The ball dropped on 2016, but don’t drop the ball on your benefit plan compliance. As part of our annual tradition, we’re pleased to present this year’s Top Ten New Year’s Countdown for the reading pleasure of our fellow ERISA geeks. You may remember last year’s Top Ten list was set to Pop Culture themes that dominated 2014? Well, we’ve decided to embrace the Star Wars fever that currently has a firm grip on our society and devote our entire list to Star Wars’-themed tips. Get your lightsabers ready…
- This epic space opera list starts just where you’d expect it: A long time ago in a galaxy far, far away (called Congress)…there was born a law called the Patient Protection and Affordable Care Act. The law made it through infancy and even toddlerhood…but then it required reporting of a kind never seen before. If you’re reading this article, you likely have made it through the data collection process and you’re poised and ready to issue/file your first 1094s and 1095s. If not, hurry hurry as the deadlines are quickly approaching. While Notice 2016-4 did “automatically” extend the deadlines relating to the 2015 plan year, further extensions are no longer available and penalties could be assessed for failure to timely comply.
- The determination letter program dies and the Force Awakens. Yes, with the determination letter program all but gone, internal document compliance audits are going to be more important. If you haven’t already, catch the latest Star Wars film in the theater, then think long and hard about how your plan will retain its documentary compliance as you coast off into the future (in the millennium falcon). One thought – engage a law firm on the same five-year remedial amendment period – to perform a document audit and advise if any interim amendments are missing/improperly documented.
- May the force be with you, and may you never forget the second most important day of the year – March 15th (aka “409A day” for payments made under the short-term deferral exemption). We recommend marking a big red X on your calendar not to miss this one.
- Luke starts his life as an orphan, separated from his departed mother and his fallen father. It could be called an act of serendipity that leads him to discover a desperate message within the droid, R2-D2. It was that message that changed the trajectory of Luke’s life from that day forward. Don’t let your plans becomes orphans – either literally or figuratively as you might not benefit from a serendipitous intervention. Maintaining employee benefit plans is hard work. Plan fiduciaries need to be engaged to avoid drifting off into the abyss of the galaxy. The government is bound to come knocking (and assessing taxes or penalties) if this happens. Remember that an engaged, procedurally prudent process is the foundation of discharging the prudent expert fiduciary duty set forth under ERISA. Let’s start with quarterly meetings.
- A central theme adopted by Lucas in the Star Wars series is nature over technology. Think of it – the Ewoks overtake the Empire on Endor. With incredibly primitive weapons, they defeat the technologically-advanced imperial troupers. What’s the lesson? Getting back to the basics. It’s easy to get caught up in the next big trend in retirement plan consulting, plan design, annuity structure, you name it. But, peeling away the layers, the plan document is our guide. We start there and build with what the delegated fiduciaries deem to be in the best interest of the participants and beneficiaries. In all cases, start with the simple questions – what does the plan say? And is this in the best interest of our plan members?
- What’s the danger of being on auto-pilot? An X-wing fighter may be able to launch into action with the simple push of the button from its pilot, but to which galaxy is it headed? It’s easy to get caught in the rut of “that’s the way we’ve always done it” mode as a plan fiduciary. We take this time to recommend a step back. As a plan’s fiduciary it is important to develop and regularly consult a thoughtful strategy for plan compliance – not only the big things (e.g., is our plan investment structure appropriate for our demographic), but also the little things (e.g., are we giving the right disclosures in our new hire and open enrollment packets?).
- Every fiduciary needs a good co-pilot – you know, a Chewbacca (or “Chewie”, as he was known by his friends) to Han Solo’s ship – but you cannot expect your co-pilot to excel without receiving training. When a new co-pilot joins the fiduciary team/committee which has authority over plan matters, make sure that he/she receives training. Also, we recommend that plan fiduciaries actually read the governing plan documents and governance materials to ensure they actually understand the plan and their responsibilities. Best practice requires annual fiduciary training.
