A recent federal district court case demonstrates the risk to an ERISA fiduciary’s personal assets when he commits a fiduciary breach. The court previously held that the former owner of a privately-held company engaged in a prohibited transaction and breached his fiduciary duties when he sold shares of company stock to his company’s leveraged ESOP at prices in excess of its fair market value. The district court required the owner to provide assets, including several cars, as security in conjunction with his motion to stay enforcement of the judgment pending appeal, stipulating that if the judgment were upheld, the security would be transferred to the plaintiffs. When the U.S. Court of Appeals for the Fifth Circuit upheld the judgment, the owner refused to turn over the assets. The district court is now ordering the owner to turn over the assets despite any hardship that it may cause the owner. Perez… Continue Reading
Safeguards to Defend Against Conflict of Interest Allegations in the Administration of ERISA Welfare Benefit Claims
In cross-motions for summary judgment in Geiger v. Aetna Life Insurance Company, the U.S. Court of Appeals for the Seventh Circuit considered whether Aetna, the designated claims fiduciary and insurer of disability benefits provided under an employer-sponsored ERISA welfare benefit plan, abused its discretion when it terminated the plaintiff’s disability benefits. The plaintiff was a former employee of the employer-plan sponsor. The terms of the plan specifically granted discretionary authority to Aetna with respect to determining benefits and construing the terms of the plan. However, the plaintiff alleged that Aetna had operated under a conflict of interest, as the party that both determined eligibility for and paid plan benefits, and thus abused its discretion in denying her claim. In deciding that Aetna did not abuse its discretion, the Court considered the following four safeguards that Aetna had undertaken to minimize any conflict of interest: (i) Aetna obtained numerous independent physician… Continue Reading
On December 28, 2016, the DOL released Interpretive Bulletin 2016-01 (the “Bulletin“), which provides updated guidance for ERISA plan fiduciaries with respect to the voting of proxies on individual securities held in employee benefit plan portfolios and the appropriateness of active engagement with corporate management by plan fiduciaries. In publishing the Bulletin, the DOL withdrew Interpretive Bulletin 2008-2 and generally reinstated the language of Interpretive Bulletin 94-2, with certain clarifications. The DOL was concerned that Interpretive Bulletin 2008-2 had been misunderstood in a manner that dissuaded plan fiduciaries from voting proxies and otherwise prudently exercising shareholders’ rights, particularly with respect to areas concerning environmental, social, and governance issues and active engagement with corporate management. View the Bulletin here. View a news release related to the Bulletin here.
The DOL has issued the first of several FAQs addressing the DOL’s new fiduciary rule, which was finalized in April 2016 (the “Rule”). The Rule, which will generally become effective on April 10, 2017, prohibits parties that provide fiduciary investment advice to plan sponsors, plan participants, and IRA owners from receiving payments that create conflicts of interest, unless the parties comply with a prohibited transaction exemption (“PTE”). The FAQs generally address how the Rule will be implemented and clarify a number of issues related to the new “best interest contract” and “principal transactions” PTEs. View the FAQs. View the DOL’s announcement of the FAQs.
