Summary Judgment Briefing Completed in Chamber of Commerce Lawsuit Challenging the Final Fiduciary Regulation

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By Joseph A. Garofolo

The Chamber of Commerce and the Department of Labor have cross-moved for summary judgment in the Chamber’s lawsuit seeking to vacate the final fiduciary regulation.  See Chamber of Commerce of the United States of America, et al. v. Thomas E. Perez, et al., United States District Court for the Northern District of Texas, Case No. 3:16-cv-1476-M.  The briefing on the Chamber’s motion was completed on September 16, 2016, and, according to the Chamber’s website, oral argument is set for November 17, 2016.

A central dispute in the case revolves around the scope of the Department’s authority to promulgate regulations. The Chamber argues the following:

Congress gave DOL regulatory and enforcement authority over employer-sponsored retirement plans and virtually no authority over retirement savings outside that context. Desiring to regulate all ‘retirement savings’ but lacking that power, DOL leveraged its limited interpretative authority under ERISA and the Internal Revenue Code to impose restrictions that are so impracticable that the financial and insurance industries will have no choice but to either abandon the market or submit themselves to the vast and onerous new regulatory architecture that DOL has erected through its exemptive authority.

(Chamber of Commerce Plaintiffs’ Reply in Support of Their Motion for Summary Judgment and Opposition to Defendants’ Cross-Motion for Summary Judgment at 1) (emphasis in original).  The Chamber continues by asserting that the Department has used “that authority to exact firms’ agreement to legal obligations that it is powerless to impose directly, DOL has seized the power over ‘retirement savings’ that Congress never bestowed on it; shoved aside other regulators, both federal and state; and upended decades of state and federal regulation and law.”  (Id.).

There is little doubt that the losing parties will appeal and we may see some interesting differences of opinion among judges about the Department’s authority, especially considering that there are multiple suits challenging the fiduciary regulation.  Nonetheless, the author remains convinced that the plaintiffs face an uphill battle in these suits.

Plaintiffs File Five Lawsuits Challenging the Final Fiduciary Regulation

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By Joseph A. Garofolo

In the month of June, no fewer than five lawsuits were filed challenging the Department of Labor’s authority to promulgate the final regulation broadening the definition of fiduciary.  Three suits were filed in Texas, one was filed in the District of Columbia, and one was filed in Kansas.

All but one of the lawsuits seek to vacate the entire fiduciary regulation for failing to comply with the requirements of the Administrative Procedure Act, including because the regulation is “arbitrary, capricious, . . . or otherwise not in accordance with law” as that phrase is used in 5 U.S.C. § 706(2)(A).

In the author’s opinion, these lawsuits face an uphill battle, at least with regard to their 5 U.S.C. § 706(2)(A) attack, due to the standard of review applied by the Supreme Court.  As the Court explained, “[t]he scope of review under the ‘arbitrary and capricious’ standard is narrow and a court is not to substitute its judgment for that of the agency.”  Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983); see also Lawrence D. Rosenberg & Richard M. Re, Basic Legal Doctrines Frequently Arising in the D.C. Circuit.

 

The DOL Promulgates the Final Fiduciary Regulation

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By Joseph A. Garofolo

On April 8, 2016, the Department of Labor promulgated a final regulation regarding ERISA’s definition of fiduciary.  The final regulation becomes applicable on April 10, 2017, and is available here.  

There were a number of changes between the proposed regulation published on April 20, 2015 and the final regulation.  The Department provided a chart summarizing changes made in response to the following issues raised in connection with the proposed regulation: the distinction between education and investment advice, the applicability of the regulation to health and welfare arrangements and appraisals, whether “hire me” recommendations are subject to ERISA’s fiduciary standards, the applicability of the Best Interest Contract Exemption (the “BICE”) (a class prohibited transaction exemption) to small plans and all asset classes, disclosure requirements under the BICE, the applicability of the contract requirement to ERISA plans and arrangements not subject to ERISA (including individual retirement accounts “IRAs”), the application of the regulation to call centers, web disclosure and data retention requirements, recommendations relating to proprietary products, lifetime income products, and level fee arrangements, fee-based account conversions, bias toward products with low fees, grandfather relief, and concerns regarding regulation implementation.  The Department’s chart is available here.