- And here’s where Darth Vader went wrong. He thought – and declared – that “[t]he Empire has a legion of loyal soldiers that are in endless supply.” This lack of respect for his minions should not be adopted by plan fiduciaries in their dealings with plan participants. No, no. Think of it: Just as Stormtroopers should be recognized as elite soldiers of the Empire, all plan participants should be recognized as elite members of the plan mission. This means plan fiduciaries must engage in a thoughtful review of plan design and fees to ensure they appropriately benefit and protect plan participants. Sure, it’s not 2007 and plan fees aren’t the only thing being discussed by the DOL and the plaintiffs’ bar, but plan fiduciaries should not relax their efforts to secure what it deems to be the best deal for the plan and its participants (given the services to be provided). After striking the initial deal, plan fiduciaries should periodically monitor all fees charged against the plan’s assets to ensure reasonableness.
- The Force is strong in some families. You can feel the power pulsing just beneath the surface…but remember, when the Force attempts to pull you to choose a family member or other related party to perform services for your company’s 401(k) plan, resist the Force and remember to avoid conflicts of interest and abide by your duty of loyalty as an ERISA fiduciary. It’s easy to think – “what’s the big deal, your sister General Organa (or Princess Leia, if you prefer) is great at her job and can handily do what we need” – but that is the Dark Side talking. A thorough conflict of interest and prohibited transaction analysis is necessary before going this route.
- And finally – it’s time for you to weigh in: Who would win in a battle between the Galactic Empire and Rebel Alliance? Okay, and who is your money on between the Department of Labor and the judiciary? We may know the answer on the latter sooner than the former with the new stated-based IRA guidance and fiduciary rule both catching a lot of colorful commentary from the private sector. 2016 may bring answers on whether the DOL’s interpretation of ERISA (i.e. to permit such state-based arrangements) will be upheld…
Everyone seems to be talking about last month’s Supreme Court decision in Tibble v. Edison International, even though its holding wasn’t all that momentous. But I’m not complaining. As an ERISA lawyer, I love when ERISA developments hit mainstream news because, for at least one brief fleeting moment, there is a connection between the ERISA world in which I dwell and the rest of the world.
That said, some question whether Tibble warrants the level of attention it is generating. Some say Tibble merely affirms a well-known principle of ERISA law—that is that an ERISA fiduciary has an ongoing duty to monitor plan investments. Others see Tibble as a reflection of enhanced scrutiny of the duty to monitor plan investments, as well as recognition of a statute of limitations that facilitates enforcement of that duty.
Specifically, the Supreme Court found in Tibble that because retirement plan sponsors, as fiduciaries, have a “continuing duty to monitor trust investments and remove imprudent ones,” plaintiffs may allege that a plan sponsor breached a duty of prudence by failing to properly monitor investments and remove imprudent ones. Further, the Court found that such a claim is timely as long as it is filed within six years of the alleged breach of continuing duty.
Facts: Tibble arose when current and former employees of Edison who were participants in a 401(k) savings plan offered by Edison brought suit against the company and other fiduciaries for alleged breaches of fiduciary duty. The alleged breaches occurred with respect to six retail class mutual funds selected for the savings plan, a group of three selected in 1999 and an additional group of three selected in 2002. The plaintiffs objected to these retail class mutual funds because similar institutional funds were available at a lower cost. Under ERISA, a plaintiff has six years after “the date of the last action which constituted a part of the breach or violation” to bring a claim. At commencement of the suit, the two groups of funds straddled the 6-year period from the date of their selection. If the only date that triggers the running of the statute of limitations is the date the funds were selected, the case would be simple. However, the law clearly provides a plaintiff with six years after the most recent action that constitutes a breach of fiduciary duty to bring their claim. Though this seems straightforward, what exactly comprises a breach or violation of a fiduciary duty has arguably not been clear.
In an attempt to resolve the uncertainty, the Ninth Circuit held that the continued offering of an allegedly imprudent investment is not sufficient on its own to trigger a new breach upon which plaintiffs can base a timely claim. Although the Ninth Circuit rejected the continued offering theory, it acknowledged that a showing of changed circumstances that occurred within the six-year period that would have prompted a replacement of existing funds may constitute a new breach upon which plaintiffs can base a timely claim.
The Supreme Court decided to clarify the issue and began by criticizing the Ninth Circuit for failing to consider the law of trusts in formulating its decision. Relying on trust law, the Supreme Court vacated and remanded the Ninth Circuit’s decision, holding that “a trustee has a continuing duty to monitor trust investments and remove imprudent ones,” and this continuing fiduciary duty allows a plaintiff to allege that “a fiduciary breached the duty of prudence by failing to properly monitor investments and remove imprudent ones.” So long as the alleged breach of the continuing duty to monitor the investment occurred within the six-year statutory bar, the claim is timely.
