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Fiduciary Update | May 2015

Drew McCorkle
Vice President, Financial Advisor

Topics Covered:

  • Plan Fees Cases—and Settlements—Continue
  • Employer Stock: Issues Left Open by the Supreme Court in Dudenhoeffer
  • Notice Failure May Require Double Pension Payments
  • Not Providing Summary Plan Description Was a Fiduciary Breach
  • Oral Promise Allows Pension Claim to Proceed
  • No Partial Plan Termination
  • Participant Release of ERISA Claims Enforced
  • Slayer Cannot Benefit From Participant’s Death
  • Orthopedic Surgeon Jailed for ERISA Offenses
  • Cases and Developments We Are Following

Plan Fees Cases—and Settlements—Continue

This quarter saw continuing activity in the area of cases involving plan and investment fees. Plan fiduciaries settled two significant cases, and follow-on cases against Fidelity concerning float income practices were dismissed.

  • Ameriprise Settles for $27.5 Million. Concluding a multiyear litigation by participants in its own 401(k) plan, Ameriprise has agreed to settle a class action lawsuit alleging overpayment of 401(k) plan fees, in part by investing in funds owned or operated by Ameriprise and using affiliated service providers, among other things. The proposed settlement of $27.5 million, which awaits approval by the court, reportedly includes a provision that would have recordkeeping fees charged on a flat fee or per-head basis. The plaintiffs’ attorneys are seeking approximately $10 million of the settlement amount in fees. Krueger v. Ameriprise Financial, Inc. (D. MN, No. 11-2781) This outcome is the result of a settlement, so many of the underlying details are not disclosed. While flat or per-head fees are more straightforward than basis-point fees, we are not aware of any decision or Department of Labor (DOL) guidance challenging use of a basis-point-fee approach.
  • Lockheed Martin Settles for $62 Million. In another excessive fee lawsuit, filed by the same firm that led the litigation against Ameriprise, Lockheed Martin reached a $62 million settlement. Legal fees sought are approximately $20 million. One allegation claimed that the stable value fund held too much cash or cash equivalents and, as a result, participants earned below-market returns. The proposed settlement would require special reporting to the court if predetermined limits on cash holdings in the stable value fund are exceeded. Abbott v. Lockheed Martin Corp. (S.D. IL, No. 06-00701)
  • Copycat Float Income Suits Against Fidelity Dismissed. The U.S. District Court decision in ABB v. Tussey found, among other things, that Fidelity breached its fiduciary responsibility to a 401(k) plan by retaining float income earned in connection with the plan and was liable to the plan for $1.7 million. Immediately following this decision, a number of copycat suits were filed alleging that Fidelity’s usual process with respect to float income violated ERISA’s fiduciary rules. On appeal, however, the district court’s float income decision in ABB v. Tussey was reversed. The copycat cases were consolidated into a single case: In re Fidelity ERISA Float Litigation. (D. MA 2015) Following the same reasoning as in the ABB v. Tussey appeal—that float income earned in connection with a plan is not a plan asset—the district court in Fidelity ERISA Float Litigation dismissed the claims before it. 

In 2002, the DOL issued Field Assistance Bulletin 2002-3 describing aspects of float income that plan fiduciaries should consider, including, among others: 1) who is benefiting from the float, the plan or the service provider; and 2) the terms of the float arrangement, addressing the handling of float among service providers and when a service provider retains float. The DOL notes that float income should be reviewed at least annually as part of the overall compensation a party is receiving. Documenting the use of float income is a sound fiduciary process and will help meet fee disclosure requirements for eligible indirect compensation. 

Employer Stock: Issues Left Open by the Supreme Court in Dudenhoeffer

In the widely reported case of Fifth Third Bancorp vs. Dudenhoeffer, the Supreme Court of the United States struck down the fiduciary-friendly presumption that employer stock is a prudent retirement plan investment. Rather, the Court said that the same duty of prudence applies to all fiduciaries, and that they should treat employer stock like all other plan investments. The Court went on to establish other rules in this area pertaining to the specific facts in Dudenhoeffer. Importantly, Dudenhoeffer presented a dramatic drop in the stock price of a company that was otherwise assumed to be a prudent investment at the time the stock price dropped. 

