BNA Pension and Benefits Blog

9th Circuit Holds San Francisco Ordinance Not Preempted: Is There a Conflict in the Circuits?

Today's decision on the merits by the 9th Circuit in the Golden Gate Restaurant Association v. San Francisco case upholding the employer spending requirements of the San Francisco ordinance as not preempted by ERISA is a most interesting read. 

For most of the decision, the unanimous three-judge panel methodically describes and then disposes of all the arguments made by the GGRA and its numerous amici (including the Department of Labor) in favor of preemption.  The opinion is written as if the court is perfectly aware that its decision is likely to wind up on the steps of the Supreme Court and therefore the court is careful to leave no "t" uncrossed and no "i" undotted.  And yet the final portion of the opinion when the court addresses the 4th Circuit's decision which came to a contrary conclusion regarding the Maryland law (RILA v. Fielder) seems to go in the other direction. 

ERISA preemption groupies will remember that in January when the same panel of the 9th Circuit granted the City's motion to stay pending appeal the District Court's judgment holding the ordinance preempted and ordered the ordinance to go into effect, it was roundly criticized by many commentators for ignoring the impact of the Fielder case.  These commentators obviously expected that the court would fall into line and adopt the 4th Circuit reasoning that an employer expenditure requirement was the same as a benefit mandate (such as that required under the Washington statute found in Egelhoff, one of the key Supreme Court cases that the majority of the 4th Circuit relied on in holding the Maryland law preempted).  However, this time in addressing the merits of the case, the 9th Circuit panel did not ignore the Fielder case. 

GGRA had contended that if the 9th Circuit upheld the San Francisco ordinance, it would create a split among the circuits.  Not so, says the 9th Circuit, the 4th Circuit's analysis is not inconsistent with its analysis of the San Francisco ordinance.  "We neither adopt or reject the analysis of the Fourth Circuit in Fielder.  ... But even under the reasoning of the panel majority, San Francisco's Ordinance is valid."  What distinguishes the Maryland statute from the San Francisco ordinance in the eyes of the 9th Circuit is that "The Maryland law gave nothing in return - either to an employer or its employees - for the employer's payment to the State."  In Maryland, the taxes collected would have gone to the State Medicaid program and presumably only those employees of covered employers (ostensibly Wal-Mart) who were Medicaid beneficiaries would benefit. By contrast, any uninsured individual, including employers who chose not to have ERISA plans, would be covered under the San Francisco program and employees whose employers chose to pay into the program would be eligible for free or discounted enrollment in the HAP (health access plan). 

What do you think of this argument and does the 9th Circuit decision create a conflict in the circuits or not?

For those of you who have not yet listened to the oral argument in this case and want to, you can find it on the 9th Circuit's website - one way to locate it is to know that the argument was held on April 17, 2008 - and this "no conflict in the circuits" question was addressed by the City Attorney during that argument.

Phyllis Borzi

Reviewing the Scope of Section 409A Transition

Full compliance with Section 409A is scheduled to be required in less than four months, by January 1, 2009. This deadline is the result of the considered and responsive review by personnel from Treasury, the IRS and the legislative branch last year, as 2007 ran its course. At that time, an extension sought by the market from an impending December 31, 2007 deadline was gratefully granted, ostensibly on the basis that compliance by year-end 2007 would be difficult to achieve, would result in inordinate corporate distraction and would produce a less-than-optimal quality of compliance.

It may be time to review the present state of Section 409A transition. Market circumstances have changed (AC/DC, still alive and rockin', might say things are "all screwed up"), and the financial crisis has thrown a wide range of institutions into total disarray. That situation is not one that was present as little as several weeks ago, and was not so much as a glimmer in anyone's eye when the year-end 2008 extended deadline was established.

