Benefits In Brief

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).

Both the Employee Retirement Income Security Act (“ERISA”) and the Internal Revenue Code (the “Code”) generally prohibit fiduciary investment advisers from receiving compensation from the investment vehicles that they recommend to plan participants and IRA holders.  However, the Pension Protection Act of 2006 amended ERISA to create a new statutory exemption from the prohibited transaction rules that is designed to expand the availability of fiduciary investment advice to participants in individual account plans and IRAs, subject to specific safeguards and conditions.

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.

Employers sponsoring ERISA-covered, participant-directed, individual account plans (such as 401(k) or 403(b) plans) are constantly reminded of their fiduciary duties. In recent years, almost any discussion of these duties has included the issue of fees that are charged to participants’ accounts (or that otherwise affect a participant's account balance). Fiduciaries are being told that they must (i) know what fees are being charged to or paid from plan assets, (ii) understand what those fees are for, (iii) make sure that the fees paid are reasonable in relation to the services provided, (iv) disclose certain fees to plan participants, and (v) report certain fees to the government. But where are all of these requirements coming from? And why is there so much more focus on fees than there was 10 years ago?

Inevitably, anything as massive as health care reform will have unanticipated consequences. One of those appears to be a renewed demand for welfare benefit trust funds. This demand arises in a specific context: self-insured, stand-alone retiree health plans. To understand this recent phenomenon, some history is in order.

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.

On July 15, 2010, the Department of Labor (“DOL”) issued “interim” final regulations regarding the fee information that service providers must disclose to fiduciaries of ERISA-covered retirement plans. This information is intended to assist fiduciaries in assessing the reasonableness of contracts or arrangements for the provision of services to the plan, including the reasonableness of the service provider’s compensation and the potential for conflicts of interest.

For years, the Department of Labor (“DOL”) has focused much of its enforcement resources on delinquent deposits of participant contributions. Under the general rule set forth in existing regulations, participant contributions to ERISA plans become plan assets “as soon as they can reasonably be segregated” from the employer’s general assets.

A recent decision by an Illinois federal court (Majestic Star Casino, LLC v. Trustmark Insurance Co.) carries two important lessons for sponsors and administrators of self-funded health plans. Unfortunately for the plan sponsor involved in this case, those lessons came at a steep price — in the form of denied stop-loss claims.

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.)

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.

Part 4 of Title I of the Employee Retirement Income Security Act of 1974 ("ERISA") sets forth the rules that apply to fiduciaries of ERISA-covered employee benefit plans.  These "fiduciary responsibility" rules include the requirement to hold plan assets in trust, a fiduciary's duties of loyalty, prudence, diligence and diversification, and the prohibition on certain transactions between the plan and parties-in-interest.  One of the lesser-known (but still important) rules is the requirement (under Section 412 of ERISA) that every person who "handles" funds or other property of the plan be bonded.

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)

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.

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.

On July 23, 2008, the Department of Labor issued proposed regulations setting forth the information that plan fiduciaries will soon be required to provide (and the manner in which such information must be provided) to participants who are allowed to direct the investment of their accounts in defined contribution plans. This is the third and final piece of guidance in a three-part initiative by the DOL (starting with regulations finalized in November 2007 regarding Form 5500 reporting, and followed by regulations proposed in December 2007 on the information service providers must disclose to plan sponsors) designed to improve the transparency of fees and expenses in participant-directed defined contribution retirement plans (such as 401(k) plans and 403(b) arrangements) that are subject to ERISA.

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.

An important issue for 401(k)plan sponsors is whether amounts withheld from employee paychecks are deposited into the plan’s trust account in a timely manner. The Department of Labor (“DOL”)devotes significant enforcement resources to cases involving the delinquent remittance of employee contributions, and nearly 90% of applications under the DOL’s Voluntary Fiduciary Correction Program relate to this issue.

There has never been greater attention in Washington, D.C. to the issue of fees charged to individual participants in 401(k) plans, how those fees are shared among a plan’s service providers, and the disclosure of those fees/revenue sharing arrangements to plan sponsors and plan participants.

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.

A major insurer learned, to its chagrin, that it doesn’t pay to include soothing words in a summary plan description (“SPD”) unless those words are actually acted upon. The result in Rosenberg v. CNA Financial Corp. was potential liability for nearly $5 million in severance benefits that were clearly not payable under the terms of the plan.

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 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.

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.

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)).

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.

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.

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.

The Pension Protection Act of 2006 (PPA) made several changes intended to facilitate automatic enrollment plans, including new ERISA Section 404(c)(5), which provides fiduciary relief for certain default investments under participant-directed individual account plans. The DOL has now issued its proposed implementing regulations. The regulations will be effective 60 days after the final regulations – expected early in 2007 – are published.

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.

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.

In the context of final regulations concerning abandoned defined contribution plans (so-called “orphan plans”), the Department of Labor (“DOL”) has also clarified its 2004 guidance on the permissible means of distributing accounts of participants and beneficiaries who cannot be located at the time of a plan’s termination. Although these orphan plan regulations are primarily of interest to banks, insurers, and mutual fund companies that hold assets of abandoned plans, plan sponsors and administrators will also benefit from the regulations’ “missing participant” provisions.

The Department of Labor (“DOL”) recently issued guidance regarding the distribution and allocation of mutual fund settlement payments made to employee benefit plans and their participants. This guidance is directly related to SEC enforcement actions alleging late trading and market timing activities. As a result of these actions, numerous mutual funds have established settlement funds.

Under ERISA’s claims and appeals regulations, participants and beneficiaries are entitled to a “full and fair” review process. In St. Joseph’s Hospital of Marshfield Inc. v. Carl Klemm Inc., a federal district court in Connecticut ruled that a plan beneficiary was not given a full and fair review when the plan’s third-party administrator (“TPA”) made both the initial decision to deny benefits and the appeal determination.

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.

Market timing and other short-term trading patterns impose costs on mutual funds by disrupting management, forcing funds to maintain excessive liquidity, and driving up tax expenditures. The SEC issued final rules on mutual fund redemption fees last year to curb these abuses.

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.

Many sponsors of employee benefit plans have found it necessary to lend money to a plan, as a way of easing a liquidity problem or otherwise facilitating the plan’s operation. Such loans have occurred in the context of failed insurance companies, other illiquid assets, or delays in the disbursement of distributions by plan trustees or custodians. Because a plan sponsor is a “party-in-interest,” however, such a loan constitutes a “prohibited transaction” under both ERISA and the parallel Tax Code provisions.

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.

A recent decision by an Ohio federal court illustrates an important distinction between two regulatory exemptions from ERISA’s definition of an “employee welfare benefit plan.” These are the exemptions for “payroll practices” and for “voluntary insurance arrangements.”

Yet another recent federal court opinion reminds us that ERISA plans – and thus ERISA obligations – may be created even when they are not intended. While an Ohio court was construing the “payroll practices” exemption from ERISA in the Langley case (see “What is in a Name? Not an ERISA Plan”), a court in Texas construed a similar exemption for “voluntary insurance arrangements,” and found it unavailable. Yet another recent federal court opinion reminds us that ERISA plans – and thus ERISA obligations – may be created even when they are not intended.

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.