One of the themes I have returned to time and again with regard to excessive fee and other class action litigation under ERISA is that the traditional litigation approach deployed for years by the plan sponsor community needs to be updated. With some variation, it has followed the traditional defense model typically used in class action defense, but in the context of ERISA class action cases, it has too often resulted in a motion to dismiss, followed by amended complaints, followed by more motions to dismiss, followed eventually by a version of an amended complaint that passes muster, followed by very expensive and broad discovery, followed by summary judgment practice that resolves only part but not all of the case, eventually followed by settlement after defendants and their insurers have already spent a fortune on discovery and motion practice. This pattern, and whether it is effective, took central stage in much of the discussion of the summary judgment ruling a year or so ago in the excessive fee class action filed against Boston College, as I discussed here and here.

My own concern about this model started over a decade ago, when it took me three motions to dismiss, each targeted at a new and amended version of the complaint, to finally obtain dismissal with prejudice of what I considered from the outset to be a meritless class action case, one that after discovery – if the case wasn’t dismissed – would inevitably be won by the defendants at summary judgment. However, it was crucial to prevail early, at the motion to dismiss stage, because the costs of discovery before getting to summary judgment would have been onerous. Even more than other types of litigation that I have handled, including IP litigation and multi-million dollar insurance disputes, there is something about ERISA cases that makes discovery broader and more expensive than in most other types of cases.

One of the topics I have talked a lot about recently with insurers and plan sponsors, as well as written about, is the idea that the Supreme Court’s recent decision in Cunningham v. Cornell contained an open invitation for defendants and their lawyers to break away from this model in ERISA class action litigation, by using the tools available to them under federal practice to ask district courts to assert more control over these types of class action cases at various points in their lifecycle and by focusing district courts on specific opportunities to decide outcome determinative issues early in a case, rather than later at summary judgment after extensive, expensive and often irrelevant discovery has been conducted.

I have been advocating for defense lawyers, their clients and their clients’ insurers to take advantage of this opportunity to seek reordering of the standard and accepted norms for litigating ERISA class actions, and to affirmatively try to find opportunities to have courts decide outcome determinative issues at as early a moment as possible, often long before summary judgment on the case as a whole could be pursued and, with any luck, even long before extensive discovery has been undertaken.

Most ERISA class actions, and in fact most ERISA cases, have a few outcome determinative issues in them that will determine liability – whether that be standing, statute of limitations, the role of ESG in investment decisions, the underlying rationale for including certain investments in a plan’s menu, causation or other issues that are likewise similarly discrete. There is no reason, if a case can’t be resolved right off the bat under the traditional plausibility test for deciding a motion to dismiss, to litigate all of the other issues in that type of a case all the way through discovery and to summary judgment motions before that discrete issue – one that might moot everything else – is decided. Whether it is seeking bifurcation so that only the single discrete, outcome determinative issue is litigated before discovery or motion practice occurs with regard to any other aspect of the case, or transforming the motion to dismiss into a partial summary judgment proceeding targeted at that one key issue, or another tactical move, plan fiduciaries and their lawyers should affirmatively and constantly pursue these types of opportunities to reduce the scale of the litigation to solely the outcome determinative issues that they have identified, before the case is ever allowed to expand into broad discovery and litigation of the remainder of the case.

A perfect example of this crossed my desk last week in two different pieces of reporting on the same case. Both Bloomberg News and Kantor & Kantor have reported on the federal district court in Maryland’s decision to certify for interlocutory appeal the potentially outcome determinative issue in an ERISA class action of whether the putative plaintiffs had standing in light of the Supreme Court’s decision in Thole, after denying defendant’s motion to dismiss. The interlocutory appeal, if resolved in favor of the defense, may end the case at that point, without the need for discovery, summary judgment practice and trial to occur before the case is resolved on the merits. This is exactly the type of strategy by defendants, and proactive management of ERISA class action litigation by the bench, that I am talking about when I say that defense lawyers and judges should look for opportunities to resolve the outcome determinative but disputed issues in ERISA class actions early, rather than only after full discovery and comprehensive summary judgment practice. This is exactly one way to do it – to send the open legal issue that could resolve the entire action up for appellate review, instead of having it reviewed only after the entire case has been litigated.

There is no more overused word in the English language these days than disruption – in fact, whenever I hear it, I often think of the line from The Princess Bride that “I do not think it means what you think it means.” But the Supreme Court has literally invited the defense bar to pursue approaches to more efficiently litigate class action ERISA cases. It is an open invitation to lawyers to disrupt the way these types of cases have been litigated for decades, and lawyers for plan sponsors and fiduciaries should think constantly about how best to do so. The interlocutory appeal approach taken by the Court in Maryland is exactly one way to do it.

This is a very nice, well-balanced article by Kellie Mejdrich of Law360 on the question of adding private equity investments into 401(k) plans. I am quoted in it not so much as a naysayer on the idea, but more on the need for a little bit of skepticism and caution on the idea. To be clear, I don’t think the case has been made yet for fiduciaries to sign off on adding private equity investments, particularly in the form of a holding within a target date fund, to the 401(k) plans for which they are legally liable. Fiduciaries – and I to be less skeptical– need to see models, math and projections that show doing so will improve returns for participants even after accounting for cost issues. This is not what we have been seeing to date, which has instead basically been sloganeering about democratizing the financial markets. Unless I missed that part of the statute, ERISA doesn’t consider that to be part of the fiduciary obligation of plan sponsors, administrators, named fiduciaries and deemed fiduciaries.

I am not against adding private equity investments into plans, and, if anything, I am impressed by the work done by ERISA and fund lawyers to figure out how to do it. I am also wildly in favor of anything that actually improves outcomes for plan participants.

