recent erisa litigation and related title i issues marcia s. wagner, esq. august 26, 2014
TRANSCRIPT
RECENT ERISA LITIGATION AND RELATED TITLE I
ISSUES
Marcia S. Wagner, Esq. August 26, 2014
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AGENDA
Employer Stock Funds – the Demise of MoenchLessons from Excess Fee CasesProprietary Funds LitigationEquitable Remedies after Cigna v. AmaraEvolving Definition of an ERISA FiduciaryStatute of Limitations Developments
• Fiduciary Breach
• Heimeshoff Limitation on Claims for Benefit DenialSame-Sex spouse Litigation
DEMISE OF MOENCH
PRESUMPTION
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DEMISE OF MOENCH PRESUMPTION
MOENCH PRESUMPTION
Plan holding or buying employer stock is presumptively prudent; the presumption applied to:• ESOPs• 401(k) Plans invested in employer stock
Moench doctrine had been spreading since 1995Result was early stage dismissal in many stock drop cases
DUDENHOEFFER HOLDING: NO PRESUMPTION OF PRUDENCE
Supreme Court rules that a presumption of prudence exists only as to the diversification of plan assets
Supreme Court’s suggestions for weeding out meritless cases favor plan fiduciaries
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DEMISE OF MOENCH PRESUMPTION
POST DUDENHOEFFER MOTION TO DISMISS
Plan fiduciaries generally entitled to rely on market price of employer stock in making buy/sell decisions
To overcome defendant’s reliance on the market, plaintiffs will need to allege special circumstances
Lower courts to work out what special circumstances can overcome reliance on the market• Plaintiffs will need to allege specific facts in support of special
circumstances
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DEMISE OF MOENCH PRESUMPTION Actions taken by fiduciaries must be consistent with securities laws
• Duty of prudence does not require fiduciary to break the law, including insider
trading restrictions
• Cannot require divestiture of employer stock on the basis of inside information
• Acts should not be more likely to harm the employer stock fund than help it
Supreme Court’s instructions to lower courts:
• Potential conflicts with insider trading that must be avoided
> Requiring a sale of employer stock on the basis of inside information
> Disclosure of nonpublic information
• Viable complaint must allege that prudent fiduciary could not have concluded
that alternative actions would do plan more harm than good
> Stopping purchase of employer stock
> Disclosing nonpublic information
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DEMISE OF MOENCH PRESUMPTION
TAKEAWAYS
Consider excluding insiders from serving on plan committees
Consider appointment of independent fiduciary to make employer stock decisions
Review Securities Law requirements Review employer’s public statements and filingsApply a prudent process to decision making
LESSONS FROM EXCESS FEE
CASES
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LESSONS FROM EXCESS FEE CASES
Excess fee cases assert fiduciary breach due to unreasonably high fees paid by plan
ERISA Sec. 404(c) regulations provide exemption from fiduciary liability• Plan must give participant discretion to select investments
• Participant must exercise control over investment selection
Hecker v. Deere: over 2,500 available funds give participants requisite choice to pick expensive or low priced funds• Market regulates fund fees
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LESSONS FROM EXCESS FEE CASES
Hecker v. Deere progeny holding participants have adequate choice:• Renfro v. Unisys – 73 investment options• Loomis v. Excelon Corp. – 32 investment options
Cases are limited to their particular facts
Tipping point: offering a wide range of fund fees
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LESSONS FROM EXCESS FEE CASES
Tibble v. Edison International (2013) - 50 investment options
• Inclusion of retail class mutual funds with high fees held imprudent
• Plan fiduciaries fail to investigate institutional class alternatives
• Unquestioning reliance on consultant who fails to recommend alternatives
Evolution of complaints in excess fee cases
• Complaints focus on overcompensation of service providers by mutual funds
• Overall fees no longer relevant
Large array of funds no longer protects fiduciaries from liability
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LESSONS FROM EXCESS FEE CASES
Tussey v. ABB (2014) liability imposed on plan fiduciaries• Fiduciaries fail to carry out prudent fiduciary process