It is submitted here that these unexpected and changed circumstances may well justify a reconsideration of the current deadline generally - not because the existing deadline did not confer sufficient time, but because things, simply put, have changed. The need to devote significant attention to Section 409A compliance may be inconsistent with the attention that will have to be devoted to the economic crisis. And, notwithstanding the ongoing bail-out efforts, query whether any exacerbation of the current crisis in the coming weeks might make broader relief downright necessary.

It is worthy of note that a client memorandum from Wachtell, Lipton distributed earlier today (September 24) suggests that it may be time for a reexamination of Section 409A transition. As unfortunate as it may seem, reconsideration of the deadline may indeed now be appropriate.

Regardless of whether a general reconsideration of the Section 409A compliance deadline takes place, it seems as though some continued permitted good-faith compliance would be appropriate. (Wachtell's memorandum makes a similar point here, too.) In this regard, several things have become evident:

- As a result of the complexity inherent (as is now apparent) in Section 409A itself, the 409A Regulations have turned out to be extraordinarily complex, giving rise to an innumerable number of difficult and sometimes imponderable issues. It seems as though every crevice of the rules gives rise to issues and analyses that are much more interesting than one would expect or hope.

- Experts seem consistently to disagree on a host of issues. Reasoning balanced on the head of a pin comes out one way for one practitioner and another way for another practitioner. One wonders whether there aren't important issues as to which there isn't even unanimity among Treasury and IRS personnel.

- New issues continue to arise. It seems as though issue after issue, some sending shockwaves through the practitioner community, continues to emerge on points that hadn't even been widely identified in the market as being problematic.

- Indications are that, as to matters covered by the existing 409A Regulations, further official guidance will not soon be forthcoming. The existing voluntary compliance program does not generally extend to documentary compliance, thus making compliance more challenging, and, as a further indication of how difficult the issues are to deal with, it looks as though it is going to take Treasury and the IRS considerable time just to develop a more extensive voluntary compliance program.

- Key new authority on income inclusion, reporting and withholding, once hoped for in the early part of the summer, is still not out, presumably because of substantive complexity generally, as well as, possibly, the interrelationship between Section 409A and other provisions.

Against this backdrop of substantive uncertainty, complete and total compliance by December 31, 2008, however desirable it may be, seems almost unattainable. One possible approach could be that, for 2009, good-faith compliance with Section 409A and the existing final authority thereunder would be considered compliance with Section 409A. It is not suggested here that the effectiveness of the final rules would be suspended; rather, the suggestion is that reasonable interpretations of the rules should be sufficient to forestall punitive tax results. Essentially, it would be recognized that, against a landscape riddled with substantive uncertainty, taxpayers should not be punished for taking fair positions under incredibly challenging rules, merely because some theoretical ultimate interpretation of those rules might turn out to be adverse.

Thus far, regulatory consideration of extended relief apparently is not being actively considered (see, e.g., the lead Washington Item in the September 5, 2008 TMCPJ ); given the responsive and substantial extensions that have been previously conferred, that result is arguably understandable. But market conditions have changed, and the substantive analyses just have not sorted out, and it is suggested here that, for both of these reasons, it may unfortunately be time for the transition question to be reopened.

Looking Back, Looking Forward

While December is when most of us look back on the year coming to end and make plans and resolutions for the year about to begin, September is another one of those times for me. After all, it’s an important month in its own right—the start of the academic year (even if classes now begin in August), the official beginning of the race in election years like this one, the unofficial end of summer with Labor Day and lest we forget, the anniversary of ERISA’s passage.

September also brings a couple of personal anniversaries: Labor Day marks the beginning of another year as a self-described ERISA “geek” and in the middle of month, my third year in Washington at the AFL-CIO begins.

My anniversary musings this year, as you might expect, were influenced by the work of the past year and the significance of the election to come in November

Health care reform is clearly important with many polls ranking it, together with the economy, among the top issues of concern. But, one issue that’s talked about less outside the benefits community is just as critical--the pending retirement security crisis.

