The Roller Coaster Continues: Court Finds ING a Fiduciary Over Revenue Sharing Practices. Schedules Trial for September.

The roller coaster of who is and isn’t a fiduciary under ERISA section 3(21)(A) continues its seemingly out of control ride. Today, August 9, 2013, a district court in Connecticut ruled ING Life Ins. and Annuity Co. (“ILIAC”) a fiduciary related to its revenue sharing practices and scheduled a four week trial to begin anytime after September 3.

The lawsuit, Healthcare Strategies v. ING Life Insurance and Annuity Co., was previously certified as a class action, with the following class definition:

All administrators of employee pension benefit plans covered by the Employee Retirement Income Security Act of 1974 subject to Internal Revenue Code §§ 401(a), (k) with which ING has maintained a contractual relationship based on a group annuity contract or group funding agreement and for which, since February 23, 2005, ING has received revenue sharing payments (e.g., asset based sales compensation, service fees under distribution and/or servicing plans adopted by funds pursuant to Rule 12b-l under the Investment Company Act of 1940, administrative service fees and additional payments, and expense reimbursement) from any mutual fund, investment advisor or related entity.

Said another way, the two plan administrator class representatives who filed suit now represent what is most likely every one of ILIAC’s retirement plan clients. As a reminder, this class definition survived an interlocutory Rule 23(f) appeal to the 2nd Circuit when they failed to take the appeal.

The plaintiffs here allege:

(1) ILIAC has included certain mutual funds as investment options based on the funds’ revenue sharing payments to ILIAC rather than the funds’ potential to benefit the plans,
(2) ILIAC’s receipt of revenue sharing payments constitute prohibited transactions under ERISA 406(b)(1) & (3),
(3) The fees charged by ILIAC to the plans do not bear a meaningful relationship to the cost of the services provided, and they thus constitute excessive compensation to ILIAC, and
(4) By taking as its compensation the spread between the guaranteed payment and the investment performance of assets in fixed accounts and guaranteed accumulation accounts, ILIAC has retained excessive compensation and engaged in self-dealing.

The reason that I paint this decision as a runaway roller coaster is that its core ruling finding ILIAC a fiduciary is squarely at odds with recent decisions such as the 7th Circuit case Leimkuehler v. American United Life Insurance Co. At issue is ILIAC’s authority, as an insurance company platform that controls and sells separate accounts wrapped around mutual funds, to change, add, or eliminate the funds that may be invested by 401(k) plan participants when it determines that such a change is “desirable . . . to accomplish the purpose of the Separate Account,” and whether that authority confers fiduciary status. In order to exercise such discretion over a plan’s investments, all that is required of ILIAC is that it notify the plan trustees of any such action.

ILIAC and the plaintiffs agreed that to the extent ILIAC actually exercises its contractual authority to substitute funds in a plan, it is acting in a fiduciary capacity with respect to any revenue-sharing payments it acquires from that change. However, ILIAC argued that under ERISA section 3(21)(A)(i), its fiduciary status is limited to the extent it actually “exercises . . . discretionary authority” to manage a plan. Thus, ILIAC sought to limit its fiduciary duty to the two isolated occasions during the last 10 years that it actually substituted funds. This would be consistent with the ruling in Leimkuehler.

However, the court, relying on 2nd Circuit law which the Connecticut district court is required to follow, found that such an interpretation of an ERISA fiduciary is too limited, particularly given the mandate that the term “fiduciary” be broadly construed. Slip op. at 13. Instead, the 2nd Circuit in Bouboulis v. Transp. Workers Union of Am., 442 F.3d 55, 63 (2d Cir. 2006), holds that section 3(21)(A) creates a “bifurcated test”:

Subsection one imposes fiduciary status on those who exercise discretionary authority, regardless of whether such authority was ever granted. Subsection three describes those individuals who have actually been granted discretionary authority, regardless of whether such authority is ever exercised.