Finally,  on April 8, 2016, the Department promulgated the following exemptions relating to prohibited transactions under ERISA and the Internal Revenue Code of 1986, as amended: i) the BICE (the Best Interest Contract Exemption); ii) Class Exemption for Principal Transactions in Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs; iii) Amendment to Prohibited Transaction Exemption (PTE) 75-1, Part V, Exemptions From Prohibitions Respecting Certain Classes of Transactions Involving Employee Benefit Plans and Certain Broker-Dealers, Reporting Dealers and Banks; iv) Amendment to and Partial Revocation of Prohibited Transaction Exemption (PTE) 86-128 for Securities Transactions Involving Employee Benefit Plans and Broker-Dealers; Amendment to and Partial Revocation of PTE 75-1, Exemptions From Prohibitions Respecting Certain Classes of Transactions Involving Employee Benefits Plans and Certain Broker-Dealers, Reporting Dealers and Banks; v)
Amendments to Class Exemptions 75-1, 77-4, 80-83 and 83-1; and vi) Amendment to and Partial Revocation of Prohibited Transaction Exemption (PTE) 84-24 for Certain Transactions Involving Insurance Agents and Brokers, Pension Consultants, Insurance Companies, and Investment Company Principal Underwriters.  These documents can be accessed here.

While the retirement plan community continues to analyze the final regulation and its related exemptions, it is safe to say that many investment advisers and participants will be affected by the significant changes made to the Department’s interpretation of “investment advice” as that phrase is used in ERISA § 3(21)(A)(ii).  

Research Reveals Disparities Between Disability Claims and Other Types of Benefits Litigation

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By Joseph A. Garofolo

The Department of Labor recently cited ERISA Benefits Litigation: An Empirical Picture, 28 ABA J. Lab. & Emp. L. 1 (2012) (“ERISA Benefits”), in its proposed regulation regarding disability benefit plan claims procedures.  See 80 Fed. Reg. 72014, 72016 n.8 (Nov. 18, 2015).  ERISA Benefits is a study by Sean M. Anderson, a professor at the University of Illinois College of Law, that most ERISA practitioners—regardless of whether they focus on disability claims—will find fascinating.

Professor Anderson analyzed data relating to ERISA benefits lawsuits filed between 2006 and 2010.  He found that disability suits accounted for 64.5% of benefits litigation whereas lawsuits involving health care plans and pension plans accounted for only 14.4% and 9.3%, respectively.  ERISA Benefits at 7.  According to the study, defendants asserted failure to exhaust in 27.8% to 40.4% of lawsuits in which disability benefits were not involved.  Id. at 11.  In contrast, failure to exhaust was asserted as a defense in only 14.7% of the disability cases.  Id.  

Professor Anderson has indicated that he intends to further analyze the data that he has collected.  The author believes that analysis of class action benefits litigation, claims brought by providers where numerous medical claims are litigated in a single lawsuit (often brought by providers), and the amount of monetary recovery sought in different types of benefits claims would be of interest to ERISA practitioners and policymakers.

Montanile May Be a Mixed Result for Plans and Participants

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By Joseph A. Garofolo

At first glance, the Supreme Court’s recent decision interpreting “appropriate equitable relief” as used in ERISA § 502(a)(3) is a victory for health plan participants.  But upon closer scrutiny, Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan, 2016 U.S. LEXIS 843 (2016), is a mixed result for participants and plans.

The plan at issue paid $121,044.02 in medical expenses for a participant who was injured in a car accident caused by a drunk driver.  The participant subsequently settled his claim against the drunk driver for $500,000.  The plan contained a subrogation clause that provided the following: “[A]ny amounts [that a participant] recover[s] from another party by award, judgment, settlement or otherwise . . . will promptly be applied first to reimburse the Plan in full for benefits advanced by the Plan . . . and without reduction for attorneys’ fees, costs, expenses or damages claimed by the covered person.”  Id. at *7 (internal quotations omitted).   The plan further stated that “[a]mounts that have been recovered by a [participant] from another party are assets of the Plan . . . and are not distributable to any person or entity without the Plan’s written release of its subrogation interest.”  Id. at *6-*7.

After the participant and the plan could not reach agreement regarding the plan’s entitlement to the funds recovered by the participant, the participant’s attorney distributed $240,000 (the amount remaining after payment of attorney’s fees and costs).  The participant subsequently spent some or all of the $240,000 and the board of trustees asserted a claim under ERISA § 502(a)(3) against the participant to enforce the plan’s subrogation provision.

