ERISA Fiduciary Guidebook

A Thank You and Good-bye. . .

As some of you may have heard, I have been diagnosed with a very rare and aggressive form of cancer which started in my kidney and spread to my lymph nodes. Because of that, it is with sadness that I am announcing I will no longer be writing here at the Fiduciary Guidebook or any of the other blogs that I have maintained. I just want to thank so many who have been readers here and have emailed or called.  Writing this blog and the others has been a wonderful experience which has connected me to so many people and I have enjoyed both writing as well as getting to know so many of you.

As a believer in the Lord Jesus Christ, my life rests with Him and I know that I have a home in heaven, at whatever time the Lord decides that my time on earth is finished. "All the days ordained for me were written in your book before one of them came to be." Ps. 139:16. You can read my testimony about how I came to know Jesus Christ at this location here.

I will be taking this blog down in the next month or so, so please print off anything you want to keep ASAP. Blessings to all of you!

The Role of ERISA Counsel In the Fiduciary Process

The recent case of In Re: Delphi Corporation Securities, Derivative & ERISA Litigation represents another victory for fiduciaries in a company stock case.  As in most of the recent cases holding for fiduciaries, prudent practices and processes won the day and this recent case is no exception.  However, what stands out in the case is the illustration that the case provides of the various roles that ERISA counsel can play in the fiduciary process and how utilizing counsel at critical junctures in the process can contribute towards a positive outcome for fiduciaries.

In the Delphi case, the directed trustee was being sued for breach of fiduciary duty.  The issue before the district court was whether the directed trustee had acted properly by not divesting the 401(k) plan of its investment in company stock (which had occurred through direction by participants into a company stock investment option under the plan) until three days before the company filed for bankruptcy.  (Six months before the bankruptcy filing the employer had amended the plan to prohibit additional participant money from going into the stock fund, but had not closed down the stock fund altogether.) 

Generally, ERISA would dictate that a directed trustee is required to follow the directions of a named fiduciary when such directions are "proper, in accordance with the terms of the plan and not contrary to ERISA."  After reviewing the facts of the case and what went on, the district court provided a discussion of the issue as to when ERISA might require a directed trustee to take this language of the statute to heart--"contrary to ERISA"--and override a plan document's requirement, and named fiduciary's direction, to invest in company stock.  The court in the Delphi case concluded, after reviewing DOL guidance and case law, that the directed trustee had not breached its fiduciary duty "in not taking action to override the provisions of the. . Trust documents and initiating the sale of [company] stock before it did. . . "  The court came to this conclusion even though a panoply of very well-respected ERISA attorneys had provided expert testimony that, in their opinion, ERISA would have required the directed trustee to divest the plan of its stock at a much earlier time.

So what was ERISA counsel's role in the process that lead to this favorable outcome for the fiduciaries? You can find it in the case if you read between the lines:

• The Plan documents, including an investment policy statement, had been drafted to provide a fiduciary structure and investment direction that was clearly outlined and followed. (Pgs. 4-8 of the opinion).  Excerpt from the opinion:

. . . It is this “directed trustee”exception that is at issue in this case. State Street contends that as to the retention of Delphi stock in the Company Stock Fund, it comes within this third exception as it was a “directed trustee,” subject to the proper directions of GMIMCo, the named fiduciary of the Plan. An examination of the Plan Documents in this case supports State Street’s contention. . .

 

• The agreements between the Plan and the directed trustee contained language that was consistent with the fiduciary structure dictated by the Plan documents. (Pg. 9 of the opinion)
  
• The directed trustee had adopted a "formal process for monitoring and evaluating company stock and making fiduciary decisions" which was followed and implemented. (Pg. 10 of the opinion)
  
• "Outside counsel" was hired to advise the fiduciary about “the current state of the law regarding when a directed trustee is bound to disregard its fiduciary obligation to follow plan provisions to invest in company stock” and advised the fiduciary "that extraordinary events such as imminent bankruptcy of the company are required before a fiduciary may disregard plan provisions." (Pgs. 16-17 of the opinion)

Bottom line: The case illustrates how important it is to involve qualified ERISA counsel in the drafting of plan documents, negotiations regarding agreements entered into between fiduciaries and providers, and the prudent processes that are established for implementing the plan documents. Also, when legal issues arise, engaging counsel to advise the fiduciaries helps to ensure that decisions that are made will withstand judicial scrutiny.

