Benefits In Brief

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).

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.

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.)

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)

Section 401(k) plans are not required to offer annuity distribution options – and most do not. Instead, participants are typically offered a lump-sum payment and, perhaps, a range of installment options. Of those few 401(k) plans that do offer annuity options, only a tiny fraction of retirees select them.

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.

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.

It’s sometimes tempting to conclude that ERISA imposes unnecessary duties on plan fiduciaries – but then we see a case that confirms Congress’ wisdom in creating those duties. Such a case was recently decided by an Alabama federal court. The decision in this case, Cromer-Tyler v. Edward R. Teitel, M.D., P.C., serves as a roadmap for what plan fiduciaries should not do in administering a retirement plan.

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.

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.

A recent decision by a Utah federal court serves as a reminder that fully insured welfare plans actually achieve their goal of transferring an employer’s risk to an insurer only if the employer meets its fiduciary obligations during the enrollment process.

In an opinion dated March 16, a judge for the Southern District of Illinois ruled against defendants’ motion to dismiss claims that they breached their fiduciary duties by permitting the Kraft Foods 401(k) plan to charge excessive and undisclosed fees. The court also refused to strike or order clarification of portions of the complaint that defendants claimed were lengthy and ambiguous, but did grant defendants’ motion to transfer the case to the Northern District of Illinois.

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.

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.

The short history of cash balance plans has been a tale of extremes. Once the darling of consultants, cash balance plans became something of a pariah after a wave of lawsuits cast doubt on their legality. The Pension Protection Act of 2006 (“PPA”) and a recent appellate court decision, however, may put cash balance plans back in the good graces of employers.

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.

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.

ERISA guarantees plan participants and beneficiaries the right to request and receive certain information about their plans. If the plan administrator receives such a request and fails to respond within 30 days, ERISA authorizes the federal courts to impose statutory penalties on the administrator.

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.

The Supreme Court has just made it easier for ERISA welfare plans to recover from participants who refuse to honor their plans’ reimbursement provisions. Resolving a question that has divided the federal circuit courts of appeals, the Court held in Sereboff v. Mid-Atlantic Medical Services that – under the right plan language and the right facts – a welfare plan’s action to recover such funds constitutes “equitable” relief and is therefore permissible under ERISA. And while the subtleties of the Court’s reasoning might not make spellbinding reading, they nonetheless contain an important message for employers who sponsor such plans.

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.

Spencer Fane’s ERISA Litigation Group secured a major victory last month in a case arising from the Enron bankruptcy. The dispute followed the sale of an Enron subsidiary, Northern Natural Gas (“NNG”). As a consequence of the sale, NNG withdrew from Enron’s voluntary employees’ beneficiary association (“VEBA”) and established its own welfare benefit plan, which was funded by a VEBA established by NNG’s ultimate purchaser, MidAmerican Energy Holdings Co. (“MEC”). When Enron allegedly failed to transfer to the MEC VEBA the assets necessary to fund the new plan, a group of participants in the new plan, along with the new plan’s trustee and the new plan sponsor’s administrative committee, sued fiduciaries of the Enron plan to compel a transfer of the disputed VEBA assets.

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.

The travails of ERISA welfare plans seeking to enforce their subrogation and reimbursement provisions are in the news – again. We have already devoted two Benefits in Brief articles to the debacle resulting from the Supreme Court’s 2002 decision in Great-West Life & Annuity Ins. Co. v. Knudson^,1 but relief may be in sight.

Sponsors of ERISA-governed plans should pay heed to the experiences of Raytheon Company, which recently learned to its dismay that the fiduciary liability insurance policy for which it had paid thousands of dollars was worthless as a defense to ERISA claims against it.