Where are we now? So where do we stand today? The Supreme Court has reiterated that a continuing fiduciary duty to review plan investments attaches to plan sponsors and fiduciaries; although there is still uncertainty with regard to the precise scope of that duty. The extent to which fiduciaries must monitor plan investments will surely be the subject of future litigation. In the meantime, plan sponsors and fiduciaries should review their current processes and procedures for monitoring ERISA plan investments in light of their recognized fiduciary obligations. They should ensure that their investment reviews are properly documented and that they take into account the reasonableness and allocation of plan fees, performance, diversification and all other relevant facts. If Tibble can prompt such reviews, then the headlines will have served a far greater purpose than a momentary validation of my professional relevance – they will have enhanced participant protections and reduced fiduciary exposure with respect to plan investments. In that case, the “ado” would be warranted.
In Duda v. Standard Insurance Company, a recent case decided by the Federal District Court in the Eastern District of Pennsylvania, we are reminded of the limits on the type of relief an employer may obtain for participants in its insured ERISA plans. In this case, the employer filed suit against the insurer of its long-term disability plan under Section 502(a)(3) of ERISA, which provides the following:
“A civil action may be brought…(3) by a participant, beneficiary, or fiduciary (A) to enjoin any act or practice which violates any provision of this title or the terms of the plan, or (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of this title or the terms of the plan.”
A suit brought by a fiduciary under 502(a)(3) is preferable since the de novo standard of review, which is less deferential to the party making the initial benefit determination, would apply. The court determined that the employer was not a plan fiduciary for purposes of making claims determinations, and therefore could not rely on this provision to sue the fiduciary that held such authority (i.e., the insurer). The court noted that even if the employer was considered to be a fiduciary, ERISA does not afford a fiduciary the right to sue if the relief sought can be obtained directly by the participant under 502(a)(1)(B), which provides the following:
“A civil action may be brought …(1) by a participant or beneficiary… (B) to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan or to clarity his rights to future benefits under the terms of the plan.”
Thus, an employer’s leverage, if any, to pressure insurers to pay benefits rests with the power to move the business to a different insurer. Of course, that leverage is significantly impaired if the insurer is not interested in keeping the business.
The Department of Labor (“DOL“) has responded to the concerns of the broker-dealer community as expressed in myriad comment letters concerning the 2010 proposed fiduciary regulations by adding the Best Interest Contract (BIC) exemption to the new proposed rule. The DOL suggests that this addition will minimize compliance costs and allow firms to set their own compensation structures (meaning commission-based fees, revenue sharing, 12b-1 fees and subTA fees) while acting in their client’s best interest. This exemption will be available when advising IRA owners, plan participants and small plans.
Here’s the catch that has drawn a mostly negative reaction from the broker-dealer community:
First: The BIC will be a formal contract committing the advisor and her firm to act with the care, skill, prudence and diligence that a prudent person would exercise based on the circumstances. The advisor and her firm must avoid misleading statements about fees and conflicts of interest. The DOL requires compliance with “impartial conduct standards.” These standards also mandate reasonable compensation for the service rendered.
The concerns: This is a roadmap for the plaintiffs bar as prudent persons can disagree on what is prudent in various circumstances, and reasonable fees may be reasonable to some and not to others. The high cost of “fee litigation” is already a known quantity. Besides, this is a contract, and contracts can be expensive on the front end to negotiate and on the back end when someone alleges a breach.
Second: The firm must warrant that it has adopted policies and procedures designed to mitigate conflicts of interest. This would require that the firm warrant that it has identified its conflicts and fee structures that might encourage an advisor to make recommendations not in the client’s best interest and has adopted measures to mitigate any harmful result that might occur due to the conflicts of interest. The DOL theory is that these warranties and fulfillment of their objectives will permit the firm to continue its compensation practices.
The concerns: This is a form of guarantee, and guarantees can be expensive to defend. Going through the process to “clean up” will be expensive as well and will likely require significant changes in the way many firms do business. This is a complex “answer” to a problem that will have many unexpected consequences, but one consequence that the industry expects is a broad refusal to advise small plans and IRAs since the cost of doing so will be prohibitive.