The Supreme Court reversed the Eleventh Circuit—which had reasoned that the board of trustees could enforce the subrogation provision—and held that “when a participant dissipates the whole settlement on nontraceable items, the fiduciary cannot bring a suit to attach the participant’s general assets under § 502(a)(3) because the suit is not one for ‘appropriate equitable relief.’” Id. at *6.  As it had in previous decisions, the Court looked to “standard equity treatises.”  Id. at *14.  The Court explained the following:

[The standard equity treatises] make clear that a plaintiff could ordinarily enforce an equitable lien only against specifically identified funds that remain in the defendant’s possession or against traceable items that the defendant purchased with the funds (e.g., identifiable property like a car). A defendant’s expenditure of the entire identifiable fund on nontraceable items (like food or travel) destroys an equitable lien.

Id.

While the facts of Montanile are sympathetic to the participant, in other instances, the Court’s reliance on standard equity treatises will likely continue to create impediments for participants seeking to obtain relief against nonfiduciaries pursuant to ERISA § 502(a)(3).  In her dissent, Justice Ginsburg referred to the Court’s holding as “bizarre” and reiterated her opinion expressed in another dissent that “the Court [has] erred profoundly . . . by reading the work product of a Congress sitting in 1974 as unravel[ling] forty years of fusion of law and equity, solely by employing the benign sounding word ‘equitable’ when authorizing ‘appropriate equitable relief.’”  Id. at *25 (some internal quotations omitted).  Notably, in her concurrence in Aetna Health Inc. v. Davila, 542 U.S. 200, 223-24 (2004), Justice Ginsburg accurately interpreted the scope of relief available against fiduciaries under ERISA § 502(a)(3) years before the Supreme Court confirmed such interpretation in CIGNA Corp. v. Amara, 563 U.S. 421 (2011).  It remains to be seen whether the Court will come around to her interpretation of ERISA § 502(a)(3) as it pertains to nonfiduciaries.

Moreover, in addition to bringing suit under ERISA § 502(a)(3) before a participant dissipates funds potentially subject to subrogation, a trustee may be able to recover funds from a participant under the theory that such funds constitute plan assets when the participant receives the funds.  The Eleventh Circuit has applied a documentary test when determining whether particular funds constitute plan assets.  See ITPE Pension Fund v. Hall, 334 F.3d 1011, 1013 (11th Cir. 2003).  The language of the plan in Montanile appears to support an argument that the participant was handling plan assets.  The theory would be that the participant is exercising authority or control over the management or disposition of plan assets and is, therefore, a fiduciary within the meaning of ERISA § 3(21)(A)(i).  A suit could then be asserted against the participant/fiduciary on behalf of the plan pursuant to ERISA § 502(a)(2).

Accordingly, there may be more than meets the eye with regard to issues implicated by Montanile.

 

 

 

 

 

 

 

 

 

 

 

 

401(k) Plan Investors Should Take Notice of Recent Report on Concentrated Stock Risk

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By Joseph A. Garofolo

Although not everyone agrees about the value of diversification, 401(k) investors would be wise to take notice of a J.P. Morgan report relating to concentrated stock risk.  See Michael Cembalest, The Agony and the Ecstasy: The Risk and Rewards of a Concentrated Stock Position, Eye on the Market Special Edition, J.P. Morgan (2014).  The J.P. Morgan report highlights how risky investing in even large companies can be and emphasizes the risk that investors take when they fail to diversify. 

According to the J.P. Morgan report, 40% of all stocks that had been a part of the Russell 3000 suffered a catastrophic loss from 1980 to 2014.  Catastrophic loss was defined as “a decline of 70% or more in the price of a stock from its peak, after which there was little recovery such that the eventual loss from the peak is 60% or more.”  Id. at 4.

The report also makes clear that even the largest public companies were not immune to large losses—since 1980, 320 companies have been deleted from the S&P 500 due to significant distress.  The 320 “deletions . . . were a consequence of stocks that failed outright, were removed due to substantial declines in their market value, or were acquired after suffering such a decline.”  Id. at 3.

The report identifies 10 factors, including government policy changes, that are outside of company control.  And it concludes with the following:  “The factors outside management control . . . are a formidable list, and have grown in complexity since we first drafted this report 10 years ago.  This is perhaps the most important epiphany we gained from the study: that exogenous forces may overwhelm the things we can control.”  Id. at 36 (emphasis omitted).

The J.P. Morgan report serves as a good reminder of the importance that 401(k) plan participants should place on modern portfolio theory and its emphasis on diversification.

