Benefits In Brief

The recent decision in Tussey v. ABB, Inc. provides many lessons for 401(k) plan fiduciaries.  One such lesson is to avoid having an overly rigid investment policy statement.  Failing to follow the protocol outlined in a plan’s IPS for replacing an underperforming investment option led the Tussey court to tag the plan’s fiduciaries with substantial liability for the participants’ lost earnings.

Plan fiduciaries must not only make sure that their own conduct complies with ERISA’s exacting standards, they also have a duty to monitor the conduct of the plan’s other fiduciaries.  The failure to do so can result in personal liability under ERISA’s co-fiduciary duty rules, as demonstrated by Smith v. Stockwell Construction Co. (W.D.N.Y. Dec. 10, 2011).

After months of delay, the Department of Labor (“DOL”) today released final regulations under Section 408(b)(2) of ERISA, requiring retirement plan service providers to disclose information about their services and fees to plan sponsors.  In doing so, the DOL delayed the effective date of those rules and made minor modifications to them.  The final regulations defer the compliance date from April 1 to July 1, 2012.  As a consequence, plan sponsors will also have more time to comply with the related participant-level fee disclosure rules.

Among ERISA’s many notice and disclosure obligations, the requirement to timely inform participants of important plan changes is one that is too often overlooked.  Although there is no monetary penalty for failing to distribute a summary of material modifications (“SMM”) or an updated summary plan description (“SPD”) within the time periods set by the regulations, such a failure can still have severe consequences.  AT&T recently learned that lesson – to the tune of a six-figure judgment awarded to a deferred vested participant in its defined benefit pension plan.  (Helton v. AT&T, Inc., Sept. 16, 2011).

In our efforts to help plan sponsors minimize their fiduciary risk, we consistently advise against giving the sponsoring employer a fiduciary role.  Designating the “company” or “employer” as an ERISA fiduciary can unintentionally subject the employer’s executive officers and board of directors to ERISA’s fiduciary standards, and potentially to personal liability.  The United States Supreme Court recently reminded us of another reason to avoid this plan governance mistake: the potential loss of the attorney-client privilege.

Offering employees the opportunity to invest in the stock of their employer through a tax-favored vehicle like a Code Section 401(k) plan or employee stock ownership plan (“ESOP”) must have seemed like an innocuous idea at one time.  Indeed, Congress expressed its approval of such arrangements by creating special tax benefits for both the sponsors of such plans (in the form additional deductions) and participants in them (in the form of favorable tax treatment on unrealized appreciation in the value of employer stock).  Yet these “employer stock funds” are now the quickest path to the courthouse for employers that sponsor them and fiduciaries that administer them.

A long-awaited ruling issued by the United States Supreme Court this spring gives employers both reason to celebrate and cause for concern.  The Court’s decision in CIGNA Corp. v. Amara (May 16, 2011) reaffirms that courts will not enforce benefit rights that are described in a summary plan description (“SPD”) as if those rights were actually set forth in the plan document.  At the same time that it foreclosed this avenue of relief for plan participants, however, the Court apparently opened up another by concluding that participants who are actually harmed by inconsistent or misleading plan summaries may have an equitable right to be compensated for that harm.  As a result, participant communications are likely to be a new source of ERISA litigation in the coming years.

A small, Oklahoma-based employer recently learned that inattention to 401(k) plan governance can create costly corporate liability. It also learned that retaining the responsibility for collecting plan participants’ investment election forms, and then forwarding them to the plan's recordkeeper, may not be advisable.

In late January the United States Court of Appeals for the Seventh Circuit (whose jurisdiction includes Illinois, Indiana, and Wisconsin) weighed in yet again on the extent to which ERISA’s fiduciary duty rules apply to the selection of 401(k) plan investments. As you may recall, the Seventh Circuit issued one of the most important rulings on this topic in recent years in Hecker v. Deere & Co. (2009), a case challenging as imprudent the fees attached to such investment options. Now, just two years later, the court appears to have reconsidered its analysis in Hecker, adding even more murkiness to these muddy waters.

