Guidance 'Counseling'

 When the Labor Department issued last month what it called “new guidance” that it further described as “the first time the department’s Employee Benefits Security Administration has issued cybersecurity guidance”—well, I, for one, was expecting… guidance. 

However, rather than an advisory opinion, information letter or even a field assistance bulletin, it turned out instead to be three documents outlining what were termed “best practices for maintaining cybersecurity.”

The issue of cybersecurity has, of course, loomed large in recent months, reportedly emerging as a focus in Labor Department audits and as a point of contention[i] in participant lawsuits. In fact, even the preamble to the final e-delivery regulations stated a year ago that “…the Department expects that many plan administrators, or their service or investment providers, already have secure systems in place to protect covered individuals’ personal information.” 

Now, in fairness, the Labor Department press release did state that it was guidance on those best practices—not that there wasn’t guidance on cybersecurity to be found in those documents. 

Consider that in the component labelled “Cybersecurity Program Best Practices,” none other than the Labor Department itself says, in no uncertain terms, “Plans’ service providers should…” and then proceeds to enumerate 12 precise and distinct elements. The first of these is no less than to “have a formal, well documented cybersecurity program,” followed immediately by “conduct prudent annual risk assessments.” 

Doubtless there are some who would prefer to have a more detailed expectation as to the particulars of those practices, some specific sense as to exactly what constitutes a “cybersecurity program,” the criteria for “strong access control procedures” and what is required in order to “appropriately respond” to past cybersecurity incidents. 

Make no mistake: Plan fiduciaries that aren’t attentive to the issue, much less the best practice guidance and its detailed outlines as to what would constitute “best” practices—well, perhaps the high-level admonitions leave too wide open the determination as to how those mesh with ERISA’s fiduciary standard. That said, and even if the Labor Department has yet to turn a sharp eye upon such things, the plaintiffs’ bar soon surely will.

The elements outlined, while broad, seem to offer at least a basic structure and specifics sufficient to validate an existing program, or—should one not yet be in place—begin its construction. And so, even if there are some specific criteria not yet detailed, plan fiduciaries can know, it seems to me—regardless of this particular guidance—for a certainty that the standards of considering, hiring and monitoring the processes and practices of those who provide support to their plan and its participants require—as they always have—a standard of care and loyalty that has been described as “the highest known to the law.” 

And surely that includes pursuing best practices in protecting both the information and account balances to which they are entrusted. 

- Nevin E. Adams, JD

---

[i] Other recent cases have involved participant accounts at Abbott Laboratories (Split Decisions in 401(k) Theft Suit for Plan Sponsor, RK), Estee Lauder (Recordkeeper, Plan Sponsor Charged in 401(k) Account Theft), MandMarblestone Group (Court Backs TPA Counterclaim on Plan Sponsor in 401(k) Cyber Theft Case) and Boeing (Man Charged with Retirement Account Thefts).

Why You Shouldn’t Hire Your Brother-in-Law as Your Plan’s Advisor

Last week an advisor reached out to me looking for an article on a topic that comes up with remarkable frequency.

Specifically, this advisor was dealing with a situation where a client was considering hiring their brother-in-law as the plan advisor, and wondered if we had ever written an article dealing with that situation. It’s not the first time I have been asked that, though sometimes it’s a cousin, a friend, a friend’s cousin, or a cousin’s friend.

When that situation comes up – and come up it will – this is what I would tell them:

If you’re a plan sponsor, you’re an ERISA fiduciary.

If you have discretion in administering and managing the plan, or if you control the plan’s assets (such as choosing the investment options or choosing the firm that chooses those options), you are a fiduciary to the extent of that discretion or control. Ditto if you are able to hire individuals to control those assets – including your brother-in-law.

Plan decisions you make as an ERISA fiduciary – including hiring those who provide plan services – must meet certain criteria.

As an ERISA fiduciary you have a legal obligation to act solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them. Does hiring your brother-in-law meet that test? Would it look that way to a judge?

As an ERISA fiduciary, you’re expected to be an expert — or to hire help that is.

You may not have been told this when you were given this responsibility, but when you, as an ERISA fiduciary, act for the exclusive purpose of providing benefits, you are legally bound to do so at the level of a hypothetical expert. Lacking that level of expertise, the Labor Department says that “a fiduciary will want to hire someone with that professional knowledge to carry out the investment and other functions.” Like your brother-in-law?

As an ERISA fiduciary, you’re expected to fire help that isn’t expert.

The flip side of hiring an expert is being able to terminate that relationship if they aren’t fulfilling their obligations. Think how awkward Thanksgiving dinner will be if you fire your brother-in-law. Think how awkward it will be standing in front of a judge if you should have – and don’t.

Your liability as an ERISA fiduciary is personal.

There are any number of things that can go wrong in running a workplace retirement plan. That’s why it’s important to hire experts – and to keep an eye on them. But don’t forget that ERISA fiduciaries can be held personally liable to restore any losses to the plan, or to restore any profits made through improper use of the plan’s assets resulting from their actions.

It is, of course, possible that your brother-in-law is an expert in such matters, that he brings real value to your plan and the participants and beneficiaries it serves, and that your decision to engage his services is based solely on your desire to fulfill your fiduciary obligations.

If so, by all means proceed – just take care to make sure – as you should with any such hire – to document the rationale behind that decision.

Your brother-in-law will understand.

- Nevin E. Adams, JD

4 Things Plan Sponsors Are Scared of – and 3 More They Should Be

Halloween is the time of year when one’s thoughts turn to trick-or-treat, ghosts and goblins, and things that go bump in the night. But what are the things plan sponsors are scared about?

Getting sued.

Plan sponsors will often mention their fear of getting sued, and little wonder. The headlines are full of multi-million-dollar lawsuits against multi-billion-dollar plans, and if relatively few actually get to a judge (and those that do are decided in the plan fiduciaries’ favor), they nonetheless seem to result in multi-million-dollar settlements. Oh, and not only has this been going on for more than a decade, the issues raised are changing as well.

As a plan fiduciary, you can still be sued of course; and let’s not forget that that includes responsibility for the acts of your co-fiduciaries, and personal liability at that (see 7 Things an ERISA Fiduciary Should Know).