Please note that the court viewed the testimony offered by the plaintiffs' panel of ERISA experts as an invasion of the "sole province of the court to determine the applicable law."  (Footnote 10.)  In other words, the court liked the fact that the fiduciaries engaged ERISA counsel in the decision-making process.  However, it rejected their input when offered as expert testimony in the litigation phase.  

Second Circuit Warns Plan Administrators Making Disability Determinations

While the Second Circuit in a recent case--Hobson v. MetLife--upheld the plan administrator's determination that the participant in question was not entitled to long-term disability benefits, the court warned plan administrators to provide an explanation when they determine a participant is not disabled and their determination differs with the Social Security Administration:

We encourage plan administrators, in denying benefits  claims, to explain their reasons for determining that claimants are not disabled where the SSA arrived at the opposite conclusion: Doing so furthers ERISA’s goal of providing claimants with additional information to help them perfect their claims for subsequent appeals.

The court also did not believe that the structural conflict that the plan administrator had in being both the "evaluator and payor of benefits" in this case "influenced its reasonable interpretation" of the participant's claim for disability benefits.  Thus, the court declined to give the conflict of interest any weight pursuant to the Supreme Court's MetLife v. Glenn analysis. 

Disability determinations can occur in all types of benefit plans, including qualified retirement plans, and therefore the significance of the case should be analyzed for its impact on other types of ERISA plans as well.

Ninth Circuit: In ESOP Setting, ERISA Fiduciary Law May Apply to Decisions Related to Corporate Salaries

It is well established under the law that ERISA fiduciaries can wear two hats and serve in a corporate capacity at the same time they are serving in a fiduciary capacity for an ERISA-covered plan.  However, when they are acting as fiduciaries of the plan, they must act solely in the interests of participants and beneficiaries.

A recent Ninth Circuit case highlights the conflicts that can occur where an ESOP is involved.  For instance, are decisions relating to corporate salaries, when made by directors and officers who are also fiduciaries of the company's ESOP, subject to ERISA fiduciary law such that the decisions must be made in the best interest of participants and beneficiaries?  The Ninth Circuit in Johnson v. Couturier held that such decisions should be subject to ERISA fiduciary law where the fiduciaries stand to "directly profit" from such decisions: 

Decisions relating to corporate salaries generally do not fall within ERISA’s purview. But where plan assets include the employer’s stock, the value of those assets depends on the employer’s equity. Employee compensation levels are, of course, one of the many business expenditures reducing the value of the overall equity of any company. On the other hand, “[v]irtually all of an employer’s significant business decisions affect the value of its stock, and therefore the benefits that ESOP plan participants will ultimately receive.” Martin v. Feilen, 965 F.2d 660, 666 (8th Cir. 1992). Taken to its logical conclusion, therefore, this line of thinking would, in the case of an ESOP, extend the application of ERISA to a corporation’s annual expenditures on office supplies—clearly an absurd result. The Eighth Circuit has on this basis limited an ERISA fiduciary’s duties “to transactions that involve investing the ESOP’s assets or administering the plan.” Id. Setting executive compensation levels does not obviously fall into either category. See Eckelkamp v. Beste, 201 F. Supp. 2d 1012, 1023 (E.D. Mo. 2002) (holding that a corporate director is not acting as an ESOP fiduciary in setting compensation levels).

Nonetheless, we conclude that applying ERISA to the instant case does not risk encompassing within its confines any and all day-to-day corporate decisions shielded by the business judgment rule. Where, as here, an ESOP fiduciary also serves as a corporate director or officer, imposing ERISA duties on business decisions from which that individual could directly profit does not to us seem an unworkable rule.  To the contrary, our holding merely comports with congressional intent in establishing ERISA fiduciary duties as “the highest known to the law.” Howard v. Shay, 100 F.3d 1484, 1488 (9th Cir. 1996) (quotation omitted). To hold otherwise would protect from ERISA liability obvious self-dealing, as Plaintiffs allege occurred here, to the detriment of the plan beneficiaries.

