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ERISA Update. Roberta J. Ufford Groom Law Group, Chartered April 29, 2009. Litigation and Enforcement Update Employer Securities 401(k) Fee Cases Securities Lending Investment Fraud - Madoff Valuation Delinquent Contributions Meals and Gifts Received by Fiduciaries Corrections

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erisa update

ERISA Update

Roberta J. Ufford

Groom Law Group, Chartered

April 29, 2009

Litigation and Enforcement Update
    • Employer Securities
    • 401(k) Fee Cases
    • Securities Lending
    • Investment Fraud - Madoff
    • Valuation
    • Delinquent Contributions
    • Meals and Gifts Received by Fiduciaries
  • Corrections
  • Other New DOL Guidance
litigation update employer securities
Litigation Update - Employer Securities
  • 2008 Surge in New Stock-Drop Claims
    • Participants claim plan sponsor fiduciaries breached their duties by (a) offering or retaining stock as an investment option and (b) failing to disclose key (insider) information about company financial matters.
  • Financial Industry is New Target
    • Bear Sterns; Wachovia; Lehman Bros. Holdings, Inc.; Regions Financial Corp; Fifth Third Bancorp; Citigroup, Inc.
litigation update employer securities1
Litigation Update - Employer Securities
  • 2008 Stock Drop Decisions
    • Participants did not rebut presumption that fiduciaries should follow plan terms requiring the plan to invest in and hold employer stock; plan fiduciaries should not be in “untenable position” of having to predict future performance.
      • Kirschbaum v. Reliant Energy, Inc., 526 F.3d 243 (5th Cir. 2008); see alsoWard v. Avaya Inc., 45 EBC 1449 (3d Cir. 2008) (employee was not able to overcome presumption that, if the plan that mandates employer stock investment, fiduciaries are presumed prudent in following plan terms under Moench v. Robertson, 62 F. 3d 553 (3d Cir. 1995)).
litigation update employer securities2
Litigation Update - Employer Securities
  • 2008 Stock Drop Decisions
    • Courts are mixed in recognizing claims that employers breached their fiduciary duties by not disclosing information about employer’s financial situation.
      • In re Guidant Corp. ERISA Litigation, 44 EBC 1236 (S.D. Ind. 2008) (court did not dismiss failure to disclose claims) but see, Urban v. Comcast Corp., 45 EBC1161 (E.D. Pa. 2008) (court dismissed claims that failure to disclose was a fiduciary breach).
litigation update employer securities3
Litigation Update - Employer Securities
  • Shirk v. Fifth Third Bancorp (W.D. Ohio Jan 29, 2009)
    • Plaintiffs alleged breach of fiduciary duty in light of negative effects of merger of Fifth Third with Old Kent Corp., Fifth Third offered employer stock as a plan option and also matched contributions with stock.
    • Court granted summary judgment to Fifth Third:
      • Plaintiffs did not overcome the Moench presumption; stock price increased during class period; expert testified that investment in the stock was prudent.
      • Plaintiffs did not show that defendants were acting in a fiduciary capacity when making alleged misrepresentations.
litigation update employer securities4
Litigation Update - Employer Securities
  • “Reverse” Stock Drop - Bunch v. W.R. Grace
      • Independent fiduciary did not breach fiduciary duties by divesting investments in W.R. Grace.
      • Court recognizes sound fiduciary decision process based on facts known at the time; rejects using Moench presumption against fiduciaries.
      • 532 F. Supp. 2d. 283 (D. Mass. 2008), aff’d 555 F. 3d 1 (1st Cir. 2009).
  • But seeStanford v. Foamex LP, 44 EBC 2072 (E.D. Pa. 2008) (refusal to dismiss claims that fiduciaries breached duties by liquidating employer stock); Tatum v. Reynolds Co., 44 EBC 2859 (M.D.N.C. 2008) (claims that fiduciaries should not have sold Nabisco stock).
litigation update 401 k fee lawsuits
Litigation Update - 401(k) Fee Lawsuits
  • Claims by participants against plan sponsors allege:
    • service arrangements with “unreasonable fees” and “hidden and excessive fees” were imprudent;
    • fiduciaries did not understand/recognize revenue sharing arrangements; and
    • fiduciaries did not disclose to participants in “proper detail and clarity” the transactions, fees and expenses.
  • Claims by participants and/or plan sponsors allege:
    • service provider is a fiduciary based on selection of plan options and/or failure to disclose fees, and
    • breached fiduciary duties by failing to disclose and engaging in prohibited transactions, e.g.,“using” plan assets, self-dealing, receiving kickbacks.
litigation 401 k fee lawsuits
Litigation – 401(k) Fee Lawsuits

