BNA Pension and Benefits Blog

Participant's access to information in claims adjudications.

One of the purposes of ERISA was to provide participants with access to information so they could understand their rights and obtain their benefits from their plans.

One of the major problems that plaintiffs face is obtaining information and documents from insurance companies and third party administrators, when they do not comply with the US Department of Labor Claims regulations. For example, they do not provide the appropriate notices to the claimant about the specific sections they are relying upon in the plan documents or produce the documents relied upon in the claims adjudications.

These entities are not subject to penalties under ERISA unless they are designated as plan administrators, which rarely happens, and they can ignore their obligations to comply with ERISA.

I suggest that the statute and/or the claims regulations be amended to address these issues so that the insurance companies and TPAs will now have a financial incentive to comply with their obligations to the plans and the participants.

Automakers' Insolvency Opens All the Benefit Cutback Targets and Problems

    The insolvency (whether or not in Chapter 11 reorganization) of the three automakers brings “legacy costs” back to the center stage of ERISA cutback negotiation and litigation. 

    The automakers have already put themselves on the cutting edge of many of these issues outside of bankruptcy.   

    They have litigated retirees’ medical benefit cutbacks, arguing that retirees were not vested (Sprague v. General Motors Corp., 133 F.3d 388, 21 Employee Benefits Cases 2267 (6th Cir. 1998)). 

    They have negotiated VEBAs with the UAW and then sought to bind the retirees by class action settlements and court approval after a fairness hearing. International Union, United Auto., Aerospace, and Agr. Implement Workers of America [McKnight] v. General Motors Corp., 497 F.3d 615, 41 Employee Benefits Cases 1692 (6th Cir. 2007)   Still, further developments are inevitable, particularly in light of the recent VEBA history. 

    Some of the key “legacy cost” questions are these:

        1.  The first question, logically, is this: Are the retirees’ medical benefits “vested”?   The “vesting” of retiree medical benefits is certainly possible, and it depends on the words of the plan, the magic of language such as “for your lifetime,” the admissibility of parole evidence to clarify “ambiguities” in the plan and SPD, and so on. UAW v. Yard-Man, Inc., 716 F.2d 1476, 4 Employee Benefits Cases 2108 (6th Cir. 1983), cert. denied, 465 U.S. 1007 (1984); Sprague v. General Motors Corp., 133 F.3d 388, 21 Employee Benefits Cases 2267 (6th Cir. 1998); Yolton v. El Paso Tennessee Pipeline Co., 435 F.3d 571, 36 Employee Benefits Cases 2217 (6th Cir. 2006); Bland v. Fiatallis, 401 F.3d 779, 34 Employee Benefits Cases 1875 (7th Cir. 2005); Doubtless the rules need clarification, and the various circuits’ positions need reconciliation.

        2. If the case reaches the bankruptcy court, does “vesting” really matter?  The answer ought to be obvious, but if you read the actual language of the Bankruptcy Code (11 U.S.C. section 1114), the statute on its face never mentions vesting, instead requiring continuation of a “program” of  “retiree benefits” that was “maintained” before the bankruptcy filing (Sec. 1114(a)).

        3. If a union makes a cutback bargain, how does the union get to "represent" its retirees, when unions legally only represent actives? Allied Chem. & Alkali Workers v. Pittsburgh Plate Glass Co., 404 U.S. 157, 1 Employee Benefits Cases 1019 (1971).  A retirees’ medical benefit program would not be a mandatory bargaining subject under the NLRA if the bargaining issue did not affect any currently active employee. But that may be a non-problem because the bargaining topic frequently includes benefits for current employees, payable when they retire (which is certainly a mandatory bargaining subject). And in any event, there is an overriding reality in distress situations – the union has at least a little “muscle,” and the retirees ordinarily do not.