That said, those cases seem to involve a rather small group of rather large plans. Most plan sponsors won’t ever get sued, much less get into trouble with regulators, of course. And those who do are much more likely to drift into trouble for things like late deposit of contributions, errors in nondiscrimination testing, or not following the terms of the plan.

Changing recordkeepers.

Any plan sponsor who has ever gone through a recordkeeping conversion knows that, however smooth the transition, and regardless of how much better the experience on the new platform is, moving is a lot of work. And, as with relocating your home, the longer you have been in a particular location, the harder it seems to be. Knowing that, it’s little wonder that many plan sponsors make those changes only under a duress of sorts, forced by poor service, a lack of capabilities, (relatively) high fees, or more than one of the above.

And that, of course, means that the transition, however badly needed or desired, will likely be rougher – and take longer – than desired (see 3 Things Plan Sponsors Should Know About Changing Providers).

Offering in-plan retirement income options.

While surveys suggest that plan participants are interested in the concept of retirement income solutions, and other surveys indicate that plan sponsors are concerned about participants’ abilities to manage their retirement income flows, there has been little movement in the addition to current plan designs, nor little indication that participants, given access to that option, are quick to embrace it. Plan sponsors remain concerned about the cost and operational implications, not to mention an extension of their fiduciary responsibility to a product that is neither required nor requested.

That said, new legislation has been introduced that might at least mitigate some of those concerns – were it to become law (see also, 5 Reasons Why More Plans Don’t Offer Retirement Income Options).

The ‘squeaky’ participant.

We’ve all heard (and likely experienced) the response to that squeaky wheel that every organization has, and that every plan sponsor fears, or at least dreads. Other than sheer human inertia, there is perhaps no more powerful force in freezing proposed plan changes in their tracks than concerns about the response that this individual (and the individuals whose attention they always seem to garner) might wreak on those responsible for those changes.

We all know who they are. We all know what they do. And yet they continue to be a force to be reckoned with in many organizations.

And 3 They Should Worry About

Now, arguably most of the foregoing concerns are overblown – they loom larger in the abstract than they should in reality. But loom large they do. But what about the things they should be “scared” of, but often aren’t?

Their personal liability

Most of the aforementioned concern about being sued seems borne from a concern about the damage – both reputational and financial – to their organizations. While that is certainly a well-founded and rational concern, plan fiduciaries, particularly plan sponsors, often seem oblivious to the reality that their liability is personal.

You can, of course, buy insurance to protect against that personal liability — but that’s likely not the fiduciary liability insurance that most organizations have in place. And it may not be enough.

Participants not having enough money to retire

For much of their existence, workplace retirement plans have been, and been viewed as, voluntary affairs. The focus of plan sponsors was to provide benefits that served to both attract and retain valued workers, and the retirement savings program was high on that list. A variety of discrimination tests served to provide incentives to encourage a certain rate of participation, while others worked to either foster a certain rate of deferrals, or brought with them the pain of restraining the contributions of the more highly compensated. Despite those, encouragements the focus was almost always on the amount of contribution going in, not the amount of income that would eventually come out.

That has begun to shift in recent months amidst the growing evidence that workers, fearful of outliving their savings, are contemplating extending their working careers (the data still suggests that such notions are aspirational compared to the realities) at a point in time where the costs to the employer – both out-of-pocket and organizationally – of that employment are problematic. Moreover, there is a growing sense that concerns about retirement security while employed have costs of their own on productivity, as well as health – which contributes to the costs of things such as absenteeism, etc.

Enter a growing focus on what has been termed “financial wellness” that encompasses not only a focus on financial security post-retirement, but also in taking the steps ahead of retirement that allow individuals to successfully build toward that day. It is perhaps too soon to describe this as a “fear” – but it is a concern, and a growing one for attentive plan sponsors.

Not having the knowledge of a prudent expert

ERISA’s “Prudent Man” rule is a standard of care, and when fiduciaries act for the exclusive purpose of providing benefits, they must act at the level of a hypothetical knowledgeable person and must reach informed and reasoned decisions consistent with that standard. The Department of Labor notes that “[l]acking that expertise, a fiduciary will want to hire someone with that professional knowledge to carry out the investment and other functions.”

Indeed. Because, when it comes to the former, most people do – and as for the latter, many still don’t.

- Nevin E. Adams, JD

Litigation, Regulation, and Tax Reform – Oh My!

It’s been a busy year, a crazy summer – and we’ve still got a presidential election to go.

It has been years since things actually slowed down in the summer (at least in the way we all seem to remember it), but this summer has been busier than any I can remember. Not only has everybody been making preparations for the implementation of the Labor Department’s fiduciary regulation (and it’s affecting different business models very differently), we’ve had the looming prospects of litigation regarding the legality of the regulation itself, and the authority of the Labor Department to undertake it.

The challenges to that regulation share certain critical aspects, and yet each has its own unique flavor – and let’s not forget that they are filed in three different federal venues (four, counting the one filed just last week). Could one prevail in convincing a federal judge to grant a preliminary injunction to stop the rule’s implementation? Could such a ruling actually serve to maintain the status quo until after the presidential election? Could that presidential election result in new leadership at the Labor Department? If so, might a new president decide to halt implementation, and set a new course for that regulation? It seems unlikely now, but that’s pretty much what happened in 2008 with the then-pending advice regulation from the Labor Department.

Oh, and what about the series of excess litigation lawsuits taking on some of the nation’s largest (and we’re talking multi-billion dollar) university retirement plans? A decade ago, the law firm of Schlichter, Bogard & Denton galvanized the retirement industry’s attention with about a dozen such lawsuits filed against similarly mammoth 401(k) plans.

Things have changed since then, of course. Sure, revenue sharing is still an issue, as is the disclosure of such transactions to participants. But there is a greater sophistication in the current wave of allegations – it’s not just the use of retail versus institutional shares, but the failure to consider investment vehicles like collective investment trusts and separate accounts, the choice of active management funds with an S&P 500 benchmark instead of an S&P 500 index option itself, the choice of a poor-yielding money market fund instead of a stable value option – and in some cases, the choice of what is alleged to be a high-priced stable value choice rather than a relatively straightforward money market fund.

