Supreme Court Waiting Game Begins After DOL Submits Stock Drop Amicus Brief

The continued viability of the “Moench Presumption” may or may not be decided by the United States Supreme Court. As explained below, we are now in a waiting game to learn whether the court will vote to hear an appeal of a case where the Moench Presumption was not adopted.

Since 1995, ERISA plan sponsors have had the so-called “Moench Presumption” to help defend against breach of fiduciary duty claims regarding company stock funds included in their retirement plans. The Moench Presumption originated from Moench v. Robertson in the 3rd Circuit. Explained simply, the case stated that proper breach allegations must “implicate the company’s viability as an ongoing concern or show a precipitous decline in the employer’s stock.” Otherwise, the plan sponsor is entitled to a presumption of prudence regarding the company stock fund and in most circumstances, a lawsuit claiming the fund is imprudent will be dismissed.

Since then, the defense has been adopted by most circuit courts across the country. Except the 6th Circuit. After a case against Fifth Third Bancorp was dismissed by the district court, the 6th Circuit reversed and held that the plan sponsor was not entitled to any presumption of prudence at the beginning of a case, and instead, those issues should be decided during the discovery phase of a case because of their factual nature.

Fifth Third Bancorp filed a cert. petition with the Supreme Court last year raising two questions:

(1) Whether the Sixth Circuit erred by holding that respondents were not required to plausibly allege in their complaint that the fiduciaries of an employee stock ownership plan abused their discretion by remaining invested in employer stock, in order to overcome the presumption that their decision to invest in employer stock was reasonable, as required by the Employee Retirement Income Security Act of 1974, 29 U.S.C. §§ 1101 et seq. (“ERISA”), and every other circuit to address the issue; and

(2) whether the Sixth Circuit erred by refusing to follow precedent of this Court (and the holdings of every other circuit to address the issue) by holding that filings with the Securities and Exchange Commission become actionable ERISA fiduciary communications merely by virtue of their incorporation by reference into plan documents.

In response, the Supreme Court asked the Department of Labor for their opinion. On November 12, 2013, the Department of Labor, in conjunction with the Solicitor General of the United States, submitted an amicus curiae, or “friend of the court,” brief. In that brief, the DOL recommends that the Supreme Court hear only the first question but in a modified form:

1. Whether, in a suit claiming that an ESOP fiduciary violated the statutory duty of prudence, 29 U.S.C. 1104(a)(1)(B), the fiduciary should be accorded a presumption that he acted prudently.

2. If so, whether the presumption applies at the pleading stage and what a plaintiff must allege to rebut it.

In summary, it is the DOL’s position, and has been for quite some time, that ESOP fiduciaries are no different than any other ERISA fiduciary in their duties and responsibilities, except that ESOP fiduciaries are given a limited exemption from the diversification rules of ERISA 404 because of the obvious concentration in employer stock.

I was asked to comment on this brief for Pension & Investments, and did so in an article published this morning. The outstanding issue at this point is whether the Supreme Court will now vote to hear the case. There are multiple practitioners in the industry that are flat out stating this will happen. I respectfully decline to make any predictions, as regular readers of this blog will know is my standard position. Does the DOL’s recommendation that the Supreme Court take the case raise the chances? Yes. But is it guaranteed? No.

If the Supreme Court does take the case, we [hopefully] will finally have resolution to this issue for plan sponsors and plan participants, alike. My recommendation is that for anyone wanting to stay informed,  you should regularly visit the case page on the Scotusblog (a wonderful resource for anything Supreme Court related). It is not yet clear to me at which conference the Supreme Court justices will vote whether to hear the case, although there is one today, with the results published tomorrow.

An Update on the Church Plan Litigation

Much has happened in the Church Plan litigation since our first post about it and our last post. At this point, motions to dismiss by the different defendants have been fully briefed in four cases and oral arguments have been held in 2 of those. None have yet been ruled on, however, in the Medina case as explained below, the court turned the motion to dismiss into a motion for summary judgment, and discovery has begun.

Here is a case by case update of the five cases. (click the names of each case to go to that case’s page to download all relevant filings)

Overall v. Ascension Health

Defendants filed a Motion to Dismiss on June 28, 2013. Since then, Plaintiffs have responded and Defendants have replied.
On September 16, 2013, the United States of America intervened in the case because of the constitutional questions raised by the Plaintiffs. At this stage, they are declining to file any briefing. On November 18, 2013, a hearing was held and the Motion to Dismiss was taken under advisement.