But any changes to plans that don’t improve outcomes, or instead make them worse, is a recipe for class action litigation against plan fiduciaries who sign off on those changes. Moreover, I am, by nature, education, training and 35 years in courtrooms, an evidence-based skeptic, and I need to see a factual basis for believing that adding private equity into the investment mix of 401(k) plans – in whatever form that addition takes – will lead to improved investment results for participants. In its absence, adding private equity investments into plans risks putting fiduciaries and their insurers at risk of looking up in a few years and finding they are facing a whole new wave of breach of fiduciary duty class actions, this time based on decisions to open 401(k) plans to private equity options.

When it comes to this change, I would caution plan sponsors and fiduciaries to “measure twice, cut once,” as the saying goes. Make sure the evidence backs up any changes they make in this regard – and don’t act until you have the evidence in hand to make a thoughtful decision.

Walk softly and carry a big stick. Trust but verify. Never bring a knife to a gunfight.

People who know me, have read my blog regularly, heard me speak on ERISA issues, or been on a jury in a case I have tried, know that I am very fond of analogies, metaphors, short examples, and good stories. To me, they are like the old saying that a picture is worth a thousand words – they boil down complex ideas that I am trying to communicate to judges, fact finders, witnesses, clients, readers, and anyone else in a way that makes the idea easier to grasp. For experienced courtroom lawyers, this is a significant tactical concern: how do you take decades of experience and knowledge on a particular topic and communicate it, quickly and succinctly, to a judge who may be a generalist and may have only seen the particular issue a few times, or to jury members who have never heard of the issue before. You don’t have time to teach a seminar on it, and stories, analogies and examples are the tools that let you explain the issue both accurately and quickly.

The three sayings (or possibly cliches at this point) with which I opened this post are all meant to capture the value and importance to plan sponsors and fiduciaries of relying in the current world order on an experienced courtroom advocate, preferably a trial lawyer and if at all possible, one with deep knowledge of ERISA. When I say this, I don’t mean just calling one when a dispute arises or service of a complaint is received, but instead relying on one in the day in, day out course of running a plan.

As some of you know, I have begun a new series of posts on this blog, captured in a new category topic, called Plan Sponsor and Fiduciary 2.0. The idea behind the series is that developments in running an ERISA governed plan have, at this point, come so fast and furious that it no longer makes any sense for sponsors and fiduciaries to continue to operate just as they did in the olden days, such as a few years ago. We have learned too many lessons about risks and liabilities in offering plans, and are watching too many things change, to not update the best practices for plan sponsors and fiduciaries.

In my most recent, and first, post on this topic, I discussed the need for plan sponsors and fiduciaries to start paying far closer attention to their contracts with vendors. Today, I want to talk about the importance for plan sponsors and fiduciaries of having a veteran ERISA litigator watching their backs.

And why do they need that, now more than ever? Because the ever-expanding range of risks that plan sponsors and fiduciaries are facing, and the rapidly evolving decisions they have to make, call for a litigator’s advice, and preferably not any litigator, but one with both significant courtroom experience and deep substantive knowledge of ERISA.

There are many reasons for this, all rooted in the realpolitik of running a plan in the current economic, regulatory and litigation environments, but today I will give you three examples that should be sufficient to make the point.

The first concerns the effort to open up 401(k) plans to private equity assets. I guarantee you there isn’t a fiduciary of any defined contribution plan of any size at this point who isn’t being bombarded with pressure to open up the plan to private equity investments. If they are not getting it directly already from vendors or some participants, they are hearing about it internally from other company executives or they are seeing it constantly in the media. But there is a great deal of homework that plan fiduciaries are going to have to do before they can safely greenlight opening up their plans to private equity investments, and part of that involves thinking critically about the investment option at the center of current efforts to add private equity investments to plans –target date funds.

The idea, I think obviously, is that including private equity investments within the overall mix captured within such a fund solves the liquidity problem in opening up plans to such investments, and will likely give some room for arguing that the accompanying fees are reasonable, when considered in the context of the overall mix of costs and investments in such a fund.

But a trial lawyer who knows his or her way around ERISA will tell you right off the bat that this idea may be good for those selling private equity investments to plans, but it is going to be a terrible look for plan fiduciaries caught in the crosshairs of a breach of fiduciary duty class action alleging that a plan’s performance was too volatile or, over time, too poor because one part of the fund’s investment mix consisted of private equity holdings. Plan fiduciaries and sponsors should assume that, unless somehow no fund holding such assets ever underperforms, class actions making such claims will be the inevitable outcome of adding private equity into plans, including within the confines of target date funds.

And when that happens, plaintiffs’ counsel, in his opening at trial, is going to characterize the inclusion of private equity assets in target date funds not as having been a way to solve technical ERISA problems of liquidity and expenses, but as a way to hide private equity investments with volatility, risk and expense problems from participants. And that is going to be a very poor way to start a trial, if you are a plan sponsor or plan fiduciary, particularly if insurance isn’t going to cover every penny of any settlement during trial or of a potential verdict.

An experienced trial lawyer, particularly and maybe only one who knows his or her way around ERISA, is the one who can see down the road to that day when the class action lawyers come knocking at the door about the decision to include in the plan target date funds with private equity assets in them, and is almost certainly the only one who can tell a plan fiduciary in advance just how poorly that is likely to play in a courtroom at trial. I am not saying plan sponsors or fiduciaries cannot properly decide to include such assets in a plan, but they aren’t doing it with full knowledge and awareness if they haven’t – before making that decision – sought out the advice of a veteran ERISA litigator who can predict some of the future for them.