Over the past several months, high profile class action lawsuits have been filed against plan sponsors and fiduciaries of very large 401(k) plans alleging breaches of fiduciary duty related to excessive plan administrative fees and underperforming investment options. A new class action lawsuit filed in the U.S. District Court of Minnesota raises concerns that plan sponsors and fiduciaries of relatively small 401(k) plans may also become targets of such suits. Similar to the class actions filed against fiduciaries of large 401(k) plans, plaintiffs in the case of Severson v. LaMettry’s Collision, Inc. allege their employer, its president, and its CFO breached their fiduciary duties by causing the employer’s 401(k) plan to pay excessive administrative fees, selecting imprudent classes of investments, and selecting investment options that were unnecessarily expensive. Unlike the other class actions, the LaMettry 401(k) plan is relatively small, having just over 100 participants and approximately $9.2 million in… Continue Reading
Fifth Circuit Addresses ERISA Fiduciary Duty of Appointing Fiduciary to Monitor an Appointed Fiduciary
The U.S. Court of Appeals for the Fifth Circuit, which includes Texas, upheld a district court judgment that the former owner of a privately-held company engaged in a prohibited transaction and breached his fiduciary duties of loyalty and prudence when selling shares of company stock to his former company’s leveraged employee stock ownership plan (“ESOP”) at prices in excess of the stock’s fair market value. Specifically, the court found that the owner influenced the outcome of the appraiser’s valuation of the stock to achieve a higher stock price, which resulted in the ESOP overpaying for the stock. The Fifth Circuit disagreed with the district court’s holding that the owner, who was also a trustee of the ESOP, breached his fiduciary duty to monitor the other two plan trustees whom he had appointed and whom he knew had breached their duties of loyalty and care. Perez v. Bruister, No. 14-60811 (5th… Continue Reading
The DOL has issued a final regulation defining who is a “fiduciary” of an employee benefit plan under ERISA (including an individual retirement account (“IRA”)) as a result of giving investment advice to a plan or its participants or beneficiaries. The DOL also issued a number of related prohibited transaction exemptions (including the “Best Interest Contract Exemption” and the “Principal Transactions Exemption”) and amendments to certain current prohibited transaction exemptions. The final rule broadly treats persons who provide investment advice or recommendations for a fee or other compensation with respect to assets of an employee benefit plan or IRA as fiduciaries in a wide array of advice relationships. Although the final rule maintains the same essential framework as the proposed rule, it includes a number of changes and clarifications which the White House has indicated are efforts by the DOL to “[streamline] the rule and exemptions to reduce the compliance… Continue Reading
An employer permitted participants in its 401(k) plan to transfer their account balances into the employer’s cash balance plan, where each participant’s account balance was based on hypothetical investments chosen by the participant. The employer was not required to and did not invest the trust assets in the investments chosen by the participants. The IRS determined that the transfers violated the anti-cutback provision in Code Section 411(d)(6) because the transfer eliminated participants’ actual separate accounts. Participants sued the employer for violating the parallel anti-cutback provision in ERISA Section 204(g)(1) and sought an accounting of the profits that the employer made on the spread between the plan’s actual investments and the hypothetical account balance investments. The U.S. Court of Appeals for the Fourth Circuit reversed the district court’s dismissal and reinstated the plaintiffs’ claims holding that financial injury is not a prerequisite for standing when the remedy being sought is disgorgement of… Continue Reading
ERISA fiduciary liability insurance policies protect fiduciaries and trustees of ERISA plans from personal liability. As fiduciary liability law changes, it is important to make sure that such policies cover the appropriate risks and to evaluate whether the coverages are sufficient and complete. Newer and more comprehensive policies not only cover breaches of fiduciary duty and administrative errors, but settlor and non-fiduciary functions and regulatory penalties as well. Companies should evaluate their policies and consider, depending on their needs, whether the following items are covered and/or should be covered under their policies: Coverage for costs and expenses of DOL and other regulatory audits/investigations. Coverage for claims involving settlor/non-fiduciary functions. Coverage for failures to comply with certain ERISA disclosure requirements. Coverage for ERISA 502(a)(3) equitable-relief claims. Coverage for non-exempt prohibited transactions under ERISA and the Internal Revenue Code. Coverage for plan benefit overpayments. Coverage to pay for costs involved in corrections… Continue Reading
In Tibble v. Edison International, announced on May 18th, the U.S. Supreme Court confirmed that fiduciaries have an ongoing fiduciary duty to monitor investments in retirement plans and to remove imprudent investments. The Court held that fiduciaries will not avoid potential liability simply because the six-year ERISA limitations period has run from the time the investment alternative for the retirement plan was originally selected, even if that original selection was prudent. The Court did not provide any further guidance on what the “duty to monitor” entails and instead remanded the case to the lower court to determine whether the fiduciaries in the case satisfied their duty to monitor. The opinion can be found here.