This is interesting – it’s the story, in abbreviated form, of the Seventh Circuit breathing new life into an excessive fee class action case, by finding that there is a factual question of whether the fiduciaries properly evaluated their options and that the defendants cannot insulate themselves easily from their obligation to properly monitor and test fee levels. Its also an interesting case on the question of the fiduciaries’ obligations with regard to structuring an employer stock fund and on the effect of such choices on returns net of expenses. The case itself is George v Kraft Foods Global, and you can find the opinion itself here.

The case jumped out at me for three reasons. The first is that it runs counter to the assumption, expressed in many quarters, that the Seventh Circuit’s prior and highly publicized ruling in Hecker created a significant barrier, and possibly spelled the death knell, for claims built around excessive fees and costs for plan investment options. Many, including me, thought the Seventh Circuit went too far in that regard at that time, and that excessive fee claims needed to be evaluated on the micro-level of the actual facts of the fiduciary’s conduct to decide whether a claim was viable, which was not the approach taken in Hecker. This latest case out of the Seventh Circuit seems to move in that direction, as it is clearly a fact specific investigation of the issue, one that found that the plaintiffs were free to make out such a case on the actual facts of the fiduciaries’ conduct.

The second is that this ruling thereby fit perfectly with the thesis of my article on excessive fee claims after Hecker, referenced here, which posited that subsequent judicial and regulatory developments would move the case law away from the approach of the court in Hecker and toward the approach taken in this most recent Seventh Circuit case. Time seems to be bearing out my forecast.

The third is the nature of this claim involving breach of fiduciary duty involving employer stock holdings. We all know that the traditional form for such claims is the stock drop case, in which the complaint is that the plan should not have been holding employer stock which then dropped significantly in value. In many jurisdictions, this is no longer a promising approach (although not in all, and for good reason, an issue for another day). Here, however, we see a revamping of the traditional approach to such claims, one that makes the stock holdings aspect of an investment plan a possibly significant basis for a breach of fiduciary duty claim under ERISA. Those plaintiffs’ class action lawyers – what will they think of next?
 

I thought I would pass along that my article on the law of excessive fee claims under ERISA is coming out this week in the Spring 2011 edition of the Journal of Pension Benefits. Titled “Retreat from the High Water Mark: Breach of Fiduciary Duty Claims Involving Excessive Fees After Tibble v. Edison International,” the article explores the interplay of the Seventh Circuit’s reasoning in Hecker (a case I have discussed often on this blog), the detailed fact finding of the trial judge in Tibble, and the regulatory changes related to fees and fiduciary status being enacted by the DOL. The article’s takeaway – since as many of you already know, I tend to think that legal writing that doesn’t tie things up with a lesson or a conclusion that will help practitioners or clients is wasted ink – concerns how to structure plans to reduce potential liability in light of these developments.

Here is a link to the abstract for the article, which will also give you the full cite if you want to track it down.
 

Funny, this chart from Bloomberg on the top rated 401(k) plans in the country, taken from the BrightScope data. When I first discovered BrightScope’s beta site and blogged on it, I was struck by the fact that if you want a good retirement, you should go to work for the Saudi Arabian oil company. This chart highlights that this advice, cheap and useless though it is, is still sound. But what’s not a throwaway comment about this chart is this: take a look a this list of the best 401(k) plans, and then look at the companies. It’s a cross sample of some of the most successful companies in America. So what comes first? Does the success breed large account balances? Or do employees who feel the company has their back on benefit plans, such as 401(k) plans, build a better company? My gut instinct from a lifetime of work and a professional career working on benefit and plan disputes is that the answer to both is yes, in that it is a self-reinforcing cycle. Properly treated employees build a better and wealthier company, which in turns leads to larger account balances in 401(k) plans (because of employer matching, because employees have more income to invest, and because employees think they will be there long enough for it to be a worthwhile undertaking), which in turn leads to more highly motivated employees, which in turn leads to a more successful company, which in turn . . . Well, you get the picture.

One underlying theme of much commentary about 401(k) plans is the idea that their replacement of pensions as the primary retirement vehicle for most private sector workers was not intended, and is the walking, talking example of the law of unintended consequences. Seen as it was in its origin myth – as a supplemental retirement investment vehicle – its flaws become less significant; for instance, questions of the appropriate levels of fees, or whether and under what circumstances to include employer stock, are less important when the risks of reduced return from those issues impact not the participant’s primary retirement investment, but rather a supplement to it. In some ways, that is the revolution of BrightScope. I have spoken with lawyers and industry people who quibble (and sometimes outright quarrel) with its math, but the reality is that, regardless, it is the first public forum (that I know of, anyway) to really treat 401(k)s as what they truly are: the primary retirement vehicle for a vast swath of the public. Viewed in that light, every piece of information that impacts or reduces performance, which BrightScope tries to capture and communicate to the participants, is of the utmost importance, something that would not be the case if 401(k)s played a less central role in employee retirement planning.