Here’s a second example of why a plan fiduciary or sponsor needs a sharp ERISA litigator in the tool kit at all times these days. I have long been an advocate of plan sponsors, fiduciaries, insurers and the ERISA defense bar taking more breach of fiduciary duty cases, particularly class actions, to trial. The record, as more (although only a few) are tried, is proving the worth of this advice. For instance, here is a nice write up from Kantor & Kantor on a very recent trial win for plan fiduciaries on a breach of fiduciary duty case. What’s particularly noteworthy about it is that the court found that the case was not black and white, but instead shades of gray, as to whether a breach had occurred, meaning that it was almost certainly never a clear and obvious choice for the defendants to try the action. Anyone can and will try a case when the evidence for the defense is flawless, but it’s a different calculus all together when you have to steel your nerves to make that choice with a debatable defense case.

I have little doubt, particularly as the class action ERISA bar turns its sights increasingly on high value targets in the health and welfare space, using ever more novel theories, that taking cases to trial will become more and more the right call. But the issue with doing so is that plan sponsors and fiduciaries have to take the right cases to trial, and a lot goes into evaluating whether to try any one, particular case. It would take pages to list those types of considerations, and I won’t do it here.

But at the end of the day, only someone who has tried enough cases to understand the subtleties of trial, and of how particular pieces of evidence or particular witnesses will be viewed by the bench or a jury, can be counted on to make a good call on whether to take a particular case to trial. And in the context of ERISA cases, that almost certainly also requires a veteran courtroom lawyer who, in addition, knows enough about ERISA to make the right tactical calls in this regard.

The third reason for keeping an experienced ERISA litigator close at hand rests in the subtext of the Supreme Court’s recent decision in Cunningham v. Cornell. Much of what someone else called the ERISA commentariat has coalesced around the idea that the Court through that case should, but did not, have made it harder for the class action bar to bring excessive fee cases. The Court certainly did not do so in its decision. But the Court clearly, at the same time, sent the message that, with regard to the plan sponsor, plan fiduciary and defense bar community, it is time for the doctors to heal themselves – in other words, for the ERISA defense bar to stop seeking some sort of deus ex machina event where the Court puts an end to excessive class action litigation against plans in one fell swoop, and to instead start using all the tools of the federal rules and courts to push back against cases that overreach on their facts or their theories.

All the tools necessary to do so are already there, resting in a court’s power to control the cases before it, in bifurcation orders, in the discovery rules, in Daubert and in a dozen other places. But only an experienced ERISA litigator is going to be able to tell a plan sponsor or fiduciary how to use them to do that, and in what cases.

So at the end of the day, what is the lesson, in these modern and risky times, for plan sponsors and fiduciaries about ERISA litigators and trial lawyers? Very simple – don’t leave home without one.

I have long been inordinately fond of the Dickens’ line “It was the best of times, it was the worst of times.” It is applicable to many things at many times, and I have used it in briefs, slide decks, presentations, and conversations. But at this point in time, for plan sponsors and plan fiduciaries, as well as for corporate executives, in-house lawyers and others with financial, professional or legal responsibility for the operation of benefit plans – especially but not only 401(k) plans – it feels to me like the more accurate quote would be “It was the worst of times, it was the worst of times.”

And what makes this ironic is that you don’t have to go back too many years to find a time when taking on responsibility for pension or defined contribution plans in corporate life was something of a step up in rank and responsibility, and represented the climbing of another rung on the corporate ladder. In the early days of excessive fee class action litigation and the rise of fiduciary exposure that accompanied those developments, I wrote about how often targeted plans were run by appointed committees, which often did not include the CFO (for many, many reasons, including workload and the need to prioritize responsibilities) and instead typically included a younger, mid-level or above finance executive, for whom the role was a plum assignment that both increased internal visibility and simultaneously reflected it. Now though, I would say that the risks of personal liability as a fiduciary (or at least the need to ensure that, through corporate indemnification and insurance, that risk is only a paper risk and not a real one), the litigation environment, the expanding scope of potential bases for a lawsuit against a plan, and the substantial likelihood of ending up in the witness seat at a deposition – among other factors – have taken a lot of the sheen off such an assignment.

That change is mirrored on the corporate level itself, at the plan sponsor level. Providing employee benefits is a necessary task and – these days – risk; among many other things, doing it well is essential to any company that relies on a talented and motivated workforce to succeed (and every company today does, to one degree or another, even in the era of AI). But for plan sponsors, doing it well is becoming exponentially harder and riskier in myriad ways – and the pace of that change has ratcheted up dramatically in recent times, as class action lawyers have explored new theories of liability against a range of different types of benefits, regulatory guidance has opened up new worlds for plan sponsors and fiduciaries to master, and marketplace pressures on those who provide plans have only increased.

It has reached the point where I think it is time for a redefinition of the role of plan fiduciary and in how companies and individuals understand, as well as perform, this role. Historically, companies – as well as the lawyers and executives assigned to the tasks undertaken by a fiduciary – relied on (to reframe a tired metaphor) a multi-legged stool in performing this role, that consisted of conventional wisdom, the advice and recommendations of outside administrators and other contracted vendors, often excellent analysis of the latest legal developments provided by lawyers, the current state of regulatory guidance, and the comfort traditionally provided in all walks of life by insuring the risks.

Conversation after conversation with plan sponsors and fiduciaries, as well as with plan participants, has convinced me that this stool is wobbling, and that this approach just doesn’t work well anymore. Heck, as a litigator, I am not even sure that having relied on all of those traditional supports would be enough in a courtroom to convince anyone anymore that the plan sponsor and fiduciaries had acted prudently, which would not have been the case ten years ago. In fact, a decade or so ago I was using slide decks in presentations on fiduciary liability that pushed plan fiduciaries to increase both their use of these tools and the documentation of their use of these tools in operating plans, because in that era doing both was the best defense they could purchase against the possibility of being sued and, even more so, the risk of possible liability. That would not be enough now, and the new environment in which plan sponsors and fiduciaries have to thrive calls for a new approach.