        4. In any event, how do you bind the retirees?  Typically, the court certifies a group of retirees as a Rule 23 class action representative.  International Union, United Auto., Aerospace, and Agr. Implement Workers of America [McKnight] v. General Motors Corp., 497 F.3d 615, 41 Employee Benefits Cases 1692 (6th Cir. 2007)

        5. What standard is used by the court to decide whether to force retirees to give up their claim against the employer in exchange for reliance on the VEBA? See the GM and Ford rulings. And while the Ford/GM standards are not (yet) actually under the Chapter 11 cutback devices (sections 1113 and 1114), the VEBA settlements previously approved by the district court were based on findings that the VEBA deals were less severe than the cutbacks the retirees might have lost in bankruptcy (497 F.2d at 628).  And yet only recently GM has backed out of its VEBA funding commitment.

        6.  How can you VEBA-ize a solution to legacy costs, when a VEBA can only accumulate one year’s worth of benefit costs?  A “garden variety” VEBA is allowed only a very limited pre-funding accumulation, but a collectively bargained VEBA is not so restricted. IRC §§ 419(c), 419A(f)(5)(A), 501(c)(9).

        7. What if the employer buys this deal in exchange for payments into the VEBA, and then the employer defaults or goes bankrupt before full payment?

        8. Is there some hidden logic in this -- an assumption that the VEBA only has to remain solvent for a few years, and then National Health will arrive in all its glory and bail out everyone?   How many years?  And in the meantime, what sort of “booking” treatment is allowed, in such situations, for financial statements of public corporations?

        9. Do the rules really change after a filing in Chapter 11?  Chapter 11 bankruptcy reorganization has its own collective bargaining provisions, which apply to changes in labor agreements (11 USC 1113) and even to retirees medical benefits (11 USC 1114). This special “last offer” bargaining lowers but does not ordinarily wipe out retirees medical benefits, because the court’s approval of the “bargain” depends upon a finding that the cut-back is the least severe change necessary to save the debtor.

        10.  And then there is the whole array of issues arising under the defined benefit pension plans.  Termination of these plans (“distress” or involuntary termination under ERISA 4041(c) or 4042), inevitably generates losses by surprise.  Employees and retirees are often surprised that they are not eligible for funded benefit levels as high as they expected, because of the calculation of “PC3" priority benefits under ERISA 4044(a)(3)), particularly after the funding level of the terminated plan is recalculated by the PBGC.  And even the guaranteed benefit level may not be as high as anticipated, given the obscure rules for ERISA Title IV guaranteed benefit calculations.  And the liability of the plan debtor/employer/sponsor may be higher than expected, given PBGC’s determination to argue and re-argue questions concerning their priorities in bankruptcy, even though PBGC seemingly has lost these arguments repeatedly.

    The core problems, however, concern conflicts of interest – conflicts by the union, by the employer, and by the PBGC – and these conflicts abound. 

    The union’s conflict:  It does seem clear that the UAW – now as in the past, all the way back to the seminal Studebaker case – will inevitably be faced with a terrible Hobson’s choice:  Save jobs by lowering costs (“selling out” the retirees)? Or fighting tenaciously for protection of retirees, and risk destruction of the enterprise?  Section 1114(c) of the Bankruptcy Code recognizes the conflict of interest of the incumbent union, but presumes that the conflict may be avoided or ignored.  And yet, inevitably, it is still there.

    The employer’s conflict: ERISA by its express terms makes the employer a presumptive fiduciary – even a named fiduciary – and plan administrator.  ERISA §§ 3(16)(A)(ii), 402(a)(2)(A).  The existence of the conflict is assumed by the statute, but the employer, even with a conflict, is prohibited from acting on the conflict (wearing “two hats” but not at the same time).  And in chapter 11, the employer has three hats – employer, fiduciary for the plan, and fiduciary for the creditors.  Again, the conflict is inherent in the situation.  In the ordinary course, the situation is manageable.  But the puzzles described above are not ordinary.

    And the PBGC’s conflict: The PBGC was invented to protect employees and retirees.  In recent years (decades?), however, the PBGC has often seemed more interested in protecting its balance sheet than its natural constituents.

    We shall see.