Here are just a few facts to consider, most of which are familiar to benefits professionals. Pension coverage remains at about 50 percent of the workforce. The shift from defined benefit to defined contribution plans, primarily 401(k) plans, is leading to a decline in pension wealth. And, according to the latest Retirement Confidence Survey from the Employee Benefit Research Institute, only 18 percent of workers are very confident about having sufficient money for retirement. The 9 point drop from the 2007 survey was the biggest one-year drop in the survey’s history. One bright spot is the continued vibrancy of defined benefit plans in the public sector.

So far, the conventional wisdom seems to be that individual account defined contribution plans or individual retirement accounts (IRAs) are the best way for workers to provide for their retirement. But, is this really true? Should we consider different approaches to defined benefit coverage?

When I was introduced to ERISA more than 25 years ago, there was talk of setting a national retirement income policy. Is it finally time for all of us to have that conversation?

Good Planning or Pension Manipulation?

A front page article in the August 4th edition of the Wall Street Journal outlines a method by which companies are transferring portions of their non-qualified deferred compensation obligations of senior executives into their qualified plans. As reported by the Journal: “In recent years, companies from Intel Corp. to CenturyTel, Inc. collectively have moved hundreds of millions of dollars of obligations for executive benefits into rank-and-file pension plans. This lets companies capture tax breaks intended for pensions of regular workers and use them to pay for executives’ supplemental benefits and compensation.”

In order for a pension plan to qualify for favorable tax treatment (current deduction of employer contributions and tax-deferral on any investment gains), the plan must meet certain requirements set forth in the Internal Revenue Code, including the requirement that neither contributions nor benefits under the plan discriminate in favor of highly compensated employees. According to the Journal article, “benefits consultants market sophisticated techniques to help companies do just that, without running afoul of IRS rules against favoring the highly paid.”

There are significant tax advantages if a company can provide more of an executive’s pension under a qualified plan rather than a non-qualified deferred compensation arrangement. In Intel’s case, according to the Journal, it contributed $187,000 to the qualified plan to fund $200,000 of its deferred compensation liability. The ability to immediately deduct the $187,000 allowed Intel to save $65,000 in taxes according to the Journal. While these benefits were being provided under a non-qualified deferred compensation arrangement, Intel would not be entitled to a tax deduction until the benefits were actually received by an executive.

The pension system in the United States is a voluntary system and unless an employer deems it to be in its best interest to establish a plan, it will not do so. Therefore, the tax system provides incentives for employers to establish plans for their employees, including the highly compensated employees. The anti-discrimination and other rules set forth in the Code are designed to assure that the non-highly compensated received adequate benefits vis-à-vis the highly compensated before an employer qualifies for the tax advantages of a qualified plan. The program outlined in the Journal article may very well be reasonable. The IRS should examine this practice to determine whether it violates the anti-discrimination rules. If it does, the IRS should eliminate it administratively or request Congress to pass clarifying legislation. For example, Congress enacted IRC Section 401(a)(19) in order to prevent a perceived abuse of the comparability procedures for testing compliance with the nondiscrimination rules.

A Report on Yet Another Reporting Issue for Private Equity and Other Investment Funds

Section 404(a)(1) of ERISA generally requires a fiduciary to act in the interest of participants and beneficiaries and to act prudently. ERISA also requires, under Section 103(b)(3)(A), an annual report which includes a financial statement containing, among other things, a statement of assets and liabilities "valued at their current value." Current value is to be determined in good faith by a trustee or named fiduciary.

A July 1, 2008, letter from James Benages of the DOL's Boston office has made its way around the market. There, he considers a plan which was invested in a number of alternative investments ("AIs" (no relationship to the Kubrick/Spielberg movie, at least I don't think so)), and which apparently took a fairly common approach to the Form 5500 reporting thereof. For example, one particular AI was valued at cost by the applicable committee "based on the general partner's unaudited Capital Account Balance Statement" for the period in question "and the accompanying audited financial statements." Another was valued according to the general partner's unaudited determination of fair market value.

