All posts by Thomas E. Clark, Jr.

Tom is Of Counsel with The Wagner Law Group, a law firm specializing in ERISA & Employee Benefits. He leads the firm’s St. Louis office. Tom’s expertise encompasses all aspects of employee benefits programs, including the design, implementation and compliance of retirement plans, health and welfare plans, and executive and incentive compensation arrangements. He also has a robust practice assisting covered service providers in meeting their ERISA compliance needs. Earlier in his career, Tom worked for the law firm of Schlichter, Bogard & Denton including on such landmark cases as Tibble v. Edison, which was decided by the U.S. Supreme Court last year. He also teaches ERISA Fiduciary Law as an Adjunct Professor at the Washington University in St. Louis School of Law, his alma mater. Tom is also a co-author of the forthcoming Second Edition of ERISA: Principles of Employee Benefits Law, the only treatise of its kind that provides an overview of the regulation of employee benefit plans by highlighting the central principles and competing policies of employee benefits law in a compact and accessible format for a broad audience of readers.

MassMutual Settles Excessive Fee Lawsuit

On Friday, October 31, 2014, the parties in Goldenstar, Inc. v. MassMutual Life Insurance Co. filed a motion seeking the court to approve a settlement agreed to by the parties. (See previously MassMutual is Found to be a Fiduciary in ERISA Suit by Proposed Class of Client Plans)

The settlement agreement (Part 1 and Part 2) allows for two settlement classes to be approved: (1) the Monetary Relief Class and (2) the Structural Changes Class. The Monetary Relief Class covers current and past retirements plan customers of MassMutual, while the Structural Changes Class covers current and future retirement plan customers of MassMutual.

To note, it appears that the lawsuit brought by MassMutual’s own employees is not affected by this lawsuit (See Breaking: New Excessive Fee Case Filed By MassMutual Employees) as the following parties are excluded as plaintiffs:

Excluded from the Classes are (1) Defendant, (2) any administrators of retirement plans (“Plans”) for which Defendant’s directors, officers or employees are beneficiaries, (3) any Plans for which the Judge(s) to whom this case is assigned or any other judicial officer having responsibility for this case is a beneficiary, (4) any Plans that were former Hartford Plans (as that term is defined in the Settlement Agreement), and (5) any Plans which are invested through registered products.

The Monetary Class will receive a payment of $9,475,000, which will be reduced a claim for attorney’s fees up to 1/3 and costs up to $315,000.

The Structural Changes Class is much more involved. The promised changes to be implemented over the next 12 months include:

Defendant shall make the following changes to the menu(s) of investments it offers (“Product Menu(s)”):

(a) Defendant shall identify to plan sponsors, via MassMutual’s plan sponsor website or other electronic media made available by Defendant to the plan sponsor (“Plan Sponsor Website”), any addition of any insurance company Separate Investment Account, Mutual Fund, Bank Collective Trust Fund or other investment option (collectively “Funds”), to the Product Menu(s). Defendant shall inform current plan sponsors within ninety (90) days of the effective date of any settlement and future plan sponsors at point of sale in writing that such additions are identified on the Plan Sponsor Website;

(b) Defendant shall advise all current and future Plan fiduciaries that, notwithstanding any provision in any group annuity contract or group funding agreement (“Group Contract”), Defendant would not delete, change or replace any Funds (including share classes of a given Fund) on the Product Menu that is in a Plan’s selected investment lineup without: (1) providing an applicable fiduciary for each affected Plan with sixty (60) days’ written notice, and (2) obtaining a plan fiduciary’s consent to the proposed change, subject to the qualification that Defendant can remove a Fund from the Plan’s lineup if it is no longer available through merger or otherwise and further provided that a Plan fiduciary’s failure to object will be treated as consent to the proposed change. If the fiduciary affirmatively rejects the proposed change and Defendant ultimately implements the change, the Plan fiduciary has the right to terminate its Group Contract with Defendant without application of a surrender charge or similar charge (a “penalty”) and the Plan fiduciary will be provided with an additional sixty (60) days from the effective date of the change to identify an alternative service provider. The conditions described in this subparagraph (b) only apply to Fund changes initiated by the Defendant and not to any Fund changes initiated by an investment provider other than Defendant; and

(c) Defendant shall provide to plan sponsors notice on the MassMutual’s Plan Sponsor Website of any removal of a Fund from the Product Menu. Such notice shall be published on such website at least thirty (30) days prior to the removal, and shall state the effective date of the removal. The conditions described in this subparagraph (c) only apply to the removal of a Fund initiated by Defendant and not to the removal of a Fund initiated by an investment provider other than Defendant. Defendant shall inform current plan sponsors within ninety (90) days of the effective date of any settlement and future plan sponsors at point of sale in writing that such deletions will be identified on the Plan Sponsor Website.