Since the beginning of the year, the cases brought against 401(k) plans – and this has found its way into the 403(b) litigation – have challenged not only the methodology for recordkeeping fees (dismissing asset-based revenue-sharing in favor of per-participant approaches), but attempted to set markers as to what that reasonable per-participant charge should be. Needless to say, millions of dollars are at stake – and one suspects we’re not near the end of even this litigation cycle.

And then there’s the prospects for tax reform. Sure, we may have been lulled into complacency by the gridlock in Congress that calls to mind a Friday afternoon traffic jam on the Beltway. But the major party candidates are already talking about changes to tax rates, and the rates they plan to cut – and in some cases plan to raise – could, if enacted, have a ripple effect on the current tax structures for retirement plans. Could the current 401(k) deferral be rejected in favor of a Roth-only approach? Might the contribution limits and benefit levels be frozen in place – or even reduced? Tax reform means different things to different people – and can impact different people in very different ways. And make no mistake, those kinds of changes are being contemplated as you read this. Could something actually happen?

In the midst of all this change and potential disruption lies opportunity for advisors. There will be plan fiduciaries looking for guidance, and plan sponsors more open to plan design changes than they may have been otherwise. It’s likely that firms (and advisors) that had previously been committed to the retirement business will rethink that commitment, and advisors who merely dabbled in this space may well decide it has simply become too rife with potential litigation to continue their dalliance.

That said, if the field is winnowed, the firms – and advisors – who remain will doubtless be made of sterner stuff. Those who survive and who hope to prosper will likely have to step up their game to compete effectively in this new, and more challenging arena.

- Nevin E. Adams, JD

6 Questions to Ask at Your Next Investment Committee Meeting

Every plan, and every investment committee, is unique — and yet, conducted properly, there are inevitably areas of commonality.

As the quarter draws to a close and preparations for these meetings get underway, here are some questions that could enhance the discussion, if not the outcome, of your next meeting.

1. Do we really need to have all these funds on the menu?

We know that participants tend to hold four or five funds on average, regardless of how many choices are on the menu. And for years we’ve known that the more choices participants have, the more difficult it is for them to make choices. (Remember the famous study about jam choices?) Sure, it can be hard to let go of a fund, especially if some participants have invested money in that option. But what tends to happen over time is a kind of fund menu inflation, where new funds get added but old ones never leave.

The funds on your menu should have a purpose. If they don’t — even if they once did — you aren’t doing anyone a favor by cluttering up the menu. And you could be leaving in place a non-performing ticking time bomb that could lead to problems later on.

2. Are there less expensive share classes available for the funds on our investment menu?

Arguably, this is the question that the defendants in Tibble v. Edison should have asked, and spared themselves a lot of time and litigation. The bottom line is, if there’s no difference in a fund choice (particularly when it’s just a different share class of the same fund) other than price, why is the more expensive one on your menu?

3. How much are our participants paying for this plan?

Odds are that most of the fees paid by the plan are investment-related, and with all the additional fee disclosures floating around, you’d like to believe that the committee already knows the answer to this question.

In my experience, however, it’s one thing to invoke a sterile “x basis points” assessment and another thing altogether to stop and do the math to put a gross dollar figure on the total cost to the plan. Or maybe even how much the average participant in the plan is paying in dollars and cents.

4. What services are we buying with those fees?

There’s been a lot of focus on fees lately — but fiduciaries are charged with ensuring that the fees and services rendered are reasonable. And I’ve never understood how you can figure out if fees are “reasonable” if you don’t know what you are paying them for.

5. Do we all need to be on this committee?

Over time, committees have a tendency to expand, sometimes based more on factors like internal organizational politics than on valuable perspectives or expertise. But human dynamics are such that the larger the group, the more diffused (and sometimes deferred) the decision-making.

As for how to trim the “fat” from the committee, sometimes all you have to do is remind committee members that plan fiduciaries have personal liability (see “5 Things Plan Sponsors Should Know”).

6. Who’s taking notes?

Finally, if you’re having a committee meeting, you’ll want to document all decisions that are made and the rationale behind each one. Prudence is process, after all — and it often starts with asking the right questions.

- Nevin E. Adams, JD

Lessened, Learned?

When I’m talking to plan sponsors (and advisers) about the challenges of being an ERISA fiduciary, I’m generally inclined to emphasize the awesome responsibilities that come with the “assignment”: the impact exerted on participant retirement savings; the admonition to ensure that fees paid by, and services rendered to, the plan are reasonable; the implications of the prudent expert rule; and the liability (and personal liability, at that), not only for your own acts, but for the acts of your co-fiduciaries (and hence an urgency around knowing who those co-fiduciaries are). I’m inclined to talk about the limitations of ERISA 404(c) in providing a shield against all that potential liability.

I’ll remind them that the Labor Department considers them responsible for all participant-directed investments outside 404(c)’s provisions, and note how frequently participant directions tend to fall outside those provisions. I’ll tell them how important it is to read the plan document, and to make sure the plan is operated according to its terms. I will remind them that the power to appoint members to the plan committee has been found to extend fiduciary liability to those who do the appointing, and I will, from time to time, remind them that company stock has been called “the most dangerous plan investment,” in no small part because a group of 401(k) participants is a class-action litigant’s dream team.

And then we get a court decision like the 2nd Circuit’s recent holding in Gray v. Citigroup, Inc., and I wonder if I understand ERISA at all.

The Case

Gray is a “stock drop” case (see 2nd “Circuit Affirms Dismissal of Citigroup Stock Drop Charges”), brought on behalf of Citigroup participants whose 401(k) balances were invested in the stock of their employer, stock that dropped precipitously in value in the wake of the 2008 financial crisis, in response to the collapse of the subprime mortgage market. As is common in such cases, the participant-plaintiffs alleged that the stock was retained as a plan investment option after it was no longer prudent to do so, and that those on, and who appointed, the plan investment committee were not only in a position to know that, but to know that well before the stock tumbled in value.

However, the 2nd Circuit noted—and supported—the determination of the lower court that “defendants had no discretion whatsoever to eliminate Citigroup stock as an investment option, and defendants were not acting as fiduciaries to the extent that they maintained Citigroup stock as an investment option.” Moreover, it noted—and supported the District Court’s determination that “even if defendants did have discretion to eliminate Citigroup stock, they were entitled to a presumption that investment in the stock, in accordance with the Plans’ terms, was prudent….”