Frank Cummings

Recent Standing Case Promotes Confusion

The U.S. Supreme Court in LaRue, albeit in a footnote, endorsed the holding that participants who cashed out of defined benefit plans did not lose standing to assert claims under section 502(a)(2) for losses to their plans that diminished the amount in their accounts at the time they cashed out.  I'd have thought that the opportunity for mischief in these cases was nearly at an end, particularly in light of the the Third Circuit's thorough and scholarly opinion in Graden v. Connexant, decided just last year.  In that opinion, the court was at great pains  not only to hold that standing existed to bring a case under section 502(a)(2) to restore losses to the plan, but to once and for all reject the dichotomy between a claim for benefits and a claim for losses.  The Court was quite clear that although the the participant might have standing to seek benefits under section 502(a)(1)(B), such a claim was hardly sensible, because the money would have to come from other particpant's accounts, a result that ERISA probably would not permit. The Graden court explained that "...the sensible route is to use section 1132(a)(2) to get the money in the first instance from a solvent party liable to make good on the loss, not from the plan itself." 

So while a participant ultimately seeks benefits, he does so by pursuing a loss to the plan under section 502(a)(2) that must be allocated not merely to those participants who have received no distribution, but to those cashed out with diminished accounts.   If cashed out participants could not share in such a recovery "the plan would recover money that could only properly be allocated to people no longer in the plan."  If a participant or fiduciary pursued such a claim for the plan and no such allocation were possible "it is unclear what the plan would be entitled to do with the money...if we are to take the trust law analogy seriously, then the recovered funds must go to to the people actually sustaining losses."

In short, the dichotomy between a suit to recover losses for the plan and a suit for benefits is a false one.  The participant sues to recover the loss to the plan, relief specifically provided for in ERISA section 409.  He has standing, because any recovery for the plan must be allocated to the affected accounts, regardless of when a participant cashed out, before or during the litigation. 

Notwithstanding the conceptual clarity introduced by the Third Circuit, the Eleventh Circuit in Lanfear v. Home Depot, purporting to agree with Graden ignores its teaching and resorts to the discredited benefits v. damages dichotomy.  While the decision makes clear that the claim asserted by the participants was a breach of duty causing losses to the plan that allegedly diminished participant accounts, just as in Graden, the court says definitively it is claim for benefits, not damages.  This view certainly supports the eccentric Eleventh Circuit view that there must be exhaustion of administrative remedies in fiduciary breach claims, though it is a mystery how such procedures can afford relief against plan fiduciaries, but it does nothing to advance understanding.  As the Third Circuit recognized, meaningful relief must come not from the plan but from breaching fiduciaries (and we would add sometimes non-fiduciaries under Harris); these are claims for the plan that will result in the recovery of money that must, in a defined contribution plan, be used for benefits; they are not literally claims for benefits that could be brought under 502(a)(1)(B).  The courts need to distinguish between their own rhetoric and actual statutory language; the "claim for benefits" rhetoric could cause as much mischief as the "plan as a whole" rhetoric from Russell.  That singular bit of linguistic sloppiness caused years of confusion and took a Supreme Court decision to correct.

Amschwand? Or am not Schwand?

It's that Dean guy again.  Sheesh. 

In Amschwand v Spherion Corp., 505 F.3d 342, 41 EBC 2697 (5th Cir. 2007), Mr. A was on medical leave for terminal cancer and still covered by Spherion's life insurance plan.  At the end of the year, Spherion changed to a new insurance carrier and was supposed to list Mr. A as one of the carryovers to the new policy -- but didn't.  Mr. A was reassured time and again, orally and in writing, that he would still be covered by the new policy, and there were no writings yet issued from which he would have learned otherwise.  He dies and the life insurance benefits were denied.  Widow sues and loses, because the Circuit says she's seeking damages, not benefits.  Supreme Court asks the Solicitor of Labor for opinion on cert petition, and SOL says they should grant and hold (a) that Mertens/Great-West/Sereboff don't apply because fiduciaries were not defendants in those cases and, since fiduciaries are a creature of trusts which are solely a creature of equity, all remedies against a fiduciary are necessarily "equitable." (b)  in any event, where the action is against a messing up fiduciary, plaintiff is entitled to have the fiduciary make good by way of "surcharge," an equitable remedy.