Service Provider Fiduciary Status

  • Hecker v. Deere & Co., 496 F. Supp. 967 (W.D. Wisc. 2007), aff’d 45 EBC 2761 (7th Cir. 2009) (Fidelity Trust not fiduciary responsible for selecting plan investment options); Columbia Air Services, Inc. v. Fidelity Management Trust Co., Civ. Act. No. 1:07-cv-11344 (9/30/08 D. Mass.) (granting Fidelity motion to dismiss); but seeTussey v. ABB Inc.; 2008 WL 379666 (W.D. Mo. 2008) (Fidelity could be a fiduciary with respect to choosing plan investment options).
  • Charters v. John Hancock Life Ins. Co., 1:07-CV-11371-NMG (9/30/08 D. Mass. (on motion for summary judgment, holds that Hancock is a fiduciary based on ability to change funds under annuity contract); Phones Plus, Inc. v. The Hartford Financial Services Group, Inc., 2007 WL 3124733 (D. Conn 2007) (Hartford could be a fiduciary based on ability to change funds available under annuity contract).
litigation 401 k fees in house plans
Litigation – 401(k) Fees - In-House Plans
  • Recent lawsuits allege prohibited transactions and breach of duty of prudence in connection with in-house plan investments in plan sponsor investment products.
    • Gipson v. Wells Fargo & Co., No. 08-4546 (D. Minn. March 13, 2009) (participants could go forward with claims that company breached its fiduciary duties and engaged in prohibited transactions by investing in affiliated mutual funds).
    • See also Leber v. Citigroup, Inc., 07-9329 (S.D.N.Y. filed Oct. 18, 2007); David v. Alphin, No. 07-0011 (W.D.N.C. filed July 1, 2007).
litigation 401 k fees in house plans1
Litigation – 401(k) Fees - In-House Plans
  • One court recently held that “in-house fiduciaries” were prudent when investing in the sponsor’s investment products, where there was “appropriate due diligence and procedural prudence in selecting proposed investments and monitoring the Plan’s performance.” Court noted that fiduciaries:
    • Considered other products;
    • Regularly reviewed performance and fees; and
    • Retained an independent consultant
      • Dupree v. Prudential Life Ins. Co. of America, 2007 WL 2263892 (S.D. Fla. 2007).
litigation sales of affiliates
Litigation – Sales of Affiliates
  • Plaintiffs allege that plan sponsor benefited by using an affiliated investment management unit and/or from a sale of a recordkeeping unit.
    • Nolte v. Cigna, 2:07-cv-02046-HAB-DBG (C.D. Ill. filed Feb. 26, 2007)
  • DOL has brought similar claims in connection with the sale of investment management units.
litigation securities lending
Litigation – Securities Lending
  • Recently filed cases allege:
    • Plan participating in collective trust (CIT) incurred losses and could not redeem from CIT where CIT had losses and received illiquid securities because of participation in securities lending.
      • BP Corp. North America Inc. Savings Plan Investment Oversight Committee v. Northern Trust Investments, N.A., Case No. 08CV6029 (N.D. Ill.) (filed October 21, 2008).
    • Collateral imprudently invested in “risky” and “illiquid” securities; inaccurate valuation; fraudulent concealment; refusing to redeem client from securities lending program.
      • Workers Compensation Reinsurance Assoc., et. al., v. Wells Fargo Bank, N.A., et. al., Case No. 62-CV-08-10825 (State of Minn., 2d Jud. Dist., Cty of Ramsey) (filed Oct. 22, 2008); see also AFTRA Retirement Fund v. JP Morgan Chase Bank, N.A., (S.D.N.Y., No. 1:09-cv-00686-SAS, filed Jan. 23, 2009) (investment of collateral was imprudent).
litigation investment fraud madoff
Litigation - Investment Fraud - Madoff
  • DOL Statement re: Duties of Fiduciaries (Feb. 5, 2009) Plan fiduciaries should take “appropriate steps” -
    • request disclosure from investment and fund managers and other intermediaries about possible exposure;
    • seek advice about likelihood of losses;
    • appropriate disclosures to other fiduciaries/participants;
    • consider whether the plan has claims that should be asserted and ensure claims are filed within required deadlines.
litigation investment fraud madoff1
Litigation - Investment Fraud - Madoff
  • Multiple lawsuits against consultants and managers are expected.
