At the end of last month, Judge Laughrey handed down her decision in Tussey v. ABB, Inc. (W.D. Mo., No. 2:06-CV-04305). In their simplest recitation, the facts of Tussey v. ABB are that ABB selected Fidelity to provide not only recordkeeping and other administrative services to its 401(k) plans, but also certain investment management services through one of Fidelity’s affiliates. During the time period at issue in this lawsuit, Fidelity also provided services to ABB in other capacities, including recordkeeping services for ABB’s defined benefit plan, non-qualified deferred compensation plan, health benefits, and payroll services (collectively referred to as “corporate services” by the court). Plaintiffs brought claims on behalf of a class of present and former ABB employees who are participants in ABB’s 401(k) plans alleging various breaches of fiduciary duties on account of ABB’s relationship with Fidelity, ABB’s management of the plans and Fidelity’s treatment of “float” income (i.e., earnings resulting from the short-term investment of funds held in accounts used to facilitate benefit plan transactions).
Following a four-week bench trial which concluded in January 2010, Judge Laughrey issued an 81-page decision on March 31st finding that the ABB Defendants (hereinafter “ABB”) and Fidelity Defendants (hereinafter “Fidelity”) each breached certain of their fiduciary duties under ERISA. Specifically, the Court found that the: (1) ABB violated its fiduciary duties by (i) failing to monitor recordkeeping costs, (ii) failing to negotiate rebates from either Fidelity or other investment companies utilized on the plan’s investment platform, (iii) selecting more expensive share classes for the plan’s investment platform when less expensive share classes were available, and (iv) removing the Vanguard Wellington Fund and replacing it with Fidelity’s Freedom Funds (i.e., Fidelity’s target-date retirement product); (2) ABB and its Employee Benefits Committee violated their fiduciary duties by paying Fidelity an amount that exceeded “market costs” for plan services in order to “subsidize” the corporate services provided to ABB by Fidelity; (3) Fidelity breached its fiduciary duties by failing to distribute “float” income solely for the interest of the plans’ participants and beneficiaries; and (4) Fidelity violated its fiduciary duties by transferring float income to the plans’ investment options rather than the plans themselves.
While the court did find multiple breaches of fiduciary duties, those findings were largely based on ABB’s detailed investment policy statement (“IPS”) which mandated that the plan’s fiduciaries undertake certain specific actions (e.g., when multiple mutual fund share classes were made available, ABB was required to choose the share class with the lowest “cost of participation”). In fact, while Tussey v. ABB may be noteworthy because it the first “401(k) fee case” to award significant damages to the plaintiffs, it may be more noteworthy for some of the arguments it rejected and for some of the reasons it declined to assess liability. Some of the most interesting “take-aways” from the case include:
- The court specifically states that a plan may choose revenue sharing as its model for compensating its recordkeeper and, perhaps more importantly, recognized that the use revenue sharing arrangements is not per se imprudent.
- The court did not find that there was a duty to disclose revenue sharing to participants.
- The court recognized that a common method for determining the reasonableness of those fees is to examine the expense ratios of various investments (but also found that this method was not sufficient in ABB because of ABB’s IPS).
- The court declined to find that there was a duty for a large plan to offer separate accounts and/or co-mingled funds. In fact, the court recognized that even if separate accounts might be more cost effective, it was not imprudent for a plan fiduciary, such as ABB, to also weigh other factors, such as SEC oversight and the method of reporting asset valuation, in deciding what investment options to offer in a plan.
- The court ruled that ERISA fiduciaries are not required to make the “best choice”, just a prudent choice.
The Tussey v. ABB decision will by no means radically alter the litigation landscape or benefit plan governance. Nevertheless, the decision offers a good reminder of certain “best practices” for plan fiduciaries. Some of these best practices include:
- Ensuring that the plan is operated in compliance with its plan documents (which, according to ABB, may include the IPS).
- Establishing thoughtful decision-making processes for selecting and monitoring plan service providers and plan investment options. (And, following that process.)