Defendant shall provide on the Plan Sponsor Website for each fund made available by MassMutual a disclosure of the expense ratio for each Fund, including the amount, if any, of the SIA Management Fee or other direct fees specifically associated with each Fund. MassMutual shall also disclose for each Fund made available by MassMutual the revenue paid to MassMutual from a Fund, including disclosure of those Funds that make no revenue sharing payments to MassMutual.

Defendant shall modify its written point of sale disclosure, so as to:

(a) advise Plans that Defendant offers various Funds, including various share classes of certain Funds, to retirement plan customers depending on the amount of direct fees plan sponsors choose to pay and other factors, that these various Funds pay to Defendant differing amounts of revenue sharing as a percentage of the Funds’ assets, that only one share class of each Fund is typically offered to a Plan consistent with the Defendant’s pricing and product offering and that, as an investment option under a retirement plan, the primary difference between share classes of a Fund is the Fund’s expense ratio (i.e., the amount that the Plan’s participants pay as a Fund expense) and the amount of revenue sharing that Defendant receives from the Fund, which is paid from the revenue derived from the Fund’s fees and expenses, and that Funds are available to all Plans that pay no revenue sharing of any kind resulting in the expenses of a Plan being paid for entirely by direct fees assessed to the Plan and/or its participants;

(b) explain that revenue sharing payments are made by certain, but not all, Funds and the amount of revenue sharing payments received can be dependent on the share class(es) offered by the Fund and the share class(es) chosen by Defendant; and

(c) advise Plans that more detailed information regarding the share classes available on various menus offered by Defendant, as well as the revenue sharing associated with those share classes, and the revenue sharing received in connection with the plan’s investments, would be provided upon written request to Defendant.

Each of the Plans in the Settlement Classes will be deemed to have elected to reinvest all mutual fund dividends from the effective date of the Plan’s Group Contract. Defendant’s point of sale disclosures will now provide that, as a result of entering into a contractual relationship with Defendant through a Group Contract, each Plan is directing Defendant to reinvest any mutual fund dividends.

Defendant will include in its proposal an explanation of the option for Plan customers to pay all fees to Defendant through direct charges and, if requested by the plan sponsor or its advisor, will offer a menu of Funds for which Defendant does not receive revenue sharing payments.

Defendant shall not make any change in the compensation that it receives from the Plans, including the SIA Management Fees or the Funds without providing each affected Plan with sixty (60) days written notice and an opportunity to terminate its Group Contract without penalty if the changes are not acceptable.

The filings do not provide a monetary value to this affirmative relief.

Supreme Court Grants Cert in Tibble v. Edison – BREAKING

Today, October 2, 2014, the United States Supreme Court granted the Plaintiffs’ Petition for Writ of Certiorari in Tibble v. Edison International. The list of orders from the Court can be found here.

As we’ve discussed in the past, the Supreme Court requested the opinion of the Solicitor General of the United States along with the Department of Labor in asking whether cert should be granted for the two issues that Plaintiffs sought to have heard. The first, regarding the six year statute of limitations found in ERISA was granted after the Solicitor General recommended that the Court take the case:

The petition for a writ of certiorari is granted limited to
the following question: “Whether a claim that ERISA plan
fiduciaries breached their duty of prudence by offering
higher-cost retail-class mutual funds to plan participants, even
though identical lower-cost institution-class mutual funds were
available, is barred by 29 U. S. C. §1113(1) when fiduciaries
initially chose the higher-cost mutual funds as plan investments
more than six years before the claim was filed.”