    • E.g., Pension Fund for Hospital and Health Care Employees v. Austin Capital Management Ltd., 09-00615 (E.D. Pa., filed Feb. 12, 2009).
  • Madoff Plea Agreement, included (among others) a charge of “theft from an employee benefit plan.” DOL-EBSA involved in the investigation.
litigation and enforcement valuation
Litigation and Enforcement - Valuation
  • Boston regional office “10-day” letter alleging ERISA violations in connection with plan holding of LP interests, including (i) failure to establish a process to evaluate valuation procedures, (ii) failure to report LP interests at “current value” when valued at “cost”, and (iii) failure to report current value of LP interest when valued using unaudited financial statements.
  • DOL explained “[i]t is incumbent on the [plan fiduciary] to establish a process to evaluate the fair market value of any hard to value assets held by the [p]an” and the plan fiduciary should “have thorough knowledge of the general partner’s valuation methodology to assure it comports with the fund’s written valuation provisions and reflects fair market value.”
litigation and enforcement valuation1
Litigation and Enforcement - Valuation
  • “Ludwig Letter” (March 21,1996) discusses fiduciary rules for “derivatives”; applies to any hard to value asset.
    • Fiduciaries must consider whether they have access to appropriate information to evaluate risk/return and appropriately value assets.
  • Court holds pension trustee breached fiduciary duty by undervaluing plan assets resulting in a reduction of benefits paid to participants when plan was terminated.
    • Solis v. Current Development Corp., No. 08-1228 (7th Cir. March 5, 2009).
litigation and enforcement delinquent contributions
Litigation and Enforcement - Delinquent Contributions
  • Recovering delinquent contributions continues to be a DOL enforcement priority. See
  • Proposed “safe harbor” for deposits of employee contributions. See 73 Fed Reg. 11070 (Feb. 29, 2008).
    • Current rule: contributions must be transmitted as soon as “reasonably segregated” but no later than 15th business day of the month following when wages were paid.
    • Proposed rule for plans with fewer than 100 participants: contributions will be timely if transmitted within 7 business days.
    • For large plans, DOL looks to plan’s past practice as benchmark; may question whether contributions not transmitted within 3 business days are timely, based on industry standards.
litigation and enforcement delinquent contributions1
Litigation and Enforcement - Delinquent Contributions
  • FAB 2008-01 (Feb. 1, 2008) addresses “trustee” responsibility to collect delinquent contributions and plan documentation requirements.
    • If plan documents state that trustee is not responsible for collecting contributions; documents must assign responsibility to another fiduciary.
      • Named fiduciary is generally responsible for whether plan documents assign responsibility.
    • A trustee may be liable as a co-fiduciary if trustee is aware that contributions are delinquent.
litigation and enforcement delinquent contributions2
Litigation and Enforcement - Delinquent Contributions
  • Recent Developments
    • DOL Letters urge use of VFCP in connection with delinquent contributions generated from Form 5500.
    • DOL case against sponsor of a prototype plan document in connection with delinquent employer contributions.
      • Chao v. Plan Benefits Services, Inc., Civ. Action # 7-11474-DWP (D. Mass.)
litigation and enforcement delinquent contributions3
Litigation and Enforcement - Delinquent Contributions
  • Court decisions re: responsibility for contributions.
    • Recordkeeper didn’t have duty to ensure plan was funded or notify participants that employer did not contribute.
      • Wilkinson v. Haworth, 186 F. Supp. 2d 687 (S.D. Miss. 2002).
    • TPA not liable where sponsor embezzled contributions.
      • CSA 401(k) Plan v. Pension Professionals, Inc., 195 F. 3d 1135 (9th Cir. 1999).
    • Recordkeeper/investment manager could be liable as co-fiduciary where sponsor did not transmit assets.
      • Silverman v. Mutual Benefit Life Ins. Co., 138 F. 3d 98 (2nd Cir. 1998).
litigation and enforcement meals gifts and entertainment
Litigation and Enforcement - Meals Gifts and Entertainment