Maybe we should call it Plan Sponsor and Fiduciary 2.0? I am open to suggestions on what to call it, but I am more interested at this point in time in sketching out what the new approach that should be taken by plan sponsors and plan fiduciaries should look like. In a new section of this blog, titled Plan Sponsor and Fiduciary 2.0, I plan to address various issues that plan sponsors and fiduciaries should consider in running their plans in the new world that we are moving into.

For starters, I wanted to address certain questions about vendor contracts entered into by plan sponsors and fiduciaries. For many years, reliance on well-qualified vendors was a good way of demonstrating reasonable fiduciary conduct if and when sued over the plan’s operations. However, as some plan vendors become more and more invested in pushing new changes to the operations of plans, as well as new investment options such as crypto and private equity, plan sponsors and fiduciaries need to be more careful than they have been in the past about the terms of their agreements with vendors.

Over the years, I have litigated a number of disputes, and negotiated resolutions of others, where a vendor’s contract with a plan sponsor or fiduciary did not provide the type of protection against errors by the vendor that the sponsor or fiduciary expected (or worse yet, assumed would be in the contract without having anyone confirm). Instead, when problems with the plan’s operations occurred, plan sponsors and fiduciaries would discover that various contractual terms limited both the amount of potential recovery and the level of performance – or poor performance, more accurately – that would be sufficient to trigger liability on the part of the vendor. Even worse, many plan sponsors discovered only after engaging litigation counsel that, horror of horrors and contrary to their assumptions, the vendor was not a fiduciary and had not, in fact, accepted delegation of fiduciary duties in the contract.

With more and more change and risk coming to plans and to those running them, particularly with regard to what the investment menu is going to begin to look like in many plans, plan sponsors and fiduciaries can no longer afford that approach, and have to end the blind eye they often used to take with regard to the details of their vendor contracts or the terms in those contracts. Not only that, but they should now have experienced counsel review the contracts before they are executed to make sure that, first, the plan sponsor or fiduciary’s understanding and expectation of the relationship are a match for the contract’s terms, and second, that there are no terms limiting damages or the performance obligations of the vendor in the event they err. As the current evolution of plans, and particularly of the financial exposures of fiduciaries, continues along (likely for the worse, in my view, when viewed from the perspective of the plan sponsor or fiduciary), the cost for not proactively taking this action will become much too high.

Group life is the redheaded stepchild of employee benefits, often added on by insurers on top of the primary products being sold to plan sponsors and employers, such as disability insurance. There is nothing inherently wrong with that, except that problems tend to crop up in the administration of group life plans and in the payment of claims due to nothing more than the lack of attention that comes with being a relative afterthought. In fact, off the top of my head, I would guestimate that whether advising sponsors on issues related to those plans, defending insurers or plan sponsors against claims involving those benefits or the occasional times I have represented plan participants seeking payment of those benefits, the underlying issue has always been an oversight and nothing more.

When it comes to denied claims for group life insurance benefits, and litigation to overturn denials, typically either the denial was right in the first place, or the cause of the erroneous denial was some form of a “left hand, right hand” problem in the interaction between the employer and plan sponsor, who is managing enrollment and payroll aspects of the benefit, and the insurer, who is overseeing both underwriting of the risk in the first place and decisions over whether a claim is covered.

A few examples from cases where I have represented either the participant, the plan sponsor/employer or the insurer are probably sufficient to make my point. (Note that I have changed the details somewhat, as well as left out any identifying information, to protect all involved, as well avoid any privilege or confidentiality issues). In more than one case, a terminally ill employee left his position with the employer, not realizing that before doing so, he should have converted his group life to an individual policy, and as a result forfeited the coverage. The mistake occurred, almost certainly, because the plan documents did not assign responsibility for advising the employee of that option to anyone in particular, neither the plan sponsor, the insurer nor the plan administrator, and the ball simply got dropped. In a number of other cases, employers had deducted premium dollars from paychecks for the group life benefit, but the necessary medical underwriting was never finished that was needed to trigger the benefit under the insurer’s policy – leading to two questions that are at the heart of all such cases, which is, first, who is responsible for that mistake (the employee, the plan sponsor/employer or the insurer), and second, is the employee’s beneficiary entitled to that life insurance payment if the mistake is chargeable to the plan sponsor/employer and/or the insurer itself.

In my experience, courts have often found for the existence of coverage in these factual scenarios without a clear doctrinal basis for doing so – in at least one such case, the Court essentially ruled that the events at issue had to have constituted a fiduciary breach and therefore the employee’s beneficiary was entitled to the benefit at issue without explaining the conclusion beyond that finding. This was in the early days after the Supreme Court first breathed new life into equitable remedies under ERISA in its decision in Amara, but before subsequent decisions would really give a doctrinal foundation for how those equitable remedies might be used to address that type of a fact pattern, so the Court’s cursory treatment of that issue is both understandable and easily excused.

Since that time, however, it has become more and more clear that such claims can find a comfortable home in the elements of both surcharge and estoppel, depending on how the error came to be in a given case. The Fifth Circuit just added some precedential weight to the argument that these types of “drop the ball” errors in providing group life insurance – in particular where premium dollars for the benefit have been deducted from paychecks but the terms of coverage were never actually fully satisfied – justify an award of the group life benefit to the beneficiary, in its very recent decision in Edwards v. Guardian Life Insurance. Interestingly, though, the Court, as has often been the case in the history of these types of claims, focused on the factual history, rather than on the doctrinal basis under ERISA for requiring payment. That said, though, estoppel, a theory of liability under ERISA generally approved of by the Supreme Court in Amara, or waiver – or both – is the underpinning of the decision.

