The Seventh Circuit’s opinion in Hecker v Deere is interesting in a number of ways, and on a number of levels. I won’t detail the facts of the case in depth here, but the case turns on the question of the plan sponsor’s and service providers’ potential fiduciary liability for allegedly high fees in the mutual funds offered in a 401(k) plan and the limited degree of disclosure provided to participants about the fees. You can find the case itself here, and for those of you who don’t have an interest – or possibly the time – in reading the entire 33 page opinion, a readers digest overview of the case itself right here. It is, though, a well-written, fluid, almost elegant opinion, an easy read if you care to take the time.

Perhaps most notable, from an overview perspective, is the fact that the Seventh Circuit simultaneously gave the scope of protection granted to fiduciaries by Section 404(c) pretty much as broad an interpretation as possible, and the scope of fiduciary obligations with regard to investment selection and fee disclosure as narrow a one as possible. Its an interesting double whammy. I am not saying its right or wrong (although Ryan Alfred at BrightScope has made a detailed argument that the court is off base in reading the protections of section 404(c) so broadly), but it is certainly a very interesting framework. If you think of it as a Ven diagram, with one circle the world of problems that can arise with mutual funds and 401(k) plans, and the other the extent of fiduciary obligations in the view of the Seventh Circuit, the overlap is smaller than one would have anticipated.

Then there is the question of the court’s view of the fiduciaries’ obligations of disclosure with regard to fees in the plan, finding that the statute and the regulations did not require more disclosure than was made, and thus there was no breach in failing to disclose more information about the fee structure. Paul Secunda in his piece on the intersection of preemption and the statute’s limited remedies (in which he emphasizes how those two aspects of ERISA can result in harms that cannot be remedied) discusses what he views as two competing ideological camps with regard to the interpretation of ERISA, literalists and remedialists. I don’t fully agree with this particular bicameral division of the world, but it offers a handy frame of reference for understanding the Seventh Circuit’s ruling: the panel took a truly literalist approach to the question of disclosure, finding that what the statute and regulations don’t expressly require, is not required. This seems, I have to say, hard to square with the idea that a fiduciary’s obligations run to a high level of care, which would seem to raise the question of whether a fiduciary has more obligations than simply those that are required by express mandates, but the panel does not squarely address that question.

This leads into a central point that animates the case, in my opinion, and which can be summed up in two famous words: caveat emptor, at least if you are the plan participant. The court finds that the mutual funds in the plan are numerous and also sold to the public as a whole, and therefore the fees are, in some broad sense, fair and appropriate, as they are what the public marketplace as a whole is willing to bear. But is the public pricing as a whole a fair determination of whether fees charged within a 401(k) plan are excessive or not? Isn’t this just using the lowest common denominator to make this call? After all, a public buyer does not have the leverage or the expertise – at least in theory – that a plan sponsor brings to negotiating investment options and their fees. Part of the problem in analyzing this question is that the district court, and now the appeals court, resolved the case on a motion to dismiss, where argument and supposition play too much of a role and factual development of these types of questions have not occurred. Deciding whether the fees are excessive on an actual factual record may suggest an entirely different answer than just the assumption that the market as a whole has acquiesced in the pricing, so therefore it was not excessive when a plan sponsor signed off on it. But for a plan participant, the ruling clearly means one thing: it is your responsibility to engage in the same full due diligence that you would have to pursue if you just purchased the mutual fund from a 1-800 number, and you are not entitled to rely on the plan’s fiduciaries to have done that for you.

Still parceling out items of interest that have stacked up on my desk in the last week or so. Among the things I still haven’t gotten to, I have to admit, is a careful reading of the Seventh Circuit’s recent decision in Heckler v John Deere, but I will, shortly. In the meantime, though, the bright guys over at BrightScope have, and their’s is a very interesting take. You can find it right here. Its clear, when you read the post, that they don’t just have the analytics down when it comes to 401(k) plans, but also their structure and the manner in which they operate.
 

A lot of interesting things have piled up in my in-box during the past week and a half or so, when I have not had time to blog. I still think they are interesting, even after a few days of having them underfoot, so I am going to try to parcel out as many of them as possible over the course of this week, until I have either run out of them or out of time, whichever comes first.