Now, how is it that the plan’s committee had “no discretion whatsoever” to deal with the company stock investment? Quite simply, because the plan document called for that as an investment option.1 That’s right, apparently the court felt that the plan fiduciaries had no choice in deciding to keep that option in the plan and available because, to put it simply, “the plan document made them do it.”2

Presumption of Prudence

As for the alternative argument, the “presumption of prudence”? Well, it’s come up before in Moench v. Robertson, a 3rd Circuit decision not only cited here, but subsequently adopted by other courts. In Moench, the 3rd Circuit found that a plan sponsor that offered stock as an investment in an Employee Stock Ownership Plan (ESOP) was entitled to a presumption of prudence.3 Moench is an older case (1995), and from a time when suits based on employer stock investments were less prevalent than today.

More recently, such cases have become nearly as routine as a 100-point drop in the Dow, and the judicial system, honoring precedent, and what it has chosen to view as a Congressional endorsement for employer stock investment in these programs, has led a growing number of jurisdictions to summarily (if not peremptorily) dismiss many of these actions. Indeed, when all is said and done, it now seems as though the courts are comfortable imposing a less stringent review of the decision to invest in employer stock than in any other investment on the retirement plan menu.4

Moreover, for those that have, since Enron anyway, worried about the potentially conflicting duties owed by certain committee members to shareholders and plan participants, the 2nd Circuit provided a moment of unexpected “clarity,” resolving with a pen stroke a dilemma that has concerned plan fiduciaries for at least the past decade by declaring, “We also hold that defendants did not have an affirmative duty to disclose to plan participants non-public information regarding the expected performance of Citigroup stock….”

Ironically, it was this very 2nd Circuit that, just a few years ago, called to mind the notion that ERISA’s fiduciary standards of conduct are “the highest known to the law.”

Perhaps they still are, but, IMHO, this decision serves only to lessen that standard.

—Nevin E. Adams, JD

Footnotes:

1 More specifically, the 2nd Circuit noted that “[a] person is only subject to these fiduciary duties ‘to the extent’ that the person, among other things, ‘exercises any discretionary authority or discretionary control respecting management of such plan’ or ‘has any discretionary authority or discretionary responsibility in the administration of such plan.’” And then it went on to decide that the plan fiduciary’s obligation to honor the terms of the plan document effectively displaced that discretionary authority.

2 “When, as here, plan documents define an EIAP as ‘comprised of shares of” employer stock, and authorize the holding of ‘cash and short-term investments’ only to facilitate the ‘orderly purchase’ of more company stock, the fiduciary is given little discretion to alter the composition of investments.”

3 More than a year ago, I noted that “in effect, this ‘presumption of prudence’ seems to have become a magic talisman against which no claim of malfeasance can be successfully alleged, much less established, simply because the courts have discovered (a cynic might say created) a presumption that holding employer stock is appropriate.” (see “IMHO: Prudent Mien?”).

4 One needn’t read between the lines here. In the court’s own words, “We reject plaintiffs’ argument—endorsed by the dissent—that we should analyze the decision to offer the Stock Fund as we would a fiduciary’s decision to offer any other investment option. We agree with the Sixth and Ninth Circuits that were it otherwise, fiduciaries would be equally vulnerable to suit either for not selling if they adhered to the plan’s terms and the company stock decreased in value, or for deviating from the plan by selling if the stock later increased in value.” (In the court’s defense, plan sponsors have, in fact, been sued for selling stock that later increased in value in a couple of rare situations.)

The 2nd Circuit’s decision is available HERE.

You might also find the amicus brief filed by the Department of Labor instructive HERE:

"Better" Business

There was another judicial decision in another revenue-sharing case earlier this month—and another victory for a plan sponsor.

The case was Loomis v. Exelon (see Another Plan Sponsor Win on Revenue-Sharing), a case argued before the 7th U.S. Circuit Court of Appeals, which had previously weighed in on the case that appears to be setting the tone in most of these cases, “Hecker v. Deere & Co.” Hecker, as you may recall, involved a situation with a large, multi-billion-dollar plan that offered its participants access to a couple of dozen funds from a single provider alongside a self-directed brokerage window that afforded access to funds beyond that. The 7th Circuit dismissed that challenge, finding that the competitive forces of the market were sufficient to ensure reasonable fee levels for the specific funds on the menu, and that, if the participants felt otherwise, they could always pursue other options via the brokerage window.

In Exelon, there was no brokerage window, though there were 32 fund options, mostly (24) mutual funds—mutual funds that were retail-class funds. Once again, the 7th Circuit noted that “all of these funds were also offered to investors in the general public, and so the expense ratios necessarily were set against the backdrop of market competition,” and restated its holding in Hecker that “nothing in ERISA requires every fiduciary to scour the market to find and offer the cheapest possible fund.” And then the court launched off into what, IMHO, was an odd juxtaposition of the benefits of those retail funds against “institutional” funds, which it claimed don’t offer the same level of liquidity, transparency, and ability to benchmark against comparable investments. Really? Have they never heard of an “I” share?


I once opined that, based on the Hecker decision, I would advise plan sponsors to give “participants LOTS of fund choices —via a brokerage window if possible—and I would make sure that there were at least some low-cost fund choices available via that window,” and that, among other things, I wouldn't concern myself “overly much with the fees paid by the plan/participants—so long as those fees were paid via mutual fund expense ratios that are the same as those paid by investors in the retail market” (see IMHO: “‘Winning’ Ways?” ). It was a tongue-in-cheek remark, of course, but the Hecker decision struck me as heavily - perhaps too heavily - dependent on free-market principles: Participants weren’t forced to put money in the plan, those who chose to do so weren’t forced into any particular option, and the fees associated with those options were, almost by definition, reasonable since they were subject to free and fair market forces.

That same court was similarly inclined here—and, if you can’t embrace the rationale, one can at least appreciate the consistency.