I was thinking of this today because of two stories on issues involving the use of ESOPs and 401(k) plans for purposes other than retirement income accumulation; in both cases, for the more traditional purpose – in my mind anyway – of motivating employees and managing tax exposures. As tools for these purposes, they have more value and less risk than they do as primary retirement vehicles. Both though are subject to distortion depending on the nature of the management of them: the ESOP by misuse, as I have written before, as a tempting tool for corporate transactions and the 401(k) by mismanagement of its investment selection and cost. Each risk is countered, or supposed to be, by the fiduciary obligations of those operating the plans, and at heart this is what the Department of Labor initiatives to expand the scope of fiduciaries is targeted at: making sure that all those who play a management or similar key role in the operation of these types of plans become fiduciaries and are subject to the discipline imposed by that status, in terms of potential liability exposure, behavioral demands and expectations, and litigation risks.
 

I have mentioned to people in the past that I am reasonably confident that I am the only author of legal information who has managed to link Walker Percy, denied benefit claims and ERISA in the same publication, which I did here in this post. I think that’s a pretty good stupid human trick myself. Adam Pozek’s linking of Warren Zevon, Werewolves of London, 401(k) plans and the 404(c) defense, although a little less obscure in its references, is pretty good too. It also has the benefit – pun intended – of being accurate and informative, and a nice little walk through the realities of the 404(c) defense, all at the same time.

Well, geez, I am embarrassed by the awkward silence in this space over the past couple of weeks. I was out of the country on business for a bit, and digging out ever since. Not that I ever lost sight of the ball, though, as I kept jotting down stories and developments that I wanted to pass along in a blog post. I am going to do that right now, clearing my desk of two of them.

In the first one, I had wanted to pass along this excellent and thought provoking post from Adam Pozek’s Pozek on Pensions, in which he discusses the regulatory changes being developed by the Department of Labor related to who is a fiduciary and what information has to be disclosed to and by fiduciaries. Adam makes the point that what should not be lost in these developments, and in the controversies the changes engender – see here, for instance – is that they do not change the actual obligations of plan fiduciaries to act reasonably and conduct appropriate investigation; those obligations have always been there and continue to be there. The only thing that is changing is what information is available as part of that obligation and how it may impact a fiduciary’s compliance with that obligation. I have discussed before that the disclosure of further information through this regulatory structure will almost certainly shift the nature of fiduciary liability and litigation, and affect how such claims are structured and how they are defended. They don’t, however, change the fundamental, underlying legal obligation of fiduciaries, a point Adam drives home in his post and which, perhaps implicitly, he is reminding us of as we get lost in the details of these regulatory changes.

The second item I had wanted to highlight was this blog, by John Lowell of Cassidy Retirement Group, titled – in a walking, talking exemplar of transparency – Benefits and Compensation with John Lowell. John’s experience shines through in his posts, which are detailed, thought provoking and frankly, compared to much of what one finds on blogs, highly original. For my purposes, and for any of the rest of us waiting for the Supreme Court to rule in Amara, I particularly liked his real world discussion of the problem of misleading and inaccurate summary plan descriptions, which you can find here.
 

Why do I blog? For the swag, of course. Well, no, not really, but I did just receive a review copy of Randy Maniloff and Jeffrey Stempel’s new General Liability Insurance Coverage deskbook, and it is tremendous. The book bears the subtitle “Key Issues in Every State,” and that phrase on the book’s cover is a perfect example of truth in advertising. The authors take the primary key issues in handling general liability claims, from the beginning (whether there is a duty to defend) to the end (how should recovery from the insured be allocated among multiple insurers) and provide a detailed synopsis of the law, with citations to key authority, on each issue in every state. Although that sounds like a recipe for a dense, possibly impenetrable text, here at least, in these authors’ hands, it is not, which should come as no surprise to anyone who has read any of Randy’s annual reviews of a preceding year’s top insurance coverage decisions. The book is instead, if such a thing is possible in this context, a breezy read.

Substantively, I am more and more impressed each time I turn to it. In the first 24 hours it was on my desk, I referenced it as a starting point for research into the issues in two or three different cases. For someone like me and most other experienced insurance coverage practitioners, who are already more than conversant in the broad themes of insurance law, the devil is in the details on a daily basis; we spot the issues right off the bat, and then need to ascertain how a particular state’s law handles those issues. Randy and Jeffrey’s book provides a ready starting point for research into a particular state’s law, and in many cases, an answer right off the bat to how a particular state handles certain issues, such as whether an insurer can obtain reimbursement of defense costs or how that state determines the number of occurrences under a general liability policy.