I thought, for reasons of both vanity and timeliness, I would start with a couple of items on the Supreme Court’s decision in Kennedy v. DuPont. I am quoted in an article in the current edition of Lawyers USA discussing the case, along with a motley assortment of worthies, including the law professor formerly known as the Workplace Prof. It’s a good article, and for those of you who are subscribers, you can find it here; for those of you who aren’t, I am going to pass on my usual approach of (by putting on my copyright litigator hat) deciding how much of it I can quote under the guise of fair use, and instead send you to my post on the case here, which says pretty much what I think on the subject.

Also, I would be remiss if I didn’t point out that attorney Albert Feuer was kind enough to send along to me links to a series of papers and commentaries he has written on the Kennedy decision and the issues it raises (and, in many cases, does not answer, in both my and Albert’s views).  You can find them here, here and here.

I love this story. A couple of weeks ago I blogged about BrightScope’s launch, and pointed out my view that more information generally means less litigation. I learned thereafter that some think that is a counter-intuitive thought; presumably, people who believe that think that if you cover up problems and don’t let people know what’s going on, they may not find out and thus may not sue you. The oldest saying in the book, of course, is that the cover up is worse than the crime. Rather, people who are legitimately wronged will sue no matter what, as they should; but people on the margins are more likely to sue if they feel they were not told the truth, than they would be if they feel they were given a fair shake, even if it worked out badly for them. More technically as well, many breach of fiduciary duty claims are based on allegations of non-disclosure – that the sponsors did not disclose problems with the company stock, or backdating, or cdos. etc., that would have changed the participants’ investment strategies had they known. Obviously, something that is disclosed, rather than kept under wraps, cannot be the basis for a breach of fiduciary duty claim based on the failure to disclose.

This thesis, which I maintain is hardly counter-intuitive, but just plan common sense, is borne out beautifully by this story about a long time Merrill Lynch broker who has lost millions of dollars in company stock held in an ESOP. He points out that had he been told the truth and given the opportunity, he would have divested and diversified along the way, but did not, and that he was regularly told things by management that were not true. Now, in the close of the article, he points out that what he needs now are “the services of a sharp labor and ERISA attorney." Had he been told the truth and given the opportunity to move his retirement savings out of company stock in light of information given to him at that time, he may be worse off today than he was before the Wall Street meltdown, but he is likely well enough off still that he isn’t looking for a lawyer to file suit for him.

Paul Secunda, the law professor formerly known as the workplace prof, has a new law review article out on the “wrong without a remedy” aspect of ERISA litigation, which is the fact that the broad scope of preemption can combine with the limited range of remedies available under ERISA in a way that makes some alleged wrongs involving employee benefit plans simply not redressable. Notice that unlike many commentators, including Paul in his article, I call it an aspect of ERISA litigation, rather than a problem, as, contrary to Paul’s article, I am not convinced this isn’t the logical outcome, rather than the problematic distortion, of the original statutory structure. Either way, there is certainly room to argue over whether, and if so what, should be done about this aspect, and Paul provides his own version of changes that could be enacted legislatively or by judicial development to eliminate the “wrong without a remedy” scenario. I don’t necessarily agree with all of his points or his reasoning, but its an interesting read and presents some interesting approaches. Moreover, I am on record – I guess as part of a Greek chorus at this point – with my criticism of legal scholarship that is simply part of a hermetically sealed circle of philosophical commentary, without adding value to practicing attorneys, courts, or the legal system as a whole. Paul’s article avoids this problem, I am happy to report, in two ways, making it something worth recommending as reading to practitioners. The first is that the article provides a highly readable, educational (and cite-able) survey of the historical and current state of the law of preemption. The second is that the article thoughtfully shifts the nature of the discussion of this problem from the general fixation on the preemption prong, which is usually the focus of the discussion in commentary and in litigation, to the remedies part of the problem, posing the idea that preemption is broad enough to preclude adding state law causes of action to benefit plan cases, and that instead the place to look to end the “wrong without a remedy” conundrum, which Paul has called in other places the “grand irony of ERISA,” is to the statutory remedies under ERISA and to whether they can be expanded by judicial development or legislative fiat. In the courtroom, in cases involving the clash between preemption of state court remedies and the limited nature of the relief available under ERISA, the focus tends to be on the scope of preemption; Paul, in his article, posits that it would make more sense to simply start the analysis, and any response to this issue, from the premise of accepting the broad scope of preemption, and then go from there.

