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Carol Buckmann | Pension360

It’s All In The Fine Print: Will Your Fiduciary Insurance Cover You When You Need It?


Carol Buckmann is an attorney who has practiced in the employee benefits field for over 30 years. This post was originally published at Pensions & Benefits Law.

Will that insurer your company has been paying premiums to for all of these years stand behind you if you are sued for ERISA violations?  Have you just been relying on a broker to give you the coverage you need?

I previously wrote about a decision in which CIGNA’s insurer was permitted to deny coverage for fiduciary breach due to a fraud exclusion in its policy.   We have since had another decision from an appeals court in Louisiana in which fiduciaries being sued by the U.S. Department of Labor were denied coverage under each of three separate policies they thought would provide them with legal defense costs and cover any awards assessed against them.  Again, the reason was buried in the policy fine print, which even the brokers didn’t seem to understand, if the facts set out in the decision are any indication.

The facts boil down to the following:  Plaintiffs had three policies: a D&O policy, fiduciary liability insurance and excess fiduciary coverage.  They were sued by the DOL following a formal investigation for selling stock to an ESOP at an inflated price, but the court ruled that the policies didn’t cover the plaintiffs for the following reasons:

  • The policies didn’t cover actions taken before the effective date.
  • The D&O policy didn’t cover ERISA claims at all.
  • Plaintiffs failed to give notice of the claims during the policy period, where the claim was specifically defined as including an investigation by the Department of Labor or the Pension Benefit Guaranty Corporation.
  • The excess coverage didn’t kick in until the policy limits in the basic policies had been reached (which was not possible given the court’s other rulings.)

The plaintiffs were also told that they couldn’t amend their complaint to include the brokers who they claimed were supposed to be providing them with specific coverage, but failed to do so.

No one wants to wade through the details of these policies, but those who fail to have them reviewed by legal counsel may be in for rude surprises later on.  We regularly speak with very competent  employee benefits professionals who confuse the required ERISA bonding coverage (which provides recovery to the plan, not the fiduciaries) with fiduciary liability insurance, or who think D&O policies cover their ERISA plan committee actions (many such policies either don’t cover ERISA claims at all, or don’t cover lower level committee members).  We frequently are told that a plan sponsor maintains fiduciary liability insurance, only to be sent the ERISA bond when we ask to see a copy of the policy.  In many of those cases, we have to deliver the bad news that the fiduciaries have no personal coverage at all.

Clearly, the time to review coverage and obtain any required endorsements is not when the accusations of fiduciary breach are raised.  Just a few among the points to be considered in a thorough review of coverage are the following:

  • Your broker is not a lawyer.  Don’t rely on her to interpret legal clauses in your policy. Get a qualified independent review.
  • Don’t assume that employer indemnification obligations are a substitute for coverage or will cover any gaps in coverage.  There will be legal constraints (for example, under state corporate law) on the company’s ability to provide full indemnification and the commitment may become worthless in the event of bankruptcy or other financial distress.
  • Understand the exclusions in your policy and find out whether endorsements are available to eliminate some of them.
  • Consider whether your policy limits should be increased.  Courts seem to be awarding ever increasing damages in fiduciary breach cases.
  • Understand and follow the notice requirements in your policies.


Photo by Juli via Flickr CC License

Boomerangs and the PBGC, or When a Sale is Not a Sale


Carol Buckmann is an attorney who has practiced in the employee benefits field for over 30 years. This post was originally published at Pensions & Benefits Law.

The surprising thing about a boomerang is that just when you think you have tossed it away, it suddenly comes back to you.  The same result can happen under Section 4069 of ERISA, a rarely applied provision that holds a seller liable for underfunding and other Title IV liability when a buyer terminates an assumed plan within 5 years following the sale. The key is that a principal purpose of the transaction must be to evade  liability.  Such a transaction can be ignored and the seller pursued as if the transaction had not occurred. The Pension Benefit Guaranty Corporation (PBGC) has recently cleared a big  hurdle in its attempt to hold The Renco Group liable under Section 4069 and possibly make new law on when Section 4069 can apply.What Happened?