For anyone who deals with insurance claims issues on a daily basis, whether as a coverage lawyer or a claims professional, I can’t recommend it highly enough. Insurance coverage, as a practice area, is such a research intensive activity that anything that reduces the time needed to research and answer a question makes the practice more fun and saves clients money, all at the same time. This book does that.

Now if you don’t write a blog, you can’t count on swag to get a copy, but you can get it here.

Alert reader Tom Obara of Cassidy Retirement Group here in Massachusetts – or as I have taken to calling it during this perpetually snowy winter, East Dakota – passed along to me an article on behavioral finance in January’s issue of PlanSponsor in which I am quoted on the need for plan sponsors to adequately educate and inform plan participants about investment options and the risks they pose. You can find the article, called “Misbehavioral Finance,” here, and this is what I had to say on the matter:

Not delivering a reality check: Some of the wave of participant lawsuits since the 2008 crash could have been prevented if sponsors had delivered the message more clearly throughout to DC participants that they bear ultimate responsibility for their retirement security, believes Stephen Rosenberg, a Boston-based Partner at law firm The McCormack Firm, LLC, who works primarily with employers. “There are some lawsuits that suggest they do not want to rock the boat in telling people who are already concerned about their declining house value anything else that could worry them,” he says.

Employers should have been delivering that reality check all along, Rosenberg thinks. “There is little doubt that years and years of significant asset growth meant that many people did not pay attention to the risks and the fees. It has left people with very unrealistic beliefs and expectations,” he says. “I do not think that they were educated enough in advance. It is easier for plan sponsors, as well as for their vendors, to not really point out the risks or exposures and just let everybody be happy.” Employees need to get the clear message that “you cannot just rely on the company to get you there,” he says of retirement security. They need to know, he says, that a 401(k) “is something different from what your parents had, or what you wish you had.”

Now lets be clear. No amount of information, education and disclosure is going to insulate a plan against class actions if there is a problem in a plan that the class action bar thinks can be targeted (and let’s make sure we are fair: sometimes the class action bar is right and a plan does have legitimate problems that call for class wide relief). They will always be able to find some plan participants who are unhappy enough to serve as class representatives, no matter how much information the plan sponsor had imparted to those individuals. But it is my view and my experience that many individual complaints and individual participant lawsuits can be avoided by educating participants properly about their investments; many suits arise because participants feel blindsided and misled, and that is a dynamic that disclosure and education can defuse. Beyond that, there is little doubt in my mind that an educated workforce that, even when 401(k) balances decline, is knowledgeable enough to understand that risk and even to have foreseen that possibility, is a happier workforce, and one that suffers less damage to its morale in a downturn. Isn’t that a good enough reason right there to expand disclosure and education to plan participants?

Here is a terrific article on the lessons about directors and officers insurance that should be taken from a series of rulings that eventually ended coverage for the Stanford Financial executives. I have said many times that because the scope of D & O insurance is so dependent on the scope of the exclusions, it is important to analyze and understand them when the policy is being acquired, and not wait until after a claim is made, when it may well be too late. That is, in essence, what happened to these executives; as the authors of the article point out, had they sought narrower exclusionary language when they acquired the policy, they might well have avoided the rulings against them that ended their insurance coverage. Of more precise importance, I have discussed in prior posts the significance of exclusions that apply if a certain conduct “in fact” happened; the article addresses the meaning of this language in depth, and contrasts it to other wording that, if used instead, would narrow the scope of the exclusion and, by extension, expand the scope of the coverage.

Ouch. Here’s the story of a payroll company that overpaid salary for years to an employee of its client company, because that employee was authorized to provide the payroll company with payroll information and direct it to issue payments; according to the case, she requested additional payments to herself and the payroll company made those payments. Who bears the loss here, the client company or the payroll company it hired? The former, not the latter, because the contract between the client and the payroll company could most fairly be interpreted as assigning the risk in that manner. Here is the opinion, and blogger Stanley Baum down in New York has a detailed review of the case here.

Anyone, like me, who has represented third party administrators hired by plan sponsors has seen the outline of this problem before, although often under less sinister circumstances; disputes in this relationship usually arise out of performance issues by the third party administrator relating to its operation of a benefit plan, followed by litigation over who is responsible and to what degree for those problems. Inevitably, as in the case of this payroll administrator, the linchpin of the dispute becomes the terms of the contract between the parties, and often those contracts are written in ways that protect the third party administrator from, or strongly limit its liability for, losses from its operation of the plan. As I have argued in court in the past when speaking on behalf of a third party administrator in that relationship, if the sponsor wanted different performance obligations or stronger remedies for performance failings, it should have written them into the contract in the first place. That is the story here, as well: any third party administrator contract requires looking a little bit into the future and guessing at the potential problems that may occur down the road, and allocating responsibility for them in the contract before they occur. Sure, its easier said than done, but that should be part of what a plan sponsor is paying for when it hires an attorney to deal with these types of contracts.