Thus, the court found that ILIAC is a fiduciary under 3(21)(A)(iii) related to its control over the funds. Key to this conclusion was the court’s finding that services performed by ILIAC could be defined as “plan administration,” the language found in (iii), as opposed to the “plan management” language found in (i). The court held that under 2nd Circuit and Supreme Court authority, “plan administration” should be ready broadly. Finally, the court addressed the Leimkuehler decision and distinguished it based upon the fact that the plaintiffs there failed to argue fiduciary status under (iii) and instead solely argued under (i).

As it was a ruling on ILIAC’s motion for summary judgment, the court held that there were triable issues of fact related to whether ILIAC’s control and receipt of revenue sharing was within the scope of it’s fiduciary duties owed from having authority over changes to plan funds, and required each side to be ready for a four week trial anytime after September 3.

So what does this mean?

(1) It means that the fiduciary duties related to the control and receipt of revenue sharing are far from settled. On one side we’ve got cases such as Tussey v. ABB, Inc. and Santomenno v. Transamerica Life Ins. Co. On the other, we’ve got Leimkuehler and Tibble v. Edison Int’l (that foreclosed an ERISA section 406(b)(3) claim because revenue sharing was ruled not to be a plan asset).

(2) Any provider that receives revenue sharing as compensation should carefully analyze their own practices in light of this decision and others. This is especially so in light of other recent news such as the settlement between a fiduciary investment advisor and the Department of Labor (“DOL”) over charges the advisor failed to disclose the receipt of revenue sharing that amounted to 10 times the contracted fee with the client. ($500,000+ v. $50,000). How serious is this issue? The DOL initially sought injunctive relief that would have forever prohibited the advisor from acting as a fiduciary to a qualified plan again, which probably would have shut down the advisor’s business. Instead, the advisor agreed to pay $200,000+ and to forever disclose all forms of compensation to every current and future client in perpetuity. Either punishment is nasty business.

(3) The second breed of ERISA breach cases involving classes of plans, rather than classes of one plan’s participants, are finally progressing to a determination of liability. The potential damages are magnitudes higher, as is the catastrophic harm to a service provider.

Here is the call to action. Mitigate your risk and exposure over the receipt of revenue sharing as compensation if you are a service provider or the payment of revenue sharing if you are a plan sponsor, through the implementation of a comprehensive plan and prudent procedures, that at a minimum includes an analysis of fiduciary identification, exercise, and authority. If you are unsure of how to do so, seek the help of a qualified entity with demonstrated expertise (such as FRA PlanTools).

Victory for Plaintiffs: 7th Circuit Allows Class Certifications for Excessive Fee Cases

Back in May, we previously discussed the oral argument held in the 7th Circuit case Abbott v. Lockheed Martin Corporation. At issue was the district court’s denial of class certification in an excessive fee case. Today, August 7, the 7th Circuit issued a plan participant/plaintiff friendly opinion reversing the district court’s denial of class certification and providing much needed clarification of the previous 7th Circuit case Spano v. Boeing Corp. In Spano, the 7th Circuit rejected an overly broad class definition that generically included all past, current, and future plan participants, and instead required certain limitations, as discussed below.

Before we dive into the decision, it is worth noting that this opinion is written by Circuit Judge Diane Pamela Wood, who previously wrote the decisions in Spano and Hecker v. Deere. In my previous blog post, I hinted that at oral arguments, Circuit Judge Wood showed a sympathy towards the plan participants/plaintiffs that I had not previously seen from the court. Whether this decision is evidence of a long term change in tone and jurisprudence of the 7th Circuit (which is generally known as the most plan sponsor friendly), remains to be seen. Now to the decision.

The plaintiffs in Abbott allege a number of different claims that are discussed in greater detail in our previous blog post and the case page on the ERISA Litigation Index. Only the class certification of one claim was at issue on this appeal, which the 7th Circuit summarizes nicely:

Plaintiffs allege that the [Stable Value Fund] that Lockheed offered through its Plan failed to conform to [the general description of a SVF]. Rather than containing a mix of short- and intermediate-term investments, Lockheed’s SVF was heavily invested in short-term money market investments. This resulted in a low rate of return, such that in Lockheed’s own words, the SVF did “not beat inflation by a sufficient margin to provide a meaningful retirement asset.” Plaintiffs contend that structuring the SVF in this manner amounted to imprudent management and violated Lockheed’s duty to manage the Plan “with [] care, skill, prudence, and diligence under the circumstances.” 29 U.S.C. § 1104(a)(1)(B).