> Revenue sharing received by recordkeeper not calculated
> Fees not evaluated for competitiveness
• Court denies that wide range of investment options bars claim of unreasonable recordkeeping fees
New Arguments:• Investment options should be limited to enable qualification for
lower priced institutional shares
• Plan fiduciaries have duty to seek rebates of revenue sharing from service providers
• $12 million settlement in Bilewicz and Yeaw cases v. Fidelity
PROPRIETARY FUNDS LITIGATION
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PROPRIETARY FUNDS LITIGATIONFirst Union precedent
• Plan invested exclusively in proprietary funds
• $26 million settlement
Typical defendants:• Ameriprise Financial
• Bank of America
• Fidelity
• Sun TrustCauses of Action
• Fiduciary breach> Excess fees received by service provider from mutual funds
• Prohibited transaction> Seed money for new fund
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PROPRIETARY FUNDS LITIGATION
Statute of Limitations Defense• Applies to prohibited transaction claims
> Protection for funds selected for inclusion on menu before commencement of limitations period
• Less successful with breach of prudence / loyalty claims
> Continuing duty to monitor
Standing Requirement• Plan investor needed for each challenged mutual fund
EQUITABLE REMEDIES AFTER CIGNA V. AMARA
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EQUITABLE REMEDIES Cigna v. Amara (2011)
• Plan document v. SPD
• Dispute over transition formula for conversion of DB pension to cash balance plan
• Held: no legal authority under section 502(a)(1)(B) to order plan amendments
Guidance on equitable remedies under ERISA 502(a)(3)(B)• 3 traditional equitable remedies discussed
• Concurring opinion refers to discourse as nonbinding dictum
• On remand, district court orders plan reformation
> Same remedy
> New rationale, i.e., equitable reformation
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EQUITABLE REMEDIESContract Reformation
• Mutual mistake
• Fraud
• Reliance
• Contract principles not a good fit for benefit plansEquitable Estoppel
• Promise
• Reliance (action or forbearance induced by promise)Surcharge
• Breach of fiduciary duty causing loss
• Unjust enrichment
• Disagreement over whether loss to plan is required
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EQUITABLE REMEDIESCigna v. Amara – district ct. imposes additive transition
formula under contract reformation rationale• Implicit / questionable assumption that participants could reject
amendmentOsberg v. Foot Locker – facts similar to Cigna v. Amara but
different result • Alleged harm held to be speculative
Several appellate decisions apply surcharge remedy to give money damages
9th Circuit rejects surcharge because plan must suffer lossApplication of equitable remedies continues to evolve
THE EVOLVING DEFINITION OF A
FUNCTIONAL FIDUCIARY
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EVOLVING DEFINITION OF FUNCTIONAL FIDUCIARY
Definition of Investment Advice Fiduciary to be reproposed by DOL
DOL taking aggressive positions in litigation that powers of platform providers result in fiduciary status even if not exercised
Advisory Opinion 97-16A – power to change investment options on platform does not result in fiduciary status• Final decision must rest with plan sponsor• Platform provider must provide full disclosure• Negative elections permitted
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EVOLVING DEFINITION OF FUNCTIONAL FIDUCIARY
Leimkuehler v. American United Life Ins. Co. (2013)• Provider’s receipt of revenue sharing would violate
ERISA if fiduciary status imposed
• DOL argues that offering a fund on investment platform is equivalent to exercise of right to make substitutions
• 7th Circuit limits functional fiduciary characterization to actual exercise of authority
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EVOLVING DEFINITION OF FUNCTIONAL FIDUCIARY
Healthcare Strategies v. ING(2013)• Group annuity does not give plan right to reject
investment option substitutions• Insurer exercises substitution authority only twice• Court construes services as “plan administration, not
“plan management”> Under administration prong of fiduciary definition only
authority to make substitutions (not actual exercise) sufficient for fiduciary status
• Case settled 2014> $15 million
> Procedures consistent with Advisory Opinion 97-16A
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EVOLVING DEFINITION OF FUNCTIONAL FIDUCIARY