- Periodically reviewing investment processes against the IPS the ensure consistency (or consider retaining an investment fiduciary to perform this function). For example,
- Ensuring that the addition or removal of a fund complies with the IPS’s designated procedures.
- If the IPS contains a policy for monitoring managers or placing them on a “watch list”, following such policy.
- Using experts as appropriate, but evaluating their input pursuant to fiduciary process (e.g., give expert input due consideration and appropriately document the ultimate decision).
- Thoroughly documenting the basis for all fiduciary decisions in meeting minutes or otherwise.
The Eleventh Circuit Court of Appeals recently ruled that a district court’s remand of a benefits claim to the plan administrator is not appealable to the circuit court. For a copy of the court’s opinion in Young v. Prudential Ins. Co., 2012 WL 538955 (11th Cir. Feb. 21, 2012), click here.
The plaintiff in Young submitted a claim for long-term disability benefits, which was denied by Prudential. After she exhausted her administrative appeals, the plaintiff sued for benefits. On cross motions for summary judgment, the district court found in favor of the plaintiff and remanded the case to Prudential for reconsideration of whether the plaintiff was disabled. The district court clerk then entered what purported to be a final judgment and closed the case. Prudential initiated an appeal to the Eleventh Circuit, and while that appeal was pending, Prudential (in its capacity as plan administrator) determined that the plaintiff was disabled.
On appeal, the Eleventh Circuit held that it did not have jurisdiction because the district court’s remand was not a “final decision” under 28 U.S.C. § 1291. The remand did not end the case, the Eleventh Circuit noted, because it left unresolved whether the plaintiff was entitled to disability benefits. The district court therefore retains jurisdiction over the matter until a final decision on that issue is made.
This ruling on the limits of appellate jurisdiction over remand orders is in accord with similar decisions from the First, Eighth and Tenth Circuits.
Although the volume of so-called “stock drop” litigation has decreased somewhat in recent years, decisions announced in February and March, 2012, show this is still an issue to follow. The plaintiffs of Pfeil v. State Street Bank and Trust Company (2012 WL 555481 (6th Cir. 2012)) and In Re: BP ERISA Litigation (case number 4:10-md-02185, S.D. Texas (March 30, 2012)) alleged that ERISA fiduciaries to defined contribution plans breached their duties of prudence by continuing to allow participants to invest in company stock during the time periods leading up to the financial decline of the companies sponsoring the plans. The outcomes of each of these cases are opposite to the other due to differing applications of what has come to be known as the Moench presumption.
We last wrote of the Moench position in a February 6, 2012 blog entry. The presumption provides that a plan fiduciary is presumed to have acted prudently in making the determination to offer and continue to offer company stock as an investment. It can be rebutted by showing that the fiduciary abused its discretion in investing in employer securities. Abuse of discretion may be shown by evidence of fraud, conflict of interest, fiduciaries’ knowledge of the impending financial collapse of the company, or that reasonable fiduciaries could not have reasonably believed that continued investment in employer securities was prudent.
In Pfeil, the Sixth Circuit held a plaintiff need not plead enough facts to overcome the presumption in order to survive a motion to dismiss. State Street, an independent fiduciary for certain GM retirement plans, was sued by participant-plaintiffs alleging that State Street should have known by July 2008 that GM stock was an imprudent plan investment. The bank did not divest GM stock until five weeks before GM declared bankruptcy. In allowing the case to go forward, the court held that while State Street was entitled to the Moench presumption, the presumption may only be applied to a fully developed evidentiary record.
In contrast, the Southern District of Texas, in weighing the BP litigation, applied the Moench presumption at the motion to dismiss stage, holding that the BP plan fiduciaries were presumed to have acted prudently in continuing to offer BP stock as an investment option to plan participants following the Deepwater Horizon disaster. In so holding, the court found that the plaintiffs had not shown that plan fiduciaries were aware of non-public information that would have prompted removal of company stock from the investment line-up, that the oil spill disaster was not a novel risk unknown to investors, and that the 55% drop in BP stock price was not of a magnitude to call into question BP’s continued viability.