See also the Ninth Circuit's very interesting discussion in the case regarding indemnification agreements.  The court held that the agreements at issue, indemnifying the directors and officers and requiring advancement of the defendants' legal defense costs, were void and unenforceable.

UPDATE:  See also this article--Case Imperils Rights of ERISA Fiduciaries--which provides some of the history behind this case.

Sixth Circuit Opines On ERISA "Safe Harbor" Exemption

One of the key aspects of determining whether ERISA fiduciary law applies has to do with whether the benefit plan at issue is an ERISA-covered plan. ERISA provides an exemption from its applicability under 29 C.F.R. Section 2510.3-1(j) for certain "group or group-type insurance programs." If a plan meets all four requirements of this exemption, then the plan is not an ERISA-covered plan, but will be governed by state law.

In general, in order to fall under this safe harbor (and fall out of ERISA), one of the requirements of the safe harbor is that no contributions be made by the employer, i.e. if the employer is making contributions to the plan, then it is an ERISA-covered plan. Thus, because many disability plans are funded either partially or fully by the employer, they are covered by ERISA.  

In the recent Sixth Circuit case of Helfman v. GE Group Life Assurance Company, et al., a participant had challenged the district court's decision that the plan was covered by ERISA because the participant sought to get out from under the ERISA banner of deference afforded the plan administrator's decision.  The district court had ruled that the plan administrator had not abused its discretion and upheld the insurer's termination of the participant's benefits.

In the case before the court, the participant had reimbursed the employer for contributions made on his behalf, even though contributions made on behalf of other participants to the plan had not been reimbursed. The participant argued that, because the employer was not making contributions to the plan on his behalf, ERISA should not apply in the case of his benefits under the plan, even though he agreed that ERISA would apply to the plan with respect to those participants on whose behalf the employer did make contributions.  While it was an interesting argument, the Sixth Circuit rejected it, upholding the district court's decision that ERISA applied and holding that the four requirements of the safe harbor exemption had not been met. The Sixth Circuit opined as follows:

Accordingly, we hold that if an employer contributes to any employee’s payment of premiums, ERISA must apply to the entirety of the particular insurance program, regardless of whether one or more employees pays his own premiums in full. (Emphasis added.)

And:

To that end, we find that the ERISA policy of uniform regulation dictates a finding that a single plan may not be variously governed by both ERISA and state law, depending on the particular employee in question.

After reaching the decision that ERISA applied, the Sixth Circuit then went on, using the MetLife v. Glenn conflicts analysis, to hold that the insurer had abused its discretion.  In finding that the insurer had failed to provide "explanations of its reasons" for making certain determinations leading to the termination of the participant's benefits, the court held that the insurer/fiduciary had not engaged in a "deliberate and principled reasoning process." 

Please note that, in reaching its decision, the court cites the fact that the insurer used "a combination of in-house consultants and independent consultants" in concluding that the insurer was "conflicted" under Glenn.

Conclusion: The case illustrates the complexity of the law surrounding the issue of ERISA applicability. Suppose that a disability plan is designed to fall out of ERISA through the safe harbor, but the employer on an ad hoc basis decides to reimburse even just one participant with respect to his or her contributions under the plan. Under the holding of the case, a plan might suddenly become an ERISA plan based on the reimbursement of a single participant.

The case is also another illustration of how fiduciaries should engage in a "deliberate and principled reasoning process" in reaching a claims decision in order to find refuge under the Firestone standard of review.

Madoff-Related Liability Insurance Litigation

D & O Diary has started keeping track of the Madoff-related insurance coverage litigation in a list which you can access here. The list begins with coverage here of a recent case filed in connection with a profit sharing plan where 100% of the assets ($12,000,000) was invested with Bernard L. Madoff Securities LLC.  The DOL apparently launched an investigation, and by letter dated June 30, 2009, demanded that the company "restore losses" to the plan. The plan sponsor filed a claim with its "Employee Benefits Plan Administrative Liability" insurer in connection with the plan losses and the DOL’s actions, but the carrier denied coverage. The lawsuit is being filed in connection with the denial of coverage.