A case involving Eastman Kodak’s retirement plan, Gedek v. Perez (W.D. NY 2014), challenges the fundamental question of whether Eastman Kodak stock was a prudent retirement plan investment independent of any fluctuations in the stock price. This presents a particularly challenging aspect of holding employer stock in ERISA-covered plans following the decision in Dudenhoeffer. In Gedek, motions to dismiss were decided in light of Dudenhoeffer. Denying the motions to dismiss and allowing the case to proceed to trial, the judge in Gedek made the following observations that begin to shine light on areas the Supreme Court left unanswered for fiduciaries responsible for employer stock in ERISA-covered retirement plans:

  • The Supreme Court did not address the situation of an employer’s stock when the “correct” market value was not at issue, but rather when the prudence of investing in or continuing to hold the stock as a long-term investment was.
  • The availability of other options does not excuse offering an imprudent investment.
  • A fiduciary must initially determine and continue to monitor the prudence of each investment option available to plan participants.
  • There need not be a sudden event or specific date upon which holding employer stock becomes imprudent. Making this point, the judge said, “To hold otherwise would be akin to saying that a sea captain could not be found negligent for not issuing an abandon-ship order merely because the ship sank slowly rather than suddenly.”

In view of the uncertainty in this area, fiduciaries of plans holding employer stock should work with legal counsel to determine an appropriate standard for the ongoing review and monitoring of employer stock, independent of stock-drop situations, which the Supreme Court left unanswered in Dudenhoeffer. Gedek and other cases will help to fill in the gaps left open by Dudenhoeffer. In the meantime, plan fiduciaries should consider and understand their responsibility to monitor and supervise employer stock as a plan investment option so that they can take appropriate action.

Notice Failure May Require Double Pension Payments

Following a corporate transaction, a group of participants’ pension liabilities—and assets—were transferred to the purchaser, their new employer. The participants were not notified of the pension transfer, which was legally required. However, they were told the purchaser’s pension plan would give them credit for their prior service under the seller’s plan. The participants sought pension benefits from the former employer, which were denied without any reason other than that those liabilities and assets had been transferred to the new employer. The participants argued that the new employer’s promise to give them credit for their past service was an inducement to remain working and join the new employer, not as a substitute for the benefits they earned with the former employer. Following denial of benefits by the former employer, the employees sued.

The former employer sought a decision in their favor at the preliminary stages of the case on the basis that, among other reasons, if the participants won, they would receive an unjust double recovery. However, the district court decided the case should proceed to trial, noting that the possibility of a double recovery did not outweigh the obligation to meet ERISA’s notice requirements. The case will proceed and is a reminder of the importance of meeting ERISA’s technical requirements. Anderson v. CEMEX, Inc. (D. UT 2014)

Not Providing Summary Plan Description Was a Fiduciary Breach

During annual open enrollment, an employee enrolled in supplemental life insurance with a death benefit equal to five times his compensation. Because he was not a new employee, an evidence of insurability form was required. However, he did not submit one. Even so, when the new benefits year began, the employee’s biweekly paycheck began reflecting a $10 charge for supplemental life insurance coverage. The employer failed to provide a summary plan description (SPD) that could have alerted the employee to the need to provide evidence of insurability. The employee died six months later and his beneficiary claimed his life insurance benefits. 

The insurer denied the claim because the employee had not provided the required evidence of insurability form. The beneficiary filed suit against both the plan sponsor employer and the insurance company. The district court found that a death benefit was not due to the beneficiary and that no equitable remedies would support such a benefit; however, it did order that premium payments of $129 be returned to the participant’s estate. The U. S. Court of Appeals for the 8th Circuit disagreed and sent the case back to the district court. Noting the Supreme Court’s recent liberalization of relief in ERISA cases, the court of appeals saw possible remedies against both the employer and the insurance company. Because an SPD was not provided, the district court could order a “surcharge” against the employer equal to the death benefit amount of the insurance paid for: $429,000. The acceptance of insurance premiums to pay for coverage could support a reformation of the insurance agreement to ignore the missing evidence of insurability. Silva v. Metropolitan Life Insurance Co. (8th Cir. 2014)

This case highlights the expanding range of relief available to plan participants under ERISA and the importance of vigilance in the administration of ERISA-covered benefits. 

Oral Promise Allows Pension Claim to Proceed

An employee was asked to move between separate legal entities within his employer’s business. As an inducement to move, the employer offered a sign-on bonus. However, in place of the sign-on bonus, the employee agreed to the move only if he received pension service credit with the new entity for his prior service. According to the employee, the company’s human resources representatives agreed that he would receive pension service credit. 

The employee was later told that he would not receive the promised pension service credit, and he sued. Virtually all courts that have considered the issue have found that oral representations cannot alter the terms of a written plan document that ERISA requires. The court allowed the claim to proceed so the disappointed employee could determine through the discovery process whether any written documents would support his position. Lees v. Munich Reinsurance America, Inc. (D. NJ 2015)

This case underscores the importance of being cautious when communicating with employees about benefits and employment terms, including through conversations.

