Transcript ERISA Section 408(b)(2) Fee Disclosures: Impact on Broker

ACOPA Advanced Actuarial Conference
Recent Court Cases of Interest to
Administrators and Actuaries
Kathryn J. Kennedy
The John Marshall Law School
315 S. Plymouth Court
Chicago, IL 60604
[email protected]
312.987.1418
Outline of Today’s Presentation


Fiduciary Liability
ERISA Remedies
◦ Who has standing?
◦ What are the causes of action?
ERISA Benefit Claims, Standing & Standard of Review
 Breach of Fiduciary Claims, Standing & Duties
 Spousal Rights, Domestic Partners and QDROs
 Bankruptcy Issues
 Q&As from Audience

2
ERISA: Who is a Fiduciary?

Broadly defined in ERISA

Fiduciary Duties:
◦ Duty of Loyalty: to discharge duties solely in the interest of the participants
and to act for the exclusive purpose of providing benefits and defraying
reasonable administrative costs
◦ Duty of Prudence: to use skill, care, prudence and diligence that a person
would use in a like capacity and with like aims
◦ For trustees, duty to diversify investments; exception under ERISA §404(c)
for individual directed accounts
◦ Duty to keep property separate and maintain adequate records
3
Breach of Fiduciary Duty
Breach of Fiduciary Duty:
• A breach of fiduciary duty may result in personal
liability
• Liability may equal losses to the plan plus profits
gained from the breach
• Breach may also result in removal of the trustee
4
Remedies under ERISA

Who has standing to sue?
◦ Participants, beneficiaries, fiduciaries, and Secretary of Labor

What are the causes of action?
◦ Recovery for benefits due, enforcement of rights or clarification of
future rights
◦ Relief for breach of fiduciary duty
◦ Injunctive or other equitable relief
◦ Failure to provide individual statements
◦ Failure to comply with COBRA or provide requested information
◦ Recovery of amounts owed to former participants where insurance was
purchased in connection with the termination of the plan or participant
status or termination was in violation of ERISA
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Suits for Benefit Claims - Standing


Graden v. Conexant Systems, 496 F.3d 291 (3rd Cir.
2007)
Facts:
◦ 401(k) plan with directed investments, including employer stock
◦ Graden was a participant until October 2004
◦ Employer stock collapsed from $7.42 high in March 2004 to $1.70 by
October 2004
◦ Graden had been fully cashed out of his benefits at the time he brought a
fiduciary claim against the fiduciaries, alleging mismanagement of plan
assets which reduced his share of the benefits
◦ Issue was whether Graden had standing
◦ Issue was whether Graden was seeking benefits or damages
6
Suits for Benefit Claims - Standing

When a Party Has Standing:
◦ DC Plan: A participant may bring suit after cashing out of the
plan if value of the participant’s account was reduced due to a
breach of the fiduciary’s duty
◦ DC Plan: There is no need for a participant to maintain a balance
in his/her individual account in order to file a suit
Graden v Conexant Systems
496 F.3d 291 (3rd Cir. 2007)
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Suit for Breach of Fiduciary Cases Standing


Wilmington Shipping Co. v. New England Life Ins. Co.,
496 F.3d 326 (4th Cir. 2007)
Facts:
◦ WSC maintained a defined benefit plan that was funded through
New England Life Ins. Co.’s group annuity policies.
◦ The group annuity policies produced lower-than-market returns.
◦ In 2003, WSC and the participants brought suit against NEL
alleging it breached its fiduciary duty due to the severe financial
losses associated with the group annuity policies.
◦ By 2004, the PBGC approved the involuntary termination of the
WSC plan and in 2005 appointed statutory trustee for the plan.
◦ The district court dismissed WSC’s ERISA claims in 2006,
holding that it was no longer a fiduciary to the plan.
8
Suits for Breach of Fiduciary Claims Standing
When a Party Has Standing:


A participant may file suit on behalf of the plan after the plan is
terminated
Upon a plan termination, the PBGC may file suit on behalf of the
plan as a statutory trustee (if appointed to such a role)
Wilmington Shipping Co. v. New England Life Ins. Co.
496 F.3d 326 (4th Cir. 2007)
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Suits for Breach of Fiduciary Claims Standing

