Here’s an interesting, although at a minimum somewhat overstated, diatribe against 401(k) plans from Forbes, in which the author complains about four specific risks to participants: greater investment risk than would exist investing outside of such a plan; problems with employer or vendor record keeping and management; the possibility of employer failure; and a lack of regulatory oversight, at least in comparison to the extent of regulation applicable to other investments. The author overstates some of his points – for instance, some of his complaints about regulatory oversight are more accurately seen as complaints about sponsor capabilities, such as with regard to publishing and timely distributing summary plan descriptions or making timely distributions.

What’s more interesting to note, though, than quibbling about the details of the author’s complaints, is the extent to which they primarily concern the fact that the 401(k) world, much more than being a regulatory driven regime, is governed more on a private attorney general model, in which breach of fiduciary duty lawsuits and denial of benefit claims are the tools that address and remedy the problems the author identifies. For instance, in his discussion of increased investment risk, he references the fact that, outside of 401(k)s, an investor can pick from the universe of funds, while within the 401(k), the investor is limited to the several funds included in the plan, which may not be the best performers or the cheapest (or, if neither, at least the funds with the optimum combination of performance and cost). This, though, is at heart what all breach of fiduciary duty claims related to excessive fees or other complaints about fund selection are directed at, namely whether the fiduciaries included the right mix of funds. In theory, fiduciaries will do that, if for no other reason than out of fear of being sued if they don’t. Anecdotally, there seems to be, for instance, greater attention being paid now by plans to fees and fund selection in the wake of the class action litigation that has been pursed over excessive fees and alleged non-disclosure of fees. This is a perfect example of a private attorney general mindset, in which the issues of concern – here, the operation of 401(k) plans – are expected to be avoided by the threat of liability and, if they are not, are remedied by private litigation; this is, theoretically anyway, the counter to the type of more regulated regime to which the author compares the 401(k) world.

Bravo. In the context of discussing the Supreme Court’s grant of cert to a case presenting the question of how to resolve conflicts between plan terms and summary plan descriptions, the authors of this client alert, Lisa Brogan and Joseph LaFramboise at Baker & McKenzie, provide, in only four pages, a succinct yet comprehensive overview of the standards applied across the country to this issue. Conflict between plan terms and the terms as described in summary plan descriptions is one of the more frequent issues that arise in benefit litigation under ERISA, raising questions about the level of talent and effort being committed to plan compliance by many companies, since the best defense to cases involving conflicts of this nature is to avoid them in the first place by ensuring that the description in both documents of the substantive benefit terms match up. That said though, as the case of the billion dollar scrivener’s error suggests, some issues are going to arise no matter how much time, effort and compliance dollars are lavished on a plan’s documentation and operations. Either way, though, this client advisory nicely sums up exactly where we are in each circuit right now when it comes to adjudicating these types of conflicts.

Here’s a little story that rung an old bell for me, and provides an object lesson on a point I have made in the past in various forums concerning the protections against liability that need to be sought by officers and directors. The story concerns a decision out of the Tenth Circuit finding that a company did not have to indemnify one of its former corporate officers in total for legal fees related to the officer’s defense of a securities fraud case, despite a written agreement that appeared to impose such an obligation. I have not studied this case enough to hazard a guess as to whether the former officer, or the company indemnifying the officer, might have had access to coverage of those defense costs under a directors and officers policy. However, the case illustrates a principle I have often mentioned with regard to issues concerning service as a director or officer of a company – there is no way to know for certain long in advance of any particular claims being made whether the company will stand by an apparent obligation in its by-laws or other documents to indemnify an officer, nor can one be absolutely certain in the abstract whether the officer will have coverage against any such future claims under a directors and officers policy. There are too many variables to be certain, as the story reflects and evidences. As a result, as I discussed in detail here some time ago, it is important for directors and officers to protect themselves by doubling down on their protections, and requiring both broad indemnification protections in the company’s documentation and that the company acquire directors and officers coverage that is as broad as possible. That way, if and when a claim is made, if one of the two (the company or the directors and officers insurer) balks at paying for the defense of the officer or director, a second avenue of potential payment still exists. Certainly, as appears to have been the case in the little exemplar story discussed in this post, there may be claims in which neither will have to pay for all of the costs of defending the officer or director against a claim, but at least this two pronged approach gives the officer a reasonable shot at having someone pay those fees for him or her.

Well, I have written extensively on my skepticism about commercial arbitration as a tool for solving commercial disputes, and my belief that the courtroom is a better forum for most complex cases. It would take a lot of links to cover my past discussion of the pros and cons of this type of dispute resolution, and my reasons for thinking it a far weaker forum for a dispute between corporate entities than the courthouse. If you click on the category “Arbitration of Coverage Disputes” or the category “Arbitration” over on the left side, however, you will quickly find my past discussions of this topic. If you don’t want to do that, however, you could read this article here, which nicely sums up the same calculus that underlies my earlier posts on the efficacy, and sometimes lack thereof, of commercial arbitration.

