Here is a nice article from Planadviser.com that sums up the recent opinion out of the Seventh Circuit that I discussed the other day in this post, on the propriety of certifying classes of plan participants in excessive fee cases. The article does a nice job of summing up the findings on that issue, if you don’t want to read the court’s fairly long, but well written analysis of the issue.

One of the impressions you may get from the article is that, in some manner, certifying a class in such a case may be difficult, but I don’t think that is a fair reading of the case or of the events in the litigation itself that gave rise to the ruling. If you think about it, there is little question that each plan participant’s account rises and falls on its own, independent of those of other plan participants to a certain extent, and that harm to one may not be harm to all. However, there is also little question that if there is an overarching problem with the plan that runs across all or many participants’ accounts – such as fees that are too high with certain investment options – that many participants may be injured in the same way and to a similar extent. What the Seventh Circuit’s ruling in Spano suggests, rightfully I think, is that, under these circumstances, one has to think carefully about how a class should be defined and of whom it should consist. There is no reason to draft a broad class definition that simply includes all plan participants, and instead a class should be constructed that is limited to those plan participants who actually invested in the specified investment options that are shown to have had excessive fees or other fiduciary breaches during the time period that the problems existed. That is not a lot to ask to make sure that class action litigation actually serves it purposes and satisfies the procedural and other legal limitations that exist to ensure that it does so, and doesn’t run off the tracks. It certainly requires more thinking, study and analysis of the actual scope of the investment problems at the class certification stage, rather than simply certifying the class and waiting to figure that out during the merits portion of the case, but isn’t that, after all, what class certification discovery exists for?

Just idle musings for a Monday morning.

I have been blogging long enough that I can bore people by pontificating about how blogging was easier back in the old days. It’s actually true though, to some extent, at least with regard to my blog, and that’s because when I first started blogging, Paul Secunda, at the Workplace Prof blog, was still posting regularly on scholarly and legal developments concerning ERISA. He has stepped back from doing that over the past couple of years, leaving me with one less source of ready made analysis and commentary to mine.

Paul has stepped back into the salt mines, though, with this interesting post on the Third Circuit’s recent consideration of conflicts of interest under the MetLfe v. Glenn rubric. On some levels, I agree with Paul’s comment in his post that he doubts the new regime ushered in by Glenn will change the outcome of many denied benefit cases, only I agree with him from the opposite perspective: it was always my opinion that, in the courtroom, the evidence typically pointed the way to the right result regardless of the existence or non-existence of what has come to be known as a structural conflict of interest on the part of the decision maker. As I wrote in many posts back in the era when different circuits had different approaches to this issue, leading eventually to the Glenn ruling, it was more often than not my experience that the administrative record in a given case could tell you whether the decision was improperly influenced by outside factors – i.e., anything other than the facts of the participant’s claim – and thus there was generally no evidentiary reason to care one way or the other whether the decision maker, independent from what the administrative record itself showed, was acting with a conflict.

What is interesting to me at this point about this topic is that we are probably far enough along into the post-Glenn world that an academic could sit down with pre- and post-Glenn denied benefit decisions from the courts and analyze, in a statistically accurate manner, whether the Glenn rules have had a measurable impact on the outcome of these types of case. How about it, Paul? Time to bring the law and statistics movement to bear on ERISA questions?

I have written before about the various implications of the Supreme Court broadening fiduciary duty claims in LaRue to allow individual participants to sue for losses only to their own accounts, rather than just for harms suffered by all participants, or in other words, by the plan as a whole; among other aspects, I have discussed its interplay with the class action rules, and the importance for the development of the law of ERISA of the Court’s distinction in that case between defined benefit plans and defined contribution plans.

On the first point, I have noted that the famous – to a small group of interested observers otherwise known as ERISA lawyers and scholars – role played in LaRue by the so-called (by me, anyway) diamond hypothetical may have a wide range of implications for the development of the law, not all of them either intended or even foreseeable. Under the diamond hypothetical, each participant’s account in a defined contribution plan can be understood to contain its own specific bunch of diamonds, which all together add up to make up the totality of the diamonds held by the plan; this is different than a defined benefit plan, in which the diamonds are not subdivided in that manner, but instead are merely held in their entirety as the plan’s assets. I have blogged before about the question of whether this meant that an individual plan participant who suffered no harm to his particular account – i.e., his diamonds didn’t vanish – could proceed as a class representative where other plan participants did suffer harm in their accounts – i.e, their diamonds did vanish – or could seek relief on a plan wide basis. Judge Gertner of the United States District Court for the District of Massachusetts has a nice discussion of the diamond hypothetical in the footnotes of her opinion that is discussed in this post.