Third: There are required disclosures that must met in the BIC: (1) identify material conflicts of interest; (2) advise the client that the client can get information about all fees and recommended assets; (3) disclose whether proprietary products are being used and whether third party payments are being received; and (4) identify the required website that discloses the compensation structure between the firm and the advisor.
The concerns: This will add significant additional cost to the process. There is also some concern about potential anti-competitive hiring when compensation structures are disclosed.
Fourth: Two things cannot be in the contract: (1) exculpatory provisions limiting liability and (2) waiver of any right to participate in a class action or other representative court case.
The concerns: Being unable to limit exposure may be cost prohibitive when it comes to small plans and small accounts.
The DOL believes that the concerns are not so severe as to create the impact that the advisor industry believes will result. In fact, the DOL takes the position that this approach provides flexibility to “accommodate a broad range of business practices, while minimizing the harmful impact of conflicts of interest on the quality of advice.” It will surely be interesting to read the upcoming comment letters and to consider the testimony at hearings on the proposed regulation.
Prior Posts on This Topic
How many of you remember the classic children’s’ story “Are you My Mother?” by P.D. Eastman? In that delightful story, we follow a confused but determined baby bird who is looking for his mother. He sets off to find her, asking various creatures along the way (a dog, a cow, a plane) whether they are his mother, and in the end happily finds his way beneath her protective wing.
The parallels between this story and the proposed Conflict of Interest Regulations are clear (at least to some of us). The proposed guidance examines the various service providers encountered by retirement plans and IRA owners, as well as their participants and beneficiaries (“retirement investors”) and evaluates whether or not such service providers are fiduciaries who offer a protective wing. Moreover, the guidance expands the types of services which will be treated as fiduciary in nature, thus increasing the odds that the retirement investors will in fact find the fiduciary protection they seek.
ERISA has always defined a fiduciary to include:
- a named fiduciary,
- a person who exercises discretion with respect to management or administration of the plan,
- a person who exercises discretion with respect to management or disposition of plan assets, or
- a person who provides investment advice for a fee.
Years ago, regulations were issued to further define who would be regarded as a fiduciary by virtue of rendering investment advice for a fee. The recently issued proposed regulations seek to expand those old regulations to include a much broader category of service providers.
Specifically, under the proposed regulations, a person will be treated as providing the protective wing of a fiduciary if that person provides any of the following types of advice and satisfies the agreement requirement noted below:
- Recommendations as to the advisability of acquiring, holding, disposing or exchanging securities or other property – including a recommendation to take a distribution or reinvestment of a rollover;
- Recommendations as to management of securities or property;
- Appraisals, fairness opinions or similar statements regarding the value of securities or property in connection with acquisition, disposition or exchange of that property (but NOT in connection with an ESOP); or
- Recommendations of person(s) who will receive a fee or compensation for providing any of the above advice.
In addition to providing one of the services described above, the person must also (i) represent or acknowledge that he/she is acting as a fiduciary or (ii) render the advice pursuant to an agreement (written or verbal) that the advice is individualized to, or specifically directed to, the recipient for consideration in making investment/management decisions regarding plan property.
EXCLUSIONS: The proposed regulations provide a number of specified exclusions to the definition of fiduciary. For instance a person will not be treated as a fiduciary if s/he provides advice to an independent plan fiduciary who exercises authority regarding management or disposition of assets of a large plan (> 100 Participants or at least $100 million in plans assets) if that person satisfies certain requirements, including a disclosure requirement. A person also may not be treated as a fiduciary in certain swaps or securities based swaps if the plan is represented by an independent fiduciary and certain requirements are satisfied.