Paulsen v. CNF Inc., 559 F.3d 1061 (9th Cir. 2008)

Denied U.S. Supreme Court certiorari January 2010

Facts:
◦ CNF Inc. reorganized in 1996, resulting in a spinoff of a division which
became CFC, with part of the defined benefit plan of employees of the
spinoff.
◦ After the spinoff, CFC declared bankruptcy and its defined benefit plan
was terminated via a distress termination, and the PBGC became trustee.
◦ The employees of CFC sued CNF, the administrative committee of CFC
pension plan, and the plan actuaries for various fiduciary breaches.
◦ The district court dismissed all the claims as the employees lacked
standing. The PBGC had the sole power to bring a lawsuit against the
defendants to recover trust assets.
10
Suits for Breach of Fiduciary Claims Standing

Holding by the 9th Circuit:
◦ Standing under ERISA for breach of fiduciary claims requires
that it is “likely” as opposed to just speculative that any injury to
the CFC participants will be redressed by a favorable ruling.
◦ Since the CFC Plan was distress terminated and under the PBGC
control, any possible recovery on behalf of the plan must go to
the PBGC because the plan does not exist post-termination.
Paulsen v. CNF Inc.
559 F.3d 1061 (9th Cir. 2008)
11
Twin Duties of Prudence and Loyalty

ERISA §404 – prudence is the cornerstone for ERISA’s
standard of fiduciary conduct
◦ To act “with the care, skill, prudence and diligence under the
circumstances then prevailing that a prudent man acting in a like
capacity” and expert in ERISA

ERISA §404(a)(1)(A) – discharge fiduciary duties “solely in
the interest of the participants and beneficiaries” and for the
“exclusive purpose” of providing them with benefits

Prohibited transaction provisions prevent self dealing
12
Twin Duties of Prudence and Loyalty


Braden v. Wal-Mart Stores, Inc. 88 F.3d 585 (8th Cir.
2009)
Facts:
◦ 401(k) plan with directed investments with ten mutual funds, a
common/collective trust, Wal-Mart common stock, and a stable
value fund
◦ Allegation was that, due to the size of the plan ($10 billion in
assets), the fees charged should have been cheaper than retail
shares
◦ Allegation that funds of the plan included those of the trustee,
Merrill Lynch, who received a portion of the fees charged –
revenue sharing
◦ Class action against the executives of Wal-Mart that they breach
their fiduciary duties of prudence and loyalty
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Twin Duties of Prudence and Loyalty


Duty of Prudence: focus on the process by which it
made its decisions, rather than the results of the
decisions
Duty of Loyalty: to deal fairly and honestly with all plan
members
◦ Cannot affirmatively mislead participants
◦ May on their own disclose material information that could
adversely affect a participant’s interest
Braden v. Wal-Mart Stores, Inc.
88 F.3d 585 (8th Cir. 2009)
14
Twin Duties of Prudence and Loyalty
Hecker v. Deere & Co., 556 F.3d 575 (7th Cir. 2009)
• Facts:
•
• John Deere & Co. offered a 401(k) plan with directed investments, with
23 different Fidelity mutual funds, two investment funds managed by
Fidelity Trust, and a BrokerageLink.
• Fidelity Trust was the recordkeeper for the plan and managed two of the
investment funds; Fidelity Research was the investment advisor for the
mutual funds.
• In a class action, participants alleged that Deere violated its fiduciary
duty by providing investment options with excessive fees and by failing
to disclose the fee structure.
• The mutual funds charged a fee that Fidelity Research shared with
Fidelity Trust – revenue sharing; thus failure to disclose these fees
results in a breach of fiduciary duty.
• District court dismissed the action. The participants amended the
complaint and appealed to the 7th Circuit.
15
Twin Duties of Prudence and Loyalty