The July 1 letter states that (i) not only has the committee "failed to establish a process to determine the most accurate fair market value," but cost and fair market value have been "equate[d]," (ii) such failure violates ERISA's "solely in the interest" requirement, and (iii) as a result, in the DOL's view, the committee "is in violation of ERISA and will remain so until it takes corrective action." Before discussing Section 502(l) and the possibility of action by other governmental agencies and third parties, the July 1 letter kindly comforts that, if corrective action is taken, no lawsuit will be brought by the DOL.

The issues implicated by the July 1 letter are significant. Many private equity and other investment funds provide valuations on the bases noted in the letter, and plan fiduciaries would not ordinarily be expected to have the information required to second-guess the available valuations or the expertise to do so even if they had the information.

The DOL's approach seems to raise the specter that making an investment not practically susceptible to ready valuation is somehow a per se violation of Section 404(a)(1) of ERISA. The July 1 letter seems expressly to tie the "sole purpose" requirement to the reporting requirement, although the connection isn't particularly clear. There's also a more oblique reference to the Section 404(a)(1)((B) prudence requirement, not tied specifically to the reporting issue. Is the DOL implying that it is per se imprudent for a fiduciary to invest in a difficult-to-value investment, without special valuation efforts?

What would be the effect of there being a Section 404(a)(1) violation merely because an investment is not subject to valuation? Several alternatives seem possible.

Maybe the plan would demand that the fund provide appraised valuations. A number of funds, however, would presumably not be anxious to engage an appraiser, whether because of an unwillingness to develop and distribute the valuation, an unwillingness to spend the time and money on the valuation or an unwillingness to share the underlying information with the appraiser.

Maybe the plan would do its own analysis. However, any number of plans presumably would not have the time or inclination to do so.

Maybe the plan would ask for additional factual information to facilitate the plan's valuation efforts. It is by no means clear that the fund would provide such information.

Or maybe the plan would simply decide it's not worth the effort. To someone who does not appreciate AIs, maybe this result is somehow acceptable.

But is it? It is not up to non-experts to decide that a class of investments is suboptimal, whether or not there are experts out there who might agree. Clearly, AIs have enthusiastic support as a part of an overall portfolio from a wide range of investment professionals, and it is up to the responsible fiduciary to make the actual investment decision. The fact that support is not unanimous is a fact to be taken into account by the responsible fiduciary.

I recognize that there are those who will disagree, even vehemently. (I'm ducking already.)  Some have made the argument that there is no possible way that an unvalued/unvaluable investment can be prudent. I would point out that almost by definition such a conclusion has been rejected as a business matter by substantial portions of the market - the investments are in fact being made, often by the most sophisticated of investment professionals. (If Warren Buffett were to offer me the opportunity to invest in a black box of managed investments for a 10-year term with no information and a de minimis fee, would I be imprudent to make the investment? Maybe I'd be imprudent not to do so.)

To me, one of the areas (the only one?!) in which ERISA has consistently been lauded is its use of modern portfolio theory and deference to the expert fiduciaries regarding portfolio choices. Notwithstanding the apparent trend of some in the government to pretend that they are competent to decide what plans can invest in, as evidenced by the recent and possibly continuing commodities-legislation debacle, ERISA arguably has no legitimate role in trying to identify specified types of investments as imprudent per se. ERISA should not be responsible for depriving the most sophisticated managers from being unable to access, on behalf of ERISA plans, the most sophisticated investments.

A potential gut reaction is that this whole issue is a tempest in a teapot - if plans are made unable to invest in AIs in the absence of developed valuation information, the funds will naturally come up with improved information. However, the dust-up of several years ago where governmental investment put funds' confidentiality at risk, resulting in an unwillingness of some funds to accept government-plan investment, shows that there could come a point at which funds will indeed turn their back on money over regulatory issues. Further, even if the market would adjust, there is a question of whether it should have to adjust.