A number of other specific exclusions include:
- Employee (of plan sponsor) who provides advice to a fiduciary and receives no fee for the advice
- Provider of investment alternatives platform if the provider discloses in writing to the fiduciary that it is not acting as a fiduciary
- Selection and monitoring of investment alternatives that meet objective criteria specified by a fiduciary or provide to the fiduciary objective financial data comparisons with independent benchmarks
- Provision of financial reports and valuations for reporting / disclosure purposes
- Provision of certain investment education so long as the provider does not provide recommendations regarding specific investment products or alternatives
- Provision of certain asset allocation models and interactive investment materials
- Securities transaction exclusion for a broker dealer who executes a transaction pursuant to instructions of the fiduciary
- Lawyers, accountants and actuaries who provide professional assistance regarding a particular investment transaction
The proposed regulations provide a number of exemptions deigned to preserve business practices (such as common fee and compensation practices) in the delivery of investment advice. For instance, the Best Interest Contract Exemption provides conditional relief in connection with investment advice to “retail retirement investors” (i.e., participants/beneficiaries of participant-directed plans; IRA owners; sponsors of non-participant directed plans with < 100 employees under which the sponsor is a fiduciary regarding plan investment decisions). These exemptions will be discussed in a separate blog.
When the proposed regulation becomes effective (likely in 2016), plan sponsors, IRA owners and plan participants should be asking – “Are You My Fiduciary”? Understanding whether or not the protective wing of a fiduciary pertains to the plan or IRA will require an analysis of both the proposed expansion of the rule and its complex exceptions.
Acting on reaction to a proposed and subsequently withdrawn regulation from October 2010 and attempting to address concerns expressed by both interested parties to the initial proposed regulation and an economic analysis by the Council of Economic Advisors (that the Investment Company Institute considers flawed), the Department of Labor has issued a new proposed regulation expanding the definition of investment advice. The DOL’s stated purpose in doing so is to protect retirement plan and IRA investors from practices engaged in by some advisors whose interest in providing investment advice is conflicted and not in the best interest of the participant or IRA owner.
The proposed rule does not expand the definition of fiduciary per se, but instead it expands the areas of advice that are rendered by ERISA fiduciaries and covers most significantly investment recommendations, investment management recommendations and recommendations of parties who provide advice for a fee or manage plan assets. This has the effect of expanding the net to cover more advisors as fiduciaries. People who provide advice in these areas will fall under the ambit of “fiduciary” in the following situations:
- They represent that they are acting in a fiduciary capacity; or
- The advice they give is provided pursuant to an agreement, arrangement or understanding that the advice is individualized and directed to the plan participant or IRA owner for consideration in making investment or investment management decisions pertaining to the plan’s assets.
There are a number of specific and important carve-outs to the new rule generally intended to address the concerns expressed by the business and financial communities as well those expressed by a number of Members of Congress. We will address the carve-outs in follow-up posts.
The impact of the new rule is to cause brokers and insurance agents who render advice to plan participants and IRA owners to do so in compliance with ERISA’s fiduciary standard rather than the “suitability” standard under which they render advice today. The DOL’s position is that the suitability standard is not sufficient to prevent the rendering of conflicted advice that it believes costs retirees billions of dollars in inappropriate fees. The brokerage industry contends, in part, that the cost of compliance with the new rule, the enhanced risk of litigation, and the fact that fees must necessarily be higher to provide advice on an individual basis make the rule unworkable and that small plans and small investors will lose the ability to obtain investment advice and to continue to work with a trusted advisor. At a minimum, compliance with the new rule is expected to alter the way that brokerage houses do business.
Another concern that would impact all fiduciary advisors rendering advice to a plan on a fee basis that is not level is that they would engage in a prohibited transaction should they provide advice to a participant about rolling over her account to an IRA unless they enter into a complex Best Interest Contract to be discussed in a later blog. One contention is that this would tilt the playing field by giving advisors charging level fees to the plan an unfair business advantage.
There is now a 75-day comment period, and lines for and against the rule have generally been drawn. It’s possible that the new rule might be modified in response to comments, but the Administration is bound and determined to get the regulation finalized sooner rather than later.
Happy New Year!
As part of our annual tradition in helping retirement plan fiduciaries get started down the right path in the new year, we’re pleased to present our Top Ten New Year’s Countdown. But, wait, what’s better than a Top Ten Countdown list to kickoff 2015? How about a Top Ten list set to Pop Culture themes that dominated 2014? Well, here goes nothing…. Because we’re happy (clap along if you feel like a fiduciary without a roof):
1. It’s all About The Fees, about the Fees, No trouble. Another year, another reminder (thank you, Meghan Trainor) that fees should be closely scrutinized by plan fiduciaries. Participant fee disclosures are not the new kid on the block anymore; however, fiduciaries should still ensure that all required fee disclosures are complete, accurate and made timely. Plan fiduciaries should also periodically monitor all fees charged against the plan’s assets to ensure reasonableness.