7th Circuit affirmed the district court’s dismissal:
◦ No requirement in ERISA or the regulations to require disclosure to
participants of the revenue sharing arrangement. In order for the
nondisclosure claim to result in a breach of fiduciary duty, there must be
an intentional misleading statement or material omission.
◦ Wide variety of funds were also offered to the general public at the same
expense ratios and therefore set by the marketplace. The fact that some
funds had lower ratios than others is irrelevant.
◦ Allegation that Deere improperly limited the investment funds to
Fidelity mutual funds does not result in a breach of fiduciary duty as
there is no requirement that a fiduciary cannot select funds from one
management company.
◦ Alternatively, as to the ERISA §404(c) defense, the court found no
plausible allegation that the plan did not comply with §404(c).
Hecker v. Deere & Co.
556 F.3d 575 (7th Cir. 2009)
16
Fiduciary Duty to Disclose
Nelson v. Hodowal, 512 F.3d 347 (7th Cir. 2008)
 Facts:

◦ 401(k) plan maintained by the employer (IPALCO) with directed
investments including employer stock
◦ IPALCO was to merge with a larger energy company, AES
◦ Executives of IPALCO sold off their employer stock both in the plan
and under stock options, with the knowledge of the third party
investment advisor, Merrill Lynch
◦ After merger with AES, price of the stock collapsed within a year but no
reason given for the demise of the stock
◦ Plan participants sued alleging that the IPALCO executives owed a
fiduciary duty to disclose that they were selling their stock in advance of
the AES merger
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Fiduciary Duty to Disclose
◦ Fiduciary is required to disclose only material
information that effects the value of the plan
investments
◦ Information that does not affect the participants’
ability to make informed decisions on their benefits
does not need to be disclosed
◦ Disclosure requirement may be circumvented by
hiring a third-party investment advisor
◦ Latent conflicts of interests may need to be disclosed
Nelson v. Hodowal
512 F.3d 347 (7th Cir. 2008)
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Fiduciary Duty to Disclose


Ladouceur v. Credit Lyonnais, 584 F.3d 510 (2d Cir.
2009)
Facts:
◦ Participants had worked for a wholly owned subsidiary and
moved to the parent.
◦ Prior to the transfer, oral representations were made that the
vesting periods and funding for pension benefits would be
calculated from the date of employment at the sub and not the
parent.
◦ Upon termination of employment with the parent, pensions were
based solely on employment with the parent.
◦ Participants sued alleging that the fiduciaries had an affirmative
duty not to make material misrepresentations regarding pension
plan changes
19
Breach of Fiduciary Duty
Oral Misrepresentations by Fiduciary:
 An oral misrepresentation by a fiduciary to a participant
regarding the terms of a qualified plan is not sufficient to
be a breach a fiduciary duty that would warrant a
monetary award for lost benefits.
Ladouceur v. Credit Lyonnais
584 F.3d 510 (2d Cir. 2009)

Similar result in Armistead v. Vernitron Corp., 944 F.2d
1287 (6th Cir. 1991)
20
Remedies under ERISA


LaRue v. DeWolff, Boberg & Associates, Inc., 128 S.Ct.
1020 (2008)
Facts:
◦ 401(k) plan with directed investments
◦ Participant instructed administrator to change his investment
elections for his account
◦ Instructions were ignored and the account lost value
◦ Prior 1985 Supreme Court decision of Russell required breach of
fiduciary duty claims to be limited to relief for the plan as a
whole, not individual relief
21
Remedies under ERISA

Defined Benefit Plan:
◦ Claims arising from breach of fiduciary duty are
limited to relief for the plan as a whole, not to an
individual or group of participants

Defined Contribution Plan:
◦ Claims arising from breach of fiduciary duty does not
need to address the plan as a whole; individuals and
groups or participants may seek relief for their
individual accounts
LaRue v. DeWolff, Boberg & Associates, Inc.
128 S.Ct. 1020
22
Remedies under ERISA