I think two additional arguments should have been made:  (1) That because Mr. A was no longer a participant in the plan, having been unceremoniously bounced from it, there is no ERISA preemption of a state law claim.  In Miller v Rite-Aid, 504 F.3d 1102, 41 EBC 2537 (9th Cir 2007) on nearly identical facts (apparently the 9th Circuit exists in a parallel universe -- hey, watch your language), the court held that since Miller wasn't a participant there could be no preemption, with that wonderful quote: "Unlike the Cheshire cat, one cannot have the stripes of preemption without the smile of participation."  I think we all know why the Solicitor doesn't like that argument.  (2) Sereboff said money was equitable relief if it were based on an "equitable lien established by agreement."  This is so even if the "fund" on which the lien existed had not yet come into being, as long as it was identifiable.  Here, insurance companies create "reserves" to pay expected benefits.  If I took discovery from the new insurance company, I would find out that if Spherion included one more participant in their list, someone who was terminal with a life expectency of months and whose benefit would be $426,000, I would also learn that Spherion's premium would have been increased by $426,000.  Thus, Spherion had an ill-gotten gain of $426,000, and the "fund" is the diamonds in the lockbox -- with the diamond Spherion kept for itself being worth $426,000.  The indentifiable fund is the whole of the premiums, and the equitable lien by assignment (the reassurances) is on the diamond Spherion kept for itself.

Roy Harmon's blog today mentioned Fitzgerald v. H&R Block Fin. Advisors, 2008 U.S. Dist. LEXIS 45472 (E.D. Mich. June 11, 2008) (115 PBD, 6/16/08) where the district court, upholding an arbitration award, said that under ERISA § 510, where plaintiff said he was prevented from obtaining shares of company stock, plaintiff was indeed claiming equitable relief by identifying a specific fund upon which he claimed an equitable lien by assignment -- the pool of company stock owned by the company. 

So?  Whaddya think?

The Trouble With Estoppel in ERISA Cases

Hard cases really do make bad law. 

Every now and then an estoppel case pops up under ERISA, and the law is twisted and mangled to make it fit.   See, e.g., Livick v. The Gillette Co., U.S. App. Lexis 8261, 43 E.B.C. 2025 (1st Cir. 2008) (dictum), citing Hooven v. Exxon Mobil Corp., 465 F.3d 566, 578 (3d Cir. 2006); Mello v. Sara Lee Corp., 431 F.3d 440, 444 (5th Cir. 2005); Devlin v. Empire Blue Cross & Blue Shield, 274 F.3d 76, 85-86 (2d Cir.2001); Sprague v. General Motors Corp., 133 F.3d 388, 403 & n.13 (6th Cir. 1998) (en banc); Greany v. W. Farm Bureau Life Ins. Co., 973 F.2d 812, 821 (9th Cir. 1992); Kane v. Aetna Life Ins., 893 F.2d 1283, 1285 (11th Cir. 1990). 

Behold: the good old fashioned set of estoppel requirements is hauled out, and plaintiffs are told that, to prevail, they must show (at least) a misrepresentation of fact made expecting the other person to rely, and then  reasonable and detrimental reliance.  It is a state law doctrine and should be routinely preempted by ERISA unless it is somehow incorporated into ERISA under § 502.

Why not incorporate it into federal employee benefits law?  How shall I reject thee? – let me count the ways.  First, it is basically a contract doctrine, and a benefit plan is not inherently a contract in the first place.  You don’t need offer, acceptance, consideration, mutuality and so forth.  All you need is a plan. You don’t need reliance.  You don’t need to show that the participant even knew the plan existed, much less relied upon it.   Why not?  Because you would end up with people similarly situatated bu getting different benefits depending solely upon their awareness and understanding of the plan, which is exactly the wrong result under an employee benefits law.  Instead, one looks to the plan, the whole plan, and nothing but the plan.  And the plan that must be in writing.  (Described in an SPD that must be in writing). 

What about ambiguity?  Can’t you use estoppel to resolve an ambiguity in the plan?  Well, not estoppel, but parole evidence.  Note the difference: Parole evidence doesn’t require adverse reliance.  And if the parole evidence resolves the ambiguity, then the ambiguity is resolved for all beneficiaries, not just those who relied (or even knew about) the parole.