2. The DOL Ice Bucket Challenge – I challenge you, within 24 hours – to get your payroll remittances in…. The DOL has not receded from its firm position that employee deferrals segregated from corporate assets should be paid into the plan “as soon as reasonably practicable”. So, now is as good a time as any to visit with payroll and/or HR to make sure an air-tight process is in place for timely transmitting employee contributions and loan repayments to the plan. Sure, 24 hours may not be a feasible deadline, but remember that the 15th business day of the following month is not a safe harbor for transmissions.
3. “Game of Thrones” is our new “Sopranos”, “Orange Is the New Black” and “IPS is the new Plan Document”. With heightened scrutiny of plan fiduciaries flowing in part from the so-called 401(k) fee litigation, retirement plan fiduciaries should pay particular attention to the contents of the plan’s investment policy statement (IPS) – or adopt one if it is missing. The review should be focused on ensuring that the IPS is consistent with the fiduciaries’ intent, the other governing plan documents and actual practice (e.g., do we actually use a watch list for 1-year before removing an underperforming manager?).
4. ‘Cause the players gonna play, play, play, play, play; And the haters gonna hate, hate, hate, hate, hate; Baby, I’m just gonna delegate, gate, gate gate. Delegate it all…. It all?? Being an ERISA fiduciary is hard and delegating certain responsibilities may seem attractive. Retirement plan fiduciaries are well-served to consider retaining professionals and service providers to help perform certain fiduciary tasks. Keep in mind, however, that the act of delegating is a fiduciary act – and even after delegating responsibilities, fiduciaries still have a duty to monitor plan service providers. Also, delegation needs to be permitted by the governing plan documents.
5. Justin Bieber went to jail again, but this doesn’t have to happen to you. Get fiduciary liability insurance. Okay, so ERISA fiduciary jail is unlikely, but personal liability for restoring to the plan amounts lost due to a breach of ERISA’s complex rules is a real possibility. Remember, that ERISA fiduciary liability insurance serves as a first line of defense for potential breach of fiduciary duties. These policies often come as riders to D&O coverage; consider getting your company’s risk manager or counsel engaged to review the scope and amount of the coverage to assess its appropriateness. Remember that a fiduciary liability insurance is not the same as a fidelity bond. As discussed here, a fidelity bond is separate and distinct from fiduciary liability insurance – and bond coverage is specifically required by law.
6. It’s not just for Actors at the Oscars, Take a “Group Selfie” when your committee next meets (Yes, that’s a thing now – and a real word according to the Oxford Dictionary). Sure, it may not be as exciting as the red carpet or post-Academy Awards parties, but holding regular plan fiduciary/committee meetings can be a grand ole’ time. Plan fiduciaries should meet periodically (we generally recommend at least quarterly) to consider information regarding performance, selection, and oversight of plan investments, investment managers, service providers, and other plan administrative matters. Minutes of the meetings should be kept to help demonstrate that the fiduciaries have engaged in a prudent process of analyzing and assessing relevant issues.
7. Avoid “Scandals” and Having to Call Olivia Pope’s Crisis Management Firm…. Provide fiduciary education and training to plan fiduciaries. It is another one of our favorite taglines – the simple act of providing fiduciary training to your organization’s ERISA fiduciaries is a major step in minimizing fiduciary liability. Training will educate fiduciaries as to their responsibilities and help establish a record of procedural prudence. There are some really nifty fiduciary training programs which can be easily customized for any group of plan fiduciaries.
8. I’m so fancy, You already know… I’ve reviewed my plan docs, and I’m good to go. Since fiduciaries should make decisions by following the applicable plan documents (e.g., plan, summary plan description, IPS, trust, committee charters, delegations, etc.), fiduciaries should make sure plan documents are consistent with intended plan design, with one another and with actual practice. This can be an arduous undertaking, but can pay huge dividends down the road in the event of litigation or an in-depth plan audit by the IRS or DOL.