In an effort to improve its enforcement efforts and better protect participants from service provider conflicts of interest and self dealing, the Department of Labor issued proposed regulations on October 21, 2010, that would significantly expand ERISA’s definition of a “fiduciary.”  These regulations will, when finalized, replace guidance issued in 1975 which governs when investment advisors become subject to ERISA’s fiduciary duties. 

When is it appropriate to accept the sticker price listed on a product without asking the salesman for a better deal?  Maybe never, at least if you’re a fiduciary of a $2 billion 401(k) plan spending the participants’ money, according to a federal court in California.  (Tibble v. Edison International, 7/8/2010).  That’s true even if an independent consultant advises you to buy the higher-priced product.

In addition to transforming the rules governing the benefits that health plans must offer, the Affordable Care Act substantially alters the way that plan sponsors and health insurers must describe and report those benefits. From new claim appeal procedures, to standardized benefit summaries, to additional governmental reporting, the Act will almost certainly increase administrative costs and complexities for employers. And like many other aspects of the Act, determining precisely how — and even when — to comply with some of the new reporting and disclosure obligations will be difficult. Although regulations will likely answer some of these questions, plan sponsors should start revising many of their procedures immediately.

We are occasionally reminded that the claims and appeals procedures carefully spelled out in ERISA plans have real meaning. Although the regulatory deadlines within which plan fiduciaries must render decisions on benefit claims and appeals may appear arbitrary – and although many plan administrators treat them as mere “guidelines” – the failure to abide by those deadlines can have disastrous consequences in court. A recent decision by the 10th U.S. Circuit Court of Appeals illustrates that those deadlines do have teeth. (Rasenack v. AIG Life Insurance Co.)

 In a closely watched case pending in a Massachusetts federal court, Scotts LawnService has successfully defended its policy of refusing to hire anyone who smokes, even if they do so on their own time.  The employer’s anti-smoking policy was just one component of a comprehensive wellness initiative.  Employers across the country who are seeking judicial guidelines on the extent to which they can stretch wellness programs may find some comfort in this ruling, but they would be well advised not to place too much emphasis on it.

When corporate executives also serve as ERISA fiduciaries for employee stock ownership plans (“ESOPs”), their business decisions may become subject to heightened legal scrutiny. That was the holding of the Ninth U.S. Court of Appeals in a recent case in which ESOP participants raised ERISA challenges to a CEO’s compensation package. The decision also upheld a California federal trial court’s ruling that barred the executives from using corporate assets to pay their defense costs. (Johnson v. Couturier, 7/27/09). Although this decision is at odds with holdings from the Eighth U.S. Circuit Court of Appeals (whose jurisdiction includes Missouri), it may nonetheless give ESOP fiduciaries pause when making certain business decisions.

The economic recession has caused many employers to reevaluate their severance policies.  We find that employers often strive to ensure that those policies do not amount to enforceable promises to provide similar benefits to similarly situated employees, but rather are non-ERISA, ad hoc arrangements.  That strategy, however, may be short-sighted.  A recent decision from a federal court in California serves as a reminder that ERISA-covered severance plans often give employers more protection than informal, “one-off” arrangements.  (Pierce v. Wells Fargo Bank)

In an effort to cushion the blow to retirement savings inflicted by the stock market crash, former President Bush signed the Worker, Retiree and Employer Recovery Act of 2008 (“WRERA” or the “Act”) on December 23, 2008. Although the Act provides some much-needed funding relief for sponsors of defined benefit plans, its attempt to help retirees under defined contribution plans will leave the sponsors of those plans reaching for a bottle of aspirin.

Tough financial times may tempt struggling employers to fudge a little when it comes to making contributions to their retirement plans. A construction company owner in Michigan recently learned the hard way, however, that leading participants to believe that contributions have been made, when in fact they haven’t, is a bad idea. (Safran v. Donagrandi, E.D. Mich. 1/30/09).

The analysis of a federal district judge last year in a decision dismissing a class action complaint that challenged Deere & Co.’s 401(k) fee practices generated a great deal of excitement about 401(k) brokerage windows. The court seemed to imply that the existence of such an investment portal – through which participants may invest their plan accounts in almost any mutual fund or security – insulated the plan sponsor from claims that the plan’s core funds were too expensive or otherwise imprudent. That analysis is currently being tested as the parties appeal the judge’s decision. It has also drawn a cool reception from the Department of Labor.