Are you persuaded?  Well, there are judges in almost every circuit who have heard these arguments, acknowledge them, and then wring their hands and think they are doing justice by knocking holes in the structure of ERISA.  Hard cases.  (Sigh).

The Interaction of LaRue, Bruch, and MetLife v. Glenn

The Supreme Court seems to have an increasing interest in addressing some of the long-standing remedial and procedural issues under ERISA. It recently decided one case, LaRue v. DeWolff, and there was a BNA blog and several comments about that. I agree with much of what was written on the blog, but I take issue with an interpretation of either ERISA or the Supreme Court's decision that would undercut the application of the benefit disputes/claims administrative process to issues that emanate from the combination of plan provisions and apparent administrative errors (such as found in LaRue). Although a failure to follow plan provisions can indeed be a fiduciary breach because of the requirement of Section 404(a)(1)(D) that fiduciaries operate the plan in accordance with governing documents (something that obviously a fiduciary must do). However, taken to its extreme, that would mean that every benefit miscalculation claim could be turned into a fiduciary breach, raise a 502(a)(2) claim, and undercut the exhaustion requirement for 502(a)(1)(B) claims. The better interpretation is to require exhaustion in LaRue and similar matters unless the participant can show futility. Once the matter has been through the administrative claim process, if the participant is still unhappy because the claim has been denied in whole or part, then he/she can proceed to litigation and presumably raise both 502(a)(1)(B) and 502(a)(2), although defendants may challenge the latter claim. Now, the issue is what should the court's standard of review be. That leads to another case the Supreme Court is currently considering, MetLife v. Glenn.

In that case, the Court will evaluate and determine what the standard should be in situations where the administrator (who is deciding the claim and/or appeal) is both the decision maker and will pay for any benefit. That would be particularly relevant regarding insured welfare plans where the insurance company makes all the decisions as well as self-insured welfare plans and presumably qualified plans where the sponsor/administrator decides the claim and appeal, makes some or all of the contributions and would be fully or partially liable if the claim was granted. The Solicitor of Labor has filed an amicus brief in the MetLife case arguing that a conflict of an administrator should be weighed as a factor in determining the reasonableness of a benefit determination. The Solicitor argues that all the circumstances should be weighed in considering how much, if any, deference should be given to the administrator's denial of the benefit claim. In this particular case, the Solicitor concludes that MetLife did abuse its discretion and argues that the Sixth Circuit's decision in plaintiff's favor should be upheld. Forgetting the merits of the particular case, the effective standard for evaluating abuse or arbitrary and capricious conduct seems to make sense and certainly offers key procedural and substantive protections for participants. It also underscores why it makes sense under a remedial statute such as ERISA for LaRue type claims to first go through the administrative processes before pursuing litigation. If an administrative denial is based on a sound, objective process, then deference makes sense. If not, the Solicitor's argument and the Sixth Circuit's decision in MetLife reflect the expected procedural result of limiting deference.

Now some have argued that it is meaningless for LaRue type claims to have to exhaust administrative remedies because ultimately there is no one to fund the benefit regarding a claim for loss under a 401(k) plan. But that is not really the case. Assuming the sponsor administers the claim and appeal process, any favorable decision will be funded by the sponsor. Assuming some outside person or entity administers the process, the sponsor would still be required to fund the lost benefit (if the participant is upheld) in accordance with the administrator's determination of what the plan provides or requires (which should effectively bind the sponsor). If the participant's claim is denied, then a court will ultimately determine the scope of review (i.e. the application of deference or not) and whether the participant's claim is upheld.

The courts are already clogged with a myriad of litigation on countless subjects. It makes no sense to turn every benefit denial or administrative error immediately into a federal lawsuit without, at least, attempting to pursue participant rights through the administrative review process. If that process is not administered in an objective and responsible manner, then it should be reformed and its decisions will not be upheld by courts until it is. Undoubtedly, plan sponsors want participants to have to exhaust any administrative processes before pursuing litigation. Perhaps, sometimes this desire is motivated by a true intent to resolve the matter in what it considers to be a fair and responsible way consistent with plan documents, etc. And, perhaps, in other situations, this desire is to construct a better litigation defense. However, regardless of its motivation, if its process is not fair and responsible, its decisions are not likely to be accorded deference. On the other hand, presumably, plaintiffs' counsel would prefer not to have to pursue the claim and appeal process because, if it is administered as it should be and denies the claim, then courts will normally give deference to its decisions. And, quite frankly, that is as it should be under the ERISA scheme and years worth of court decisions post Bruch v. Firestone. LaRue should not be used to effectively or indirectly overrule Bruch.