The article is titled “Sorry, No Remedy: Intersectionality and the Grand Irony of ERISA,” and can be downloaded here.

I have argued many times on these – virtual – pages that fair share acts, and their backers’ obsession with trying to circumvent ERISA preemption, puts the cart before the horse, in that they focus on putting more health insurance obligations on employers without addressing the real reasons that employers struggle to provide health insurance, which is its ever expanding cost. Stories like this one here make me think that I have understated the case, and that demanding more insurance out of employers, without tackling the cost problem first, isn’t just putting the cart before the horse, but is actually just plain wrong headed, and bordering on the willfully obtuse (not to put too fine a point on it). It is all well and good to insist that everyone should have health insurance and access to health care, but simply blindly assuming that employers can pay for it is a mistaken premise that sits at the base of all fair share acts. It is cost that is driving the access and uninsured problem, an issue that is not addressed to any real degree by fair share acts, including the one in Massachusetts and the San Francisco version that has so far managed to survive preemption challenges.

I cannot do better by anybody interested in fiduciary obligations under ERISA than to recommend to you the First Circuit’s decision the other day in Bunch v. W.R. Grace & Co.. For those of you not familiar with the lower court proceedings in that case, what was at issue is whether it was a breach of fiduciary duty to sell company stock, rather than maintain it as an investment option, after retaining outside advisors to investigate the stock’s value, potential and appropriateness as an investment option. At the District Court level, and again now on appeal, the courts have found the fiduciaries’ conduct to be almost literally above reproach with regard to the handling of this issue. The First Circuit’s brief is notable for two points. The first is its synopsis of the duties of a fiduciary with regard to investment options, including company stock, and the court’s emphasis on the fact that it is the appropriateness of the fiduciaries’ conduct in the face of uncertainty that must be judged, not the dollar value outcome of any particular investment decision in isolation. As the First Circuit opinion noted:

what ERISA calls for from a fiduciary is that it use the "care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims." 29 U.S.C. § 1104(a)(1)(B). As the district court aptly stated, "in common parlance, [what] ERISA fiduciaries owe participants [are] duties of prudence and loyalty," Bunch, 532 F. Supp. 2d at 288 (citing Moench v. Robertson, 62 F.3d 553, 561 (3d Cir. 1995)). The district court noted that other courts faced with allegations similar to those of appellants in this case had looked at the totality of the circumstances involved in the particular transaction. Id. Among the key decisions relied upon by the district court for reaching this conclusion was DiFelice v. U.S. Airways, Inc., in which that court stated: [W]e examine the totality of the circumstances, including, but not limited to: the plan structure and aims, the disclosures made to participants regarding the general and specific risks associated with investment in company stock, and the nature and extent of challenges facing the company that would have an effect on stock price and viability.

And second, if you want to read an outline of what a thorough and, once in court, easily defensible, course of conduct by a fiduciary looks like when it comes to investment options, it’s the underlying course of action by the fiduciaries that is described in the First Circuit’s opinion.

Holy Transparency, Batman! If you like Zillow, and you have a 401(k) plan, have I got a website for you. BrightScope has now publicly launched its rating website, in which you plug in a particular company’s name and the site then provides you with a colorful, graphic presentation of that particular plan’s performance and structure in comparison to certain benchmarks and comparable companies. Its simply a lot of fun, and, moreover, allows an easy, quick overview of a particular plan, without having to wade through all of the paper information for a particular plan. This facet alone makes it worthwhile, in a world in which plan participants really do need an understanding of the details of their companies’ 401(k) plans but may not have the time or expertise to parse the documents themselves. I certainly am not advocating limiting participant education to checking BrightScope, but every piece of information – the more accessible and transparent the better – helps. At the end of the day, its been my experience that, in all areas of the law, the more information, the less litigation, and I think that is clearly the case with regard to retirement funding. Remember that piece of folksy wisdom the next time you see someone pause in the face of government moves to increase 401(k) plan disclosure and transparency.