9. “How I Met Your Mother” ends, but fee litigation continues. The list of 401(k) fee cases left on the docket is dwindling, but the Supreme Court has agreed to weigh in on a standard of review issue in the Tibble case. Moral of the story??? Stay tuned, pay close attention to items 1-7 above, pay really close attention to item 10 below and, when in doubt, get the help of retirement plan experts.
10. Let it Go, Let it Go, Can’t Let ERISA Concerns Hold you Back anymore…. If we’ve said it once, we’ve said it a thousand times – being a good fiduciary is all about having a procedurally prudent process. For each fiduciary decision you should: inquire; analyze; consider alternatives; get help and advice if needed; and document the process, actions and basis for the decision. Completing these tasks will help establish and demonstrate procedural prudence, and ERISA stress will melt away. Pop the bubbly once more!
What is a plan administrator’s obligation under ERISA to seek and obtain information potentially relevant to a participant claim where the participant has not provided it? The Fourth Circuit recently provided guidance on that issue in the case of Harrison v. Wells Fargo Bank, N.A. A copy of that opinion is available here.
Nancy Harrison was an online customer service representative for Wells Fargo Bank. In 2011, she underwent a thyroidectomy to remove a large mass that had extended into her chest and which caused chest pain and tracheal compression. She was unable to work and received short-term disability benefits under the Wells Fargo plan. While she was recovering and waiting for a second, more invasive surgery, her husband died unexpectedly, triggering a recurrence of depression and post-traumatic stress disorder (PTSD) related to the death of her children in a house fire a few years before.
Approximately three weeks after Ms. Harrison’s first surgery, Wells Fargo determined that she had recovered and it discontinued her short-term disability benefits. (It later provided short-term disability benefits after Ms. Harrison’s second surgery.) Ms. Harrison submitted a claim for reinstatement of the short-term disability benefits due to her depression, PTSD and related physical ailments. The outside claims administrator denied that claim. Ms. Harrison submitted an administrative appeal to Wells Fargo, supported by documentation from two of her physicians and a detailed letter from a relative who was her primary caretaker. She also disclosed that she was under the care of a psychologist and provided the psychologist’s contact information, as well as a signed medical release.. Wells Fargo submitted the administrative appeal to an independent peer review. The peer review physician contacted Ms. Harrison’s primary care physician, but he did not contact the psychologist. The peer reviewer ultimately concluded that in the absence of psychological records, it could not be determined whether Ms. Harrison’s psychiatric status limited her functional capacity. Wells Fargo denied Ms. Harrison’s administrative appeal and upheld the prior claim denial.
Ms. Harrison filed a lawsuit for benefits under ERISA. The district court found there was insufficient evidence of disability under the plan to conclude that Wells Fargo had abused its discretion in denying Ms. Harrison’s claim. On appeal, the Fourth Circuit reversed.
The Fourth Circuit held that by not contacting Ms. Harrison’s psychologist, Wells Fargo “chose to remain willfully blind” to readily available information that might have confirmed her claim of disability. The court noted that ERISA requires that an administrator use a “deliberate, principled reasoning process” in claims determination. It does not require that the plan administrator “scour the countryside in search of evidence” to bolster a participant’s claim. But where potentially relevant information is readily available, the court noted, ERISA does not permit an administrator to “shut his eyes” to that information.
In light of this appellate court opinion, plan and claims administrators are well-advised to affirmatively pursue all readily available information in the claims determination process, even where the claimant has not provided it as part of the original claim or appeal. Otherwise, a court may determine that the administrative claims process was deficient, resulting in a remand of the claim for further consideration. Furthermore, after the Supreme Court’s ruling in Hardt v. Reliance Standard Life Ins. Co., 532 U.S. 598 (2009), such a remand could be considered “some degree of success on the merits” in the litigation, entitling the claimant to an award of attorneys’ fees.
On October 17, 2014, the Internal Revenue Service published a guide entitled “Retirement Plan Reporting and Disclosure Requirements Guide.” The Service states that the Guide is intended to be a quick reference tool to assist plan sponsors and administrators and is to be used in conjunction with the Department of Labor’s “DOL Retirement Plan Reporting and Disclosure Guide” [sic]. The DOL Guide was last updated in August 2013 and is actually called “Reporting and Disclosure Guide for Employee Benefit Plans”.