Should We Rue LaRue?

Last month the Supreme Court resolved, at least for one case, this question: Do individual employees have a cause of action when a fiduciary violates its responsibilities with respect to the assets in an individual’s defined contribution account? In the case, LaRue v. Dewolff, Boberg & Associates, Inc. (42 Empl. Benefits Cas. 2857), the Court held that an individual does have a cause of action. The judgment was unanimous, but Justice Roberts wrote a mystifying and mischievous concurring opinion, joined by Justice Kennedy, which might raise a question as to whether the issues purportedly addressed by the Court are really settled.

The case involved straightforward facts: a participant in a defined contribution plan gives investment instructions with respect to his account. The plan fiduciary, to whom the instructions were given, does not follow them. The account suffers a loss, and the participant brings a civil action against the fiduciary to recover the loss. Does ERISA provide jurisdiction for such a civil action?

The fiduciary argued no, because relief against a fiduciary (except for equitable relief) is available only if the fiduciary caused harm to the entire plan , as opposed to this situation in which the harm was to a participant. This argument was quite plausible given earlier Supreme Court decisions interpreting the scope of ERISA Sections 502(a)(2) and 409. (Section 409 provides, in part, that a fiduciary “is liable to make good to [the] plan any losses to the plan resulting from” the fiduciary breach.)

The Court, though, said that the loss in this case--even though felt by only a single plan participant--was still a loss to the plan under Section 409.

My initial reaction to the decision recalls a quote from “The Godfather,” when Marlon Brando, presiding over a meeting of the five families to establish a peace, asks “How did things ever get this far?” How could we, more than 30 years after ERISA, still be debating whether a participant in a defined contribution plan has a cause of action against a fiduciary whose breach reduced the value of the employee’s account?

But now, thanks to LaRue, the issue is settled. Or is it?

Justice Roberts wrote separately. His opinion says that LaRue’s true claim was a claim for benefits under Section 502(a)(1)(B) of ERISA and that “it is at least arguable that a claim of this nature properly lies only under § 502(a)(1)(B). . . . If LaRue may bring his claim under § 502(a)(1)(B), it is not clear that he may do so under § 502(a)(2) as well.”

Justice Roberts says this is important, because under Section 502(a)(1)(B), it is clear that a participant ordinarily has to exhaust administrative remedies and that a plan can grant a fiduciary a significant degree of discretion in determining benefit eligibility and the meaning of plan terms.

Although Justice Roberts does not expressly say so, it is also possible that if the action is under section 502(a)(1)(B), there may be no relief at all—LaRue’s action was an attempt to get the fiduciary to make good the plan’s loss; how would that be possible under section 502(a)(1)(B), where the fiduciary would not even be the proper defendant? (Maybe if there is a loss, the loss would have to be recovered ratably from the accounts of all participants. Now that would be a happy result for the other participants. Now could they bring an action against the plan fiduciaries for not suing the fiduciary responsible for causing LaRue a loss? And would that be actionable only under section 502(a)(1)(B), since they are basically saying the same thing that Justice Roberts says Larue is saying: “My benefit should be larger”? I can see an endless cycle of complaints here.)

The most unfortunate thing about Justice Roberts’ concurrence is that it ensures us a new period of uncertainty. Certainly every fiduciary defendant will seize on Justice Roberts' words, and courts will have to figure out just what the concurrence means and if any Justices, other than Justices Roberts and Kennedy, may in the future be sympathetic to the concurrence’s rather odd position.

I should add that it is particularly odd, given that Justice Roberts, at least in his confirmation hearings, suggested that he wanted the Court to speak, as often as possible, with a single voice. In LaRue, he opts for point, counterpoint.