  • DOL Enforcement Guidance (August 2008)
    • DOL may treat as “insubstantial” (and not an “apparent” ERISA violation) a fiduciary’s receipt of meals and other gratuities of less than $250/year from a source.
    • Special rules for educational conferences allow reimbursement of conference costs to the plan, if attendance is related to attendee’s duties and expense is reasonable in light of the benefit to the plan.
    • Plan fiduciaries should maintain policies and procedures to prevent abuses.
      • See
corrections background
Corrections - Background
  • Background; Consequences of ERISA violations
    • ERISA section 409 - requires fiduciaries to make plans whole for any losses resulting from a breach of fiduciary duty and to disgorge any fiduciary profit from a breach.
    • ERISA section 502(l) requires DOL to assess a civil penalty against fiduciaries in the case of a breach of fiduciary duty; penalty is 20% of the “applicable recovery amount” under a court order or settlement agreement.
corrections background1
Corrections - Background
  • Code section 4975 (applies to most pension plans)
    • Requires “correction” of a prohibited transaction (PT), consistent with IRS regulations.
    • A “disqualified person” (includes fiduciaries; parties in interest) who engages in a PT must pay excise tax of 15% of the “amount involved” each year until correction; for continuing transactions, a new PT is deemed to occur each new plan year. If the 15% tax is not paid, IRS may assess a 100% tax.
    • Disqualification is penalty for an IRA, if IRA owner engages in a prohibited transaction (excise taxes not applicable).
    • ERISA section 502(i) permits DOL to impose a 5% penalty on PTs that are not subject to Code section 4975.
  • Voluntary Fiduciary Compliance Program
    • Covered transactions include: correction of delinquent contributions; sale of illiquid security to a party in interest; correction of excess fees paid from a plan; below-market loans; participant loan errors.71 Fed. Reg. 20261 (Apr. 19, 2006).
  • Individual Exemptions
    • DOL recently issued individual PTEs to provide liquidity for Auction Rate Securities, see, 74 Fed. Reg. 8992 (Feb. 27, 2009) (granting exemptions for sales of ARS from plans to the plan sponsor or to selling brokers, and interest-bearing liquidity loans to plans by a selling broker, if sponsor guarantees).
    • See also PTE 2008-03, 73 Fed. Reg. 13582 (Mar. 13, 2008) (retroactive relief for plan’s acquisition of non-voting securities).
  • “Expro” Process
    • Applicants may obtain exemptions that are substantially similar to at least two previously issued exemptions within about 90 days.
      • But DOL may reject “expro” process for transactions that present “opportunity for abuse.”
      • PTE 96-62, 61 Fed. Reg. 39988 (July 31, 1996), amended 67 Fed. Reg. 44622 (July 3, 2002).
  • Statutory Exemptions
    • 408(b)(17) exempts a sale of assets between a plan and party in interest (other than a fiduciary) for adequate consideration.
    • 408(b)(2) exempts “inadvertent” transactions involving a plan’s acquisition, holding or sale of a security, if corrected within 14 days after discovery that the transaction was otherwise prohibited.
other new guidance bank deposits
Other New Guidance - Bank Deposits
  • DOL Advisory Opinion 2009-01A
    • Discusses application of Section 408(b)(4), which exempts the investment of plan assets in deposits that bear a reasonable rate of interest in a plan fiduciary bank, if authorized by plan documents or an independent fiduciary.
    • Section 408(b)(4) does not provide an exemption from ERISA’s “anti-kickback” rule (section 406(b)(3)); but DOL explains that bank’s receipt of a “benefit” – such as reduced borrowing needs as a result of deposits – is not received by a party “dealing with the plan” for purposes of ERISA section 406(b)(3).
other guidance participant investment advice
Other Guidance - Participant Investment Advice
  • ERISA § 408(b)(14) – Two “Eligible Arrangements”
      • Level-fees: Adviser’s fees do not vary based on advice, or
      • Computer Model: Adviser provides advice using a computer model certified by an independent expert.