The second issue regarding deference to a plan fiduciary in interpreting a plan document was not supported by the Solicitor General and the Supreme Court did not agree to hear it. However, the proper level of deference that a fiduciary is to be given under ERISA sec. 502(a)(2) fiduciary breach claims is also the subject of a cert petition in Tussey v. ABB before the Court. At this point, the Court has yet to put consideration of that petition on its calendar and ABB’s brief is due October 6 under the current schedule, which is always subject to change.

Oral arguments in Tibble have not yet been set but currently the Court has availability in January. If heard that late, we can expect a decision sometime between late Spring and the end of June when the term ends.


John Hancock Dodges ERISA Class Action – An Analysis of the Bigger Picture

On Friday, September 26, 2014, in Santomenno v. John Hancock, et al. the Third Circuit Court of Appeals found in favor of the John Hancock defendants in a putative ERISA class action filed against them over excessive fees, affirming the district court’s dismissal of the lawsuit. There have been a number of well drafted blog pieces on the specifics of the decision that I would recommend to our readers. See summaries by Sidley Austin and Alston + Bird. The essence of the decision is that the plaintiffs failed to show that Hancock was a fiduciary for the conduct alleged.

Instead what I want to focus on here is the bigger picture for our readers. The decision in favor of Hancock comes after recent decisions have found similar service providers to be fiduciaries and other than have found them not to be:

In most cases, there are no allegations that the service provider is a fiduciary by title such as the Named Fiduciary or the Plan Administrator. Instead, whether the plaintiffs can show the provider is a fiduciary turns to the functional fiduciary test under ERISA 3(21)(A), which by its very nature is fact driven. From there, ignoring 3(21)(A)(ii) which governs investment advice and has a specific set of regulations that are more easily understood, the plaintiffs have been trying to show fiduciary status through 3(21)(A)(i) and (iii). Those provisions read as follows:

 a person is a fiduciary with respect to a plan to the extent

(i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets,

(iii) he has any discretionary authority or discretionary responsibility in the administration of such plan…

The cases are holding with few exceptions that the functional fiduciary test under 3(21)(A(i) must show that the fiduciary actually exercised their discretion. In decisions in favor of AUL and John Hancock, the plaintiffs were unable to show that. In decisions against Transamerica, MassMutual, and ING, the plaintiffs were able to either show the exercise of discretion or that it was a issue of fact for trial. (I would also submit that the quality of the complaint and the level of detail as to the allegations has also played a part, but an academic analysis of the complaint in these cases might be the subject of a later post)

The decisions are also focusing on the “to the extent” language in the opening line of 3(21)(A), which limits fiduciary liability only to those duties that are specifically that actors. This happened here in the Hancock case, as well as in Hecker v. Deere, where the courts have consistently rejected that fiduciary status comes from the design of a larger investment menu that an actual plan fiduciary then chooses from, even if the provider is a fiduciary in other respects. However, see the decision against Transamerica which seemed to challenge the to the extent language in finding that they should have been responsible over ensuring their own fees were reasonable after becoming a fiduciary.

The open question from these cases is whether 3(21)(A)(iii) requires the actor to actually exercise their discretion or not, i.e. it’s a fiduciary breach to be both malfeasant and nonfeasant. The reason this has not been as prominent is that in most instances, the allegations are centered around the investments which generate the fees and they have little to do with plan administration. The chances are high that allegations against the large service providers in the future will involve claims under 3(21)(A(iii), even if the investments are the core of the conduct, i.e. revenue sharing.

Fidelity Settles Lawsuit with Own Employees Over 401(k) ERISA Allegations

Fidelity has  settled two lawsuits filed last year by its own employees over allegations that they violated ERISA in the administration of their own 401(k) plan by charging excessive fees and committing prohibited transactions. We extensively covered the allegations in our previous posts – Fidelity is Targeted Again and This Time Regarding Its Own In House Plan; Fidelity Files a Motion to Dismiss the Lawsuit Regarding Its Own In-House Plan; Case Against Fidelity Regarding In-house Plan Heats Up; and Fidelity is Sued Again Over In-House 401(k) Plan.