To me, the first step is to limit the analysis to where it belongs. The level of valuation information to be given over time by a fund should be considered another factor, not some super-factor, taken into account by a court in analyzing whether, on all facts and circumstances, the fiduciary has satisfied its Section 404(a)(1) obligations. It is suggested here that the lack of a draconian penalty for violating Part 1 requirements doesn't mean that those violations are somehow magically converted into Part 4 violations (any more so than would be in the case of, for example, a failure to distribute an SPD).

That still leaves Section 103(b)(3)(A), which applies on its face to require fair-value reporting. The reporting obligations help get information out to participants and beneficiaries, and bear upon the plan's funded status. In this latter regard, if the valuation information is inaccurate, the entire funding regime is potentially compromised. If I invest in a company with $100 million in reported assets, and the company assets are "really" only worth $1 million, my investment may well not be all I thought it was.  A plan's funded status could be similarly misrepresented. 

One possible interesting solution would be to focus on the practicalities of the situation (thanks to Andrew Gaines for talking this through with me). As a practical matter, AIs are likely to constitute only a small percentage of a plan's total portfolio, being there to provide a potential large maximum return as to a portion of the portfolio deemed suitable by the experts for investment at higher risks. If a concern is that overreporting of asset value could somehow place a plan at risk (or, in the case of underreporting, give rise to excessive deductible plan contributions), maybe an answer could be to allow reasonable reporting based on information disseminated in accordance with market practice (e.g., historical cost or GP estimates), but only as to a portion of the plan's portfolio not to exceed certain percentages. Presumably, given the role of AIs in most portfolios, this percentage could be made fairly low without excessive market dislocation.

AIs can form a critical part of a plan's investment strategy, and in some cases probably account in part for superior overall performance. The point here is not to argue that AIs are or are not smart investments; rather the point is to argue that the question of investment choice is for the investment professional, and that it would be unfortunate if the reporting rules were to serve as an impediment to the making of an otherwise permissible investment at the direction of a responsible plan fiduciary.

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.

Audioconference on Section 409A Proposed Income Inclusion Regulations Set for Sept. 16

On Sept. 16, BNA will host an audioconference with Greta E. Cowart, of Haynes and Boone; Pamela Baker, of Sonnenschein, Nath & Rosenthal; William C. Schmidt, of IRS (invited); and Helen H. Morrison, of Treasury (invited), titled "Section 409A Proposed Income Inclusion Regulations--Revealing the Real Sting of 409A." 

During the audioconference, the panel will provide an overview of the proposed regulations on the calculation of income inclusion for violations of Section 409A, and will address:

• How to calculate income inclusion for different types of nonqualified deferred compensation plans, e.g., nonexempt severance, change in control, different types of nonexempt equity awards, performance and incentive plans, defined benefit wrap around plans, etc.; 
• How to calculate changes in the amount includible from year to year; and
• How to calculate any interest penalties.

Registration information is available at http://legaledge.bna.com, or by calling 800-372-1033.  In the event the proposed regulations are not released by Sept. 16, the audioconference will be rescheduled to a date to be determined.

