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Court Finds Breach of Fiduciary Duty Against Broker for Failure to Explain Interaction of Stop-Loss and Self-Funded Health Plan Coverage
In Express Oil Change, LLC v. ANB Insurance Services, Inc., the sponsor of an employee health plan (the “Employer”) decided to convert its funding for the plan from a fully-insured to a self-funded basis. In preparation for the conversion, the Employer sought the advice and expertise of ANB Insurance Services, Inc. (the “Broker”) with implementation of the self-funded plan (the “Plan”) and procurement of the associated stop-loss insurance coverage. Apart from providing benefit consulting services to the Employer, the Broker had a long-standing and close relationship with the Employer as its agent for various other types of insurance coverage. The terms of the newly self-funded Plan provided for a $1 million lifetime maximum per participant on out-of-network benefits, but no such limit on in-network benefits. The Employer erroneously thought that the lifetime maximum applied to both in-network and out-of-network benefits and purchased a stop-loss policy with a deductible of $75,000… Continue Reading
Second Circuit Reaffirms that Moench Presumption Applies Only When Plan Terms Require Investment in Employer Stock
The U.S. Court of Appeals for the Second Circuit affirmed, in part, and vacated, in part, a fiduciary breach lawsuit against the investment committees of two eligible individual account plans. Participants sued the investment committees claiming that the decision to offer an employer stock fund was imprudent. The Second Circuit recognizes the Moench presumption—the presumption of prudence when a plan fiduciary retains employer securities as an investment option as required by the terms of the plan document. Although the district court applied the Moench presumption to both plans, the terms of only one plan required investment in employer stock; the other plan merely permitted investment in employer stock. Thus, with respect to the second plan, the Second Circuit vacated the dismissal and reinstated the claims and the derivative claims against the investment committee. McKevitt v. UBS AG, No. 12-1662 (2d Cir. Feb. 27, 2013).
4th Circuit Holds that the Limitations Period for ERISA Claims of Imprudent Plan Investments Commences with Initial Fund Selection and Does Not Continue With Ongoing Monitoring of Funds, Absent Material Change in Circumstances
A group of participants in Bank of America’s 401(k) plan sued alleging the bank engaged in prohibited transactions and breached its fiduciary duty by selecting bank-affiliated mutual funds despite the funds’ poor performance and higher fees in comparison to other available investment alternatives. The participants conceded that the initial fund selection was outside of ERISA’s general six-year limitations period. Nevertheless, the participants argued that the bank’s failure to remove the bank-affiliated mutual funds at meetings of its benefits committee, which occurred within the limitations period, constituted new prohibited transactions and new breaches of its fiduciary duty to monitor plan investments. The 4th Circuit disagreed, reasoning that a decision to continue certain investments, or even the bank’s failure to act, cannot constitute a “transaction” for ERISA purposes; therefore, the only transaction upon which the participants could assert a prohibited transaction claim was the bank’s initial selection of the bank-affiliated mutual funds.… Continue Reading
Liability for Fiduciary Breach Not Dischargeable in Personal Bankruptcy
The Department of Labor (“DOL”) sued the president of several related companies to establish his personal liability for more than $67,000 in employee contributions never remitted to the employer sponsored benefit plans and to prevent him from discharging this liability in his pending personal bankruptcy action. Over a nearly three-year period, the companies withheld but never remitted the employee contributions to the companies’ group health and 401(k) plans (the “Plans”). The court concluded that, under ERISA, the president was a “functional fiduciary” of the Plans because he exercised discretionary control over plan assets—the employee contributions—when he retained those funds in the companies’ general assets to pay other corporate debts, rather than timely remitting them to the Plans as required by ERISA. The president’s conduct also violated several other ERISA provisions, including the duty of loyalty, exclusive benefit rule, and prohibited transactions rule. Accordingly, he was personally liable for the unremitted… Continue Reading
Presumption of Reasonableness Standard Does Not Apply at Pleading Stage and SEC Filings Incorporated by Reference in a Summary Plan Description are Fiduciary Communications
Plan participants sued claiming breach of fiduciary duty relating to an employee stock ownership plan (“ESOP”) offered as one investment option in the employer’s defined contribution, participant directed retirement plan. The trial court dismissed the suit for failure to state a plausible claim for relief. The 6th Circuit reversed the dismissal, holding that (1) the presumption of reasonableness standard applied to an ESOP fiduciary’s decision to remain invested in employer securities does not apply at the pleading stage and (2) SEC filings, when incorporated by reference into a Summary Plan Description (“SPD”), are a fiduciary communication under ERISA. First, the court clarified that the presumption of reasonableness standard is not appropriately applied at the pleading stage because the presumption can be overcome “when applied to a fully developed evidentiary record.” The court reasoned that while ERISA 404(a)(2) generally abrogates an ESOP fiduciary’s duty to diversify investments, the fiduciary is not… Continue Reading