More than that, in this case, the 7th Circuit noted that Exelon had no real motivation to put “bad” fund options on the retirement plan menu. “[T]here is no reason to think that Exelon chose these funds to enrich itself at participants’ expense. To the contrary, Exelon had (and has) every reason to use competition in the market for fund management to drive down the expenses charged to participants, because the larger participants’ net gains, the better Exelon’s pension plan is. That enables Exelon to recruit better workers, or reduce wages and pension contributions without making the total package of compensation (wages plus fringe benefits) less attractive. Competition thus assists both employers and employees, as Hecker observed.”

The question here isn’t whether Exelon, or any employer, reaps personal benefit from the plan, or how it is structured. Employers do, of course, reap the recruiting/retention benefits of providing a robust and competitive package of benefits, alongside certain tax benefits—though, in my experience, these pale in comparison to the investment of time, money, and effort required. The decision to offer a plan, like the decision to participate, is voluntary. Bad law and intrusive regulation can weigh on the former, and poor plan design and lax administration can surely restrain the latter.

ERISA fiduciaries are, however, not merely expected to offer a “competitive” program, nor is it enough to simply steer clear of arrangements that enrich their bottom line at the expense of participants. Rather, every plan decision is supposed to be not just in the interests, but in the BEST interests, of participants, and from the perspective—or with the assistance—of experts in the field.

That test may, of course, be satisfied by merely offering access to the same types of investments available to retail investors, but, IMHO, that doesn’t mean we shouldn’t expect—better.

—Nevin E. Adams, JD

Court Costs

Last week brought to light an aspect of 401(k) litigation that doesn’t generally get a lot of coverage—and the participant-plaintiff was presented with a $50,000 bill.

Now, at some level, this case was “just” another stock drop suit where some kinds of accounting issues contributed to a sudden (and ostensibly unexpected) drop in the price of company shares, including those held in the company’s 401(k) plan.1 These types of cases have cropped up one after another in the wake of the market downturn, and while the fact patterns behind the drop in share price vary slightly, the suits themselves allege pretty much the same thing: The plan fiduciaries kept the stock as a plan investment after it was no longer prudent to do so; to wit—after it suffered a precipitous drop in value.

Most of these cases don’t seem to get very far, the courts either deferring to a “presumption of prudence” (see “IMHO: Prudent Mien?” or, as in this case, finding that ERISA 404(c)’s safe harbor provided shelter (see”Court Gives Baxter 404(c) Protection in Stock Drop Suit”).


What’s interesting to me about this case isn’t that it is a stock drop suit, not that the judge found 404(c) applicability as a shield (honestly, I’m not “getting it” in this case), and certainly not that the employer prevailed (that seems a pretty common result in stock drop cases). No, what I found interesting—and what one would hope that plaintiffs who get lured to these actions in the future might want to keep in mind—is that they might lose more than just their day in court.

Not that it was an all-out victory for the defendants. Sure, they’ll get $50,000 from the participant-plaintiff, but they had asked for roughly $500,000—and that didn’t include attorney fees! But in this case, after spending some time discussing whether such awards could be made and on what grounds, Judge Gottschall decided that such fee awards were allowed—and then proceeded to pick apart the itemized requests for reimbursements with the fine-tooth comb of someone auditing a business expense reimbursement request (disallowing most for either a lack of specificity or an inability to document the origins of the expense).

Regardless, I found the list of expenses to be eye-opening2, and while the defendants may well have had other resources to tap to cover them, it was a stark reminder of just how expensive litigation can be, how much court costs, even when you win.

But maybe there’d be less of that if those who set such things in motion had to spend some of THEIR money when they’re wrong.

—Nevin E. Adams, JD

1 Specifically, U.S. District Judge Joan B. Gottschall of the U.S. District Court for the Northern District of Illinois granted the assessment of some $50,000 in costs associated with the litigation against David E. Rogers, who filed the suit against Baxter International in 2004. The suit, rejected by this same judge in 2010, alleged that Baxter continued offering company stock in its 401(k) plan after it was no longer prudent to do so (specifically, after its stock twice took tumbles after the reporting of disappointing earnings results, one involving fraud at a Brazilian subsidiary). Judge Gottschall ultimately dismissed the suit because she found that the employer qualified for protection under ERISA 404(c)’s safe harbor (see “Court Gives Baxter 404(c) Protection in Stock Drop Suit”).


2 From Baxter and former Baxter CEO Harry Kraemer:

(1) $23,163.44 for transcripts and video recordings of court hearings and depositions,
(2) $6,956.60 for photocopying court documents and preparation materials for depositions,
(3) $112,648.13 for exemplification and copying costs incurred in connection with responding to discovery requests (including nearly $78,500 in fees paid to an “e-discovery vendor” to process data into a readable format that could be reviewed and produced to plaintiff, as well as $15,000 spent digitalizing documents that existed in hardcopy format—at a rate the court said was about twice as expensive as simply copying them),
(4) $163,474.09 for the cost of computerized legal research.

From former Baxter CFO Brian Anderson:

(1) $4,070.95 for transcripts,
(2) $10,673.10 for photocopying,
(3) $2,687.04 for exemplification of trial exhibits,
(4) $173,150.00 for expert-witness expenses (apparently without providing any supporting documentation, so it was rejected).

Court 'Case'

For all the fuss about fees, a recent friend of the court filing by the Department of Labor reminds us that it’s not just what you pay, it’s what you get for what you pay.

The amicus brief had the DoL once again weighing in on another in the series of revenue-sharing suits that have kept the industry stirred up since the first wave was filed in 2006. Once again, the DoL was expressing its sense that there were real, and triable, issues in the case, this one involving Exelon Corporation (see “Solis Asks Court to Overturn Exelon Excessive Fee Case Decision”).

The DoL had previously expressed similar concerns about a similar dismissal in the same judicial district in a case involving Deere & Co. (see “Hecker Fee Case Prompts Exelon Suit Dismissal”)—a dismissal that was affirmed by the appellate court, and that the U.S. Supreme Court has refused to reconsider.

Those concerns weren’t enough to influence the appellate court in the Hecker case, though it did result in a judicial addendum that sought to limit the broader applicability of its reasoning to cases outside the specific facts in the Hecker case (see “7th Circuit Panel Limits Ruling's 404(c) Effects”). That said, the same court rejected the plaintiff’s arguments in Loomis v. Exelon Corp. as being nearly identical to those in Hecker—and dismissed it just as summarily.

