Plaintiffs Score Victory Before Supreme Court in Tibble v. Edison

Today, May 18, 2015, the Supreme Court unanimously ruled in favor of the plaintiff plan participants in Tibble v. Edison. The decision reversed an earlier 9th Circuit ruling that under ERISA’s six year statute of limitations, a claim involving a plan investment that was initially chosen outside the 6 year window from when a lawsuit is brought could only be viable if there was a change in circumstances that would cause a fiduciary to reexamine the fund’s inclusion in the plan. The Supreme Court rejected this interpretation, finding that under ERISA, there is a continuing duty to monitor and remove imprudent investments. Today’s decision also effectively reversed rulings in the 4th and 11th Circuits that were similar to the 9th Circuits.

The Decision

 As we suggested may happen, the Supreme Court voted 9-0 to reverse the 9th Circuit but did so in a way that did not definitively rule on how exactly a claim must be plead to trigger the continuing duty to monitor and remove.

The decision by Justice Breyer began its analysis by examining the previous 9th Circuit decision:

The Ninth Circuit correctly asked whether the “last action
which constituted a part of the breach or violation” of
respondents’ duty of prudence occurred within the relevant
6-year period. It focused, however, upon the act of
“designating an investment for inclusion” to start the 6-
year period…The Ninth Circuit stated that “[c]haracterizing the mere continued offering of a plan option, without more, as a subsequent breach would render” the statute meaningless and could even expose present fiduciaries to liability for decisions made decades ago…But the Ninth Circuit jumped from this observation to the conclusion that only a significant change in circumstances could engender a new breach of a fiduciary duty, stating that the District Court was “entirely correct” to have entertained the “possibility” that “significant changes” occurring “within the limitations period” might require “‘a full due diligence review of the funds,’” equivalent to the diligence review that respondents conduct when adding new funds to the Plan.

The decision then rejects this approach:

We believe the Ninth Circuit erred by applying a statutory bar to a claim of a “breach or violation” of a fiduciary duty without considering the nature of the fiduciary duty. The Ninth Circuit did not recognize that under trust law a fiduciary is required to conduct a regular review of its investment with the nature and timing of the review contingent on the circumstances.

Different Justices of the Supreme Court showed during oral arguments that they struggled with the question of exactly what this continuing duty to monitor looks like. Rather than resolve the question, they have remanded the case back to the 9th Circuit to decide what the duty to monitor requires and whether the plaintiffs here met that burden to have viable claims. But they did so while also providing important context from trust law. Here are few excerpts:

Under trust law, a trustee has a continuing duty to monitor trust investments and remove imprudent ones. This continuing duty exists separate and apart from the trustee’s duty to exercise prudence in selecting investments at the outset. The Bogert treatise states that “[t]he trustee cannot assume that if investments are legal and proper for retention at the beginning of the trust, or when purchased, they will remain so indefinitely.” A. Hess, G. Bogert, & G. Bogert, Law of Trusts and Trustees §684, pp. 145–146 (3d ed. 2009) (Bogert 3d). Rather, the trustee must “systematic[ally] conside[r] all the investments of the trust at regular intervals” to ensure that they are appropriate. Bogert 3d §684, at 147–148; see also In re Stark’s Estate, 15 N. Y. S. 729, 731 (Surr. Ct. 1891) (stating that atrustee must “exercis[e] a reasonable degree of diligence in looking after the security after the investment had been made”); Johns v. Herbert, 2 App. D. C. 485, 499 (1894) (holding trustee liable for failure to discharge his “duty to watch the investment with reasonable care and diligence”). The Restatement (Third) of Trusts states the following: “[A] trustee’s duties apply not only in making investments but also in monitoring and reviewing investments, which is to be done in a manner that is reasonable and appropriate to the particular investments, courses of action, and strategies involved.” §90, Comment b, p. 295 (2007).

The Uniform Prudent Investor Act confirms that “[m]anaging embraces monitoring” and that a trustee has “continuing responsibility for oversight of the suitability of the investments already made.” §2, Comment, 7B U. L. A. 21 (1995) (internal quotation marks omitted). Scott on Trusts implies as much by stating that, “[w]hen the trust estate includes assets that are inappropriate as trust investments, the trustee is ordinarily under a duty to dispose of them within a reasonable time.” 4 A. Scott, W. Fratcher, & M. Ascher, Scott and Ascher on Trusts §19.3.1, p. 1439 (5th ed. 2007). Bogert says the same. Bogert 3d §685, at 156–157 (explaining that if an investment is determined to be imprudent, the trustee “must dispose of it within a reasonable time”); see, e.g., State Street Trust Co. v. DeKalb, 259 Mass. 578, 583, 157 N. E. 334, 336 (1927) (trustee was required to take action to “protect the rights of the beneficiaries” when the value of trust assets declined).