In 2012, Renco sold 24% of its affiliate, RG Steel LLP, to Cerberus Capital Partners.  This put Renco’s interest below the 80% necessary to include RG Steel in Renco’s controlled group, which would usually mean that Renco  was not liable for  RG Plan underfunding.  Renco claimed that the sale was necessary to raise capital, but after RG’s bankruptcy, the PBGC terminated RG’s plans and proceeded against Renco under Section 4069.

There are some facts alleged that don’t help Renco. Renco had just acquired the two plans in March of 2011, at which time it  told the PBGC that the plans would benefit by being transferred from the seller to Renco.  However, in December 2011, Renco notified the PBGC that it might break up the controlled group.  The PBGC expressed concerns and requested a guarantee, which Renco never provided.  The PBGC intended to terminate the plans on January 17, 2012, but on January 13, Renco requested that the PBGC not initiate termination proceedings, stating that no transaction was imminent.  The PBGC wanted a standstill agreement, but was notified on January 17 that the Cerberus transaction had been completed over the Martin Luther King holiday weekend.

PBGC’s Response

The PBGC terminated the RG plans after the Cerberus transaction.  At that time, the plans had $87.2 million in unfunded benefit liabilities,  unpaid plan contributions of $4.9 million, and owed $5.1 million for insurance premiums.  The PBGC sought to hold Renco liable for these amounts under Section 4069 of ERISA, and also filed state law claims for fraud, fraudulent concealment and negligent misrepresentation.  The court held that the state law claims were not pre-empted.

What’s Ahead

This case seems on course to give us some rules about when a transaction’s principal purpose is to evade  liability.  We have already had some guidance in another circuit on how that phrase is applied in the multi-employer plan context, as the Sun Capital Partners court found that simply taking less than an 80% ownership interest wasn’t an attempt to evade liability.  However, this case involves an interest that was originally higher than 80% and was reduced. Further, this court seems to be willing to entertain the idea that a transaction can have more than one principal purpose. So, even if the Cerberus investment provided needed capital, that doesn’t necessarily mean that Renco will win.

What to Do Now

Section 4069 liability comes up in purchase, sale and merger agreements.  Buyer’s counsel should always make sure that the ERISA reps cover seller’s actual or potential Section 4069 liability, and may seek to negotiate appropriate indemnification provisions.  But this is also an important item for due diligence, which should identify any exposure based on prior transactions in seller’s controlled group and try to quantify it.  And those considering lowering their investment in businesses to avoid Title IV exposure need to evaluate the risks.

There is also a lesson here, if the facts alleged by the PBGC are true, about the dangers of not being forthcoming with the PBGC when you file a reportable event notice or respond to early warning inquiries.  It will probably not help your case if you appear to have been less than straightforward with the PBGC.


Photo by  Simon Greig via Flickr CC License

The Blindsided Fiduciary: Ignorance is Not Bliss


Carol Buckmann is an attorney who has practiced in the employee benefits field for over 30 years. This post was originally published at Pensions & Benefits Law.

Alliance Bernstein recently released the shocking result of a survey it had taken of plan sponsors: a whopping 37% of those fiduciaries surveyed didn’t know that they were fiduciaries.Obviously, it is unlikely that these individuals are fulfilling their fiduciary responsibilities if they are unaware of their status.  And we wonder what will happen if the plans of these oblivious fiduciaries are selected for a Department of Labor audit, though we are sure that it won’t be a pretty picture.It is possible to be an ERISA fiduciary and not know it, because no acknowledgement of fiduciary status is required.  ERISA has a functional definition of fiduciary, which means that you become a fiduciary based on what you do.  Administration, investment control and giving investment advice for a fee are the activities that trigger fiduciary status. ERISA also provides that there must always be at least one named fiduciary to manage a plan,  and this will be the Company and its directors if no other designation is made.

Another form of ignorance can complicate this problem, because it is also possible to believe that your plan service providers are fiduciaries when they are not.  Small plan fiduciaries are not the only ones under these misconceptions.  Misplaced reliance on what these non-fiduciary vendors are doing can result in avoidable compliance failures and litigation exposure. Here is a short checklist for people who have relationships with employee benefit plans:

  • If you are a director, you have some fiduciary responsibilities even if the board has  delegated authority to other fiduciaries.
  • If you are a plan trustee, you are a fiduciary.
  • If you are on a plan committee, including an investment or administrative committee, you are a fiduciary.
  • If you have adopted a prototype or other pre-approved plan, your vendor is not a fiduciary unless it has agreed to make decisions and become an administrator as defined in Section 3(16) of ERISA or manages investments.
  • If you have appointed an investment manager with the authority to make investment decisions, the investment manager is a fiduciary.
  • If you are receiving investment advice from a broker or registered investment adviser, you may not be receiving advice from an ERISA fiduciary as the law stands now.  It all depends on factors such as whether the advice is one-time or on a regular basis, or is given with the understanding that it will be a primary basis for plan investment decisions.  The Department of Labor, with the support of the Obama administration, has been working on a controversial new proposal to extend ERISA fiduciary responsibilities to brokers and others who provide investment advice to plans, but so far, is being close-mouthed about what it says.

Since fiduciaries may be personally liable for losses caused by fiduciary breaches, knowing whether you and your vendors are fiduciaries is essential self-defense against being blind-sided in the pocketbook by a court award, audit penalty or settlement.


Photo by Martin Raab via Flickr CC License

Suing to Recover Benefit Overpayments? It May Not Be So Easy

7408447448_8de1f6190e_zCarol Buckmann is an attorney who has practiced in the employee benefits field for over 30 years. This post was originally published at Pensions & Benefits Law.

Can plan fiduciaries sue to recover overpayments made many years ago? As plan audits have uncovered more and more payment errors, many plans have acted as if no time limits or other restrictions applied to their repayment demands. However, a recent decision involving a Pfizer pension plan illustrates that even though the case law has recognized a fiduciary’s right to recover overpayments, lawsuits against retirees who don’t respond to demands for repayment may face some obstacles.

The retiree in this case had elected to receive her pension over a three year period ending in 2005. However, her monthly payments kept coming, and when she and her financial adviser called Fidelity, which was responsible for pension check disbursement, they were told that she had taken out an annuity that would continue for life. It was not until 2009 that Pfizer found the mistake and cut off future monthly payments. The plan and Pfizer did not commence the suit to recover over $1.3 million in overpayments until 2014.

Surprisingly, the retiree did not raise an estoppel claim or a surcharge claim under the landmark U.S. Supreme Court decision in CIGNA v. Amara, but the retiree raised other defenses. In refusing to dismiss all of the claims or grant summary judgment, the district court made the following rulings:

  • Equitable claims for repayment could proceed to trial, but plaintiffs would have to show that there were still identifiable funds (such as if the funds had been put into a bank account) or their proceeds in order to recover. It should be noted that there is a dispute among the circuits about whether this “tracing” is required, and the U.S. Supreme Court has agreed to decide this issue in a pending case, Montanile v. Board of Trustees. (135 S. Ct. 1700) If tracing is required, no recovery may be possible if the retiree has used the overpayment to pay living expenses.
  • The statute of limitations that applied was five years, based on the most similar state cause of action. (One of the surprises fiduciaries sometimes receive when they consider suing is that it is well-settled that ERISA’s three year and six year statutes of limitations do not apply to these claims. Courts look to the limit for the most similar state cause of action, which may be longer or shorter.)
  • The retiree argued that plaintiffs still sued too late, because the five years began to run when they should have discovered the error in 2006. This will be decided at trial, as will the viability of the equitable defense of laches (that plaintiffs waited unreasonable long to sue).
  • Plaintiffs could not sue to enforce the terms of the plan because they could not point to a specific plan provision requiring repayment.
  • Plaintiffs’ state law claims were pre-empted by ERISA.

While they await the outcome of this case and Montanile, plan fiduciaries can consider the following steps to improve their chances of prevailing in these suits:

  1. Make sure that plans have specific provisions for recouping overpayments.
  2. Give the payee the opportunity to argue that the payment is correct under ERISA’s claims and appeals procedures. While not an issue in the Pfizer case, this eliminates a potential defense that these have been violated.
  3. Do self-audits regularly and if a lawsuit seems necessary, file it promptly.
  4. Pay attention when retirees call to question whether they are receiving the right payments. If the error had been caught when the retiree and her adviser called Fidelity, or if Fidelity had relayed the question to Pfizer, this lawsuit might have been avoided.

Fiduciaries should also realize that lawsuits may not always be an appropriate response if participants ignore requests for repayments. These are not always required under new IRS’ correction procedures. The recipient’s financial ability to repay, the amount of the mistake , and the extent to which the mistake was the plan’s fault are also issues to consider.