Slip op. at 9.

After the 7th Circuit vacated the previous granting of class certification in Abbott that mimicked the rejected definition in Spano, the Abbott plaintiffs moved to amend. To conform to the statement in Spano that “a class representative in a defined-contribution case would at a minimum need to have invested in the same funds as the class members,” plaintiffs proposed separate classes for each claim, including one just for the SVF claim, with class membership limited to those plan participants who invested in the SVF during the class period. To conform to Spano’s warning that the class must not be “defined so broadly that some members will actually be harmed” by the relief sought, plaintiffs limited their definition of the SVF class to those who suffered damages as a result of Lockheed’s purportedly imprudent management of the fund. To achieve this latter result, Plaintiffs proposed to use as a benchmark for class certification purposes the Hueler FirstSource Universe index (Hueler Index).

The district court rejected this more limited definition, because in it’s view, including the Hueler Index in the class definition was an improper attempt to “use class certification to ‘back door’ a resolution of this contested issue [i.e., the proper measure of loss] in [Plaintiffs’] favor,” which the district court argued could only be decided at the merit’s stage.

In reversing, the 7th Circuit first addresses Lockheed Martin’s argument that the plaintiffs lacked Article III standing to bring the SVF claim because only one plaintiff was invested in the fund during the class period and was not necessarily injured when the performance of his account is compared to the performance of the Hueler Index. Drawing upon previous circuit decisions, the opinion makes quite clear that the Abbott plaintiffs always had standing because “[i]njury-in-fact for standing purposes is not the same thing as the ultimate measure of recovery. The fact that a plaintiff may have difficulty proving damages does not mean that he cannot have been harmed.” Slip op. at 9. Instead, if the plaintiff later loses on the merits, their case is just dismissed. The court does not go back in time and dismiss for lack of standing. Slip op. at 9-10.

The 7th Circuit next addresses the issue of whether it is proper to include the Hueler Index, or any benchmark of damages, in a class definition, in order to determine “who the adversaries are,” allow “the defendant to gauge the extent of its exposure to liability,” and to alert “excluded parties to consider whether they need to undertake separate actions in order to protect their rights.” Slip op. at 13. The court resoundingly rejects the position of Lockheed Martin, and the district court, and finds that including such a benchmark is perfectly acceptable:

Plaintiffs are not arguing that the SVF was imprudently managed in violation of ERISA because it did not match or outperform the Hueler Index; rather, Plaintiffs allege that the SVF was imprudently managed because its mix of investments was not structured to allow the fund to beat inflation and therefore that it could not serve as a prudent retirement investment for Lockheed employees. If Plaintiffs prevail on this theory, they may offer the Hueler Index as one basis for calculating damages. For now, however, the reference to the Hueler Index in the class definition in no way binds the district court to the use of the Hueler Index as the damages measure should Plaintiffs prevail. If the court concludes that a different measure would be better, it is free to use one.

Slip op. at 12-13.

Next, addressing the merits of the plaintiffs’ SVF claim, the decision rejects Lockheed Martin’s argument that plaintiffs are really arguing a “misrepresentation through omission: namely, that Lockheed allegedly inadequately disclosed the nature of the SVF to Plan participants.” Slip op. at 14. The court finds that Lockheed distorts the plaintiffs’ claim “when it characterizes their theory as one in which the SVF was imprudently managed because it deviated from the mix of investments held by other funds bearing the “stable value” label.” Id. Instead, the court concludes that plaintiffs “aim to show that the SVF was not structured to beat inflation, that it did not conform to its own Plan documents, and that Lockheed failed to alter the SVF’s investment portfolio even after members of its own pension committee voiced concerns that the SVF was not structured to provide a suitable retirement asset. The fact that the SVF’s investment mix apparently deviated from that of other, similarly named funds may be relevant evidence on which Plaintiffs will rely, but it does not exhaust their theory of imprudence.” Id.