[Ed. Note: For coverage of the LaRue decision see 34 Pens. & Ben. Daily (Feb. 21, 2008); 35 Pens. & Ben. Rep. 467  (Feb. 26, 2008); and 42 Empl. Benefits Cas. 2857.]

Deere 401(k) Fee Disclosure Case Dismissed

As expected, the 401(k) fee disclosure case against Deere & Company was the first to be decided, since the District Court for the Western District of Wisconsin has a reputation as a "rocket docket."  Many people, myself included, had thought the complaints in these 401(k) fee cases contained sufficient fact allegations that courts would wait until after discovery to decide them. Unexexpectedly, the court dismissed the case based on the complaint and the plan documents. Hecker v. Deere & Co., Case No. 06-C-719-S (W.D. Wisc. June 21, 2007). The facts of the Deere plan may, however, distinguish it from most other plans and make it less significant as a precedent in the other pending 401(k) fee cases, at least at the motion to dismiss stage.

The SPD provided that:

The costs of administering the Plan are paid by the Company. Participants incur no transaction fees or sales loads on funds purchased and sold through the Plan’s standard plan options.... All fund investors indirectly pay any fund-level expenses, such as management fees, asset-based sales charges (12b-1 fees), and other fund expenses, as detailed in the fund’s prospectus....

Of the 26 funds specifically offered by the plan, 23 were Fidelity Funds. However, the plan also offered a mutual fund brokerage account through which participants could select from among 2500 other mutual funds unaffiliated with Fidelity. Fidelity received direct payment for its trust services from Deere; the plan paid no additional fees to Fidelity.

The court concluded that:

The disclosure in the reports and prospectuses accurately reflect the expenses actually paid to the fund manager for fund management as evidenced by the allegations that the same fees are charged to all retail fund customers. To the extent that the charge includes profit, it is unlikely that the fund sponsor would know or be in a position to control its redistribution among related corporations, corporations, a fact conceded in defendants’ brief. There is no evidence of intent in the statute or regulations to reach this type of detail.

The court found that the recent proposals to expand disclosure of indirect fees and provide additional disclosure supported the conclusion that such expanded disclosure is not required under current law.

There appears to have been no dispute that the Deere plan satisfied the ERISA section 404(c) requirements other than requirements related to fee disclosure. The court concluded that the existing regulations do not require disclosure of revenue sharing, only the amount of the fees which were adequately disclosed. Nor did the court feel that disclosing the revenue sharing arrangements would have enhanced the participants' investment decisions:

In assessing the likely return on an investment the fees netted against the return are certainly relevant, but knowing the subsequent distribution of those fees has
no impact on the investment’s value.

The court concluded that the participants had adequate opportunity to choose funds other than the designated Fidelity Funds because of the mutual fund brokerage window and therefore their investment in the designated funds and therefore they exercised the requesite control over the investments in selecting the Fidelity Funds to insulate the Deere fiduciaries from any liability under section 404(c)'s safe harbor even if the plaintiffs could prove that the fees in the Fidelity Funds were excessive.

Most plans don't offer a brokerage window, so the Deere case is clearly distinguishable. However, the court's conclusions about the extent of disclosure required under current law, both under the general ERISA provisions and section 404(c), would protect most plan fiduciaries if followed by other courts. Stay tuned for the rest of the story, since there are still a number of these cases pending.

Fee Disclosure

ERISA fiduciary litigation isn't calming down, it is just switching subjects.  As the stock drop cases  wind down, they will be replaced (in fact, are already being replaced) by hidden or excessive fee cases.  This should really come as no surprise to anyone.  Most of us in the industry have known about these hidden payments (commissions, shelf space fees, etc.) for years, but never mentioned them in polite society. 

It took Elliott Spitzer to shine a light on these arrangements and, once he did, virtually everybody agreed that they were indefensible (not that service providers shouldn't get paid, but that their fees should be known to the payor, who would then be in a position to comparison shop).  Now everybody is getting into the act.   Both the SEC and DOL are acting as though they just found out that these arrangements exist and are telling plan fiduciaries to ask questions.  DOL is going to require greater disclosure on Forms 5500 and is considering amending the section 408(b)(2) regs. to require knowledge of fees as a pre-condition to a determination of reasonableness. 