The decision then summarized its holding as follows:

In short, under trust law, a fiduciary normally has a continuing duty of some kind to monitor investments and remove imprudent ones. A plaintiff may allege that a fiduciary breached the duty of prudence by failing to properly monitor investments and remove imprudent ones. In such a case, so long as the alleged breach of the continuing duty occurred within six years of suit, the claim is timely. The Ninth Circuit erred by applying a 6- year statutory bar based solely on the initial selection of the three funds without considering the contours of the alleged breach of fiduciary duty.

Finally, the Supreme Court made clear that it was not ruling on the scope of the duty to monitor:

We express no view on the scope of respondents’ fiduciary duty in this case. We remand for the Ninth Circuit to consider petitioners’ claims that respondents breached their duties within the relevant 6-year period under §1113, recognizing the importance of analogous trust law.

Our Thoughts

 This is obviously a significant victory for the plaintiffs in this case and plan participant lawsuits generally, as many lawsuits in the last 5 years had been dismissed citing the overly restrictive interpretation of ERISA’s six year statute of limitations.

In plain English, what this decision holds is that if a plaintiff can make a valid claim for a violation of the continuing duty to monitor, there is a effectively now a rolling 6 year window of liability. But of course, now the question is: what exactly is that duty and did the defendants violate it here? The panel of three 9th Circuit judges that previously rules in favor of the defendants will get the first chance to answer those questions. Additionally here for these plaintiffs, the defendants have raised an argument that amounts to a technicality that the plaintiffs failed to raise a duty to monitor claim in the lower courts. The Supreme Court again stated that they had no opinion on the matter and would let the 9th Circuit decide.

So what does this decision mean for the (quite probably) millions of ERISA fiduciaries out there? There is no longer any dispute that a fiduciary must have a process to monitor a plan’s investments. We think it is also fair to say that this duty to monitor extends to all other areas of plan administration and responsibility (e.g. fees paid to providers, quality of providers, whether services are necessary, etc…) However, the duty does depend on the circumstances as the Supreme Court pointed out by citing to ERISA’s statutory language. But we suggest that if a fiduciary does not have a robust monitoring process in place, they do not wait for any further court decisions. Develop a process, document why you think it’s a prudent process, and execute that process.

As we’ve done for the Tibble case since the original decision in the 9th Circuit through the granting of the cert petition, we will continue to update our readers on any further developments.

First Church Plan Case Settles – Overall v. Ascension

On Friday, May 8, 2015, the parties in Overall v. Ascension Health filed a motion seeking approval from the district court to settle the claims brought by the plaintiffs. Of the at least ten “church plan cases” that have been filed challenging the scope of the church plan exemption from ERISA, this case is the first to settle.

Previously, the defendant catholic hospital, Ascension Health, that sponsored the defined benefit plan at issue won in the district court in getting the plaintiffs’ claims dismissed. (there are actually over a dozen plans at issue in the case sponsored by the defendant, but for simplicity’s sake, we will refer to them all as a single plan) The plaintiffs, in short, had claimed that Ascension Health was not itself a church nor associated closely enough with the Roman Catholic Church, to be eligible to sponsor a plan exempt from ERISA. The plaintiffs naturally alleged that the plan’s fiduciaries had failed to meet ERISA’s stringent requirements including allowing the plan to be underfunded by ERISA’s standards by $440 million. After the defendant’s victory in the district court, the plaintiffs appealed to the 6th Circuit and was briefed and waiting for oral arguments to be scheduled and heard. According to the settlement filings, the parties worked with a 6th Circuit mediator over many months and many sessions to settle the claims.