Retail Fail?

In its most recent filing, the Labor Department sought to distinguish the two cases, noting that it wasn’t just the mere allegation that a large plan was offering mutual funds with “retail level fees,” but that—since those participants weren’t receiving services beyond those of any retail customer—those fees were, at least arguably, excessive(1). In fact, the DoL’s amicus brief noted that “[b]y continually returning to the point that the panel's opinion was limited to the particular facts as alleged, Hecker clearly and deliberately left the door open for other cases like this one in which the allegations about fees are tied directly to allegations about services.”

The Labor Department also took issue with the court’s admonitions that fiduciaries had no obligation to “scour the market” for the cheapest fees. “[T]he holding that fiduciaries are not duty-bound to ‘scour the market’ to find the lowest possible fees should not be read to mean they are free to pay any fee the market bears, without making a diligent effort to assure that they are getting reasonable services for the fees comparable to what prudently managed plans of similar size and type plans also pay.”

And the DoL also said that the district court made a mistake by “ruling instead, without inquiry, that the mere existence of fee ratios comparable to those in Hecker (.03 to .96% in this case) meant that the fees must be reasonable and prudently selected....” Indeed, the DoL noted that “[n]othing in ERISA or Hecker establishes that a particular numerical range of fees is either per se prudent or per se imprudent, or authorizes the courts to fashion a simple numerical test, without regard to what the evidence actually shows after the plaintiffs have been given an opportunity to present their case at trial or on summary judgment.” While the court’s reliance on Hecker as a basis for dismissal drew most of the DoL’s focus, it also pointed out that “[i]n an ERISA case alleging excessive fees in terms very similar to the allegations at issue here, the Eighth Circuit, reversing the district court's grant of a motion to dismiss, recently recognized the presumptive inappropriateness of dismissing a prudence claim at the pleadings stage.”(2)

However, at the heart of the DoL’s stance is, as it has been before, that the plaintiffs in the Exelon case had presented a case sufficient to be entitled to their day in court—and that the court’s dismissal of those claims was too preemptory(3), (4), too willing (though not perhaps in so many words) to apply a presumption of prudence to the decisions of the fiduciaries.(5)

What we don’t know yet, of course, is how much extra in types or number of services might be required to justify the payment of retail-level fees by a retirement program (especially a large one)(6), what kind of differential in penalties a court might apply if it found a “reasonable” gap—or if the 7th Circuit will reconsider its threshold for making that case.

However, what we can reasonably infer from the amicus filing is that the Labor Department thinks it should—and that the fiduciary threshold for a plan, certainly a large plan(7), is and, IMHO, should be, more than merely paying retail-level fees for retail-level service.

—Nevin E. Adams, JD


(1) Unlike the Hecker plaintiffs, the Exelon plaintiffs make very clear that they have not received more services for the same amount of money, and therefore the fees are not appropriate for an institutional investor.”

“The participants' amended complaint distinguished it from the one in Hecker by specifically alleging that the challenged fees were too high, not just in the abstract, but in relation to the services received.”

(2) “In Braden v. Wal-Mart, 588 F.3d 585, 595 (8th Cir. 2009), the court held that the plaintiff met the pleading requirements of Twombly and Iqbal, and was not required to plead additional facts explaining precisely how the fiduciaries' conduct was unlawful.” (see “8th Circuit Says Wal-Mart 401(k) Suit Requires Further Discussion”)

(3) “Considering the fact-intensive nature of most ERISA fiduciary-breach claims, and the near monopoly defendants often have over many of the determinative facts, the statutory scheme militates against dismissal at the pleadings stage in the ordinary fiduciary-breach case.”

(4)” It was therefore error for the district court to decide at this stage that under any plausible inference based on the facts as alleged, the defendants could not possibly have acted imprudently when they selected investment options charging retail-level fees and providing retail-level services without, according to the allegations, attempting to obtain the fees (or services) that plans of comparable size are expected to secure in the institutional-fund market.”

(5)” For the reasons stated above, the dismissal was error, not only because it was based on a misreading of Hecker, but because it misapplied the established pleading standards and gave the benefit of the doubt to the wrong party.”

(6) While the DoL’s amicus brief was technically in support of giving the plaintiffs an opportunity to plead their case, it also tipped its hand on what those findings might mean: “It (the plaintiff suit) alleges that the Plan fiduciaries breached their statutory duties by imprudently selecting Plan investment options that were unreasonably expensive for the plan's size and bargaining power and did not provide services commensurate with their high fees.

(7) Such conduct, if true, would constitute a breach of fiduciary duty under ERISA and would make the responsible fiduciaries liable for any resulting losses.”

See also “IMHO: The ‘Burden’ of Proof”

The Benefits of the Doubt

Those who were wondering when—or perhaps if—the issues raised in those revenue-sharing lawsuits would ever actually be tried got a strong, affirmative response last week.

This time, the 8th U.S. Circuit Court of Appeals found triable issues of fact in a case involving Wal-Mart’s 401(k) plan (“8th Circuit Says Wal-Mart 401(k) Suit Requires Further Discussion”), sending the case back for another hearing by the trial court that had dismissed issues raised in the lawsuit, while also taking the time (at least in a footnote) to distinguish some of its findings from a similar case (Hecker v. Deere) that had failed to clear the bar in another circuit (see "The 'Burden' of Proof").

But, IMHO, what distinguishes the ruling in Braden v. Wal-Mart Stores Inc. from all the revenue-sharing cases that have been adjudicated thus far is that the 8th Circuit judges were willing to concede that the plaintiff had alleged facts that, at least on the surface, were sufficient to support a potential claim.

Now, in fairness, the court applied a fairly traditional standard of review in evaluating the motion to dismiss; to give the benefit of the doubt, if you will, to the perspective of the party who has not made a motion to dismiss the case without moving to trial—and it admonished the lower court for not doing so in plain language. In its ruling, the 8th Circuit not only said that the lower court “ignored reasonable inferences supported by the facts alleged,” it went on to criticize that court for not only drawing inferences in favor of the party (Wal-Mart) that had made the motion to dismiss, but for criticizing the plaintiff for “failing to plead facts tending to contradict those inferences.”

What's Different?