The motion for settlement filed in Bilewicz v. FMR LLC and in Yeaw v. FMR LLC and the accompanying settlement agreement provides for $12 million to be paid to the class and for the following affirmative relief to be taken:

  • The Plan will make available a wide selection of both Fidelity and non-Fidelity mutual funds.
  • The Plan will also continue to offer: (i) the Fidelity Freedom Funds – Class K as the Plan’s qualified default investment alternative; and (ii) Fidelity’s portfolio advisory service, Portfolio Advisory Services at Work (PAS-W). PAS-W will continue to be offered at no cost to participants.
  • Fidelity is increasing auto-enrollment for eligible employees from 3% to 7% of eligible compensation, and will default current participants who are currently deferring below 7% to 7% of eligible compensation. Fidelity will apply its match to those increased contributions.
  • The Plan shall provide that revenue sharing attributable to non-Fidelity mutual funds shall be credited to participants in the same way as revenue attributable to Fidelity mutual funds and collective trusts pursuant to the 8th amendment to the 2005 restatement of the Plan is credited to participants.This revision to the Plan shall remain in effect for at least three years.

The lawyers representing the Plaintiffs have been appointed as class counsel for the purposes of settlement and will be filing a motion for attorney’s fees at a later time. The amount they will be requesting was not disclosed in the settlement agreement. Each named plaintiff has asked for a specific request of $5,000 for their work in bringing the case. In exchange for the monetary payment and affirmative relief, the plaintiffs have agreed to an extensive release of claims related to the allegations in the complaint. However, the claims against Fidelity regarding float interest in In re Fidelity ERISA Float Litigation have specifically been carved out and that case will continue to move forward.

Our Thoughts

Fidelity’s settlement of this case is somewhat surprising as they have typically vigorously defended itself in other excessive fee litigation. On the other hand, no substantive decisions had yet been made in the case and the cost of litigating this case through summary judgment had their motion to dismiss been denied, would likely have been multiples of the $12 million paid to settle the case. For plan sponsors that have Fidelity, the affirmative relief should be of particular interest, as it may serve as a road map of what kind of services are considered best in class when provided by Fidelity (such as K share classes or offering funds from multiple families). Since this settlement did not cover the float litigation, we will continue to monitor it and provide updates.

Court Grants Summary Judgment to Plaintiffs in Rollins v. Dignity Health

Today, July 22, 2014, a Northern District of California court in Rollins v. Dignity Health granted the plaintiffs’ motion for partial summary judgment and denied defendants’. The decision was consistent with the court’s earlier denial of defendants’ motion to dismiss. (See Court Finds Plan Sponsored by Catholic Hospital is NOT a Church Plan).

In finding for the plaintiffs that the pension plan should be governed by ERISA, the court rejected defendants’ argument that it was inequitable or unfair because of the long term reliance on the IRS rulings and that either the ERISA or a California state law statute of limitation applies. The court also found that these was no genuine issue of material fact as to Dignity Health’s predecessor Catholic Healthcare West establishing the pension plan, rather than that they were either controlled by a church or that a church co-established the plan.

So where does this leave the case? The plaintiffs will now need to move the court to grant it the relief it seeks, i.e. meeting ERISA. Needless to say, this will be a herculean task. I wouldn’t be surprised to see the court enter an order granting the relief plaintiffs seek and then immediately stay the order until defendants can appeal the case to the Ninth Circuit Court of Appeals. Again, I wouldn’t be surprised to see the defendants want to move the case along as fast as they can in order to get the case to the appeal stage. No true predictions here as to what will happen next, but I suspect speed will be a dominant factor.

Two New Cases Filed

In addition to the six cases we’ve written about on the blog, two new cases have been recently filed. The complaints in Owens v. St. Anthony Medical Center (N.D. Illinois) and Lann v. Trinity Health (D. Maryland) are similar to the others, with the exception that the St. Anthony pension plan was already terminated in an underfunded status.

Recommendation by Magistrate in Favor of Plaintiffs in Medina v. Catholic Health Initiatives

I’ve been reluctant to report on a development in the Medina v. Catholic Health Initiatives case. There, the district court judge used a procedure under the rules requesting the assigned magistrate judge to review the case and provide their recommendation on how to decide. Sometimes these recommendations are agreed to 100% by a district judge and adopted and other times, the ultimate outcome can be substantially different if the district judge disagrees. So read the recommendation by the magistrate (knowing that it is not binding) siding with the plaintiff and finding that the pension plan at issue is not eligible to be considered a church plan and thus should be subject to ERISA. We will report on the decision of the district court when it is granted.