I wanted to quickly pass along, with a couple of comments, this excellent blog post by Scott Galbreath of Trucker Huss on a recent Ninth Circuit decision on interpreting and applying releases of ERISA claims executed by employees. As the post points out, the Ninth Circuit adopted the tests of other circuits, including the First Circuit, that allow for a broad factual inquiry into whether an employee knowingly intended to waive fiduciary duty or other ERISA claims, and for purposes of understanding the scope of the release that was actually granted.

As a denizen of the First Circuit, from where the Ninth Circuit, in part, borrowed its test, and one who has litigated this issue on multiple occasions in the courts of the First Circuit, I wanted to pass along two things, one congratulatory and the other a tip for the unwary.

First, bravo to the Ninth Circuit for adopting this standard and also for thoroughly explaining how to use it. The intersection of releases with ERISA governed benefits, as well as with a fiduciary’s obligations, is a little backwater corner of ERISA law that, frankly, is ripe for abuse and, even when not, can give rise to a great deal of misunderstanding and confusion in the relationship between plan sponsors and plan participants. This decision – particularly since its guidance is likely to be borrowed in decisions and lawsuits elsewhere – will help with those problems.

Second, and props to the lawyers for the employees who were able to get this issue tackled head on by the Court, lawyers working on cases involving the scope of releases and their relationship to ERISA claims should be aware that – in my experience – these rules are often recognized more in the breach than in the application. Just a word to the wise from one who has litigated this issue more than once in one of the first circuits (pun intended) to really open the door to close examination of the intended scope of ERISA releases.

Years ago, I represented a financial advisor in a dispute with a particular, well-known financial product provider after the advisor concluded that the fees in the annuities offered by that company were both too high and too hidden for him to continue to recommend the product to his clients, and instead recommended that his clients purchase other annuities offered by other companies. I have to say that, even to an ERISA lawyer and financial litigator like me, it was eye opening to closely study the contrast among the fee structures, their complexity, and the lack of transparency about costs and fees among the competing products.

At the same time, particularly after the tariff driven market gyrations over the past few months, I have spoken to more than one individual looking into annuity and lifetime income options for their 401(k) plans. Is it an idea whose time has come? Well, almost certainly. But is it an idea that can be well and easily executed at this point? That’s more debatable.

ERISA lawyer Carol Buckmann has an excellent article on all of the logistical barriers and worries (reasonable and not exaggerated) of liabilities for fiduciaries that stand between current levels of participant interest in lifetime income options and their access to those options. Broadly speaking, she identifies the lack of vendor support for offering annuities, the lack of transparency on fees and costs, and the liability risks to fiduciaries who may be challenged on their selection of vendors or products. She points out that, in many ways, the practical responses to these barriers are the same ones that have always existed with regard to complexity and liability risk in defined contribution plans – namely, that fiduciaries have to do their homework, hire outside expertise, follow a prudent process and make an educated, informed decision. In theory, anyway, this should result in both the best possible annuity options for a plan and protection for fiduciaries from liability for the selection and offering of annuities to plan participants.

The one caution I would offer, though, is that we know from decades of excessive fee litigation involving investment products in 401(k) plans that there is no possible fee level or extent of investigation into fees that can entirely rule out the possibility for a fiduciary of getting sued for breach of fiduciary duty, and I can confidently predict that the same will be true with regard to annuity options added to plans – no matter how well a plan fiduciary handles the process of adding such an option to a plan, the litigation risk will always be present.

The real solution to this for plan fiduciaries is to focus less on the litigation risk and instead on the liability risk. Litigation risk for fiduciaries in running 401(k) plans is real and cannot be avoided – and the only real solution to that is to make sure that this risk is properly and thoughtfully transferred by plans to their insurers, which effectively turns the litigation risk of providing a 401(k) plan into a shared and pooled risk among all plan sponsors.

On the other hand, actual liability exposure – or in other words paying a judgment or a settlement for having added annuity options to a plan– is something a plan fiduciary can control, to a substantial although not complete extent. And the way to do that is to fully follow the best possible practices in selecting and adding such options to plans. Do your homework, hire experts, and make sure you understand the fees and costs of the products you are considering. After all, for a plan fiduciary seeking to avoid incurring fiduciary liability, the best offense in court has always been a good defense built out during the time that the decisions in question were being made.

The common law of ERISA is rife with odd decisions that likely made sense when issued, but, like opening Pandora’s box, led to unintended, unanticipated and arguably wrong rules of law when applied further down the road in additional cases. Heck, there are entire bodies of scholarship arguing that the very existence of a central element of all ERISA litigation and law – arbitrary and capricious review – was a poorly thought-out response to one case that hardened into a defining aspect of the entire ERISA legal regime (see here and here, for example). I have personally long thought, at least until the Supreme Court loosened up the rules for equitable relief under ERISA in Amara, that the entire body of case law on this subject was tying up the courts in knots for no reason other than the fact that the Supreme Court started down the wrong road with equitable relief at the outset, leading to decades of tortured decisions that sought to operate within the confines created by those rules.

Here’s another good one. Exhaustion of administrative remedies is a necessity for litigating denial of benefit claims under ERISA in, to my knowledge, every circuit. But what about if a participant wants to bring a breach of fiduciary duty claim involving stock valuation in an ESOP transaction? Does she first have to exhaust all administrative remedies? Apparently, in the 11th Circuit, she does – much to the chagrin of current members of that Court.