Expert Testimony Regarding the ERISA Fiduciary Standard of Care

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By Joseph A. Garofolo

Courts regularly allow ERISA expert testimony relating to the fiduciary standard of care, especially in complex cases.  See, e.g., In re Reliant Energy ERISA Litig., 2005 U.S. Dist. LEXIS 48034, at *3, *7-*8 (S.D. Tex. Aug. 19, 2005); Smith v. Sydnor, 2000 U.S. Dist. LEXIS 20074, at *57-*58 (E.D. Va. Aug. 25, 2000); Flanigan v. GE, 93 F. Supp. 2d 236, 242-243 (D. Conn. 2000).  As explained by one court when rejecting an effort to exclude testimony that an ERISA fiduciary breached its duties, “expert witnesses, in all types of litigation, render an opinion as to what the applicable standard of care is and whether it has been complied with.”  Harris v. Koenig, 2011 U.S. Dist. LEXIS 51860, at *6 (D.D.C. May 16, 2011).

Moreover, the vast majority of ERISA fiduciary breach cases are heard by a judge.  And courts in most federal circuits have recognized that there is a relaxed standard for admissibility of expert testimony in bench trials.  See, e.g., United States v. Wood, 741 F.3d 417, 425 (4th Cir. 2013); David E. Watson, P.C. v. United States, 668 F.3d 1008, 1015 (8th Cir. 2012); Att’y Gen. of Okla. v. Tyson Foods, Inc., 565 F.3d 769, 779 (10th Cir. 2009); United States v. Brown, 415 F.3d 1257, 1268 (11th Cir. 2005); Deal v. Hamilton Cnty. Bd. of Educ., 392 F.3d 840, 852 (6th Cir. 2004); Serby v. First Alert, Inc., 2015 U.S. Dist. LEXIS 95612, at *3 (E.D.N.Y. July 22, 2015); Wolkowitz v. Lerner, 2008 U.S. Dist. LEXIS 34698, at *5 (C.D. Cal. Apr. 21, 2008).

Thus, in addition to the fact that fiduciary breach cases are often complex, there is a significant likelihood that competing expert testimony will be heard by a judge in ERISA cases, including litigation involving 401(k) plans and employee stock ownership plans.

 

 

 

Designation of a Named Fiduciary

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By Joseph A. Garofolo

ERISA §§ 402(a)(1) and (2) require a plan to designate, or provide a procedure for designating, one or more named fiduciaries “who jointly or severally shall have authority to control and manage the operation and administration of the plan.”  The designation of a named fiduciary or fiduciaries can become important in 401(k) plan fiduciary breach and other ERISA litigation because it effectively forecloses the person or persons so designated from arguing that they are not fiduciaries with attendant duties.

But how specific does the designation of a named fiduciary have to be?

Fortunately, the Department of Labor provided early interpretive guidance, now codified in 29 C.F.R. § 2509.75-5, relating to this issue.  This guidance, issued in 1975, answers three basic questions relating to the designation of named fiduciaries.

First, the Department indicated yes in response to the question of whether the designation of a committee by position or by individual satisfies the requirements of ERISA § 402(a).

Second, with regard to a collectively bargained plan, the Department explained that ERISA § 402(a) is satisfied if a “joint board is clearly identified as the entity which has authority to control and manage the operation and administration of the plan.”  29 C.F.R. § 2509.75-5, FR-2.  The Department continued that each member of the joint board would be a named fiduciary under such a situation.

And, third, the Department confirmed that a plan may name a corporation/plan sponsor as the named fiduciary.  The Department indicated that the plan instrument designating the corporation “should provide for designation by the corporation of specified individuals or other persons to carry out specified fiduciary responsibilities under the plan, in accordance with section 405(c)(1)(B) of the Act.”  29 C.F.R. § 2509.75-5, FR-3.

Early Department of Labor interpretative guidance is often a good place to start when seeking clarification regarding fundamental fiduciary responsibilities.   

 

 

 

ERISA’s Fiduciary Duty to Monitor

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By Joseph A. Garofolo

In Tibble v. Edison International, 135 S. Ct. 1823 (2015), the Supreme Court clarified the applicability of ERISA’s statute of limitations to the fiduciary duty to monitor.  The plaintiffs alleged that fiduciaries violated the duty to monitor investments by continuing to offer retail-class mutual funds to 401(k) plan participants as opposed to institutional-class funds with lower fees.  The Court held “that the duty of prudence involves a continuing duty to monitor investments and remove imprudent ones” and that a breach of the duty to monitor occurring within ERISA’s statute of limitations was sufficient to hold that plaintiffs’ fiduciary breach claims were not time barred.  Id. at 1829.