Nothing shows up in my practice any more frequently, particularly in this economy and over the last couple of years, than severance packages, and the question of whether a particular severance package program is governed by ERISA. Roy Hoskins, on the ERISABoard.com site, reviews this issue, and its application by the District of Maine under First Circuit law, in this excellent post, along with providing a copy of the opinion by the court. For those of you who may not be able to access the Board’s site for any reason, here is a copy of the decision itself, which is Sawyer v. TD Bank US Holding Company.

I thought I would pass on two interesting insurance coverage stories, with some thoughts on each. The first is this one here, about the New Jersey Supreme Court finding that an insurer that loses an insurance coverage action can be ordered to pay attorney’s fees incurred by the insured in a separate but related coverage action in another jurisdiction. A prevailing insured’s right to recover fees incurred in an insurance coverage dispute with its insurer is a slow moving but inexorable carve out from the American Rule, which holds that parties are responsible for their own attorney’s fees, and somewhere down the road we are likely to find it has become the overwhelming majority rule in this country. The expansive reading of that obligation imposed in this New Jersey decision is reflective of that trend.

The second is this one, about a finding that an insurer had no duty to defend its insured against a class action seeking only economic losses based on the risk of bodily injury, rather than seeking recovery for bodily injury itself actually suffered by the class plaintiffs. The court found that the insurer had no duty to defend because coverage was limited to claims for bodily injury, and the action did not actually seek to recover for identifiable physical injury. This case caught my eye because it reflects a narrow, highly technical reading of the policy language and of the coverage it granted, pursuant to which the court refused to expand the coverage to include a defense obligation simply because the case pled against the insured had some relationship to possible allegations of bodily injury; the duty to defend is often interpreted by courts to be so broad that often courts, and sometimes even insurers, view the duty as triggered if the claim even comes close to fitting the terms of coverage. You can call this kind of a horseshoes approach to determining the duty to defend, as in close is good enough to do it. The court here did not buy it, and in that it is a moral victory for those of us who understand insurance policies as contracts whose terms should be honored and applied as written.

Chip, chip, chip. No, that’s not the sound of the polar ice caps shedding ice, although I suppose it could well be. It’s the sound of the Fortress Europa that some of the more optimistic lawyers for 401(k) plans thought was being enacted against excessive fee claims – in the wake of cases such as Hecker – slowly being whittled away. Cases such as this, in which the fiduciaries were found to have fallen down on the job by accepting retail class fees, are going to open the door to more of these cases, and to more settlements to resolve them, than seemed possible when the first wave of excessive fee type cases were being ruled on; indeed, as this client advisory points out, it is no longer possible for plan fiduciaries to simply ignore the question of the propriety of retail fees in their plans. I have long believed that it will take only a couple of district courts who are willing to allow excessive fee cases to proceed into discovery and to adjudication on their merits to turn excessive fee cases into a potentially significant risk for fiduciaries, and I feel comfortable predicting that this is the start of that trend. To add a Civil War metaphor to my earlier climate change and World War II metaphors, these types of cases are going to bear out my prior prediction that Hecker was likely to be the high water mark in the defense of excessive fee cases.

Anyone who writes anything for a long time, as I have this blog, cannot help but end up with certain recurring themes. When it comes to the management of 401(k) and similar plans, one of those themes has been the importance of compliance and a careful decision making process by fiduciaries, an idea borne out of this litigator’s belief that, in the courtroom, the best defense is a good offense. In the context of breach of fiduciary duty litigation, this old chestnut should be understood as meaning that the best way to defend fiduciaries against such claims is to present a long history of active oversight of investment and other decisions by the defendant fiduciaries. Not only is that good for plan returns themselves in the long run in most instances, but it goes far towards insulating the fiduciaries themselves against being liable on claims for excessive fees, too much stock, or other alleged problems. Many claims of this nature will never even reach the point of really examining the specific conduct of particular fiduciaries, and are instead often decided at an earlier stage, such as motions to dismiss, on the basis of broader defense theories, such as the existence of presumptions in favor of the retention of employer stock in a plan, or “law and economics” type theories, such as in Hecker, that the marketplace shows that the decision making was fine, or on the application of ERISA safe harbors. But one cannot be sure that this will always be the case, and some breach of fiduciary duty litigation against fiduciaries will always get past these types of early suit Maginot lines, and in those instances the next best line of defense is to be able to demonstrate specific conduct by the defendant fiduciary that shows strong efforts being made to get the challenged issues – whether the expenses or fees of a plan, or something else – correct. If the plaintiff or class gets to that point of the case, being able to show that will more often than not determine who wins.

I write of this today, and it is on my mind, because of a press release that crossed my desk this week concerning the decision of a major defined contribution plan to use an index BrightScope created from its data to benchmark the performance of its target date retirement funds. The release notes that:

The BrightScope On Target Index will help [the plan sponsor] measure the performance and risk attributes of their target date portfolios while giving participants the ability to see how accurately their target date portfolio lives up to its stated goals.