Finally, addressing the the last 2+ years of upheaval since the Spano decision (and its sister case Beesley v. Int’l Paper Co. decided in the same decision), the court states:

The combination of exceedingly broad class definitions and murky claims made it difficult to assess the district court’s certification orders…Against that background, we were certain only that the particular classes before us could not stand. While we may have offered some guidance for how to approach class certification in actions under Section 502(a)(2), we emphasized that we were deciding only the cases before us…this court has never held, and Spano did not imply, that the mere possibility that a trivial level of intra-class conflict may materialize as the litigation progresses forecloses class certification entirely.

The appropriateness of class treatment in a Section 502(a)(2) case (as in other class actions) depends on the claims for which certification is sought. Here, the specifics of the SVF claim make it unlikely that the sorts of conflicts that concerned us in Spano will arise. Plaintiffs emphasize that a Section 502(a)(2) action seeks only to make the fiduciary refund to the Plan any losses caused by the breach. 29 U.S.C. § 1109(a) (“Any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by this subchapter shall be personally liable to make good to such plan any losses to the plan resulting from each such breach … .”). There appears to be no risk that any SVF investor who benefited from Lockheed’s imprudent management would have her Plan assets reduced as a result of this lawsuit. Moreover, unlike many imprudent management claims—in which the allegation is that fraud or undue risk inflated the value of a fund and then caused it to crash, see, e.g., In re Schering Plough Corp. ERISA Litig., 589 F.3d 585, 592 (3d Cir. 2009)—Plaintiffs’ allegation is that the SVF was so low-risk that its growth was insufficient for a retirement asset. A very low-risk fund is by nature not subject to the wide swings in value that would enable some investors to reap a windfall from a fund’s mismanagement. Finally, the fact that the SVF underperformed relative to the Hueler Index for all but a very brief portion of the class period reinforces the intuition that few, if any, SVF investors profited from Lockheed’s conduct. Should any of these statements turn out to be wrong, the district court can make further adjustments to the class definition later.

Slip op. at 20-21.

So what are my immediate thoughts following this decision? A few. First, this is a resounding victory for the Abbott plaintiffs in winning on every single litigated issue. This will no doubt provide wind in the sails of additional plan participants to file cases against plan sponsors over under-performing funds. Second, there are a number of other cases in district courts in the 7th Circuit that have been held up waiting for this decision. With this decision, those cases will most likely move forward with plan participant friendly class certifications being granted on at least some of the alleged claims. Third, this decision may be seen on a similar plane as the Tussey and Tibble decisions as a watershed moment for fiduciaries to understand their duties regarding the requirement to prudently select funds, even “conservative” funds, such as SVFs. Although the Abbott plaintiffs have yet to prove their case, the fact that the plaintiffs have come this far strongly suggests at least some viability to their claims.

So what’s next? It’s possible that Lockheed Martin will try to take this to the Supreme Court, although I find it doubtful that certiorari would be granted based upon my previous experience in such endeavors, but anything’s possible. Most likely, this will go the normal route, back to the district court, where it is likely a class will be granted for the SVF claim. If/once that happens, this case is scheduled to go to trial as soon as the court’s calendar allows.

Breaking: 9th Circuit Amends Tibble v Edison Opinion on Rehearing

As we previously wrote about, the Plaintiffs in Tibble v. Edison Int’l filed a Petition for Rehearing to both the three judge panel and all active 9th Circuit judges at large. Today, August 1, the three judge panel amended their opinion and explicitly rejected any further attempts by the Plaintiffs to seek redress in the 9th Circuit. Although, as explained below, the judges tweaked their opinion regarding the application of Firestone deference, the opinion remains effectively unchanged.