The Settlement

Here is a summary of the terms of the proposed settlement:

  1. The plan will continue to be considered eligible for the church plan exemption and thus exempt from ERISA.
  2. The plaintiffs, in summary, release any and all claims that were or could have been brought with a few exceptions including:
    • “Should the Roman Catholic Church ever disassociate itself from a Plan’s sponsor, as that term is defined in the respective Plan documents, any claim arising under ERISA with respect to
      any event occurring after such action by the Roman Catholic Church”; and
    • “Any claim arising under ERISA with respect to any event occurring after the Internal Revenue Service issues a written ruling that a Plan does not qualify as a Church Plan; the United States Supreme Court holds that Church Plans must be established by a church or a convention or association of churches; or an amendment to ERISA is enacted and becomes effective as a law of the United States specifying that a Church Plan must be established by a church or a convention or association of churches.”
  3. Ascension Health has agreed to contribute $8 million to the plan to be allocated at their discretion.
  4. The plaintiffs’ attorneys will receive up to an additional $2 million in fees and costs determined at the discretion of the district court. This money will not come out of the $8 million above.
  5. Ascension has guaranteed that the plans will pay participants the level of benefits promised through at least June 30, 2022.
  6. Ascension will not terminate the plan unless there is sufficient assets to meet the life annuity and lump sum distribution amounts (as those terms are defined by the relevant Plan), elected by participants in a termination, including any administrative costs.
  7. If the plan is amended, the actuarial value of a participant’s accrued benefit will be no less than it was the day immediately
    prior to the effective date of the amendment.
  8. If there are any mergers, participants will be entitled to the same (or greater) benefits postmerger as they enjoyed before the merger.
  9. The plan documents shall: (a) name a fiduciary; (b) provide a
    procedure for establishing and carrying out the current funding policy and method; (c) describe a procedure for allocation of administration responsibilities; (d) provide a procedure for plan amendments and identifying the persons with authority to make such amendments; (e) specify the basis on which payments are made to and from the Plans; and (f) provide a joint and survivor annuity as currently defined in the plan.
  10. The plan’s summary plan descriptions shall be distributed within four months of the time that the Order approving the settlement becomes Final and nonreviewable. The summary plan descriptions shall: (a) exclude any mention of ERISA or information about ERISA rights; (b) include information about the plan’s Church Plan status, including that the Plans’ benefits are not insured by the Pension Benefit Guaranty Corporation;
    (c) make it clear that the Plans are Church Plans; (d) be in the same form and manner as they are now written; (e) not comply with ERISA § 102; (f) be distributed electronically; however, if a participant sends a written request for an summary plan description, once during any calendar year a summary plan description will be provided in hard copy format at the expense of the participant.
  11. The plan’s annual summaries, pension benefit statements, and/or current benefit values (the content of said communications to be determined solely by Ascension) will be distributed electronically in the format determined by Ascension, or on request, and at the expense of the participant, once during any calendar year paper copies of such documents will be provided.
    • Annual summaries shall include: (a) plan names and EIN; (b) plan years covered by the summary; (c) summary of funding arrangements; (d) summary of Plan’s expenses; (e) information as to the number of participants at year end; (f) summary of the value of net assets at beginning and end of each year; (g) a statement of the Plan’s assets and liabilities; (h) summary information as to the increase and/or decrease in net plan assets annually; (i) summary information as to Plan’s total income; and (j) a statement of assets and liabilities consistent with the Plans’ methodologies, not later than the next October 1 following the end of each plan year.
    • Ascension shall provide pension benefit statements at least every three years, the content, distribution and format to be determined solely by Ascension.
    • Ascension will respond to requests from participants for current benefit values information, as determined solely by Ascension, within thirty (30) days after receiving a written request from a participant. However, Ascension may unilaterally extend its deadlines to respond by an additional thirty (30) days, by providing written notice to the participant.
  12. The plan’s claim review procedures, which shall be included as part of Summary Plan Descriptions, shall state: (a) the identity of the person or entity to whom a claim should be addressed; (b) the time period for filing a claim; (c) the information that must be provided in support of the claim; (d) if a claim is denied, in whole or in part, the person to whom an appeal should be sent; (e) the time period for filing a claim appeal; (f) the information the claimant must provide in support of an appeal; and (g) any statute of limitation period for filing a benefits related claim.

Our Thoughts

Boiled down, this settlement appears to be a significant victory for Ascension Health. The plaintiffs have agreed that they will no longer claim that the plan is subject to ERISA unless there is a major change in the law from either the Supreme Court, Congress, or the IRS. In exchange, Ascension health has agreed to contribute $8 million to the plan, although we have no idea how much, if anything, they were already planning on contributing this year or how that amount compares to previous years.