    • Plan fiduciary must authorize arrangement for plan.
    • Detailed participant disclosure, including all program fees and the fiduciary adviser’s compensation arrangement. (DOL required to issue model form).
    • Annual independent audit of services is required.
other guidance participant investment advice1
Other Guidance - Participant Investment Advice
  • FAB 2007-01 interprets Section 408(b)(14)
    • Fee Leveling – financial institution and individual adviser is the “fiduciary adviser” for purposes of the fee leveling analysis. Fiduciary adviser fees must be level, but fees of affiliates may vary.
    • Existing DOL interpretations that allow participant advice programs are not disturbed.
    • Plan sponsor duties are same where sponsor relies on other relief to engage a fiduciary adviser.
other guidance participant investment advice2
Other Guidance - Participant Investment Advice
  • DOL issued final rule and class exemption.
    • Applies to IRAs and plan participants
    • Regulation requires “fee leveling” at the individual adviser and also to the ”fiduciary adviser” institution; class exemption limits fee leveling to individual adviser.
    • Class exemption permits “off-the-model advice” and for IRAs only, permits the use of educational materials in place of computer modeling, if adviser determines no appropriate model exists.
      • 74 Fed. Reg. 3822 (January 21, 2009).
  • DOL delayed the effective date until May 22, 2009 and is expected to revise the regulation and class exemption.
      • 74 Fed. Reg. 11847 (March 20, 2009).
other new dol guidance
Other New DOL Guidance
  • Selection of Annuity Providers – Safe Harbor for Individual Account Plans, 73 Fed. Reg. 58447 (Oct. 7, 2008) (adopting 29 CFR 2550.404a-4).
    • Amendment to Interpretative Bulletin 95-1, 73 Fed. Reg. 58445 (Oct. 7, 2008) (clarifies that IB 95-1 only applies to defined benefit pension plans)
  • Bonding Requirements - Field Assistance Bulletin No. 2008-04, Guidance Regarding Fidelity Bonding Requirements, November 25, 2008.
other new dol guidance1
Other New DOL Guidance
  • Economically Targeted Investments - Interpretative Bulletin Relating to Investing in Economically Targeted Investments, 73 Fed. Reg. 61734 (Oct. 17, 2008) (adopts IB 2509.08-1, modifying and superceding IB 94-1).
    • See also Adv. Op. 2008-05A (June 27, 2008) (use of plan assets to achieve collective bargaining objectives)
  • Exercise of Shareholder Rights - Interpretative Bulletin Relating to Exercise of Shareholder Rights, 73 Fed. Reg. 61731 (Oct. 17, 2008) (adopts IB 2509.08-2, which modifies and supercedes IB 94-2).
    • See also Adv. Op. 2007-07A (Dec. 21, 2007) (use of plan proxy voting rights to further public policy objectives not connected to enhancing value of plan investments).
other new dol guidance2
Other New DOL Guidance
  • QDIAs - Field Assistance Bulletin No. 2008-03, Guidance Regarding Qualified Default Investment Alternatives, April 29, 2008 (clarifies certain issues under QDIA regulations at 29 CFR 2550.404c-5).
    • See also 73 Fed. Reg. 23349 (Apr. 30, 2008) (amendments to QDIA regulation modifies definition of “stable value” QDIA).
  • Abandoned Plans - Amendments to Safe Harbor for Distributions From Terminated and Abandoned Individual Account Plans to Non-Spouse Beneficiaries, 73 Fed. Reg. 58459 (Oct. 7, 2008).
other new dol guidance3
Other New DOL Guidance
  • Statutory Exemption for Cross-Trading of Securities, 73 Fed. Reg. 58450 (Oct. 7, 2008) (final rule at 29 CFR 2550.408b-19 implements content requirements for written cross trading policies and procedures under ERISA section 408(b)(19)(H)).
  • “Householding” Exemption - Proposed individual PTE would permit Fidelity to combine IRAs sponsored or custodied by Fidelity with the accountholder's personal accounts and those of his/her family members ("householding") for purposes of offering higher interest rates on certain deposit accounts and lower interest rates or costs on certain loans by Fidelity entities, under certain conditions. 73 Fed. Reg. 51516 (Sept. 3, 2008).

Roberta J. Ufford, Esq. - (202) 861-6643

Groom Law Group, Chartered

1701 Pennsylvania Avenue, NW

Suite 1200

Washington, DC 20006