In their Petition, Plaintiffs raised two primary questions to be reheard:

[list type=”dot”]
[list_item]Does the statute of limitations in ERISA, 29 U.S.C. § 1113(1), bar a plan participant from bringing suit against a fiduciary who persists in maintaining imprudent funds on the menu of a 401(k) plan if such funds were initially included more than six years beforehand and had always been unlawful in the same way they are currently unlawful (the “Limitations Question”)?[/list_item]
[list_item]Are ERISA fiduciaries entitled to have their interpretation of plan documents reviewed under the deferential standard established in Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989), in a lawsuit seeking relief under 29 U.S.C. § 1132(a)(2) where the fiduciary is alleged to have, in violation of 29 U.S.C. § 1104, ignored the valid interests of beneficiaries in favor of non- beneficiaries (the “Deference Question”)?[/list_item]
[/list]

As to the first question, the judges did not even address it in their amended opinion and state that no active judge of the 9th Circuit voted to have the issue reheard. Thus, the plan sponsor friendly interpretation of the 6 year statute of limitations remains the law.

As to the second, the judges deleted two plus pages of their previous opinion and replaced it with new language. The judges have backed down from their very broad decision that Firestone deference to a plan administrator applies equally when violations of fiduciary duties under ERISA sections 404 and 502(a)(2) have been alleged, as when a benefits claim is filed under section 502(a)(1)(B). Instead, they now attempt to harmonize their finding that Edison is entitled to deference with cases such as the John Blair decision from the 2nd Circuit, by arguing that John Blair rejected Firestone deference only when a plan administrator is attempting to replace the prudent man standard under ERISA section 404(a)(1)(B) with the plan interpretation provision under 404(a)(1)(D). The judges here find no such scenario finding that the Plaintiffs “have not pursued this challenge as a violation of the prudent person standard; instead, their contention rises or falls exclusively on what Plan section 19.02 allows. As to issues of plan interpretation that do not implicate ERISA’s statutory duties, they are subject to Firestone.” Slip op. at 9.

My immediate reaction is three-fold:

[list type=”dot”]
[list_item]First, the judge’s amended opinion still appears to conflict with the John Blair decision which held that Firestone deference should not apply when a plan administrator has “sacrificed valid interests [of beneficiaries] to advance the interests of non-beneficiaries.” 26 F.3d 360, 369-70. It’s pretty clear that the Plaintiffs here have alleged that Edison advanced its own interest by interpreting the plan provision that stated that Edison must pay all administrative costs, as one that states that the Edison can use revenue sharing to offset Edison’s bills rather than reimburse the money back to plan participants.[/list_item]
[list_item]Second, it’s also somewhat unbelievable for the 9th Circuit to state that Plaintiffs failed to argue that Edison’s actions were an independent violation of ERISA’s statutory duties, when in a footnote in their opinion cited to that very sentence, they acknowledge a claim under ERISA section 406(b)(3) for the improper receipt of consideration, but the judges are rejecting that claim. So does this mean deference only applies where the court finds no separate breach of another provision? (Compare John Blair: prudent man violation = no deference with Edison: no 406(b)(3) violation = deference applies) Doesn’t this mean then that the arbitrary and capricious standard that the 9th Circuit wants to benefit the plan administrator with is really just masquerading as the fiduciary duty test of other ERISA provisions such as 404(a)(1)(B) or 406?[/list_item]
[list_item]Third, the panel also appears to have failed to read 404(a)(1)(D) when they stated “[w]hile subsection (a)(1)(B) codifies the statutory prudent-person standard, subsection (a)(1)(D) simply requires that actions be in line with the plan documents.” Slip op. at 8. In fact, the language at (a)(1)(D) must be read with the intro language at (a)(1): “a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and…in accordance with the documents and instruments governing the plan…” It’s simply hard for me to reconcile their reading of (a)(1)(D) with the actual language of the statute. This provision is supposed to have teeth and the three judge panel just neutered it. Especially in a situation where a fiduciary is being given deference to interpret a plan document to benefit a non-beneficiary that is itself.[/list_item]
[/list]

With the three judge panel explicitly stating that “[n]o further petitions for panel rehearing or for rehearing en banc will be entertained,” it remains to be seen whether the Plaintiffs take this all the way to the Supreme Court. If they do, we will report on it first.