The settlement filings stress that the plan participants will receive “ERISA like” protections as described above, e.g. guaranteed benefits through 2022 and hefty disclosures. However, without fully analyzing the plan’s financial statements, the plan may already have had enough finding through at least 2022, so it is not clear from the settlement filings how much of a benefit this actually provides.

Notably missing from the settlement is, what we believe was the point of the lawsuits in the first place, any funding standard that closely resembles that found in ERISA. The true underlying issue in these cases is that when a defined benefit plan is not subject to ERISA, there is not an alternate state law scheme that springs up. Instead, there is often nothing at all, as most states have not enacted any pension funding standards for non-government entities (and often not even for government entities, as can be seen in many many news stories across the country of under-funded government pensions).

So how does this settlement affect the other 10 or so cases that are currently pending, including three others that are already at the circuit court level (3rd, 7th, and 9th Circuits)? Not much. All this means is that if in the end the courts (rather than Congress or the IRS) will make the final decision on what exactly is the scope of the church plan exemption, it will not come from the 6th Circuit. However, any change in the law from the Supreme Court, Congress, or the IRS will have an effect on plans claiming the church plan exemption in the 6th Circuit, including the plan at issue in this case because the settlement included such a carve out, as described above.

It also remains to be seen whether this settlement will cause any other settlements before we hear from the 3rd, 7th, or 9th Circuits. If we do, we will make sure to cover them here on the blog.

 

 

Plaintiffs Fail to Float Claim Past District Court

The U.S. District Court for the District of Massachusetts in In re Fidelity ERISA Float Litigation, No. 13-10222, 2015 WL 1061497 (D. Mass. March 11, 2015) has determined that float income is not a plan asset. This may be the last we hear about ERISA claims involving float targeting Fidelity, or any other service provider, as the defendant. Nonetheless, this case is just another example of why retirement practitioners should keep a close watch on case law that impacts fiduciary governance obligations. Unless Congress legislates new law, the Department of Labor (“DOL”) addresses the question raised by the courts, or the losing plaintiffs appeal to a higher court, it is looking like in most circumstances, float earnings are not considered plan assets.

As early as September 13, 1993 the DOL issued an Advisory Opinion addressing the collection of interest earning on assets in transit, be it contributions not invested, or distributions not cashed. This Advisory Opinion was followed by an August 1994 Information Letter and finally a Field Assistant Bulletin issued on November 5, 2002. Collectively, these three DOL publications have influenced the governance activities of knowledgeable fiduciaries by encouraging open negotiation between covered service provider and plan sponsor as to the retention of float income to avoid a prohibited transaction claim. But by determining that float income is not a plan asset; the court in In re Fidelity ERISA Float Litigation found that retention of float income is not a prohibited transaction. The Court referenced three other circuit court decisions which all held float was not a plan asset.

At this point, a fiduciary must now determine whether it is important to continue the same governance activities of the past or abandon those activities as a waste of time. Of course, under the current short-term interest rate environment float earnings do not amount to much especially for small plans, so the question is where do we go from here?

It is very important to realize that the point of this lawsuit was to go after the service providers like Fidelity where the damages across all plans could be done collectively in one case. Now that this method appears to not be viable, the remaining avenue is to go after the plan fiduciaries themselves. Although these cases are finding that float is not a plan asset, none have held that it is not a form of indirect compensation that must be considered by a prudent fiduciary under their 408(b)(2) responsibilities.

Practically then what does this mean?  Float negotiations are still important because they involve compensation paid to service providers, but will be reserved to those plans with the most assets where the amount generated is the greatest. One thing to keep in mind. If, in fact, we see a rising interest rate environment, float income will increase and become a more meaningful profit source for a covered service provider. If and when that happens, the group of plans that must take into consideration negotiations over float will necessarily increase.

Supreme Court Wrestles with Issues in Tibble v. Edison

Yesterday, the United State Supreme Court heard oral argument in Tibble v. Edison International. A link to the transcript published by the Court can be found here. For those who are interested, I highly recommend you read through it.

The main stream media, in articles such as this one, interpreted yesterday as hinting at a victory for the plaintiffs. But let’s be clear: that’s not necessarily a clear cut outcome. Even a reversal, as I will explain below, requires difficult decisions by the Justices about what is required of fiduciaries.