I have to assume there was a reason that the 11th Circuit first created the rule that a participant must exhaust administrative remedies before pursuing a breach of fiduciary duty claim, and it probably seemed like a good idea at the time. But it doesn’t appear to be now, and it isn’t consistent with the body of law from other circuits, and it doesn’t fit with any of the rationales normally provided for the existence of the administrative exhaustion requirement in the first place.

In any event, it’s a great read and a great story, which you can find here. It’s doubly interesting to me because it comes back to one of the most interesting issues to me in ERISA litigation, which is the propriety of stock valuations in private company ESOP transactions. I have litigated this issue and studied such valuations multiple times for other matters, and there is a lot of room for funny business in this area of the law. Given that, somehow it seems fitting that it would also be the soil for a dispute over an odd line of authority concerning administrative exhaustion under ERISA.

Deferred comp plans, or what to an ERISA lawyer is a top hat plan, have become widespread in recent years, used for a variety of purposes, from executive recruitment and retention to simply rewarding important executives at smaller employers who may lack other resources for doing so. But a story from the other day about executives losing the funding – and with it almost certainly the payout – of their deferred compensation agreements as part of the collapse of Steward Health Care is a good time to remind executives that they should not simply smile and say thank you when gifted with a deferred compensation agreement, but should instead carefully and directly look the gift horse in the mouth. Now note that I certainly didn’t say they should reject the benefit – it’s a good one and something far beyond what most people can look forward to receiving in retirement. But executives awarded that benefit need to be aware that it comes with certain risks attached to it, and they should account for those risks in their retirement and other long range financial planning.

As an introduction to this piece, I am writing it in light of this story, which details that senior executives at Steward Health Care have had the rabbi trust, containing millions of dollars originally purposed to fund the deferred compensation payments that were contractually due them, instead attributed to the bankruptcy estate available to payment of all creditors. It is clear from the comments on LinkedIn and elsewhere to this story that many executives, including I suspect some who have been awarded deferred compensation, believe that the funding set aside for deferred compensation payouts is similar to the funds held in 401(k) accounts, and thus inviolable. In the context of deferred compensation plans under ERISA, that is simply not the case, and the risks of not receiving payout over time is something that executives should be aware of.

Now, I don’t happen to think that those risks are high, across the universe of such awards to executives. For the past quarter century or so, I have been representing both companies and executives in litigation and in non-litigation matters involving top hat plans and I freely admit to a selection bias problem. In other words, I typically only see deferred compensation plans when there is a problem (although I sometimes see them prospectively, when executives want an opinion or guidance before participating), and thus most of the top hat cases I handle are ones where one or more of the risks inherent in them has come into fruition. I feel quite confident in saying, though, that most plans don’t end up manifesting one or more of the potential problems that run alongside such plans and sometimes cause them to end up on my desk.

The issue, though, is that executives should not assume, without any foundation or analysis, that their plan will be one of the majority where problems won’t come to exist or that the risks in such plans are only for someone else at some other company. Instead, they should evaluate the likelihood of eventual full payout of the funds promised them under such a plan in the same way they evaluate any other long-term investment, including thinking through their tolerance for, and ability if needed to hedge in their financial planning against, a possible negative outcome.

In my practice, I have come to believe that there are three categories of risk in deferred compensation plans to which executives are exposed, to lesser or greater degrees dependent on the specifics of the companies that employ them and the industries in which they work. The first is what I like to call operational risk, which is essentially exactly what it sounds like: the risk of operating mistakes in administering the top hat plan itself. Sometimes this can consist of legitimate, good faith disagreement over the meaning of the terms of the top hat plan itself, such as in this recent decision out of the Eighth Circuit. Oftentimes, they consist of what I sometimes refer to as the “no good deed goes unpunished” principle for top hat plans. These often involve smaller employers who add a deferred compensation benefit as a retirement package for a very small number of senior executives, but lack the internal expertise to manage the plan nor the relationship with a vendor competent to do so, leading to operational mistakes that end up costing the executive gifted with the retirement package a significant amount of money at the end of the day, typically because of distribution, election or recordkeeping errors.

The second I like to refer to as managerial risk, in that these tend to place a retired executive’s deferred compensation payout at risk because of a deliberate decision by subsequent management to do so, such as a decision to revise the plan or to reinterpret its terms so as to reduce the financial burden of the plan on current management’s books, at the expense of the departed executive. You can see an example of this in one of my cases here, in which the company sought to amend the deferred compensation plan after retirement of the executive affected by the change for the purpose of reducing the payout. Another favorite example of mine from my own practice involved what I continue to this day to be convinced was score settling between former colleagues, with the one remaining a senior executive interpreting the plan as precluding a substantial payout to a retired executive as payback for a past, and long simmering, dispute between them over a long ago transaction.

The third is the risk you see in the Steward Health Care matter, which I would tend to call solvency risk, and is exactly what the name implies: the risk that the company, which generously promised the deferred compensation to the executives during good times, will go out of business in the bad times, taking the money needed to pay out the deferred compensation with it. You don’t actually see this happen that often, but for a number of reasons I think this is likely an increasing risk for executives, and one they should take seriously. Luckily, based on my experience, many of the senior executives granted deferred compensation benefits are well-suited to both access the necessary information to evaluate this risk and to make the evaluation. It is important, in figuring in how much to rely on their deferred compensation payouts for their retirement income, that they do so.

I am returning to an old chestnut on my blog, a section which went dormant to some degree over the years, namely the section on interviews. They take a little time to do well, and podcasts (with their reliance on guests) seemed to have swallowed the field, so I stopped focusing on them. However, both my blog’s analytics and discussions with readers have made clear to me that there is still an appetite for them, and when I stumbled across an excellent first victim – I mean guest – for the reinvigorated interviews section of this blog, I decided to leap back into the fray. I will try to sustain this new effort on this front, so if any of you have candidates who you would like to volunteer for the back and forth Q&A that results in these interview posts, by all means, reach out and offer them up, willingly or not, as volunteers (cue the old schtick, done by everyone from the Three Stooges to Bill Murray, where everyone else steps back in line, leaving one poor sucker as an unwitting “volunteer”).