As the Pfeil case has been remanded to the court of the Eastern District of Michigan, it remains to be seen whether the plan participants can muster the evidence to prove that State Street breached the fiduciary duty of prudence. In any event, the presumption of prudence is still something to Moench on…
On April 12, the IRS released proposed regulations regarding the collection of the fee for the Patient-Centered Outcomes Research Trust Fund (the “Fund”) under the Patient Protection and Affordable Care Act (“PPACA”). The Fund will be used to pay for the Patient-Centered Outcomes Research Institute which has the goal of helping health care providers and consumers make informed health decision by synthesizing research comparing the outcome effectiveness of various treatments.
Who Pays for This
Here’s the kicker: insurers and self-insured health plans get to pay for this, along with multiemployer plans, state and local governmental plans, stand-alone VEBAs and other health plans. We focus primarily on private employer plans, but many of the rules apply similarly to other types of plans.
Initially, the fee is $1 per covered life. It will first apply for plan or policy years ending between October 1, 2012 and October 1, 2013, which means it is coming soon. After October 1, 2013, it increases to $2 per covered life until October 1, 2014. After that, it is indexed based on projected increases in per capita medical expenditures. It is set to expire on October 1, 2019. The tax return to pay the fee is generally due by the end of July following the end of the applicable plan or policy year.
Overview and “Gotchas”
Generally, the proposed regulations provide that the fees apply to policies or plans that provide medical coverage. Insurers pay the fee on behalf of insured plans, although plan sponsors of insured plans will likely see this cost passed along to them in the form of higher premiums. The plan sponsor generally pays the fee on behalf of self-funded plans. However, within that deceptively simple broad framework, there are several nuances and some potential “gotchas” that may surprise those familiar with other PPACA requirements, such as:
In a recent decision, the Sixth Circuit Court of Appeals upheld an indemnification of multiemployer plan withdrawal liability in an collective bargaining agreement.
In the case, the employer and labor union had bargained that the union would indemnify the employer for any withdrawal liability from the multiemployer plan. The union, however, subsequently disclaimed its representation of the employees. As a result of that disclaimer, the union was no longer the exclusive bargaining representative of the affected employees and the collective bargaining agreement terminated. As a result, the employer effected a withdrawal from the multiemployer pension to which it had been obligated to contribute and incurred a substantial withdrawal liability.
It so happened that the pension fund in question was the Central States Southeast and Southwest Areas Pension Fund, which is known to have had funding problems for some time. When the pension fund assessed withdrawal liability on the employer, the employer sought indemnification from the union. Upon a challenge on the enforceability of that indemnification provision, the court upheld the provision reasoning that it was analogous to purchasing fiduciary liability insurance, which is expressly permitted under ERISA Section 410.
While this case may be unique on its facts, it may prove helpful to contributing employers to multiemployer pension plans who wish to have the labor union they are negotiating with share some or all of the pain of a withdrawal liability from a multiemployer plan. The holding could also potentially be used to support passing along surcharges or other costs of multiemployer plan participation to the union, assuming the union is willing to agree. Employers entering into union negotiations should consider whether this protection (or something like it) is worth pursuing.
Update (2:45 PM): As expected, President Obama has signed the JOBS Act into law.
The JOBS Act is expected to be signed by President Obama today. According to the Act, it is intended:
To increase American job creation and economic growth by improving access to the public capital markets for emerging growth companies.
The Act includes provisions relating to crowdfunding, access to capital markets, exemptions to encourage small company capital formation, increased private company shareholder threshold for registration, and reduced public company compliance and disclosure burdens for “emerging growth companies.”
In addition, Title I of the Act “ Reopening American Capital Markets to Emerging Growth Companies,” includes changes to executive compensation disclosure requirements for emerging growth companies.