Two notes of interest. First, on October 9, 2013, the Becket Fund for Religious Liberty filed an Amicus Brief in support of Defendants. The brief was co-authored by Eugene Volokh of UCLA School of Law along with the help of his students in the UCLA First Amendment Amicus Brief Clinic. He wrote about the brief on his blog.

Second, in support of their position, the Plaintiffs filed an NYU Law Review article written by David Pratt that does an excellent job of summarizing the legal issues in these cases. I highly recommend you read it. (Warning: the file size is quite large)

Chavies v. Catholic Health East

As we previously wrote about, the Defendants here filed a Motion to Dismiss on June 17, 2013. Plaintiffs responded, Defendants replied, and Plaintiffs were given permission to file a sur-reply.

On September 30, 2013, the United States of America intervened.

A hearing for the Motion to Dismiss has yet to happen.

Medina v. Catholic Health Initiatives

Defendants filed a Motion to Dismiss on July 30, 2013 but just 6 days later sua sponte, the Court converted the motion to a Motion for Summary Judgment based upon the Court’s jurisdictional issues being intertwined with the merits of the case. The simple outcome is that before any issues of law or fact can be decided by the Court, the Plaintiffs are entitled to take discovery (i.e. request documents and take depositions).

On August 29, 2013, the Plaintiffs filed a Motion for Class Certification.

On September 30, 2013, the Unites States of America intervened.

On October 7, 2013, the Defendants answered Plaintiffs’ complaint.

Rollins v. Dignity Health

Defendants filed a Motion to Dismiss on June 17, 2013. Plaintiffs responded and Defendants replied. On November 4, 2013, the Court heard oral arguments on the Motion to Dismiss and took it under advisement.

On October 31, 2013, the United States of America intervened.

Kaplan v. Saint Peter’s Healthcare System

Defendants filed a Motion to Dismiss on August 12, 2013. The Plaintiffs responded and the Defendants replied. The Court has yet to hear oral arguments.

On August 14, 2013, the IRS granted the Saint Peter’s pension plan church plan status. Here is Saint Peter’s IRS ruling edited to fill in the relevant names from the Pension Rights Center. On September 19, 2013, the Pension Rights Center sent a letter to the pension plan’s participants addressing the IRS ruling.

On November 14, 2013, the United States of America intervened.

Breaking: New Excessive Fee Case Filed By MassMutual Employees

Today, November 5, 2013, in employees of Massachusetts Mutual Life Insurance Company (“MassMutual”) filed an ERISA class action lawsuit against their employer alleging self-dealing and excessive fees. The Complaint in Gordon v. MassMutual, et al. was filed in the District of Massachusetts by six current and one former participant in the MassMutual Thrift Plan. The MassMutual Thrift Plan has over 14,000 participants and over $1 billion in assets. Plaintiffs allege, as an example, that the fees paid to MassMutual were more than $5 million just in 2010 alone.

The Defendants

Plaintiffs allege that MassMutual is a fiduciary to the plan because it served as the recordkeeper, investment manager, and primary service provider to the plan. The plan document also allegedly appoints the CEO of MassMutual as the primary fiduciary to the Plan. The CEO then appoints members to the two fiduciary committees. Plaintiffs have sued MassMutual, the current and former CEO’s, as well the investment and administrative committees and multiple committee members.

The plaintiffs allege that the fiduciaries to the plan were conflicted because of their roles as executives to MassMutual. In particular, the plaintiffs attack the CFO as well as the fact that three investment managers from the very products being offered to participants were on the fiduciary investment committee.

Investment Lineup

Plaintiffs allege that the plan has 38 investment options of which 36 to 37 are MassMutual proprietary funds. They allege this shows no prudent process was put in place when they were selected.

Plaintiffs attack the difference between what is paid to the subadvisor on a number of funds versus what they retain for monitoring that advisor. As an example, plaintiffs allege that the MassMutual S&P 500 Index pays its subadvisor .2 basis points, where as MassMutual pays itself 7.2 basis points, or 899% as much.