No Partial Plan Termination

The Internal Revenue Code requires that qualified plans include a provision that if a “partial termination” occurs, those participants whose employment ends as part of the partial termination will have their pension benefits—including 401(k)—fully vested immediately. The question in these situations is, “What portion of the plan sponsor’s employees must be terminated to trigger the accelerated vesting of a partial termination?” In Matz v. Household International Tax Reduction Investment Plan (7th Cir. 2014), the court applied a rebuttable presumption that a reduction in force of more than 20 percent would constitute a partial termination. The Internal Revenue Service has adopted this standard. (Rev Rul 2007-43) In Matz, the court noted that it would consolidate several related layoffs to determine if a partial termination had occurred. A series of unrelated layoffs occurred but when combined reached only 17 percent of the workforce.  Accordingly, a partial termination was found not to have occurred.

Participant Release of ERISA Claims Enforced

A participant in a 401(k) plan that invested primarily in employer stock was disappointed when the company did not consummate a planned transaction, and the employer’s stock price fell considerably. The participant filed suit under ERISA alleging that the deal fell through because of false and misleading statements by the employer’s executives. By the time he filed suit, however, the employee no longer worked for the employer and had accepted a severance package. The severance package included a release of known and unknown claims, specifically identifying ERISA claims to be among those released. Because the release was knowing and voluntary and included ERISA issues, the claim was denied.  Russell v. Harman International Industries, Inc. (D.C. Cir. 2014)

Slayer Cannot Benefit From Participant’s Death

Many states have laws preventing anyone who causes another’s death to benefit from that death. Under New York’s “Slayer Rule,” the 25-percent beneficiary of a 401(k) plan’s participant was prevented from receiving any portion of a participant’s 401(k) balance after he murdered the participant. In this instance, a law firm’s 401(k) plan filed an interpleader action seeking a determination of the proper recipient of the decedent’s plan account. The court confirmed that the 25-percent beneficiary who killed the plan participant should not receive any portion of the participant’s account. Rather, the court ordered the entire account balance paid to the beneficiary designated by the participant to receive 75 percent. Skadden, Arps, Meagher, & Flom, LLP Savings Plan v. Little (E.D. NY 2015)

Orthopedic Surgeon Jailed for ERISA Offenses

Following his fifth divorce, Dr. Alfred Massam transferred nearly $1.2 million from two ERISA-covered pension plans to a bank in Austria, apparently to prevent his fifth ex-wife from collecting $452,000 a court had ordered to be paid to her from the pension plans. Several weeks later, the bank returned the money to the plans’ accounts when it could not properly document its source. This diversion of plan assets, a criminal violation of ERISA, was followed by the theft of more than $500,000 from the pension plans by Massam. Applying the federal guidelines, he received a sentence of up to 24 months in prison, a fine of $50,000, and restitution of $147,000. The restitution amount was less than the amount stolen likely because Massam’s retirement benefits were reduced to cover a portion of the losses. U.S. v. Massam. (11th Cir. 2014)

Cases and Developments We Are Following

  • Tibble v. Edison—A decision is expected from the Supreme Court of the United States by the end of June on fiduciaries’ responsibilities for ongoing review of share classes or other expense choices for 401(k) plan investments.
  • Rochow v. Life Insurance Co. of North America—The en banc Sixth Circuit Court of Appeals reconsidered district court and court of appeals disgorgement orders totaling $2.8 million for wrongfully withholding disability payments. On reconsideration, a split court found that disgorgement of profits on improperly withheld benefits does not apply unless other remedies are inadequate. In this case, payment of wrongfully withheld disability benefits was found to be adequate. A strong dissent would have found that there were two errors to be remedied: one in not paying disability benefits and another in delaying eventual payment for more than five years, which would have warranted a disgorgement award.  (6th Cir. 2015)
  • Timing of Participant Fee Notices—The DOL has provided additional flexibility for the timing of annual participant fee disclosure notices. As originally issued, these disclosures were required to be provided at least once in any 12-month period. A one-time adjustment was permitted to enable coordination of these disclosures with other participant communications, but the “once in any 12-month period” provision remained. To provide flexibility, the rule is being changed to require that participant fee disclosures be provided at least once in any 14-month period. (Fed. Reg. Vol. 80, No. 53 pp. 14, 301-14, 304 Mar. 19, 2015)
  • DOL Reproposal of the Fiduciary Definition—On April 14, 2015, the DOL reissued a proposed rule that would update the definition of “fiduciary” under ERISA for parties giving investment advice to employee benefit plans, their participants, or beneficiaries. This proposal would broaden the interpretation of ERISA and apply its standard of care to more retirement assets, including those in individual retirement accounts (IRAs). This proposal is subject to a 75-day comment period and public discussion, after which the DOL will issue a final rule. Given President Obama's focus on this initiative, we expect the administration to push for a final rule to be effective before the president’s second term ends.
  • Benefit Statement Contents—In spring 2013, the DOL issued an Advanced Notice of Proposed Rule Making on requiring projected monthly retirement income on participants’ annual 401(k) plan benefit statements. Examples were provided and public comment solicited. The DOL has set the timing for release of a proposed rule for the second half of 2015.



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