-- Sarah Stevens, managing editor, BNA Pension & Benefit Publications

Interim Amendments for Tax Qualified Plans -- A Mixed Bag

Beginning in the late 1990s, the IRS Employee Plans group spent a great deal of time studying various options for avoiding the enormous workload spikes that arose during the determination letter process in the past and developing the settled upon option -- the staggered remedial amendment period (RAP). As part of this process, IRS EP personnel made a real effort to "partner" with the various stakeholders in the benefits community (ranging from benefits practitioners to prototype sponsors and vendors) to develop a workable, manageable program for all. One of the items that most stakeholders generally opposed during this process was a requirement for annual amendments documenting new law or regulatory changes--which have come to be commonly referred to as "interim" amendments. There was considerable concern about the time/expense that would be required to manage this process in an effective manner (particularly for prototype vendors), as well as the potential confusion and resulting "foot faults" this would likely engender. Instead, it was recommended that these amendments generally be required at the time the plan otherwise had to be submitted for IRS approval. It appeared that IRS officials understood these concerns as discussions concerning interim amendments disappeared from the staggered RAP dialogue--or so we thought. To the surprise of many, the final staggered RAP revenue procedure (originally Rev. Proc. 2005-66; now Rev. Proc. 2007-44) contained specific requirements on interim amendments for all tax qualified plans (including prototypes and the like), the primary motivation being that the plan document must be kept up-to-date throughout the cycle.

In a nutshell, the timing turns on whether the amendment is a "discretionary" one or involves a "disqualifying provision." If it is a discretionary change, the amendment must be adopted by the close of the plan year in which the change is first implemented. On the other hand, if a disqualifying provision is involved, it does not have to be adopted until the later of--

• the due date (including extensions) for filing the employer's tax return for the year in which the applicable RAP began, or
• the last day of the plan year in which the RAP began.

So, how do you tell between a discretionary amendment and one which involves a disqualifying provision? In general, a "disqualifying provision" is one which either--

• results in a failure to comply because of a change in the qualification rules, or
• is integral to a requirement that has been changed (which otherwise would result in a compliance failure).

A discretionary amendment covers everything else. While it is often easy to tell what is a discretionary change versus a disqualifying provision, the lines become blurred when there is new law or regulatory change with optional provisions--and where these fall is not always clear.

The guidance concerning the timing for discretionary amendments has, in some respects, provided some welcome clarity, as we now know that plan sponsors generally have until plan year-end to adopt discretionary changes (for example, a new contribution formula or distribution option). However, I fear that the interim amendment requirements have otherwise given rise to the very problems the benefits community was concerned would happen with interim amendments. To its credit, the IRS has taken some steps to alleviate this. In addition to issuing some clarifying guidance on amendment timing for certain new law changes, it has set up a web page which contains a listing of the 2007 interim amendments (http://www.irs.gov/retirement/article/0,,id=173372,00.html)--although it would be more helpful if an updated list was issued annually much like the agency now does with the list of cumulative changes for each staggered RAP cycle. The IRS has also set up a relatively streamlined and inexpensive application process for certain missed interim amendments under the Employee Plans Compliance Resolution System (Rev. Proc. 2006-27, Appendix F)--which the agency is apparently planning on significantly expanding soon. But are these enough or does the complexity/confusion that the interim amendment requirements have caused outstrip their value? I, for one, am finding that the latter may be true.

How Far Does a Pension Plan Have to Go to Persuade Participants to Make the Decisions that Are Right for Them Individually?

Today's (7/30/2008) Pension & Benefits Daily issue reports on the litigation following the sad death of Mr. Allen Anderson, a hard-working man who died of cancer, Anderson v. Board of Trustees of the Northwest Ohio United Food and Commercial Workers Union and Employers' Joint Pension Fund, N.D. Ohio, No. 3:07 CV 576, 7/28/08.

This is not the usual case of a participant's having been denied treatment or coverage by a hard-hearted insurance company. Rather, when Mr. Anderson's medical leave was about to expire and he asked about his options, the administrator of his pension and welfare plans suggested that he return to work briefly, to renew his entitlement to a limited period of free extended health coverage. He did that, and, as a result, was apparently able to continue receiving the medical care his doctors recommended. However, that meant he did not retire, so he did not elect a pension with a 10-year guaranteed payment feature. Since he was unmarried, no death benefits were payable from the pension plan when he died soon after returning to active-employment status, although life insurance benefits were paid through the welfare plan.

The court held that it was a fiduciary breach for the plan representatives to fail to discuss the option of retiring with a generous death benefit with Mr. Anderson, when he asked about his choices. (It was mentioned, but not discussed, because Mr. Anderson said he was determined to go back to work and beat his cancer.)