Plaintiffs also attach the performance of multiple funds, claiming as an example that “the Capital Appreciation Fund and the Large Cap Value Fund have a history of significant underperformance for years, underperforming their respective benchmarks and prudent investment options available to the Plan by over $10 million each in the past six years alone.”

Plaintiffs further allege that other MassMutual clients paid lower fees.

The Fixed Interest Account

Plaintiffs allege that participants who invested in the Fixed Interest Account not only paid risk charges and recordkeeping fees of 115 to 175 basis points, but that MassMutual also retained “spread” that was possibly multiples of this amount. Plaintiffs define spread as the difference between what the investments in the general account actually earn versus what is credited to the plan.

Of interesting note, the plaintiffs also attack the fact that the MassMutual CEO controls the group annuity contract that offers the Fixed Interest Account that invests in the MassMutual general account. Plaintiffs allege that the CEO has more or less rigged the contract in favor of MassMutual as the expense of participants. Specifically, plaintiffs allege that the contract states “it will be a breach of this Agreement for the Plan Sponsor to adopt any change or amendment that would have an adverse effect on MassMutual’s administrative procedures or the financial experience of MassMutual” and “it will be a breach of this Agreement for the Investor, Plan Sponsor or the Plan fiduciary to deliver any communication to Participants, either directly or indirectly, that is intended to induce Participants to withdraw or transfer funds from the Guaranteed Interest Account to another investment option under the Plan (a ‘Prohibited Communication’).”

 Our Thoughts

Without a doubt, this case has strong similarities to previously filed cases against Ameriprise, Cigna, and Fidelity regarding their in house retirement plans. To note, Cigna just paid $35 million to settle the case against them.

So what does this mean for plans that use MassMutual as a provider or advisors who recommend MassMutual services and products? It means that you should use this as an opportunity to review your plan’s relationship with MassMutual. This is only a complaint and no one can predict with any certainty how it will turn out. But that being said, if any of the specific allegations found in the complaint could apply to your plan, you have now been put on notice to investigate. This can include asking for more information, re-reviewing your 408(b)(2) disclosures and agreements, or benchmarking your plan’s fees. These tasks should obviously focus on analyzing any investments in your plan and ensuring that any fees paid are reasonable and necessary.


Tibble and Leimkuehler Plaintiffs Separately Appeal to the US Supreme Court

Last week, the plaintiffs in Tibble v. Edison Int’l and Leimkuehler v. American United Life Insurance Co. separately filed petitions to the United States Supreme Court seeking writs of certiorari. This follows the petition filed by the defendants in Abbott v. Lockheed Martin Corporation seeking to overturn the class cert decision by the 7th Circuit which was very favorable to plan participants.

The Tibble petition to the Supreme Court seeks to have the following questions reviewed:

1. Notwithstanding the ongoing nature of ERISA’s fiduciary duties, does the statute of limitations under 29 U.S.C. §1113(1) immunize 401(k) plan fiduciaries for retaining imprudent investments that continue to cause the plan losses if the funds were first included in the plan more than six years ago?

2. Does Firestone deference apply to fiduciary breach actions under 29 U.S.C. §1132(a)(2), where the fiduciary allegedly violated the terms of the governing plan document in a manner that favors the financial interests of the plan sponsor at the expense of plan participants?

The plaintiffs are appealing the original opinion by the 9th Circuit, as well as the modified decision that resulted from the plaintiffs’ petition for rehearing.

The Leimkuehler petition to the Supreme Court seeks to have the following questions reviewed:

ERISA § 3(21)(A)(i) provides in relevant part that “a person is a fiduciary with respect to a plan to the extent (i) he … exercises any authority or control respecting management or disposition of [the plan’s] assets ….”

The question presented is: Whether the court below erroneously held, in conflict with the decisions of six other circuits, that a person who exercises some authority or control over the assets of a plan is a fiduciary with respect to that plan only if he is alleged to have “mismanaged” the plan’s assets?

The plaintiffs are appealing this decision by the 7th Circuit, which was very favorable towards the defends and which we previously discussed in this post.

Our Thoughts

The purpose of this post is simply to get the information out. We will discuss there petitions in depth once the opposing parties in each case files their response.

Nonetheless, it is well known rumor/fact in the ERISA litigation world that the Supreme Court does not like ERISA cases. Thus, it will be interesting to see how they respond to three pending petitions that all come from “similar” excessive fee cases but all address entirely unique legal issues.