Tullis and Mack v. UMB Bank, 515 F.3d 67 (6th Cir.
2008)
Facts:
◦ Two physicians sued the bank, as trustee, to recover losses due to
the fraudulent activities of broker as the bank knew of the fraud
but failed to notified the participants.
◦ Trustee argued that the physicians didn’t have standing to bring a
fiduciary breach claim as they were seeking individual remedies,
not for the plan as a whole.
◦ District court dismissed the case, agreeing with the trustee.
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Remedies under ERISA

Defined Contribution Plan (cont’d)
◦ Suits filed by individual participants or groups of participants
that is less than the entire group of affected participants need not
join other affected participants in the suit
Tullis and Mack v. UMB Bank
515 F.3d 67 (6th Cir. 2008)
24
ERISA §502(a)(1)(B) – Judicial Standard of
Review

Firestone decision back in 1989, Firestone v. Bruch, 489 U.S. 101
(1989)
◦ Unanimous opinion (O’Connor, Rehnquist, Brennan, White,
Marshall, Blackman, Stevens, Kennedy and Scalia)

Glenn decision in 2008, Metropolitan Life Ins. Co. v. Glenn, 554
U.S. __, 128 S.Ct. 2342 (2008).
◦ 5 to 4 decision (majority: Breyer, Stevens, Souter, Ginsburg,
Alito; dissent: Roberts, Kennedy, Scalia, Thomas)

Conkright decision on April 21, 2010, Conkright v. Frommert, 130
S.Ct. 1640 (2010)
◦ 5 to 3 decision (majority: Roberts, Kennedy, Scalia, Thomas,
Alito; dissent: Breyer, Stevens and Ginsburg)
25
ERISA §502(a)(1)(B) – Judicial Standard of
Review

Firestone – 1989
◦ Facts: ER self-administered and self-funded severance
plan and denied benefits to participants
◦ Default standard is de novo, unless plan grants
discretionary authority to plan administrator to
interpret plan and determine benefits
◦ If plan administrator is conflicted, that’s a factor to
consider
26
ERISA §502(a)(1)(B) – Judicial
Standard of Review

Between 1989 and 2008 in the conflict context:
◦ 2nd Circuit: reverted to the de novo standard if claimant could
provide conflict of interest tainted decision
◦ 9th and 11th Circuits: used a presumptively void standard,
whereby once the conflict was assumed or proven, the burden
shifted to the administrator to show its interpretation was not
tainted by the conflict
◦ 10th Circuit: if conflict shown or if there was a serious procedural
irregularity, burden shifted to the administrator to show
reasonableness of its decision
◦ Majority of Circuits: Sliding Scale
27
ERISA §502(a)(1)(B) – Judicial
Standard of Review

MetLife v. Glenn – 2008
◦ Facts: MetLife was the administrator and insurer of a disability plan
maintained by Sears, Roebuck & Co.
◦ Participant Glenn received STD, but was denied LTD because MetLife
held that she was “capable of performing full time sedentary work” and
therefore not “disabled” under the LTD
◦ Insurer encouraged Glenn to seek Social Security benefits which she did
and so received
◦ District court denied Glenn relief, but the Sixth Circuit reversed, holding
that the conflict of interest was a “relevant factor” in the denial.
◦ Due to the split among the circuits, the Supreme Court took cert.
◦ Supreme Court affirmed Firestone and confirmed the combination of
factors approach in considering the conflict
28
ERISA §502(a)(1)(B) – Judicial
Standard of Review

MetLife v. Glenn – 2008
◦ Majority view: Affirms combination of factors approach. If the
factors are closely balanced, then consider tiebreaking factors:
 Insurance administrator’s history of biased claims administration
 Pro active steps taken by plan administration to diminish bias and to enhance
accuracy
◦ Minority views:
 Roberts: conflict must have actually influenced the decision to deny benefits
 Kennedy: remand case to Sixth Circuit to ascertain how much weight to
accord MetLife’s conflict
 Scalia and Thomas: conflict of interest is relevant only if administrator acted
with improper motive
29
ERISA §502(a)(1)(B) – Judicial
Standard of Review