Golden Star v. MassMutual Life Ins. Co. (2014)• Management prong of fiduciary definition
> Court hold that actual exercise of authority to substitute investment options is required to confer fiduciary status
• Plan administration prong of fiduciary definition> No decision on possession of authority vs. actual
exercise issue• Control over its own compensation confers fiduciary
status on service provider> Court holds there is triable issue, because service
provider could assess management fees up to 1% of account market value
STATUTE OF LIMITATIONS
DEVELOPMENTS
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STATUTE OF LIMITATIONS – FIDUCIARY BREACH
ERISA statute of limitations for fiduciary violations• 6 years from last act constituting a violation
• 3 years after earliest date plaintiff had actual knowledge of violation
Fuller v. SunTrust Bank (2014)• 3 year limitation period not applicable
> Proving plaintiff’s knowledge requires showing that plaintiff actually received plan documents
• 6 year limitation period results in case dismissal
> Limitations period runs from initial fund selection
> Potentially different result if complaint reflects new violations resulting from changed circumstances
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STATUTE OF LIMITATIONS – FIDUCIARY BREACH
David v. Alphin (2013)• Fiduciary breach claim barred by 6-year statute of limitations
> Limitations period commences with initial fund selection• Viable claim requires changed circumstances during
limitations period> Poor performance
> Increased fees
Tibble v. Edison International (2013)• Fiduciary breach claim barred by 6-year statute of limitations
• Result unchanged by ongoing nature of ERISA fiduciary duties
• New 6-year period begins if changed circumstances create new breach
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STATUTE OF LIMITATIONS – BENEFIT DENIAL
No ERISA statute of limitations for benefit claims• Limitations period borrowed from state law
• Date of accrual: when plaintiff should have discovered injury
Contractual provisions can limit time for bringing lawsuit• Restrict limitations period
• Specify date of claims accrual
Heimeshoff v. Hartford Life (2013) holds contract restrictions are enforceable • Shorter limitations period than allowed by state law but must be
reasonable
• May specify accrual period
• Not barred by statute
• Participant put on notice
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STATUTE OF LIMITATIONS – BENEFIT DENIAL
New cases following-up on Heimeshoff • Barriero v. NJ Bac Health Fund (2013)
> 3-year plan limitation period upheld
> Plan limits found reasonable even though limitations period begins to run before internal claims procedure was exhausted
• Munro-Kienstra v. Carpenters’ Health Fund (2014)> 2-year limitations period upheld
> Participant informed of limit
Steps to limit stale claims• Amend plan to provide reasonable limitations period
• Include reasonable rules for accrual of claims in the amendment
• Notify participants
POST WINDSOR DEVELOPMENTS
REGARDING SAME SEX SPOUSES
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SAME-SEX SPOUSE DEVELOPMENTS
United States v. Windsor(2014)• DOMA held unconstitutional
Place of Celebration Rule• IRS and DOL release guidance• Valid same-sex marriage will be recognized even if
couple lives in a state that does not recognize same-sex marriage
• Prospective effect: from September 16, 2013Query retroactive effect of Windsor?
• Pre-June 26 (date of Windsor decision)?• Pre- September 16, 2013 (place of celebration rule)?
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SAME-SEX SPOUSE DEVELOPMENTS
Cozen O’Connor, P.C. v. Tobits (2013)• Court holds same-sex spouse entitled to
surviving spouse benefit under profit sharing plan• Court looks to Illinois law (place of domicile at
time of death)>Query result where domiciliary state hostile to
same-sex marriage?
• Participant dies in 2010>Court implicitly applies Windsor retroactively
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SAME-SEX SPOUSE DEVELOPMENTS
Roe v. Empire Blue Cross Blue Shield. (2014)• Holds employee not entitled to enroll same-sex
spouse as health plan dependent• Self-insured plan• Plan provision specifically excludes same-sex
spouses• Court holds that ERISA grants broad discretion
as to welfare plan coverage• Cozen O’Connor case distinguished
RECENT ERISA LITIGATION AND RELATED TITLE I ISSUES
MARCIA S. WAGNER, ESQ. AUGUST 26, 2014
A0128252.PPTX