I have known our next guest, Joe Lorenzo, for many years, probably decades actually, going back to when he was a client. Joe recently retired after over nineteen years at AIG, where he oversaw bad faith litigation against the company. Joe handled cases all over the country, which allowed him to bring a unique and interesting perspective to the mostly Massachusetts based bad faith and coverage cases that I have long litigated. Joe had and has a unique perspective in many ways with regard to bad faith and Chapter 93A litigation in Massachusetts, having been an industry side lawyer during the entirety of the development of what I consider to be the modern era of bad faith law in Massachusetts, which has become highly driven in the past decade or two by the overlap between ever increasing jury verdicts in tort litigation (in other words, the rise of the so-called nuclear verdict) and the right to recover three times a jury verdict by proving bad faith by an insurer.

I have been trying those cases since the 90s, and tried, as a defense lawyer, the first attempt to multiply a large “runaway jury” verdict based on an insurer’s alleged bad faith in appealing the verdict rather than just paying it (I won). In the years following that trial, those types of cases started going south in many ways for the insurance industry, which from my perspective responded by getting much better, more sophisticated and more proactive in handling that risk. Joe had a front row seat on those developments during those years.

My discussion with Joe follows.

Q: Joe, can you tell us about your experience and background, particularly with bad faith litigation, in a way similar to how a lawyer would seek to qualify you as an expert at trial?

A: I have held positions in both the claims and legal departments for major insurers. My early career experience took place in the claims departments of Aetna, Travelers, AIG Technical Services, and Empire Insurance Group where I held positions as claim representative, supervisor, manager, complex claim director, Liability Manager and Vice President. This hands-on experience provided me with invaluable insight into how claims are investigated, evaluated, reserved, and negotiated. During my time in claims I attended law school and obtained a degree and was admitted in New York.

For the last 19 years I worked in the legal department of AIG as Vice President, Supervising Attorney, and Associate General Counsel where I developed extensive bad faith expertise managing and directing extra–contractual litigation and providing advice to the claim department.

Q: What do you think you bring to bad faith litigation as an expert that distinguishes you – your unique value proposition, so to speak?

A: While I was overseeing bad faith litigation, I would often encounter experts who generally fell into two categories: 1. Attorneys who represented defendants or plaintiffs in personal injury actions and 2. Former claim personnel who handled and/or managed claims.

Relative to the attorneys, although they were generally very knowledgeable and typically had tried many personal injury cases, it was often true that they had never handled, supervised, or managed a claim in their careers. While working with and preparing reports for adjusters and in some instances, claim management provides them with some insight into the world of claims, it’s a far cry from having handled claims. These “claim adjacent” experts would frequently face motions to exclude and there was always at least some concern that an individual judge, on an individual case, would strike them pursuant to a challenge.

I would typically favor choosing experts from category 2 who could not be impeached for failing to work in the field where they are alleged to be an expert.

My value proposition is that I not only have extensive claim experience but have also worked in a position where I had to evaluate the conduct of claim handlers to determine if claims were handled reasonably and whether bad faith occurred.

I think an argument can be made that much like a jury in a bad faith case, I have in essence been sitting in judgment of how claims were handled. I can only hope that a jury hearing about this experience might give my opinion more consideration than the typical expert who merely handled claims.

Q: Why become a testifying or consulting expert in bad faith cases?

A: I still enjoy talking about claims and case strategy. In many ways it’s nothing new, just an extension of what I have been doing for the last 19+ years. After having worked for corporations most of my life, the freedom of working as much or a little as I want is extremely attractive.
Being able to decide which cases to get involved in and which cases to pass on is also refreshing.

Q: Can you give us a sense of how many jurisdictions you have handled bad faith matters in over the course of your career?

A: I have been involved in bad faith matters/issues in every jurisdiction in the United States except Alaska. I have also been involved with cases which were filed in Canada, London, and Hong Kong.

Q: Are any particularly difficult for insurers as opposed to others?

A: Although there have been some recent attempts to improve life for insurers, Missouri is still very problematic. Attempting to deny coverage, or even reserve rights is fraught with complications that generally don’t exist elsewhere. Doing either might well result in an insured entering into a consent judgment for an amount of damages many many times the actual value of the case in dispute.

As if the explicitly authorized consent judgments are not bad enough, their evil twin, the
“Laydown trial” is also bad news for insurers. When I first heard the phrase many years ago it seemed like an oxymoron. Isn’t a trial a place where issues are vigorously contested in the closest thing to a gladiator fight that exists in civilized society? If you are squeamish about the sight of blood, don’t worry, because no fatal blows are ever landed in a Laydown trial. In fact, the lawyer representing the insured frequently forgets to contest the plaintiff’s claims, cross-examine liability and damages witnesses, or introduce evidence. Like the consent judgment, this process ends with the insured being liable for an amount that can be millions of dollars in excess of the true value of the case and leave insurers with a factual record that impairs their ability to prevail on their coverage position.

It’s an extremely dangerous place where things can go catastrophically wrong in a hurry.

Q: What about for plaintiffs or insureds?

A: During my tenure with the bad faith group, we had relatively few filings in Connecticut, New York, and Alabama. You can always rely on policyholder counsel to sue you in the jurisdictions where the law is most favorable to their clients. Where they don’t sue you is almost as telling.