Conkright v. Frommert -- April 21, 2010
Facts:
◦ Xerox maintained a floor offset defined benefit plan, qualified under the Code.
◦ In dispute was the calculation of the offset to the benefit formula for any prior
lump sum distributions for employees hired prior to 1989 and later rehired.
◦ Plan amended 1981, 1983, 1985, 1987, 1989, 1993, 1996, 1998 and 1999.
◦ It was clear that there were actuarial assumptions applied to the offset calculation
in the 1998 Restatement, but plan silent earlier.
◦ District court held that the terms of the plan at the time the employee applied for
benefits governed and by 1998 the plan had expressly provided the offset
calculation. Therefore the administrator’s decision was affirmed.
◦ Sixth Circuit reversed holding that the administrator’s interpretation resulted in
an anti-cutback and thus violated ERISA. It remanded the case to the district
court to determine an appropriate method to calculate the offset.
30
ERISA §502(a)(1)(B) – Judicial
Standard of Review

Conkright v. Frommert – April 21, 2010

Majority View:
◦ Court holds that on remand, district court should have given deferential
review of the plan administrator’s subsequent interpretation of the offset
calculation -- highly deferential standard of review
◦ Reject 2nd , 9th, 10th and 11th Circuits standards
◦ Majority are the minority justices from Glenn, affirming Firestone but
make no mention of the combination of factors approach; also no
mention that this was a qualified DB plan

Minority View:
◦ Minority are the majority justices from Glenn (except for Alito), alleging
that trust law permits the courts to decide; criticizing the decision as
promoting ambiguous plan drafting and harming participants.
31
ERISA §502(a)(1)(B) – Judicial
Standard of Review


Scruggs, Barbara v. ExxonMobil Pension Plan, 585 F.3d
1356 (10th Cir. 2009)
Facts:
◦ Issue was whether Scruggs was a covered employee or an independent
contractor under the pension and savings plan.
◦ Plan terms on this issue were ambiguous.

Holding:
◦ Is plan provision in question ambiguous? If so, then take a “hard look
and determine” if administrator’s interpretation was arbitrary.
◦ Is the plan provision in question unambiguous and administrator’s
interpretation differs, then unreasonable and arbitrary.
◦ Same holding after Conkright?
32
ERISA §502(a)(1)(B) – Scrivener’s Error
Cross v. Bragg, http://pacer.ca4.uscourts.gov/opinion.pdf/071699.U.pdf (unpublished)
 Facts:

◦ ER, Fleet Reserve Association established a defined benefit plan
in 1972, and modified it in 1985 to include a “step formula” to its
benefits calculation.
◦ In 1996, an integrated formula replaced the step formula,
providing more valuable benefits.
◦ Between 1996 and 2002, plaintiffs were paid benefits under the
1996 plan using the step formula instead of the integrated
formula.
◦ Bragg, the plan administration stated that the 1996 plan revision
was a mistake and that the inclusion of the integrated formula
was a scrivener’s error.
33
ERISA §502(a)(1)(B) – Scrivener’s Error
Scrivener’s Error



Textual error where the wording of the plan document is not
identical to the agreed upon intentions of the parties to the plan
Correcting a scrivener’s error is a power that resides with the courts,
not the plan administrator
Courts will generally find that the written terms of the plan are
controlling
Cross v. Bragg
http://pacer.ca4.uscourts.gov/opinion.pdf/071699.U.pdf (unpublished)
34
Spousal Rights

Anti-assignment and alienation:
◦ ERISA guarantees benefits to participants and beneficiaries.

Qualified Domestic Relations Orders (QDROs):
◦ ERISA allows for the assignment of a spouse’s interest in the
participant’s benefits with the perfection of a QDRO.
◦ QDRO must assign a benefit to an alternate payee; state the
amount of the benefit to be assigned; and be entered with a
judgment by the court.
35
Spousal Rights


