BNA Pension and Benefits Blog

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.

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.]

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.

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?

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?

Is The "Abuse of Discretion" Standard of Review Worth the Candle?

I am an ERISA benefits plaintiff's lawyer. This "note" is not intended to be objective. It is supposed to stimulate discussion.

In 1989, the Supreme Court told us in Firestone v. Bruch that if a plan provided that a fiduciary's benefits decision was given deferential review by the plan documents, so too must a court reviewing the benefits denial. The Court described the standard of review as one for "abuse of discretion" though the term is used interchangeably with "arbitrary and capricious." The Court found the basis for this in trust law, that if a trust instrument gave a trustee discretionary powers, a court must defer to the trustees decision unless it was unreasonable. Even before Firestone, all the Circuits were usually applying an abuse of discretion standard of review as part of ERISA's baptism or, perhaps more aptly, its bris.

There are two views: (a) it doesn't matter which standard of review applies as all judges are intellectual softies and if a judge believes a claimant should be paid, the claimant will be paid; (b) the standard of review is usually the most important issue, oft outcome determinative, in benefits litigation. Rush Prudential v. Moran, 536 U.S. 355, 384 (2002)(referring to deferential review as "highly prized" by benefit plans).

Those who hold that it matters little, seem to litigate the issue the most. Plaintiffs have several arrows in their quivers for attacking the standard: e.g., (a) is the discretion granting language in the appropriate documents and, if so, is it sufficient to grant discretion? (b) if the language is in an insurance policy, has that language been approved by the State Department of Insurance - and does the state have any business regulating this? (c) is the person/entity that was granted discretion the same as the person/entity that exercised it? (d) was the decision within the scope of the discretion granted? and, finally, the Big Doozie - (e) was the decision maker acting under a conflict of interest?

Each one of these issues presents its own discovery challenges. Of course, plans contend that denials must be considered only in the context of the administrative record so that discovery is irrelevant. Plaintiffs, and most courts, hold that while the underlying benefits decision is limited to the administrative record, questions regarding these issues are subject to discovery. For example, recently an en banc panel of the Ninth Circuit in Abatie v. Alta Life & Health Ins. Co., 458 F. 3d 955 (9th Cir. 2006) held that the following issues (and these only relate to the issue of conflict) were to be resolved by the trial court: (a) what outside interests did the decision-maker have? (b) what were its motives? (c) what was the "nature, extent and effect" of the conflict on the decision making process; (d) has there been a parsimonious claims granting history? (e) have there been repeated claim denials to deserving claimants that were against the weight of the evidence? In fact, Abatie recommended that decision-makers affirmatively come forward with evidence to show that its decision was not affected by any conflict. The tail has now become the dog. The whole purpose of deferential review was supposed to be streamlined, efficient and cost effective litigation. Now those defending deferential review find themselves in major, drawn out and costly litigation, even with the most minor claim, over the proper standard of review. At the same time, insurance companies report that they pay between 80 and 90% of all claims. So, putting aside the claims that would easily lose under even the de novo standard of review, aren't we talking about just a few percentage of cases? It seems to me that these cases would be more effectively and efficiently tried under the de novo standard of review.

So, whaddya think?