Hartford Connecticut was known as the insurance capital of the U.S. for many years and historically the concept that an insurer had to act with an “evil motive” was frequently referenced in bad faith decisions. While adjuster’s conduct is often alleged to be sloppy, lazy, or neglectful in bad faith litigation, evilness is a tougher sell. Although the tide seems to be shifting in the last several years, it’s not a bad place to be a defendant.

New York has a solid body of bad faith and punitive damages law that gives an insurer a fair shot in litigation. Almost as important as the body of law, is the willingness of the judiciary, (particularly the appellate courts), to undertake rigor in their application of the law to carrier conduct. New York jurists and appellate courts have generally been adept at undertaking that examination. The willingness to undertake the rigor can make all the difference in determining whether the conduct rises to the level required to find liability or impose punitive damages.

Lastly, Alabama has perhaps the most interesting extra-contractual cause of action I have come across in my career. This state recognizes the tort of “Outrage” relative to some types of claims.
Generally, to prevail, a plaintiff must be the victim of extreme and outrageous conduct. To support such a finding, it must be established that a defendant’s action was “…heinous and beyond the standards of civilized decency or utterly intolerable in a civilized society …” I remain hopeful that most of us can work our entire careers without running into a claim handling decision that could be described this way.

Q: How do you prefer to work as an expert? In other words, I have had experts who want to exhaustively review every piece of paper in a case, others who prefer to focus on the claim file believing that an insurer should be judged on the information it actually had when it made its decisions, and still others who want to focus on the testimony at trial, among other approaches. Obviously, the approach is controlled to some extent by the jurisdiction and the scope of the required report or disclosure. Do you have a preference in this regard and if so, why?

A: I generally fall into the more information – the better camp. While I agree the claim file is usually the most significant piece of evidence in a bad faith case, I don’t think there is any harm in seeing the entire picture and having a solid understanding about what other parties were claiming, writing, or doing outside of what was recorded in the claim file.

I have seen policyholder attorneys attack experts who “only” reviewed the claim file as biased. The charge being that they only consider the insurers’ narrative of the claim as documented in a file that they control. While there are answers to that charge, I think an insurer may in some instances be better served by an opinion that allows an expert to testify that the insurers conduct was reasonable under the totality of the circumstances presented.

Q: This question is a professional interest of mine, in particular. Over the course of decades, I have found that most insurance experts, and particularly experts on bad faith or other aspects of claims handling, tend to fall into one of two categories. They either were in the insurance industry for a handful of years and then hung out a shingle as an expert and consultant, and have focused on that role for most of their professional careers, or else they spent a 20 or 30 year career in the industry handling significant risks, before becoming an expert witness. I know that I find the former easier to cross at trial and that I probably have a bias towards presenting the latter type as my expert in a case. Any thoughts on this dichotomy? And which category would you put yourself in?

A: I agree with you. In general, my idea of an expert is someone who has a mastery of the subject matter acquired throughout a career of “doing” rather than talking about doing. My preference was to steer clear of people who are experts for a living if at all possible. I particularly don’t like when a witness’s resume reflects more years working as an expert than years in the industry. In bad faith litigation, policyholder lawyers are skilled at making even mundane activities look improper or suspicious. Whoever your witness is, his/her ability to explain why things were done or not done in the handling of the claim is sometimes the best indicator of a witness’ potential success or failure with a jury.

Q: How has the bad faith landscape changed in the last 19+ years and how have those changes impacted claim handling?

A: When I started in the bad faith group, an extra-contractual claim against a carrier was not a very common occurrence. Sure, there were cases based upon coverage denials where the parties were reading the same policy and coming to different conclusions. Those lawsuits usually did contain bad faith counts. However, it seemed that those counts were not frequently the focus of the litigation. There were less than a handful of firms across the country who held themselves out as “Bad Faith” lawyers. More often than not, the coverage or personal injury lawyer in the underlying case stayed on and muddled through the handling of the extra-contractual claim. Today, there are many firms specializing in bad faith. Additionally, the average plaintiff personal injury lawyer is more familiar with bad faith law (or at least able to cite those cases where carriers were found to be in bad faith.)

In today’s environment there is no hesitancy to sue a carrier alleging bad faith or even worse conduct. In addition, it can no longer be assumed that parties asserting these claims merely want to be made whole for their alleged losses. Policyholder firms have become more adept and aggressive in the pursuit of punitive claims. Carriers who don’t take those claims seriously, do so at their own risk.

In addition to increased and more aggressive litigation, another change that I have observed is the attempted injection of the concept of potential bad faith into the claim handling process. In some jurisdictions, I have seen adjusters bombarded with correspondence accusing them of bad faith conduct. The frequency and ferocity of some of these attempts are another obvious change that has occurred. To be clear, I am not referring to “time limit demand” letters which are letters that typically claim that failure to pay a demanded sum, by what is often an arbitrary date, “opens” the insured’s liability limit and subjects the carrier to extra-contractual damages. The proliferation of demand letters is a separate change of significance.

To be clear, not every firm that sends letters asserting bad faith is seeking to monetize the situation to increase the settlement amount in the negligence case. Not every policy limit demand that is sent is a pro forma one. Any such correspondence should be reviewed carefully and responded to thoroughly and promptly. I raise these instances as issues that an adjuster must address if they are handling claims in certain jurisdictions in 2025.

Years ago, an adjuster could focus almost exclusively on evaluating liability, damages and determining whether a personal injury case could be settled or not. Importantly, you could be relatively sure that the attorney on the other end of the phone was interested in doing the same thing. Today, the adjuster’s focus and knowledge must be much broader than a solid understanding of negligence principles. He/she must be able to recognize when potentially problematic situations are developing, in real time, and know how to respond to them.