Disclose 'Sure'

There are few things more annoying in my daily existence than those ubiquitous pop-up service agreement acknowledgements.

I say annoying because they are inevitably long and “lawyerly”; there’s no way that they can readily be read (much less absorbed) in the medium in which they are presented; and the alternative to not accepting the conditions presented would seem to be to forego the update that you’ve been encouraged to accept, and that, at some point in the future would seem to have its own dire consequences. And so, probably like many, if not most, if not all, of you, means that I accept the terms, and acknowledge the disclaimers basically sight unseen (or at least unread).

Last week the U.S. Supreme Court weighed in on a case involving participant disclosures, specifically the issue of whether certain plan disclosures were sufficient to establish a participant’s “actual knowledge” of the design of Intel’s custom target-date series, which had been built including an allocation to hedge funds and other alternative investments, including private equity. The participant-plaintiff here alleged that, despite “annual notices, quarterly Fund Fact Sheets, targeted emails, and two separate websites”—and tracking that indicated that he had actually visited the web sites “repeatedly”[i] during his employment, he did not “remember reviewing” the disclosures.

SOL ‘Stance’

The difference is one of timing, because of ERISA’s statute of limitations. Those injured by an ERISA breach have three-years to file suit from when the plaintiff had actual knowledge of the violation. Without that knowledge, an alternative 6-year statute of limitations applies, running from the date of the last action which constituted a part of the violation. The suit, filed in 2015, challenged actions that occurred between 2009 and 2014.

The Intel defendants argued—and the district court agreed—that the notices established knowledge well beyond the 6-year statute of limitations. However, the appellate court disagreed, explaining that if (as claimed) “Sulyma in fact never looked at the documents Intel provided, he cannot have had ‘actual knowledge of the breach.’”

The nation’s highest court—unanimously—agreed with the appellate court, commenting that while “…relevant information disclosed to the plaintiff is no doubt relevant in judging whether he gained knowledge of that information”… to meet the “actual knowledge” criteria imposed by the legislation, “…the plaintiff must in fact have become aware of that information.”

Now, as someone who appreciates a reliance upon the black letter of the law, the decision’s clarity is somewhat reassuring. If, on the other hand, you’ve spent time and money producing and distributing the plethora of disclosures mandated by the law, you could hardly be faulted for wondering… what’s the point?

Foreclosure ‘Notice’

Doubtless anticipating the clamor of plan fiduciary jaws slamming onto desktops across the nation, Justice Alito (who authored the court’s opinion) threw a (small) bone to what seems likely to be a rapidly expanding class of plan fiduciary litigants.

“Nothing in this opinion,” he cautions, “forecloses any of the ‘usual ways’ to prove actual knowledge at any stage in the litigation. … Plaintiffs who recall reading particular disclosures will of course be bound by oath to say so in their depositions. On top of that, actual knowledge can be proved through ‘inference from circumstantial evidence.’ … Evidence of disclosure would no doubt be relevant, as would electronic records showing that a plaintiff viewed the relevant disclosures and evidence suggesting that the plaintiff took action in response to the information contained in them…”. He also noted that, “Today’s opinion also does not preclude defendants from contending that evidence of ‘willful blindness’ supports a finding of ‘actual knowledge.’”

The Impact

There’s little question that the ruling will make it harder for plan fiduciaries to claim that effective notice has been provided by the series of disclosures, mandated and otherwise. Indeed, this particular plaintiff’s ability to basically disclaim awareness despite evidence that he had spent a lot  of time on the site(s) where the disclosures were housed was, to this observer, anyway, a bit of a head scratcher, to say the least.

In response, employers will almost certainly pursue technologies (or be counseled to do so) that provide a more specific acknowledgement by participants that they have seen—and read—specific plan information before proceeding to the information they really want to see (like account balance).

Now if only the lawyers (and regulators) would craft disclosures that, if not more memorable, were at least (more) readable.

- Nevin E. Adams, JD

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[i]In their filing with the Supreme Court, Intel noted that, “during his brief tenure with Intel, respondent regularly accessed the website for those materials,” clicking on more than 1,000 web pages within that site; it was undisputed that respondent “accessed some of th[e] information” that disclosed the disputed investment decisions “on the websites.”

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'Special' Treatment

Our industry has long disparaged the apparent “overindulgence”¹ of participants in the stock of their employer as a retirement investment. However, for plan fiduciaries – and those who advise them – there may be a more pressing concern.

Anyone who has been paying attention to 401(k) plan litigation these past several years knows that a common trigger – perhaps the most common trigger – for litigation is the presence of company stock in the plan; more specifically, the presence of company stock that has sharply declined in value. In fact, these days no sooner does some big earnings surprise or unanticipated business calamity make the headlines than the plaintiffs’ bar is out “trolling” for potential clients. And let’s face it, a 401(k) plan is a class action litigant’s dream – potentially thousands of similarly situated and comparably injured plaintiffs in one place (so to speak).  