So, what did the court find compelling enough to give this case a fuller hearing? The “relatively limited” (10) menu of fund options “selected by Wal-Mart executives despite the ready availability of better options”—“better” in this case including the fact that they were retail rather than institutional class mutual fund shares (there are other, and IMHO weaker, allegations about performance relative to benchmarks and the use of actively managed funds, rather than index alternatives). And then, perhaps by way of “explaining” the use of these allegedly inferior options, plaintiff Braden notes that the Wal-Mart plan funds “made revenue sharing payments to the trustee, Merrill Lynch, and that these payments were not made in exchange for services rendered, but rather were a quid pro quo for inclusion in the Plan.”

Now, IMHO, the plaintiff’s case isn’t ironclad. Even in its ruling sending the case back for another shot, the 8th Circuit noted that “there may well be lawful reasons appellees chose the challenged investment options.” However, that court also pointed out it was not the plaintiff’s job to rule out those alternatives—nor was it, in the appellate court’s view, appropriate for the trial court to basically assume that because there might be alternative explanations, no further inquiry was warranted.

The Duty to Disclose

There is another interesting aspect to the case, IMHO—and it has to do with the duty to disclose revenue-sharing arrangements. While I believe all of the cases presented to date have claimed that such a duty exists—and that every court that has heard that argument to date has just as readily refuted it—the 8th Circuit had a different take. “In the context of this case, materiality turns on the effect information would have on a reasonable participant's decisions about how to allocate his or her investments among the options in the Plan,” the court noted.

The impact of that materiality was heightened by allegations that “those payments corrupted the fund selection process—that each fund was selected for inclusion in the Plan because it made payments to the trustee, and not because it was a prudent investment,” according to the court. And “[i]f true, this information could influence a reasonable participant in evaluating his or her options under the Plan,” the court said – even as it acknowledged that there is no per se duty to disclose these arrangements.

Finally, the 8th Circuit took the lower court to task for basically insisting that the plaintiff prove that the revenue-sharing payments were unreasonable before trial (a threshold that it notes would have been impossible, even if legitimate, since the arrangement between Wal-Mart and Merrill Lynch was confidential).

The 8th Circuit’s actions here don’t necessarily portend a shift in result for these cases, nor should it suggest that there is anything about this particular case that is markedly distinctive from similar cases brought in other jurisdictions. That said, to this point, the courts have, IMHO, been extraordinarily willing to give the employer/fiduciaries the benefit of the doubt in these revenue-sharing cases.

It will be interesting to see how the allegations hold up to a full adjudication of the facts.

—Nevin E. Adams, JD

“To Do” List—Part 2

Being a plan fiduciary is a tough job—and one that, it’s probably fair to say—is underappreciated, if not undercompensated. In my experience, most who find themselves in that role (see “IMHO: Duty Call”) do an admirable job of living up to the spirit, if not the letter, of their responsibilities.

Nonetheless, there are plenty of areas in which we could do a better job. In this week’s column, we’ll touch on the rest of my “10 things you’re probably doing wrong” list:


6. Thinking your plan qualifies for 404(c) protection—and misunderstanding what that means.

Any number of studies suggest that many, perhaps most, plan sponsors think their plan meets the standards of ERISA 404(c ), a provision that ostensibly shields them from being sued for participant investment decisions, so long as certain conditions are met.

On the other hand, industry experts are nearly uniform in their assessment that very few, perhaps no, plans meet those standards (though the courts have been somewhat more liberal in their application). So, even if you think your plan does comply—check. And even if your plan does comply, understand that, while 404(c)’s shield may offer some protection against an individual participant suit, it offers no insulation against a participant suit predicated on an inappropriate investment option. Remember, too, that the DoL thinks you’re responsible for every participant investment decision except those behind 404(c)’s “shield.”

7. Depositing contributions on a timely basis.

The legal requirement for when contributions must be deposited to the plan is perhaps one of most widely misunderstood elements of plan administration. Unfortunately, a delay in contribution deposits is also one of the most common flags that an employer is in financial trouble—and that the Labor Department is likely to investigate.

Note that the law requires that participant contributions be deposited in the plan as soon as it is reasonably possible to segregate them from the company’s assets, but no later than the 15th business day of the month following the payday. If employers can reasonably make the deposits sooner, they need to do so. Many have read the worst case situation (the 15th business day of the month following) to be the legal requirement. It is not.

8. (Not) monitoring providers on a regular basis.

In some sense, we all “monitor” the performance of plan providers all the time. Is the Web site available when people try to access it? Do checks and statements arrive on time? Are the balances displayed accurate? The reality is that, for most of us, no news is seen as “good” news. After all, if the answer to any of those questions was “no,” we’d not only know about it, we’d be complaining about it (after fending off our own set of complaining phone calls). Odds are that you have a very full-time job dealing with the things that are “broken”—why go looking for trouble?

However, relationships with providers are like any other relationship—we all slip into “ruts” of complacency—and the best way to keep that new customer “honeymoon” feeling alive is to do something as simple as ask your current provider for a regular service review. At least once a year—no matter how well things are going—you should determine if your plan has access to the new services that have come online since you converted; that you are getting the advantages of the most current thinking about costs and fees; and how your plan’s participation, deferral, and asset diversification stack up. And every three to five years (sooner if there are problems, of course), you should go through a formal request for information (RFI) or request for proposal (RFP) process—on your own, or with the help of an adviser (who doubtless has more experience with such things).

Remember also that the DoL says that, “Among other duties, fiduciaries have a responsibility to ensure that the services provided to their plan are necessary and that the cost of those services is reasonable.”

9. Not following the terms of the plan document.

Plan documents are, after all, legal documents and can skirt the fringes of readability. Retirement plans develop certain patterns or routines—the way things are handled—that may not, over time, remain consistent with the terms of the plan. Particularly if you are using a plan document prepared by a provider (or, worse, an ex-provider) that may well accommodate that provider’s approach, but may not match (or may not have kept up with) how you actually administer the plan. It is a good idea to do a document/process “audit” every couple of years; don’t assume that “the way we’ve always done things” is supported by the legal document governing your plan.