The Complaint filed by the plan sponsor against the insurer provides an indication as to the allegations being made by the DOL in requiring the plan sponsor to restore losses.  According to the Complaint, the DOL is claiming "errors" on the part of fiduciaries:

• In failing to obtain a signed statement from Madoff acknowledging he was a fiduciary and registered as an investment advisor under The Investment Advisors Act of 1940.
• In failing to provide the DOL with copies of quarterly performance reports, written quarterly investment reviews, information on costs associated with the Plan, and an Investment Policy Statement.

A Win for Fiduciaries in a Stock Drop Case

District Judge Otero for the Central District of California has granted the fiduciaries' Motion for Summary Judgment in the following case:  In re: Computer Science Corporation ERISA Litigation.  More on this  later. . .

Article here on the case from AmLaw Litgation Daily.

Search Feature Added

I have included a Google search device in the sidebar which will allow you to search for content here more easily.

Also, some additional tips re: searching for content at this website:

(1) Checkout the "Pages" section in the sidebar in which I am compiling research results on various topics.

(2) See also the "Categories" section in the sidebar which indexes the various posts by topic.

Second Circuit Upholds Three-Year Limitation Period in Plan Document

In an era when lawsuits appear to be targeting fiduciaries, one of the areas that is becoming more important for fiduciaries is the practice of implementing steps to reduce litigation risk. One such practice which has been challenged and upheld in the courts is the inclusion of a limitation period in the documents governing the plan. The limitation period provision limits the period of time during which a participant or beneficiary can bring suit. The idea behind such limitation periods is to protect fiduciaries so that they are not subjected to a risk of lawsuit any longer than they have to be under the law.

Such a limitation period was recently upheld in the Second Circuit in the case of Burke v. PriceWaterhouseCoopers LLP Long Term Disability Plan, et al. The Plan’s limitation period prohibited a claimant from bringing legal action more than “three years after the time written Proof of Loss is required to be furnished." The Second Circuit stated that they were joining the Fifth, Sixth, Seventh, and Eighth Circuits in upholding the limitation period.

If the plan had not included the limitation period, then the case would not have been dismissed. A longer limitation period of 6 years provided under New York law would have applied.

With the assistance of legal counsel, plan sponsors may want to examine the applicable law in their circuit and determine whether inclusion of such a limitation period in the plan documents would be beneficial. Results vary from circuit to circuit as to (1) the extent to which a limitation period will be upheld, and (2) the length of the limitation period that is deemed permissible.

Certainly, if a limitation period is drafted into the plan document,it should also be communicated to participants and beneficiaries in the summary plan description and in any claims procedures communication materials as well. In the case of Solien v. Raytheon Long Term Disability Plan #590 decided last year, a district court found a one year Plan-imposed limitations period to be reasonable, but refused to enforce it since it had not been communicated to participants sufficiently.

Article on Fiduciary Status of Broker-Dealers

Reish & Reicher has posted an article by Fred Reish entitled "Fiduciary Status for Broker-Dealers."  Excerpt: 

The President’s proposal for reform of the financial services industry was described in a Department of Treasury publication—or White Paper—entitled “Financial Regulatory Reform, A New Foundation: Rebuilding Financial Supervision and Regulation.” As a part of that proposal, the Administration included a provision to establish a fiduciary duty for broker-dealers who offer investment advice and to harmonize the regulation of investment advisers and broker-dealers. . .

Even though this is just a proposal, it carries change with it. That is, the proposal alone will cause change—because it will require that broker-dealers, RIAs, politicians, government officials, 401(k) plan sponsors and fiduciaries, and others, engage in a discussion about the meaning of fiduciary responsibility.

It will be interesting to watch the progress of this proposal and, if it is enacted into law, to see its long-term effect.