Kennedy v. Plan Administrator for DuPont Savings and Investment
Plan, 129 S.Ct. 865 (2009)
Facts:
◦ William Kennedy married Liv Kennedy in 1971 and named her in 1974
as beneficiary under the DuPont SIP, but named no contingent
beneficiary.
◦ They divorced in 1994, subject to a decree that stated Liv was “divested
of all right, title, interest, and claim in” any retirement plan. But
William did not remove Liv as the SIP beneficiary but did executive a
beneficiary form naming his daughter Kari under the DuPont pension
and retirement plan.
◦ In 2001 William died. Kari as executor directed DuPont to distribute the
SIP funds to Williams estate. DuPont paid the $400,000 SIP funds to
Liv.
◦ Issue: Whether the waiver is rendered invalid under ERISA’s antiassignment and alienation provisions.
36
Spousal Rights

Absence of a QDRO:
◦ Plan administrator must follow the direction of the plan
document as to the payment of benefits to beneficiaries.
◦ The Supreme Court has not stated whether a spousal waiver to
benefits may be effective.
◦ The Supreme Court refrained from stating that a QDRO may be
the sole method for a spouse to relinquish rights to benefits.
Kennedy v. Plan Administrator for DuPont Sav. and Investment Plan,
129 S.Ct. 865 (2009)
37
Spousal Rights – Common Law Marriages


Owens v. Automotive Machinists Pension Trust, 551
F.3d 1138 (2009)
Facts:
◦ Norma and Phillip Owens lived together for more than 30 years,
but never married.
◦ In 2004, they separated and the state of Washington held that
they had a “quasi-marital” relationship and a DRO held that
Norma was an alternate payee under the employer’s trust.
◦ Issue before the court: Was the DRO a QDRO for purposes of the
pension trust?
38
Spousal Rights
Common Law Marriage and Quasi-Marital Status:



ERISA is silent on defining marriage and marital property rights
Courts look to state law to determine treatment of relationship
ERISA allows for alternate payee to be spouse, former spouse or
other dependent
Owens v. Automotive Machinists Pension Trust
551 F.3d 1138 (9th Cir. 2009)
39
Bankruptcy


In re Scott Lee Egebjerg v. Anderson, 574 F.3d 1045 (9th
Cir. 2009)
Facts:
◦ In 2006, Scott filed a voluntary Chapter 7 bankruptcy petition,
with a gross income of $6,115/mo.
◦ In 2004, he had taken a loan from his 401(k) plan and the $734
monthly repayments were automatically deducted from his
paycheck. The loan was scheduled to be repaid in full by 2008.
◦ Under the bankruptcy’s “means test,” Scott deducted the 401(k)
repayments on his schedule of necessary expenses, leaving him
with monthly disposable income of $15. U.S. Trustee moved that
the 401(k) loan repayments were not allowed as deductions.
◦ Issue before the court: Does his 401(k) loan repayments count as
necessary expenses under the bankruptcy’s “means test.”
40
Bankruptcy

DC Account Loans:
◦ For purposes of a Chapter 7 Bankruptcy, the amount owed to a
participant’s account arising from a loan is not “debt”
◦ The repayment of a loan from a qualified DC account may not be
deducted from income under bankruptcy proceedings
In re Scott Lee Egebjerg
No. 08-55301 (9th Cir. 2009)
41
Bankruptcy
DiFelice v. U.S. Airways, Inc., 497 F.3d 410
 Facts:

◦ U.S. Airways offered a 401(k) plan with directed investments,
that provided employer stock as an investment option.
◦ In August 2002, U.S. Airways filed for relief under Chapter 11 of
Bankruptcy Code. All employer stock was cancelled without
distribution to stockholders.
◦ Airline employees filed a class action against the plan
administrator alleging breach of fiduciary duty by retaining
airline stock fund as a plan investment option from October 2001
through June 2002 when the stock traded from $11/share to
$4/share.
42
Bankruptcy
Fiduciary Duties under Bankruptcy:


A mere conflict of interest on behalf of a plan fiduciary is not
enough to warrant a breach of loyalty due to the participants per se
Plan sponsors filing for Chapter 11 bankruptcy relief does not
necessarily result in a breach of fiduciary duties if participants are
offered employer stock in a self-directed DC plan
DiFelice v. U.S. Airways, Inc.
497 F.3d 410 (4th Cir. 2007)
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Questions & Answers
44