross v. Indiana State Teacher’s Ass’n Ins. Trust, 159 F.3d 1001,12 No. 10-1900 1011 (7th Cir. 1998). “Interpretation and modification are different; the power to do the first does not imply the power to do the second.” Cozzie v. Metro. Life Ins. Co., 140 F.3d 1104, 1108 (7th Cir. 1998). Rather, the fiduciary must reach an interpretation compatible with the language and the structure of the plan document. Of course, “it is not our function to decide whether we would reach the same conclusion as the administrator.” Sisto v. Ameritech Sickness & Accident Disability Benefit Plan, 429 F.3d 698, 701 (7th Cir. 2005) (internal quotation marks omitted)

A handy synopsis of the issue, ready at a moment’s notice to be inserted in the beginning of a brief on the issue.

The case, by the way, is Frye v. Thompson Steel Company.
 

Well, I don’t know. Could privately run pension plans get away with this type of planning, or would they be running smack dab into breach of fiduciary duty lawsuits? I doubt a fiduciary could get away with pie in the sky projections intended to support current pension math, and I wouldn’t want to be the fiduciary who, like one of the people quoted in the article, accepted a consultant’s report justifying the math without having "looked under the hood of the analysis.” That’s a good quote to have waived in your face at a deposition or, worse yet, on the stand in a courtroom. On the other hand, the comments of one public pension fund executive could be used as the starting point for a seminar on good governance or what I call defensive plan building:

"It doesn’t matter what your assumptions are," said Laurie Hacking, executive director of the Teachers Retirement Association of Minnesota, which supports sticking with its 8.5% target return assumption. "It is what that market delivers that matters and how you react to that."

Ms. Hacking said Minnesota reacted to big investment losses after the financial crisis by cutting back on pension benefits and increasing contributions to the fund from employees and school districts. Those moves had a greater impact on the funding level of the teachers’ system, now a relatively healthy 78%, than lowering return assumptions, she said.

Comparing the two examples creates sort of a koan for fiduciaries of any plan: be the latter, not the former.
 

One of the first posts I wrote on this blog was about insurance coverage and the concept of the repeat player. The idea behind it was that insurers use the same counsel over and over again in coverage disputes, with the result that they put on the field – to use a sports metaphor – counsel who have a great deal of experience with the specific policy provisions at issue and a deep reservoir of knowledge about the effect of different fact patterns on the application of those provisions; the post pointed out that insureds are therefore not well served by using their general outside lawyers to represent them in such disputes, but are instead better served by finding their own “repeat players” to represent them in such cases, who can match the other side’s lawyers in expertise on and familiarity with the insurance policy types, terms and principles at issue.

The same holds true in ERISA litigation, particularly in the realm of denied benefit claims, whether they be short term or long term disability claims, health insurance, 401k issues, pension disputes, employee life insurance or other types of benefits made available by employers. Under ERISA, such benefits are governed by the terms of the plans under which they are provided, and litigation over any of them is subject to certain rules that are consistent across the field, such as those concerning the standard of review, the impact of conflicts of interest on the part of the administrator of the benefit plan, the contents of the administrative record, exhaustion of administrative remedies, regulations governing claims handling, and the scope of discovery. Most plan sponsors and administrators use “repeat players” to represent them on denial of benefit claims, to such an extent that some obtain discounted pricing in exchange for using the same counsel over and over again. This is actually beneficial to all involved on the defense side of such cases, as it creates a dynamic not just of cost savings for the plans, but also of the development of the level of expertise that comes through regular handling of the same type of cases, in this instance denied benefit claims under ERISA; this manner of developing expertise through repetition is exactly what is meant to be captured by the short-hand phrase “repeat player,” and this type of a consistent, mutually beneficial relationship between plans or administrators and their lawyers on such cases is how that expertise gets developed and brought to bear.

Interestingly, one should note that there is nothing unique to the defense side when it comes to the benefit of using a “repeat player” in denial of benefit claims under ERISA. You will have to trust me when I tell you that I routinely see the difference when, on the other side of the “v.” from me, is a lawyer who regularly represents plan participants in such disputes, as opposed to a general practice lawyer who represents plan participants only occasionally. This area of the law, like many others, is one where plaintiffs – who unlike the defendants may rarely be involved in such cases – also benefit from retaining a “repeat player.”

Mark Herrmann, the Chief Counsel for litigation at Aon, the insurance brokerage, wrote – whether he meant to or not – of this phenomenon in his piece the other day for Above the Law on “flotsam and jetsam,” in which he discussed the benefits to in-house legal departments of identifying areas of legal work that a company can bundle up and turn over, en masse, to an outside lawyer, who will handle the entire line of work for a fixed, and reduced, yearly retainer. I have over the years met with in-house benefit people and made the same suggestion with regard to a company’s handling of benefit claims, explaining that they are perfect for assigning to one counsel in exchange for a fixed fee payment structure for several reasons, including: (1) they are predictable in terms of time and cost investment, partly because discovery is limited; (2) the exposure to the company is narrow and predictable, because of the limited remedies available under ERISA and the ability to quantify the benefit amounts at issue under the relevant plan terms; and (3) the legal principles are consistent and should be well-known to defense counsel. This combination of predictability of the case with the expertise of the “repeat player” makes benefit claims perfectly suited to being bundled up in their totality and assigned to one outside counsel for a long period in exchange for cost savings to the company assigning the work.

Now as I noted, I have broached this idea over the years with plan sponsors and administrators, but I have to say I have never explained the concept quite as well as Mark Hermann did in his story. Writing as an in-house lawyer, he does a better job, I think, of isolating and describing the benefit to businesses in taking this approach than I have been able to do as an outside lawyer who can do no more than look through the window at the pressures, demands and needs of client companies. If you are in the benefits business, though, when you read his piece on it, think for a moment about how perfectly his description of “selling off” these types of cases fits the environment in which companies handle denial of benefit claims under their company benefit plans, and how well his idea would work for those types of claims.