IRS Issues Final Regulations Permitting Plan Sponsors to Eliminate Prohibited Payment Options
Under Internal Revenue Code (“Code”) section 436, unless a defined benefit pension plan sponsored by a debtor in bankruptcy is fully funded, the plan may not make “prohibited payments” (i.e., lump sum payments or payments in any other form that exceed the monthly amount under a single life annuity). Moreover, the anti-cutback rule in Code section 411(d)(6) prohibits a plan from being amended to eliminate an optional form of benefit. On November 8, the IRS issued a limited exception to the anti-cutback rules to permit a plan sponsor in bankruptcy to amend its plan to eliminate prohibited payments such as lump sums. The exception applies if the following four conditions are satisfied: first, the enrolled actuary certifies that the plan is less than fully funded; second, the prohibition on making prohibited payments arises because the plan sponsor is a debtor in bankruptcy; third and fourth, the bankruptcy court must issue… Continue Reading
Liability for Fiduciary Breach Not Dischargeable in Personal Bankruptcy
The Department of Labor (“DOL”) sued the president of several related companies to establish his personal liability for more than $67,000 in employee contributions never remitted to the employer sponsored benefit plans and to prevent him from discharging this liability in his pending personal bankruptcy action. Over a nearly three-year period, the companies withheld but never remitted the employee contributions to the companies’ group health and 401(k) plans (the “Plans”). The court concluded that, under ERISA, the president was a “functional fiduciary” of the Plans because he exercised discretionary control over plan assets—the employee contributions—when he retained those funds in the companies’ general assets to pay other corporate debts, rather than timely remitting them to the Plans as required by ERISA. The president’s conduct also violated several other ERISA provisions, including the duty of loyalty, exclusive benefit rule, and prohibited transactions rule. Accordingly, he was personally liable for the unremitted… Continue Reading
Eleventh Circuit Holds No Fiduciary Breach in ESOP Stock Drop Case
The U.S. Court of Appeals for the Eleventh Circuit affirmed dismissal of the claim by plan participants that The Home Depot had violated its fiduciary duties with respect to the ESOP by continuing to offer employer stock as an investment option after certain accounting adjustments caused earnings to be restated and the stock price to fall. Although ultimately the Eleventh Circuit upheld the district court’s decision, it overruled the district court on several points. First, the district court had determined that the plaintiffs’ prudence claim was really a diversification claim in disguise (ESOPs are exempt from the diversification requirement). Alternately, the district court had held that even if the claim were properly a prudence claim, the claim would fail because the participants did not allege that The Home Depot was on “the brink of financial collapse.” The Eleventh Circuit determined that this was a prudence claim, not a diversification claim.… Continue Reading
Federal District Court Holds Fiduciaries Liable for Breach for Excessive Fees and Imprudent Investments
The U.S. Federal District Court for the Western District of Missouri determined that plan fiduciaries breached their fiduciary duties by failing to monitor recordkeeping costs, negotiate rebates, and prudently select and retain investment options. This is a federal district court decision and it differs from positions taken by some federal circuit courts which are precedential, but whether this decision is judicial activism or a new trend will need to play out over time. It is a case worth noting in light of the U.S. Department of Labor’s recent initiatives on plan fee disclosure whose compliance deadlines are rapidly approaching. The court considered the revenue sharing agreement with Fidelity for recordkeeping services, as assets of the plan grew, revenue sharing with Fidelity would also grow—even if Fidelity provided no additional services. If assets declined, Fidelity would request a payment to make up the loss of revenue. The fiduciaries never calculated the… Continue Reading
Bank Is Not Fiduciary and Prohibited Transaction Does Not Occur When Sweeping Funds from Employer Bank Account
The U.S. Federal District Court for the Southern District of Texas dismissed claims that a bank was acting as an ERISA fiduciary when it swept the corporate bank account of a financially distressed employer pursuant to its contract with the employer. The employer had failed to timely remit withheld employee deductions for the health plan to the third party insurer. When the employer entered bankruptcy, the insurer sued the bank under ERISA for the amount of the withheld deductions. The insurer claimed that the bank was a fiduciary and had engaged in a prohibited transaction. The court found that the bank was not a fiduciary because it did not have discretionary control over plan assets nor discretion over administration of the plan. The court further found that the bank did not engage in a prohibited transaction because it did not engage in any transactions with the plan. The transaction in… Continue Reading
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