Plan sponsors and retirement plan service providers each have reason to be concerned about a recent decision in an ERISA lawsuit pending before a federal court in Iowa. That decision allowed former participants in two separate 401(k) plans to proceed with their claims that the Principal Financial Group, the third-party service provider for each plan, breached its fiduciary duties by encouraging retired participants to roll their plan accounts into high-cost IRA products affiliated with Principal. (Young v. Principal Financial Group, Inc.) Although the court rejected one of the participants’ theories of relief on the grounds that they did not have standing to pursue it, a second theory survived.

As we reported in our last issue of Benefits in Brief (Volume 2008, No. One, p. 1), the Supreme Court’s latest foray into ERISA left open many questions about the liability of ERISA fiduciaries and the remedies available to plan participants. In LaRue v. DeWolff, Boberg & Assocs., the Court opened the door for individual participants in defined contribution retirement plans (e.g., 401(k) plans) to sue for losses suffered in their own accounts. Although the Court’s ruling allowed Mr. LaRue to proceed with his claim against his employer, it did not decide whether his employer was, in fact, an ERISA fiduciary which could be liable for Mr. LaRue’s alleged losses.

In a Field Assistance Bulletin issued February 1, 2008 (FAB 2008-01), the Department of Labor highlighted a problem that apparently is pervasive in retirement plan and trust documents: confusion over the responsibility to collect delinquent contributions. Recent DOL investigations uncovered plan and trust documents that neglected to assign responsibility for monitoring and collecting contributions, and some that even purported to relieve all of the plan’s fiduciaries from this responsibility.

Like almost 70 million other Americans, James LaRue elected to save money for retirement through his employer’s 401(k) plan. When administrative errors reduced his account balance by nearly $150,000, Mr. LaRue sued his employer in federal court under ERISA to recover that amount. Initially, he lost. In a decision handed down on February 20, 2008, however, the United States Supreme Court resurrected his claim, in an apparent victory for Mr. LaRue and similarly situated 401(k) plan participants. (LaRue v. DeWolff, Boberg & Associates, Inc.) Unfortunately, the Supreme Court’s decision raises more questions than it resolves.

The Pension Protection Act of 2006 (“PPA”) amended ERISA to provide fiduciary relief for certain default investments when plan participants do not provide investment direction. The DOL has now issued final regulations, which will take effect on December 24, 2007, under which plan sponsors may enjoy a “safe harbor” from certain fiduciary liability.

It’s a practice first developed in the early stages of life . . . frequently associated with a distraught youngster wailing something like “It wasn’t my idea, Dad; it was his fault.” Such blame-shifting is so ubiquitous it has even found a place in the American judicial system. This right of “contribution” is a principle in which a wrong-doer who has paid the entire amount of a loss is allowed to seek reimbursement from another wrong-doer whose acts also contributed to the same loss. Although contribution is a liability-shifting measure commonly employed by defendants in other contexts, it is not a right that breaching fiduciaries have under ERISA, according to the United States Court of Appeals for the Eighth Circuit. (Travelers Casualty & Surety Co. v. IADA Services, Inc.)

Imagine that you are a 401(k) plan participant who, over the course of many years and at a significant sacrifice to your take-home pay, has accumulated a hefty account balance. As your retirement date approaches, you decide to move your plan balance from the moderately aggressive equity funds in which it had been invested to a conservative money market fund . . . The problem, however, is that – for reasons unknown – your transfer request was never implemented. The market plunged, and now your once-admirable account balance has been reduced by $150,000. After consulting your attorney, you conclude that those who are responsible for administering your plan have breached their fiduciary duties under ERISA, and you file suit to recover your losses. Easy case, right? Well, maybe not.