I have actually been playing with their site for awhile, while it was in testing, but its now been publicly unveiled, so you can go there yourself and see what I am talking about. I could say more about the site, what it does and how it runs, but I don’t have to, because Josh Itzoe has done it for us, right here, and you can go test run it yourself now, right here.

If you do want to read more on it, though, try here and here.  

 

 

 

Sorry, couldn’t resist – Bill being William Kennedy and Liv Kennedy being the named beneficiary in yesterday’s Supreme Court opinion, Kennedy v. Plan Administrator for DuPont Savings and Investment Plan. After reading the opinion itself last night, I thought I would add a couple of comments to my initial impressions of the opinion, which I discussed in yesterday’s post. Initially, from a practical perspective for plan administrators, drafters, sponsors, and the like, the opinion is exactly what it should have been and, in fact, had to have been. I was chatting with a veteran benefits consultant who services retirement plans a while back about this case while it was still pending before the Supreme Court, and he commented that anything other than a clear pronouncement that administrators are to follow the express terms of the plan, rather than have to go outside the plan and weigh the implications of external events such as a divorce proceeding, would create a terribly chaotic situation. The Supreme Court could not have been more clear in its opinion that it was rejecting that possibility, repetitively reinforcing the idea that administrators act properly by relying on the plan documents; indeed, the ruling really required reciting this idea only once, but instead the Court built a long opinion around the repeated reinforcement of that idea.

Second, I noted yesterday that I wouldn’t have minded some clearer guidance on QDROs as part of the opinion, and on close review of the opinion I think we got some, although not explicitly. The Court, rightfully so, emphasized that the QDRO is the one time that an administrator faced with the divorcing participant and designated beneficiary scenario must incorporate court rulings outside the plan documents into the administrator’s application of the plan terms to determine to whom benefits must be paid. What has been more of an issue in practicality, in the courtrooms of the federal district courts, is to what extent a particular court order must perfectly comply with the statute’s QDRO requirements to be a binding QDRO for purposes of ERISA; many court decisions treat divorce decrees that are close enough to meeting the requirements as QDROs, even if they do not meet each and every statutory requirement perfectly, so long as there is enough there to convince a court that the participant and the ex-spouse intended for the ex-spouse to no longer be the beneficiary.

I would argue that the Supreme Court’s discussion at page 16 of the opinion, read in conjunction with footnote 12, indicates that the QDRO requirements must be perfectly matched by a probate court order for such an order to qualify as a QDRO, and that close – even if good enough for horseshoes – is not good enough for qualifying as a QDRO that would trump a beneficiary designation under a plan’s express terms. Why do I say this? In describing QDROs as the one exception to the Court’s preferred ideal of the administrator not having to go outside the plan documents to decide cases such as this one, the Court explained that QDROs require a “relatively discrete” inquiry that is based on a specific “statutory checklist” that “spare[s] an administrator from litigation-fomenting ambiguities.” The Court then proceeded to list the exact statutory requirements that must be satisfied for a divorce order to qualify as a QDRO. If, as lower courts sometimes appear to believe, close is good enough to qualify as a QDRO, then the issue is not a discrete, precise inquiry – as the Court depicts the QDRO inquiry – and is, contrary to the Court’s interpretation of the QDRO requirements, one that leaves, rather than spares an administrator from, “litigation-fomenting ambiguities” over the question. Indeed, while a plan administrator can make its own call on whether an order is a QDRO if the exact, specific statutory requirements must be satisfied for a particular order presented to the administrator in a particular claim to qualify, this isn’t easily done if something less than complete compliance with the statutory formalities can be sufficient to qualify as a QDRO. In that latter circumstance, whether the order is close enough to qualify is in the eye of the beholder, and you can be certain that the party that didn’t get the proceeds based on the administrator’s judgment call on this issue will sue over the question.