At the end of the day, anything and everything plan sponsors can do to put accurate, transparent information in front of fiduciaries as part of their decision making process makes it harder for liability for breach of fiduciary duty to be imposed on those fiduciaries, and this is a perfect example of a plan sponsor doing so.

This is an interesting small piece out of Reish and Reicher highlighting the fact that smaller plans, with relatively small asset pools, face many of the same risks and problems that are faced by the large plan sponsors involved in the bold face cases that show up on a daily basis in the media. To my mind, the key point is, as I have said often, one of compliance. For smaller companies in particular, an obsessive focus on compliance is needed to avoid getting sucked into these types of lawsuits. For the very largest plans, that alone won’t keep them out of the litigation cross hairs; they are simply too big of targets, and too subject – like BP – to external events that can put their fiduciaries on the wrong side of a complaint’s caption. For smaller companies, though, it is the internally controlled events, like compliance lapses, that are likely, in my experience, to trigger fiduciary or other ERISA litigation, and that is something those companies can control.

The article, incidentally, came to my attention through a Linked In group I participate in, and its only fair to note investment advisor Chris Tobe for bringing it to my attention. My comments on Linked In about the article expanded upon my thoughts above a little bit, and to the extent you are interested, were that:

The Reish article is right on point. I have represented smaller plans and their sponsors in similar cases, and relative to the size of the employer, they are every bit as disruptive, expensive and of concern as large cases against larger plans. For the smaller plans in particular, who really cannot afford the distraction from their business of these types of claims, an emphasis on compliance to avoid these types of suits is crucial. Of even more import is a willingness to work cooperatively with a participant who has a legitimate complaint to resolve the matter without litigation; I have done this, and it can save a small fortune in legal fees while ending up with a settlement similar to one that would be on the table at the end of litigation. Finally on this point, I would note one concern with regard to fiduciary liability insurance for these "small plan" claims. Many such policies have a high deductible, meaning that relatively small dollar claims in relatively small plans may not end up covered by the insurance at all or at least not to a significant extent. Small plans should keep in mind when acquiring the coverage that a low deductible is necessary to capture the typical size claim that a small plan will generate.

BP has a giant employee savings plan, making it a prime target for stock drop type ERISA breach of fiduciary duty claims in light of the Deepwater Horizon leak, as I mentioned here in this post, and the lawsuits and the investigations that will eventually result in lawsuits are coming out of the woodwork as fast as vampires in one of the Twilight movies. As I noted in this earlier post, I am beyond skeptical of any such claims that are premised on the simple thesis that the fiduciaries breached their duties by not anticipating and accounting for the risk of this type of a loss when deciding to include or emphasize company stock in the plan. However, less flippantly and more exactingly, the same is not necessarily true for the alternative thesis, which I assume to be what many of these claims will play out as, that the fiduciary breach doesn’t relate to this specific environmental loss and its impact on the stock holding, but rather is that, in light of the regulatory and environmental universe in which BP operates, it was imprudent to hold or allow employees to hold a disproportionate amount of company stock; in other words, that the risk profile of the accounts as a whole was too high because too much of the investment was in company stock in an industry subject to unique and potentially catastrophic risks. Just a quick, non-analytical glance at BrightScope indicates a large company stock exposure in the BP employee savings plan, incidentally. In this sense, these claims, and the BP fiduciaries’ exposure, is no different than other instances of companies whose stock fell at a time that employee retirement accounts held a disproportionately high share of that one stock. What makes the claim here a little different, however, is the argument that there is something unique to the industry that calls for less company stock being offered to employees and instead a greater fiduciary emphasis on diversification than would be the case in other industries. For instance, if a Gillette or a Grace is sued after a stock drop, the argument is essentially that prudent investing practice as a whole calls for greater diversification, and the claims against the fiduciaries, to dress them up, may also include the argument that the fiduciaries should have anticipated stock market risks based on their knowledge of the company and its industry that should have caused them to prevent the excessive accumulation of company stock. With the BP claims, though, what you would have, I suspect, is less the argument that greater diversification was needed as a general principle, in favor instead of the argument that the oil industry itself is so subject to unique, stock value demolishing risks – from tanker crashes, to oil well blow outs, to nationalization, to wars – that it was simply imprudent to allow an excess exposure to the industry and certainly to any one particular company in that industry. (Incidentally, there is no better overview of these topics and the peculiar risks of the oil industry than Daniel Yergin’s The Prize, which may perhaps be necessary background reading for the law clerk of any judge assigned one of these cases).

Its an alluring theory, but one that raises the question of whether it plays out against the backdrop of past case law and the development of fiduciary standards when it comes to employer stock holdings, which would suggest that the claims on their merits have weaknesses, or whether instead they play out against the political backdrop of the Deepwater Horizon event and the economic losses it is strewing across a range of actors, including but not limited to the employee shareholders. If it plays out against that later backdrop – as a, perhaps, unseen or unspoken influence – the question becomes whether this fact pattern could shift the nature of these types of claims in a direction that could give them far more traction than the past history of claims of this nature suggests would otherwise be the case.