Health care reform is shaping up to be a hot topic in the 2008 Presidential election. Several states, however, have decided to move ahead with their own reform programs rather than wait for a federal solution. Three of those states – Massachusetts, Vermont, and Maine – have passed legislation intended to yield near universal coverage for their residents. Other states have passed, or are considering, legislation which would force some employers (especially large, “big box” retailers like Wal-Mart) to make larger contributions to their health plans. Both types of legislation face an uncertain future in light of ERISA’s federal regulatory scheme for health plans.

The United States Supreme Court unanimously rejected the notion that a defined benefit plan sponsor must consider merging its plan with another retirement plan as a method of plan termination. Siding instead with the position taken by the plan sponsor, as well as the Department of Labor and PBGC, the Court ruled on June 11, 2007, that ERISA does not permit merger as a method of plan termination, because merger is an alternative to, rather than an example of, termination. Beck v. PACE International Union.

Not everyone who has a role in the administration of an ERISA plan is a “fiduciary” under the Act’s special definition of that term. Even those who process claims and calculate benefits may be excluded from this category, so long as they do so within a framework of policies and procedures made by others. And not being a fiduciary is significant, because those on the outside of the fiduciary circle are not subject to the special obligations and personal liability that attaches to those on the inside.

Plaintiffs’ attorneys have filed a purported class-action lawsuit class action lawsuit against Wal-Mart and the fiduciaries of its 401(k) retirement plan. The suit, which was filed in a Pennsylvania federal court, builds on prior allegations that Wal-Mart unlawfully forced hourly employees to work without compensation.

Since Congress enacted sweeping new legislation governing nonqualified deferred compensation arrangements two years ago (in the form of Tax Code Section 409A), the focus of the benefits community has been on how those arrangements are treated for tax purposes. In light of the publication of final Section 409A regulations this month, this undoubtedly will continue to be the case. But in the midst of the tax discussion, it is important not to lose track of the other federal law that governs these arrangements – ERISA.

Failing to make required contributions to a multiemployer benefit plan can become a matter of fiduciary liability in some circumstances. And according to a federal court in Connecticut, that liability attaches personally to company executives who control the corporate checkbook. (Trustees of Connecticut Pipe Trades Local 777 Health Fund v. Nettleton Mechanical Contractors, Inc. (March 15, 2007)).

Don’t have enough reading material on your night stand? Try adding your ERISA bond to the pile of murder mysteries; it’s a quick read, and you’ll be glad you did. Just ask the trustees of the Colorado Operating Engineers Health and Welfare Fund. (Colo. Operating Engineers Health & Welfare Trust Fund v. Clarke & Sampson, Inc.).

A recent spate of litigation involving 401(k) plan fees has drawn the attention of employers, the media, and Congress. At issue in these cases is hundreds of millions of dollars in potential liability, and also the very backbone of the retirement plan industry. Employers can expect more scrutiny of their plans from employees and, in some unfortunate circumstances, from plaintiffs' attorneys.

It’s a scenario that occurs all too frequently for 401(k) plan administrators: a participant completes a beneficiary designation form naming his current wife as beneficiary, then is divorced, subsequently fills out another beneficiary designation form naming someone else as his beneficiary, but omits information required by the form. Must the administrator honor the new beneficiary designation, or is the former spouse entitled to the plan’s death benefit? The answer lies in the language of the plan.

Changes to the federal rules governing civil litigation will affect the way that benefit claims and appeals are processed. While third-party claims administrators will be most directly affected, plan sponsors and their human resources staff should also be aware of the new rules. Failure to abide by them could make it more difficult to succeed if claim decisions are challenged in court.

In a ruling that comes as good news to pension plan administrators, the United States Court of Appeals for the Eighth Circuit (whose jurisdiction includes Missouri) recently confirmed that erroneous benefit estimates generally do not amount to breaches of fiduciary duty under ERISA. (Christensen v. Qwest Pension Plan). The plaintiff in that case sued after automated benefit estimates provided to him before he retired proved to be off by at least $250 per month. He argued that the plan administrator breached its duty of loyalty by refusing to correct what it knew to be a “flawed” automated system, and that it breached its duty of care under ERISA by providing erroneous estimates.

In addition to summary plan descriptions that describe benefits offered to employees, employers often describe such benefits – along with dress codes, vacation policies, and other employment rules – in employee handbooks. Doing so, however, can create additional fiduciary risk.