In a decision interesting on a number of fronts, the Seventh Circuit has now addressed this same issue in detail, in the context of deciding whether class certification orders in excessive fee cases involving defined contribution plans were appropriate. In Spano v. Boeing, the Court focused on the implication of the diamond hypothetical structure of defined contribution plans (without mentioning the diamond hypothetical), finding that class certification can be proper, despite the fact that each plan participant has his or her own individual account and possible loss, after LaRue, but that the particular injury to the different participants’ accounts had to be examined to determine whether class certification was appropriate with regard to the particular theory being pursued by the class and the representative plaintiffs. In essence, class certification may not be appropriate if there is too much variance in the impact on different participants’ accounts of the challenged conduct. The opinion is a fascinating read on this question, and you can find it here.

The opinion is notable for a number of other reasons as well, some of which I may return to in further posts, but one of which I will mention here. I have posted in the past that the Supreme Court’s opinion in LaRue invited courts to revisit the rules in place with regard to defined benefit plans when instead evaluating claims concerning defined contribution plans, and emphasized that the rules applicable to the former may not properly fit the latter. I have pointed out as well that figuring out where or how the rules should diverge in the two contexts should open up avenues for participants’ lawyers to try to advance their cases when pressing claims involving defined contribution plans. The Seventh Circuit drives home both this point and this new reality in Spano, recognizing this dynamic put into play by the Supreme Court in LaRue.
 

Well, I am not sure I could have said this better myself, although in post after post, I have spoken of the increasing litigation risk for fiduciaries, and of the need to respond by emphasizing compliance and diligence in designing and running 401(k) plans. At the end of the day, ERISA has become a fertile ground for litigation, and the inherent conflicts and difficulties in running 401(k) plans are exposing fiduciaries to lawsuits and the potential of personal liability. Susan Mangiero, in this post on her blog Good Risk Governance Pays, surveys this landscape and explains what is putting fiduciaries ever more at risk. Two particular aspects of her post are worth highlighting. The first is her reference to a leveling off of fees, and her attribution of that event to litigation risk; we are coming through a storm of lawsuits over investment fees and expenses in 401(k) plans, all alleging – in one way or another – that sponsors and fiduciaries should have used their market power to obtain lower fees. It is often remarked that litigation is a terribly blunt instrument to effect change (its also expensive and not terribly efficient), but it may have done so here and, if so, those of us who labor in the vineyards of the court system should be pleased by the system’s ability to effect change. The second is her discussion of the series of changes that are affecting fiduciaries, each of which in one way or the other has the potential to expand fiduciary liability, if manipulated well by counsel for participants. I have written many times that we are in an era of evolution of fiduciary liability under ERISA, driven by the old Marx line that at the end of the day, everything is economics. As I have written before, the simple fact is that 401(k) plans – and worse yet losses – have become the fundamental reality of retirement for most employees, and with that change in the economic environment is going to come change in the risks, obligations, demands and legal exposure of the fiduciaries of such plans; we see that here in Susan’s post as well.

Like most lawyers who represent plans or their administrators in denied benefit disputes, one of the first things I check when a participant’s complaint is forwarded to me is whether the participant exhausted all review opportunities with the plan’s administrator. If not, the defense of failure to exhaust administrative remedies needs to be raised. For those on the opposite side of the “v” (i.e., the plaintiff), however, whether or not the failure to exhaust administrative remedies is fatal is not so cut and dry. Circuits vary on the circumstances under which such a defense is outcome determinative, and most circuits – probably all, but I have to admit I haven’t surveyed the more out of the way circuits on this question – provide participants with ways around this defense, as this informative blog post illustrates.

In my life as a trial lawyer, I have found myself in a recurrent situation, in which a judge or an arbitrator eventually looks at me in an argument over discovery and asks if I really want the information I am after, as it could run against me. I always answer the same way, to the effect that I am comfortable with facts, believe that more information is more likely to lead to the just result in the case, that I will trust the facts to show us which way to go, and that I am more than willing to let the facts come out in the open and drive the case. Now, the truth is that, before ever seeking the discovery that is at issue, I will have long since thought through the subject and become convinced that the evidence in question, once brought out, is far more likely to help my case than to harm it; the reality, from a tactical perspective is that, otherwise, I would not have pressed the point in the first place, with me going so far as to ask a court or arbitration panel to order production of the witness, or documents, or whatever else is in question. That said though, my response – to the effect that I favor the facts coming to light – is a true sentiment. Facts are stubborn things, in the classic formulation, and they decide cases; I am more than happy to have them see the light of day. Heck, I would certainly like to know of them while I can do something about them, even if they are bad for my case, than have them just show up for the first time out of some witness’ mouth on the stand in the middle of a trial.