But if the instances of litigation have been numerous, the odds of success – for plaintiffs – have been anything but.

Prudent ‘Presumptions’

For a long while, these claims failed to clear a “presumption of prudence.” Now, one needn’t scour ERISA’s text to discern the boundaries of this legal construct; indeed, that would be a futile effort. Rather, it is a concept gleaned by the courts (and subsequently enshrined in legal precedent) from their understanding of the black letter of the law. It is a concept that found its footing in a 1995 case called Moench v. Robertson. Now, in that case, as in many of the new generation of “stock drop” cases (drawing their name from the fact that the action arises after the value of the stock drops), a plan participant sued a plan committee for breaching its fiduciary duty based on its continued investment in employer stock after the employer’s financial condition “deteriorated.” In the aftermath of the Moench ruling, nearly every court district court that considered the issue of prudence of employer stock holding had rejected plaintiff claims based on this so-called “presumption of prudence.”

That was the “law of the land” in such matters until 2014 when the Supreme Court seemed truly concerned that the “presumption of prudence” standard basically established a standard that was effectively unassailable by plaintiffs outlined a new standard – a “more harm than good” standard that emerged with Fifth Third Bancorp v. Dudenhoeffer. The notion here was that a plan fiduciary might be excused from taking action with regard to company stock in the retirement plan – such as removing it as an option, or forcing a liquidation of those investments – if doing so would do “more harm than good.”

More Harm?

“Inspired” by this new standard, many of the so-called “stock drop” suits which hadn’t passed muster under the “presumption of prudence” threshold refiled. But ironically, those too had generally come up short of the new standard – though they did at least routinely get past the summary judgment stage. Which, of course, meant more time and expense for the fiduciary defendants – but no recovery for the plaintiffs (or the plaintiffs’ attorneys, who generally work on a contingent fee basis in these class actions).

At least that was the case until a recent district court decision (Jander v. Ret. Plans Comm. of IBM) was overturned by the U.S. Court of Appeals for the Second Circuit, which concluded that, in fact, the plaintiffs plausibly alleged facts showing that a prudent ERISA fiduciary “could not have concluded” that a corrective disclosure of an allegedly overvalued IBM business would have done “more harm than good to the fund.”

In fact, the plaintiff in that case – recently accepted by the Supreme Court – argued that no duty-of-prudence claim against an ESOP fiduciary has passed the motion-to-dismiss stage since the 2010 decision in Harris v. Amgen, nothing that “imposing such a heavy burden at the motion-to-dismiss stage runs contrary to the Supreme Court’s stated desire in Fifth Third to lower the barrier set by the presumption of prudence.”

What’s Next?

And yet, that same Second Circuit Court of Appeals whose decision teed up the issue that the nation’s highest court will now consider – within a week of that decision – found that a similar case lacked the “special circumstances” necessary to overcome the more harm than good bar.

As for what lies ahead, the forthcoming review by the U.S. Supreme Court could bring a new, more relaxed pleading standard to the fore. Or it might establish a “new” standard that doesn’t do anything more to improve plaintiffs’ prospects than the “more harm than good” did beyond the “presumption of prudence.”

In any event, plan fiduciaries who still maintain company stock as plan investment option (and according to the Plan Sponsor Council of America’s 61^st Annual Survey of Profit Sharing and 401(k) Plans, 12% of plans allow company stock as an investment option for both participant and company contributions, and 4% restrict it to company contributions only) might well want to spare themselves the cost and aggravation of litigation that seems inevitable when (if?) the value of that stock holding goes down.

In this day and age, a plan fiduciary unable to see the potential for employer-security-related litigation is perhaps unworthy of the role, and a dual-role plan/corporate fiduciary unable to appreciate the potential for a conflicted duty vis-à-vis his or her fiduciary responsibility to the retirement plan is surely living in a state of active denial.

Because while “special” circumstances may seem to warrant such consideration, ultimately, perhaps inevitably, the end result seems to eventually be putting not only prospective plaintiffs, but the plan fiduciaries, between a rock and a hard place.

 

- Nevin E. Adams, JD

 

1. Participants given an option to invest in company stock have long invested what professionals would deem an inappropriately large percentage of their portfolio there ( Vanguard’s How America Saves 2019 report notes that 4% of participants with the option to invest in company stock have more than 20% of their balance so invested) – arguably the least diversified investment option on the menu, and one that is inextricably tied to the success of their employer’s business (meaning that when the business slips, so might the prospects of their continued employment). On the other hand, an investment in their employer is seen by many as a mark of confidence and loyalty – and, for many, it’s doubtless the investment on that menu that they best understand.