As we first reported in a Benefits Alert! e-mail blast several weeks ago, a series of ten class action lawsuits filed in recent weeks challenges the fee structure employed by most 401(k) plans. These cases attack investment-related fees paid by plans to service providers, including revenue sharing arrangements between plans, mutual funds, and recordkeepers.

For nearly 17 years, plan fiduciaries have known that their decisions on benefit claims will be treated with deference by courts that review those decisions – so long as the governing plan documents clearly grant the fiduciaries the discretionary authority to interpret the plan. This rule of judicial deference, under which a court will overturn a fiduciary’s interpretation only if it was “arbitrary and capricious,” has its roots in the U.S. Supreme Court’s ruling in Firestone v. Bruch.

In a series of seven class action lawsuits filed on September 11, 2006, plaintiffs’ attorneys launched an all-out assault on the fee structure employed by most 401(k) plans. These cases challenge investment-related fees paid by plans to service providers, including revenue sharing arrangements between plans, mutual funds, and recordkeepers.

Final rules adopted by the Securities and Exchange Commission on July 26, 2006, will require companies with publicly-traded securities to significantly alter the way that they disclose their executive compensation practices in proxy and registration statements. These rules are generally designed to require the disclosure of all of the compensation that executives receive. They expand the list of executives for whom disclosures must be made, substantially modify the format and content of the required disclosures, and place heightened scrutiny on options-granting practices.

Long-standing ERISA regulations require plan administrators to distribute summary plan descriptions (“SPDs”) to individuals within 90 days after they become plan participants. Sponsors generally provide SPDs in an enrollment packet during a new employee’s first days of employment. The failure to distribute SPDs can lead to statutory penalties against the administrator and, as one employer recently discovered, liability for benefits the sponsor otherwise would not have had to pay.

Fiduciaries who rely on insurance brokers for an explanation of policy language should think twice before merely paraphrasing that explanation for participants and beneficiaries. Not only do fiduciaries have a duty to understand a policy’s coverage, they also must accurately describe that coverage. If the broker’s summary proves to be inaccurate or incomplete, the fiduciaries may be liable.

Plan sponsors who are worried about increasingly common claims for benefits filed by independent contractors recently received support from a federal court in New York. In the late 1990s Microsoft was held liable for failing to provide health and retirement benefits to a group of independent contractors who claimed that they should have been classified as common-law employees. Reacting to that holding, many employers added special “Microsoft” clauses to their plan documents in an effort to avoid a similar result.

When companies fail to remit 401(k) plan contributions, the Department of Labor almost always looks for – and usually finds – fiduciaries to hold responsible. Cases such as these often can be traced to financially troubled plan sponsors trying desperately to juggle the claims of competing creditors. Employee salary deferral contributions somehow become mixed with company cash, and thus delayed on their way to the trust account. When companies fail to remit 401(k) plan contributions, the Department of Labor almost always looks for – and usually finds – fiduciaries to hold responsible.

Ignoring a participant’s request for copies of plan documents and SPDs is never a good idea. It is even less so when the participant has already filed a lawsuit against the plan sponsor or its fiduciaries, and when the letter comes from the participant’s attorney. A federal judge in Tennessee imparted this lesson to Nissan North America, Inc. in a decision earlier this year.

An Advisory Opinion recently issued by the Department of Labor may come as quite a shock to many personal financial planners and investment advisors. According to the DOL, ERISA’s prudence, exclusive benefit, and prohibited transaction rules apply to many of the bread-and-butter recommendations that these professionals give, if their advice relates to assets held in qualified individual account plans. An Advisory Opinion recently issued by the Department of Labor may come as quite a shock to many personal financial planners and investment advisors.

When ERISA fiduciaries speak, they must recognize that what they say, and how they say it, will be held to a higher standard than ordinary speech. This is because ERISA imposes special rules governing the manner in which information about benefits is communicated. Although courts disagree about the scope of this duty of disclosure, it is well established that communications must give participants information that is both accurate and sufficiently detailed to allow them to make informed decisions.