While Tibble involved the duty to monitor 401(k) plan investments, another important fiduciary duty to monitor exists with regard to the appointment of plan fiduciaries and the selection of service providers to plans.  The Department of Labor has explained the following:

At reasonable intervals[,] the performance of trustees and other fiduciaries should be reviewed by the appointing fiduciary in such manner as may be reasonably expected to ensure that their performance has been in compliance with the terms of the plan and statutory standards, and satisfies the needs of the plan.  No single procedure will be appropriate in all cases; the procedure adopted may vary in accordance with the nature of the plan and other facts and circumstances relevant to the choice of the procedure.

 29 C.F.R. § 2509.75-8, FR-17.

The Department has made it clear that the “reasonable intervals” standard also applies to monitoring plan service providers.  See http://www.dol.gov/ebsa/publications/fiduciaryresponsibility.html.

Notably, the duty to monitor is part of a fiduciary’s obligations under ERISA § 404(a)(1).  Indeed, consistent with the Supreme Court’s analysis in Tibble, some courts have held that it is part of the duty of prudence.  However, the duty to monitor should not be confused with co-fiduciary duties under ERISA § 405(a)—that section requires the elements of one of its subsections (e.g., knowledge of a fiduciary breach by another without making reasonable remedial efforts) whereas those elements are not required to be satisfied in order for a breach of ERISA § 404(a)(1) to occur.

Notwithstanding the difference between the duty to monitor and co-fiduciary duties, it is critical for fiduciaries to understand both, as ERISA is not forgiving to fiduciaries who are unware of their responsibilities.

 

Administrative Agency Interpretation, the Affordable Care Act, and ERISA

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By Joseph A. Garofolo

On June 25, 2015, the Supreme Court decided King v. Burwell, 576 U.S. ____, 192 L. Ed. 2d 483 (2015).  The Court held that the Patient Protection and Affordable Care Act (the “Affordable Care Act”) permits tax credits in states in which the federal government has established health care exchanges.  While most of the focus of commentators, understandably, has been on this substantive result, King is also interesting because of the Court’s analysis of Chevron deference.

Chevron deference is the principle articulated by the Court in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), that, under certain circumstances, courts must defer to reasonable interpretations of agencies when a statute is ambiguous.  In King, Chief Justice Roberts, writing for the Court, explained that Chevron deference assumes that Congress implicitly delegated authority to an agency to interpret “statutory gaps.”  192 L. Ed. 2d at 493 (internal quotations and citation omitted).  But, in “extraordinary cases, . . . there may be reasons to hesitate before concluding that Congress has intended such an implicit delegation.” Id. at 493-94 (internal quotations and citations omitted).  With regard to the availability of tax credits in states where exchanges have been established by the federal government, if Congress had desired to delegate authority to an agency, “it surely would have done so expressly.”  Id. at 494.  Moreover, the Court reasoned that Congress would not likely have delegated such an important decision to the Internal Revenue Service because of its lack of expertise regarding the subject matter.  Accordingly, the Court decided King without any deference to the Internal Revenue Service’s interpretation of the Affordable Care Act.

This is not the first time that the Court has invoked what has come to be known as the “major questions doctrine.”  See Adam White, Symposium: Defining deference down, SCOTUSblog, June 25, 2015, http://www.scotusblog.com/2015/06/symposium-defining-deference-down/.  And although the result was necessary in King to avoid the possibility that a different administration could change its interpretation of the Affordable Care Act, it is also possible that King could signal a broader retreat from the Court’s application of Chevron deference.  See id. 

Is this likely to occur in the field of ERISA?  There are a number of places in the statute where Congress expressly delegated interpretative authority to the Secretary of Labor.  For example, ERISA § 503, which addresses the claims procedure that must be provided by employee benefit plans (including retirement and health and welfare plans), expressly grants the Secretary authority to promulgate a regulation.  Perhaps more importantly, ERISA § 505 grants broad authority to the Secretary to promulgate regulations relating to Title I.  Therefore, the major questions doctrine is not likely to play a role with regard to the Secretary’s interpretative authority as it pertains to most significant ERISA issues.

Finally, one quick note regarding a previous post is necessary to close the book for now on King.  The prior post discussed a method of predicting the outcome of Supreme Court cases based on the number of questions asked by the Justices to each side.  This method predicted the wrong outcome in King.  However, in fairness, the professor who has been collecting data on the method had placed the case in the toss-up category.  And Justice Roberts asked only one question.  So, from an empirical standpoint, the case probably does not tell us much about the ultimate ability of the method to consistently predict the outcome of Supreme Court decisions.