I thought of this when I read this investment manager’s discussion of the Department of Labor’s expansion of the term fiduciary, which I discussed in my last post, and of the Department’s various initiatives related to fee disclosure, in particular his discussion of lobbying against those actions. Like facts in a lawsuit, the facts of revenue sharing, fees, and the like belong in the open, and can do nothing at the end of the day but improve outcomes for participants, plan sponsors, fiduciaries and the better advisors. What’s wrong with a little sunshine, a little transparency, and a lot of disclosure in this context? Frankly speaking, probably nothing. Participants will eventually end up with better outcomes, while plan sponsors and fiduciaries will have the information needed to best do their jobs, which will – if they use the information right – make them far less likely to get sued or, if sued, be held liable for fiduciary breaches. Meanwhile, we all know that advisors get paid fees, as of course they should; the only change is that everyone involved in the decision making will know who is getting paid what and for what exact services. Under that – possibly excessively rosy – view of the world, the end result should just be that the better advisors, who are providing better products and services at better prices, will get more of the business. What’s wrong with that, from a forest eye view?

I have written before, on many occasions, about the evolving nature of fiduciary status, and in particular on the shifting regulatory landscape in this regard. Here is an interview I gave to Fiduciary News on the latest proposed Department of Labor regulatory change concerning the meaning of the word fiduciary in the ERISA context. If you want more background detail on that regulatory change itself, you can find it here.

Nothing proliferates around the New Year like top ten lists; I blame David Letterman for it, and believe some academic somewhere in a popular culture department should examine the pre- and post – Letterman frequency of top ten lists in American society. That said, though, my all time favorite top ten list was Letterman’s top ten children’s book titles that haven’t been published but should be, which included my favorite book title (fictional or otherwise) ever, which was “Daddy Drinks Because You Cry.”

My second favorite top ten list comes out every holiday season, and is Randy Maniloff’s Top Ten Insurance Coverage Decisions of the expiring year, an article that he always manages to make both educational and amusing at the same time, which is an extremely hard trick. He’s pulled that off again this year, and so for my final post of 2010, I send you to it to read.

I talk regularly, of course, about the importance of compliance in the operation of ERISA plans – just take a look at my immediately preceding post for instance – but that is just a fancy way of restating the old saw that an ounce of prevention (in the form of a well run plan) is worth a pound of cure. As an ERISA litigator, the cure – litigation – is better business for me than the ounce of prevention ever could be, but that doesn’t change the basic fact that the only real precaution against litigation costs and liability is a well run plan, and the best defense against a lawsuit that arises anyway is the same thing -a well run plan.

But how do you get to a well run plan? While there are a number of ways to get there, here are a couple. Ary Rosenbaum, in this piece, explains why one step towards a well run plan is to bring in expert legal advice on the compliance aspects of the plan right from the get go. A true ounce of prevention strategy if I have ever heard one. Another is to constantly increase the knowledge base of a plan’s decision makers. On that front, Pozek on Pension’s Adam Pozek and ERISA lawyer Ilene Ferenczy have created a really useful little engine for accomplishing that, in the form of a series of webinars offered by Pension Pundits LLC. Their next one, coming up shortly after the first of the year, is on non-discrimination testing, and you can sign up for it here. At the end of the day, litigation costs too much money, even if a plan’s sponsor and its fiduciaries prevail, to not take advantage of these type of opportunities to avoid getting sued.

I tell people all the time when I speak at seminars that compliance is key because in a downturn, participants will sue plans and their fiduciaries over things they just ignored when the markets just kept going up, up and up, with participants’ account balances doing the same. I have frequently noted this in posts as well here on this blog, reminding people that when the market goes up, participants don’t get upset that compliance problems or excessive fees or the like meant they earned “only” 12 or 14% in a given year, rather then 15 or 16% in that year, but they get plenty upset when those problems in a plan mean the difference between a loss and a bigger loss.

My support for this premise has always been anecdotal, based on what I see in litigation and learn in my discussions with fiduciaries, plan sponsors, vendors and participants. It appears there is some verifiable independent data to back this up, though:

The amount of lawsuits associated with the Employee Retirement Income Security Act (ERISA) have increased significantly since the beginning of the recession, the Rockford Register Star reports.

According to data from the US District Court, 9,300 lawsuits related to ERISA were filed in the country during the 12-month span that ended on March 31, 2010. While that number is lower than the nearly 11,500 lawsuits in 2004, it represents a significant increase since the beginning of the recession, according to the news provider.