I can't figure out whether this is an important decision or an anomaly. As I read the facts, it looks as if this participant was treated with great compassion by the plan representatives, his union and his employer, and they turned themselves inside out to try to accommodate his needs. Yet the court says he was treated "with great iniquity"--maybe the iniquity was the cancer, not the treatment by the plan, but it's amazing that the publication services could read the opinion, drenched as it must have been in the judge's tears.

The court concludes that it was imprudent and a breach of fiduciary duty for the TPA to fail to counsel him to retire with the 10-year continuous and certain pension form, because that would have provided death benefits for his family (he lived with his mother). The judge says that it was ridiculous to believe Mr. Anderson’s repeated brave statements about continuing to work and conquering his cancer, since he was clearly terminally ill.

But, based on the facts recited in the opinion, the judge seems to have reached the wrong conclusion as a matter of fact. If Mr. Anderson had retired, his retiree health insurance would have been inadequate to cover his medical costs. The plan, the union and the employer conspired to prolong his active-participant status so he could keep the health coverage he needed. Mr. Allen made the RIGHT decision, based on their advice, and the court calls it a breach of fiduciary duty.

What am I missing? Would the court have understood it better if the case hadn’t gone on summary judgment? (From the opinion, it does not appear that the court was presented with a dollar comparison of the value of the health insurance to Mr. Anderson personally versus the value of the death benefit to his mother and brother.) Is this case a dramatic extension of the “duty to inform” line of opinions, or just the melodramatic conclusion to a sad end-of-life story?

Another Piece of the Extended Puzzle - Proposed DOL Regulations Reach to General Prudence Rules

Issues relating to fees to service providers have become high-profile issues, with a proliferation of indirect-fee class actions and the inevitable follow-on press reports. These issues have given rise to a four-piece puzzle, with activity regarding (i) regulations under ERISA Section 408(b)(2), (ii) the rules governing Form 5500, Schedule C, (iii) the "404(c)" rules for covered plans with participant-directed investments, and (iv) a number of legislative proposals in Congress.

The issue is clearly front-burner for the DOL, which is trying to proceed with a coordinated new regime that would have a real impact on the quantity and quality of information available to participants. There has already been movement in the first two arenas, with proposed 408(b)(2) regulations and new rules for Form 5500, Schedule C, both of which have been controversial. Congress has proceeded, too, with the proposed Miller bill. The only theater that had remained dark was the one relating to the 404(c) rules.

Section 404(c) is the section that gives plan fiduciaries the opportunity to limit their liability in the case of plans which provide for participant-directed investments and which satisfy the regulatory Section 404(c) requirements. Thus, the DOL had broad discretion to impose such informational requirements as it saw fit under Section 404(c). Showing how much attention it is giving to the question of participant information, though, the DOL took this opportunity to expand the expected scope of its rulemaking and issue rules proposed to apply under ERISA's general prudence rules, whether or not the protection of Section 404(c) is sought. The general prudence rules, like the 404(c) rules, give the DOL a fairly free regulatory hand, as there is no clear limitation on the abilty to add regulatory color on what it means to be proceeding in accordance with general prudence-type considerations.  Thus, the new proposals would generally apply to all plans under which participants have the right to direct investments, even if the plan sponsor is willing to forego Section 404(c) relief. It is clear that that the DOL is making a concerted effort to establish a set of rules that will significantly change the nature of the information that is broadly available to participants in plans where they direct their own investments.

It remains to be seen whether the market will view the balance that has so far been struck by the DOL as being the right one. I expect the comment process regarding this particular piece of the puzzle to be extremely active in terms of submissions on all sides of the market, including participant-advocacy groups, employers, financial services organizations and administrators. One thing seems certain - the old rules, with a much more generic approach to the provision of information, seem eventually to be a thing of the past.