I generally got the sense that not one of the Supreme Court Justices (other than Justice Thomas who hasn’t asked questions in years) supported the Ninth Circuit test that held where an investment is selected more than 6 years before a lawsuit is brought, there is no ongoing duty to monitor unless changed circumstances amounting to the investment almost being like a new investment would cause a fiduciary to reevaluate the fund. Being like new could mean a defined style drift, new management, dramatic change in performance, etc… On the other end of the spectrum, it also wasn’t 100% clear that there is enough support for the Plaintiffs’ position to simply have a constantly moving 6 year window with no test or limitations on what exactly a fiduciary should be doing to monitor investments. There may be a handful of Justices willing to do this, but one of them surely isn’t Justice Scalia who seemed more comfortable with the changed circumstances test than the others.

So given what we know, what is the likely outcome? Very unlikely they affirm the Ninth Circuit’s test but almost as unlikely they simply reverse without providing guidance on what the duty to monitor looks like. So that leaves us somewhere in the middle, swimming in shades of gray.

Given that the last few ERISA opinions have been 9-0 votes, I wouldn’t be surprised to see some compromises happening behind closed doors to get to another 9-0 vote here. How do they get there? The Justices will have three options: (1) they can reverse and remand back to the Ninth Circuit to develop a nuanced test for the duty to monitor, something that Justice Sotomayor was uncomfortable with the Supreme Court doing itself…if the parties are later unhappy with that test, they can file another cert petition to the Supreme Court, (2) they could do the same thing but provide “limited” guidance on what the test should look like, or (3) they reverse and provide robust guidance on what the duty to monitor requires of ERISA fiduciaries, more or less cutting the Ninth Circuit out of the process.

Of course, I don’t pull these options blindly out of a hat. Option #2 with the limited guidance is something the Court has been comfortable doing in recent decisions, including in Dudenhoeffer v. Fifth Third Bancorp last year and in Cigna v. Amara, a few years back (which my new colleague Stephen Rosenberg recently discussed on his blog sometimes brings unintended consequences). If they go this route, questions we don’t have answers to until we see a decision include what kinds of information is a fiduciary required to look at (performance, fees, etc…)? Will they keep calling it a changed circumstances test but change the criteria? Will they throw that test out and call it something different?

No matter the outcome, we will cover the decision here on the blog as soon as it’s published, which is expected before the end of June, but possibly earlier.

Lockheed Martin Settles Excessive Fee Lawsuit for $62 million

(Long time readers will note that the blog looks a little different. Last week, the blog was updated to reflect that Editor in Chief Thomas E. Clark, Jr, joined The Wagner Law Group as Of Counsel. Click here for more information.)

The last of the first wave of excessive fee lawsuits filed on September 11, 2006 in what many dubbed the “Schlichter Blitzkrieg” has been settled. On the eve of trial in December, the parties in Abbot v. Lockheed Martin agreed to settlement in principle to avoid trial and now the terms of the settlement have finally been made public.

Lockheed Martin has agreed to pay $62 million and implement extensive affirmative relief. According to the settlement agreement, Schlichter, Bogard & Denton will request up to $20,666,666 in attorneys’ fees and reimbursement of up to $1,850,000 in costs, all to come out of the settlement amount above. The plaintiffs had alleged that the fiduciaries to the Lockheed Martin 401(k) plans cause the plans to pay excessive administrative fees and that the fiduciaries had imprudently managed the money market fund and company stock fund.

The affirmative relief agreed to is as follows:

(1) to publicly file with the Court the annual Department of Labor filing that discloses fees paid by the Plans (known as Schedule C to Form 5500) as well as information about the
assets held in, and performance of, the Stable Value Fund and the Company Stock Funds;

(2) to confirm current limitations on the amount of cash equivalents held in the Company Stock Funds and the amount of money market equivalent assets held in the Stable Value Fund, and to file a notice with the Court if those limitations are changed;

(3) to initiate a competitive bidding process for the Plans’ recordkeeping services for the Plans, and to publicly file with the Court a notice identifying the entities that submitted bids and the selected recordkeeper;

(4) to offer participants the share class of investments that has the lowest expense ratio, provided that the share class is available and consistent with the needs and obligations of the Plans; and

(5) The terms of the Settlement will be reviewed by an  independent Fiduciary.

Our Thoughts

This is the single largest settlement of an excessive fee case against one employer to date. As we’ve written about before, the substantive decisions have been swinging in favor of plan participants in recent years. If that continues, this will not be the last settlement and I would imagine we could even see a higher settlement amount.