The IRS Guide covers twenty-five basic notices and disclosures, and, of course, not all of them would pertain to a particular plan. The type of plan determines the number and frequency of participant notices/disclosures. The IRS Guide addresses eleven possible reports, and, as with disclosure, the requirement for reporting depends on the nature of the plan.
The DOL’s Guide identifies thirty-three possible disclosures including both Department of Labor and PBGC notices. It identifies nineteen possible DOL and PBGC reports. As with the IRS reports and disclosures, not all of these are required for every type of retirement plan.
According to the IRS, the IRS Guide is not intended to be an exhaustive list of reporting and disclosure items but is meant to cover certain basic reporting and disclosure requirements for retirement plans required under the Internal Revenue Code and the parts of ERISA that are administered by the Service. It, along with DOL’s Guide, demonstrate how overwhelming the compliance obligations are in just the reporting and disclosure aspect of operating a retirement plan. The regime begs for analysis of the value of all the disclosures (are they read, and, if so, are they understood?) and reports (what can the IRS, DOL and PBGC do with so many of them?).
Both Guides state that not all reports and disclosures are listed. This fact, along with the myriad items that are listed, suggests that the reporting and disclosure regime is cumbersome, inefficient and expensive. It’s time for an evaluation to determine the benefit to participants and plan sponsors in having so much information produced in so many different forms. Surely there must be ways to simplify the reporting and disclosure regimes and make the information more valuable – particularly to participants, many of whom seem overwhelmed by it all.
If you keep an eye on the investment world at all, you’ve certainly heard the news – Bill Gross, co-founder and chief investment officer of Pacific Investment Management (PIMCO), is leaving the very company he started more than 40 years ago. In technical terms, Gross is what you call a “big deal” in the investment world. He has been at the helm of PIMCO for more than four decades leading the company to a whopping $2 trillion in assets under management. Gross has received countless awards and accolades in the industry for his thought leadership and successes, and is also a well-known writer on investment matters.
Until Friday, Gross managed the PIMCO Total Return fund (PTTCX). This bond fund ranks as one of the largest mutual funds with a reported $221.6 billion in total fund assets. And, perhaps more importantly for our readership, this bond fund is a pillar in many 401(k) investment platforms. Speculation and rumors swirl about the circumstances surrounding Gross’ departure from PIMCO (as well as his decision to join Denver-based Janus); however, one thing is certain – Gross’ departure from PIMCO means that many 401(k) plan fiduciaries are (or soon will be) discerning how to react.
Many investment fiduciaries may choose to put the fund on the plan’s “watch list” in the wake of this manager change. Departure of such an important part of the PIMCO investment team certainly could be grounds for closer scrutiny of the Total Return fund.
We thought these events presented a good opportunity to revisit the procedural prudence concept and provide an ERISA attorney’s perspective on how to handle this type of change. It goes without saying, but we’ll say it anyway, that best practice dictates establishment of a written Investment Policy Statement (IPS) that is kept current to ensure investments are made in rational manner and further the purpose of plan and its funding policy. If the plan’s IPS contains a procedure for monitoring managers or placing them on a “watch list” (as most do), then the plan fiduciaries should follow such policy and document those actions. Reminder – what is worse than not having an IPS in place? Not complying with the IPS!
Being a plan fiduciary, especially one with investment oversight, is hard work. Investment fiduciaries need to establish a thoughtful fiduciary decision-making process pursuant to which they may identify relevant information; gather that information from competent, independent sources; give it due consideration; make a decision consistent with the information; and document the decision. Often times investment experts are engaged to assist plan fiduciaries in making investment decisions. Remember, use of these types of experts may be appropriate, particularly when plan fiduciaries don’t have substantial investment expertise. However, the input of investment fiduciaries should be evaluated pursuant to fiduciary process (not simply rubber stamped without consideration!).
All in all, plan fiduciaries with plan investments in the PIMCO Total Return fund are now faced with making a thoughtful decision on retention and monitoring of the fund. This decision is not a simple one and requires careful consideration of the IPS, governing plan documentation and, ultimately, what is perceived to be in the best interest of plan participants and beneficiaries.
So, what do you think, is Gross’ departure alone grounds to putting the PIMCO Total Return fund on the “watch list”?