If only it were that easy.  No matter how much disclosure the government may require, people will figure out new ways to be paid.  In fact, there are so many ways now, that full disclosure would probably create something as difficult to prepare and read as a prospectus.  Great for the service providers who prepare them, but of little practical use to plan fiduciaries, let alone participants. 

In my view, for greater disclosure to become effective, it must be accompanied by greater simplicity.  I don't think either DOL or the SEC currently has the authority to dictate how fees will be paid (as long as prohibited transactions are avoided), and the chances of Congress passing an ERISA equivalent of a truth-in-lending disclosure statement appear nil.  This doesn't mean that the problem won't be solved.  It just means that the problem will be solved by class action litigation--a boon to the lawyers, but to no one else.

What I don't understand is why the industry groups, such as ICI or ACLI don't come forward to take the lead.  This can easily be accomplished by standardized disclosure statements coupled with a commitment to receive or pay no fees not covered by those statements.  This would probably be a net plus to the members of those associations, since, I assume, mutual funds and insurance companies pay more secret fees and commissions than they receive. 

It seems to me the end result is both inevitable and desirable--full disclosure (in an understandable form) of all fees paid or received by a service provider in connection with a plan's business.  There are four ways to get there; legislation, litigation, regulation (to the extent possible) and industy initiative.  The latter, I think, is most desirable, but least likely to occur.  The least desirable is litigation, and that is how I think it will happen. 

Any thoughts or comments?

Is Anyone Left Standing?

Today the Ninth Circuit decided Glanton v. AdvancePCS  Inc. http://caselaw.lp.findlaw.com/data2/circs/9th/0415328p.pdf

Plaintiff participants sued the Plan's Pharmacy benefits management company (PBM) saying the PBM was buying prescriptions for less than it was selling them to the plan and the PBM was making an inappropriate bundle.  The court held that while defendant PBM was a fiduciary, plaintiffs had no Article III constitutional standing to bring the claim. 

Interestingly, the court never mentions either 502(a)(2) or (a)(3) of ERISA - the two possible bases for ERISA standing.  However, the court, by implication, appears to reject both bases as conferring Art. III standing.

First, the court notes that if plaintiffs are successful, the money will go to the plan. The plan, in turn, may lower the co-pays and deductibles for plaintiffs, redounding directly to the benefit of the participants & beneficiaries, or it may reduce employer contributions.  However, for a benefit from the litigation to depend on the acts of an independent third party is not sufficient to confer Art. III standing because it is insufficient evidence of the required "harm." I presume this is the discussion of the (a)(3) claim.

Here's the really interesting part.  As for the stealth (a)(2) claim, the court held that the plaintiffs don't have standing to sue on behalf of the Plan because, while the Plan has suffered harm, the plaintiffs have not.  For example, sayeth the court, in Kayes v. Pacific Lumber, where plaintiffs sued saying the fiduciary's selection of an annuity provider resulted in a reduction of the plaintiffs' annuities, there was a sufficient allegation of the participant's direct harm.  Not so here, as the plaintiffs cannot show a direct harm to themselves.

This is, of course, a completely new twist on representational standing under (a)(2).  Not only must the Plan suffer harm, but the plan participant who seeks to recover on behalf of the plan must have suffered direct harm because of the plan's harm.  So let's say that a plan fiduciary steals some of the DB's plan money.  If a participant sues on behalf of the plan to recover it, the defendants will argue, under Glanton, that the participant's benefit has not been reduced because of the theft (after all, not only is there the good ol' PBGC, but there's the employer who now has to contribute more in light of the theft) (Shades of Harley v 3M).

The court noted that "associational" standing worked only one way - that the association may sometimes represent the individual.  However, it did not work the other way, the individual may not represent the association.  But this entirely misses the 502(a)(2) point.

Here, the plan clearly suffered an injury.  Are the fiduciaries of the plan the only ones allowed to sue to redress that loss if there is no individual participant or beneficiary who is directly (as is true in most cases) affected by the loss?