10. Not realizing who is a fiduciary—and what that means.

The first thing to understand is who a plan fiduciary is, and to understand that the “test” isn’t what you call yourself (or, in some cases, what you avoid calling yourself), but your ability to control and influence plan assets. A fiduciary is any person or entity named in the plan document (e.g., the plan sponsor and trustee); any person or entity that has discretionary authority over the management of a retirement plan or its assets (all individuals exercising discretion in the administration of the plan, all members of a plan’s administrative committee—if it has such a committee—and those who select committee officials); and any person or entity that offers investment advice with respect to plan assets, for a fee.

Remember too, that the authority to appoint a fiduciary makes you a fiduciary—and that hiring a “co-fiduciary” does not make you an “ex” fiduciary.

If you are a fiduciary, and you feel that you lack the expertise to make those decisions, you will of course want—and, in fact, are expected—to hire someone with that professional knowledge to carry out the investment and other functions.

Finally, remember that, IMHO, you’re more likely to get sued for not doing something you should be doing than for doing something you shouldn’t be doing.


—Nevin E. Adams, JD

You can find more information on fulfilling your fiduciary responsibilities at the Employee Benefits Security Administration’s (EBSA) Web site HERE

The "Burden" of Proof

Recently the 7th Circuit responded to requests that it reconsider its opinion in the revenue-sharing/”excessive fee” case of Hecker v. Deere (see “7th Circuit Panel Limits Ruling’s 404(c) Effects”). The case, of course, was one of the earliest in the litany of those cases to be filed in 2006, and the only one (thus far) to reach the appellate level.

To date, the courts have, with little exception, dispensed with these cases harshly. Not that they aren’t entitled to do so, of course, and not that this particular generation of filings isn’t deserving of such treatment, IMHO. From the beginning, the plans targeted seemed better-designed to fill the pockets of plaintiffs’ counsel, if for no other reason than large employers frequently figure that it’s cheaper to settle than to fight (see “IMHO: Fighting Words”). That said, the courts—including the 7th Circuit—seem to have a more “generous” view of what it takes to earn the protections of ERISA 404(c) than most ERISA lawyers I know.

I was no less confused by the 7th Circuit’s response to the request for a rehearing (see “7th Circuit Panel Limits Ruling’s 404(c) Effects” ). Basically, the court said that there had been no judicial call for such reconsideration, and that, in fact, the judges who made the original determination had voted to deny the petition for reconsideration. However, the judges apparently felt the need to respond directly to some of the charges made in the amicus curiae briefs filed in support of the motion—and, perhaps more significantly, it took pains to point out that its ruling in the case, and on the facts presented, shouldn’t be applied too broadly. And that, of course, seems to have been a source of solace and comfort to the folks who have brought us these revenue-sharing lawsuits, who have reason to feel “down” (based on the limited adjudications to date), but are apparently not “out.”

Now, I didn’t mind that the courts have held there is no fiduciary duty to disclose fees to participants (there isn’t), nor the determination that plan sponsors need not scour the marketplace to find the cheapest investment choices (cheapest might not even be “reasonable”). But, having spent some reasonable part of my adult life trying to understand and help others understand the scope, implications of, and limitations to ERISA 404(c), I’ve generally been puzzled at how liberally the courts have been willing to apply its protections, certainly in contrast to the position espoused by the Department of Labor (which, I should add, has been remarkably consistent in its voice on the subject).

That said, in its response, the 7th Circuit spoke to the issue raised in this space previously—and acknowledged in the petitions of the DoL and plaintiffs for a rehearing (see “IMHO: ‘Second’ Opinion”):

“The Secretary also fears that our opinion could be read as a sweeping statement that any Plan fiduciary can insulate itself from liability by the simple expedient of including a very large number of investment alternatives in its portfolio and then shifting to the participants the responsibility for choosing among them. She is right to criticize such a strategy," the court asserted. “It could result in the inclusion of many investment alternatives that a responsible fiduciary should exclude. It also would place an unreasonable burden on unsophisticated plan participants who do not have the resources to pre-screen investment alternatives. The panel’s opinion, however, was not intended to give a green light to such ‘obvious, even reckless, imprudence in the selection of investments’ (as the Secretary puts it in her brief). Instead, the opinion was tethered closely to the facts before the court.”

It is that last sentence that now gives comfort to those pursuing these actions in other venues (venues that might have been inclined to toss those claims, citing the 7th Circuit’s decision), and one that, for the moment anyway, may assuage the DoL’s concerns.

But as I read the original decision, I saw a causal connection created by the court that suggested that there was no cause of action because the plan was protected under the shield of ERISA 404(c), a shield the court felt the plan was entitled to in no small part because the plan had provided the array of options outlined.

I, for one, would have been perfectly content if the court had held that it wasn’t sufficient to establish a fiduciary breach claim by just stating that the plan offered retail-priced mutual funds (even from a single fund family), particularly when that was offered alongside a brokerage window that provided participants access to investments beyond that core menu. One can argue that a plan the size of Deere’s could have negotiated a better deal for its participants, or that it perhaps would have been better-served to offer a more diversified menu than a single set of proprietary funds—but I think the court would have been comfortably within its purview to say that you need more than a simple insinuation that that arrangement is a violation on its face to bring a case in federal court.

What puzzled me then—and puzzles me still—is that the court apparently felt it necessary to invoke the safe harbor protections of ERISA 404(c) to, effectively, justify its conclusion. For, while there are any number of casual 401(k) plan adviser/consultants out there who will tell a plan sponsor that all they have to do to earn those protections is to offer a lot of funds, let participants transfer between those funds at least quarterly, give those participants prospectuses on those funds—oh, and file their intent to function as a 404(c) plan—there’s more to it than that, and we trust that the courts are as aware of that as any ERISA prudent expert.

Personally, I would have preferred that the 7th Circuit restated its rationale—clarify that, while they chose to invoke 404(c ), it wasn’t necessary to do so; clarify that the plaintiffs simply hadn’t established a case sufficient to go to trial.

And reminded us all that, while the standards ERISA fiduciaries are held to are demanding, so are the standards for asserting that that duty hasn’t been fulfilled.

—Nevin E. Adams, JD

See also:

Appellate Court Backs Deere Case Dismissal

IMHO: “Second” Opinion

IMHO: “Winning” Ways?