Emerging Growth Company. An emerging growth company means a company with total annual gross revenues of less than $1 billion (indexed for inflation). Only companies with an IPO after December 8, 2011 can qualify as an emerging growth company. The company loses status as an emerging growth company upon the earliest of:
- the last day of its fiscal year in which its annual gross revenues are $1 billion or more;
- the last day of its fiscal year five years after its IPO;
- the last day of its fiscal year in which it has, during the previous 3-year period, issued more than $1 billion in non-convertible debt; or
- the date it is deemed to be a “large accelerated filer.”
Executive Compensation. An emerging growth company is exempt from the following requirements:
- the say on pay advisory vote; and
- the say on golden parachute advisory vote.
Once the company no longer qualifies as an emerging growth company it must include a say on pay advisory vote not later than:
- the date three years after its IPO (if the company was an emerging growth company for less than 2 years); and
- the date one year after it is no longer an emerging growth company (if the company was an emerging growth company for 2 or more years).
Emerging growth companies are also exempt from the following Dodd-Frank required disclosures (once the rules are adopted):
- “pay versus performance” – required disclosure of the relationship between compensation actually paid and company financial performance; and
- “pay ratios” – the ratio of the median annual total compensation of all employees (except the CEO) compared to the CEO’s annual total compensation.
An emerging growth company may also qualify as a “smaller reporting company” for purposes of scaled executive compensation disclosures available to smaller reporting companies under current rules.
Other Title I Provisions. Title I includes a number of other provisions for emerging growth companies including: reduced financial disclosures, delayed application of certain accounting pronouncements, the availability of confidential treatment for a period of a draft registration statement, relief from certain internal controls audits, and a transition period for certain auditing standards.
Opt-In Right. An emerging growth company may choose to not take advantage of these new exemptions and instead comply with the requirements for a non-emerging growth company. However, the decision to opt-in must be made at the time of the IPO, is all or nothing (no cherry picking), and the company must continue to comply with the non-emerging growth company standards for as long as it remains an emerging growth company. In other words, if an emerging growth company opts-in, there is no opting-out.
Regulation S-K. Title I also requires the SEC to review Regulation S-K and report to Congress within 180 days as to how to streamline the registration process.
Takeaway. The Act eases the reporting and compliance burden for emerging growth companies giving them easier access to public capital markets. Unlike other portions of the Act, the emerging growth company provisions are effective upon enactment. As a result, pre-IPO companies will want to move quickly to work with counsel to determine whether and how to take advantage of this new relief and the requirements for maintaining emerging growth company status.
BankBryanCave.com Post on the JOBS Act (Update June 8)
This post is the fifth and final post in our BenefitsBryanCave.com series on five common Code Section 409A design errors and corrections. Go here, here, here, and here to see the first four posts in that series.
Code Section 409A abhors discretion. One concern with discretion is that it could lead to the type of opportunistic employee action or employer/employee collusion that hurt creditors and employees during the Enron and WorldCom scandals.
Another concern is that discretion could be used opportunistically to affect the taxation of deferred compensation. Consider an employment agreement with a lump-sum payment due at any time within thirteen months following a change in control, as determined in the employer’s discretion. This provision would permit the employer to pick the calendar year of the payment. Because non-qualified payments are generally taxable to the recipient when paid, this type of provision would allow a company to essentially pick the year in which the employee is taxed on the payment. In this situation, the IRS would be concerned that the plan participant (who often has great influence with the company) would collude with the company so that the resulting payment was of most tax benefit to the participant.
Code Section 409A addresses this problem by restricting the timing of a deferred compensation payments following a triggering event to a single taxable year, a period that begins and ends in the same taxable year, or a period of up to 90 days that could potentially span two taxable years. If the “up to 90 day period” approach is taken, Code Section 409A also requires that the service provider not have the right to designate the taxable year of the payment. Most plans provide for payments within a 90 day period following the appropriate Code Section 409A triggering event.
Plans are occasionally drafted using a payment period longer than 90 days. Fortunately, the IRS allows correction of these over-long payment periods. The correction is to amend the plan to either remove the over-long payment period from the plan or to provide for an appropriate period of time for the payment. This amendment can even occur within a reasonable amount of time following the Code Section 409A triggering event, but penalties would apply. As always, certain correction documents must be filed with the IRS.