At least one federal decision, Wells v. United States Steel & Carnegie Pension Fund (950 F2d 125, 6th Cir. 1991), recognized that fiduciaries have a cause of action under ERISA to recover overpayments, but noted that recoupment may be unavailable if it results in hardship to the payee.

In addition to looking for the Montanile decision, fiduciaries should be aware that organizations such as AARP have been urging Congress and the federal agencies to adopt new rules restricting a plan’s ability to recoup overpayments, and there is a possibility of new laws or regulations in this area as well.

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No More Determination Letters? What are Plan Sponsors to Do?


Carol Buckmann is an attorney who has practiced in the employee benefits field for over 30 years. This post was originally published at Pensions & Benefits Law.

Would you bet millions of dollars on your ability to accurately predict how the IRS will interpret the tax code? That’s what a plan sponsor that adopts a plan that isn’t approved by the IRS does. Even though they are not legally required to obtain determination letters,  virtually all plan sponsors with their own plan documents apply regularly for favorable determination letters approving their plan language.

The Internal Revenue Service recently announced that it is not only discontinuing its requirement that individually-designed plans seeking approval be reviewed for new determination letters every five years, but it will no longer review these plans except on adoption and termination.  The excuse given is lack of manpower and resources, but the decision leaves adopters of individually-designed plans in a quandary.

How are they to make sure that their plans are in compliance, given the seemingly ever-changing statutory and regulatory requirements and the serious consequences, up to retroactive disqualification, for failure to do it right?  

Here are some suggestions for plan sponsors and the IRS to consider.

If you are a plan sponsor:

  • Could you move to a pre-approved plan?  The IRS will continue to approve the language in prototype and volume submitter plans used by vendors such as Fidelity and Vanguard and some banks and law firms.  This would simplify life, but at the cost of sacrificing flexibility.  Most of these plans have limited ability to accommodate custom provisions, or provisions designed to protect plan fiduciaries, such as contractual statutes of limitations for participant lawsuits or plan governance delegations.
  • Encourage your law firm to develop a volume submitter plan.  Plans are legal documents that are best drafted by lawyers, and these might accommodate more flexible legally-recommended options than vendor pre-approved documents. Large vendor documents often seem to be drafted to make life simpler for the vendors.  However, your law firm will need a minimum number of adopters to do this.
  • If you keep your own document, consider getting legal qualification opinions from your employee benefits counsel on a regular basis.  These will be particularly helpful in audits and litigation, but may also be sought by buyers in acquisition transactions.
  • If you keep your own document, consider adopting model and sample amendments issued by the IRS, which are “safe harbors” with language intended to automatically satisfy the legal requirements. Note, however, that these also will limit flexibility and may not work without modification if there are unusual or complicated plan designs.
  • If you keep your own document, make sure to hire the most competent drafters.  The consequences of drafting mistakes will get much more serious and expensive.

The IRS should consider the following changes to preserve individually-designed plans:

  • Modify its rule that a document defect found on audit goes automatically into the closing agreement program, and is not eligible for the less expensive voluntary correction program (VCP) penalties.
  • Modify its long-criticized rule that interim and discretionary amendments must be adopted by the end of the year in which they are effective or the plan sponsor’s tax return deadline for that year.  There should be reasonable extended remedial amendment periods for adopting amendments to reflect changes in the law. (That would also limit the frequency with which qualification opinions might have to be obtained from counsel.)
  • Approve major modifications to a plan, such as conversion to another type of plan as if a new plan had been adopted at the effective date of the change.
  • Issue more model and sample language and add choices, similar to the way that adoption agreements can be used for different choices.

The basic decision made by the IRS seems to be set in stone.  However, it will be a blow to the private pension system if these changes make individually-designed plans too risky to maintain.

Defined benefit plans, in particular, are already being discouraged by overly complex regulation and ever increasing PBGC premiums.  Since individually-designed plans have long been a way to  customize provisions to meet an employer’s own business needs, the IRS should make special efforts such as those suggested above to keep them alive.

Photo by Roland O’Daniel via Flickr CC License

Planning To Annuitize Current Retirees? Fifth Circuit Unambiguously Upholds Verizon’s Right To De-Risk


Carol Buckmann is an attorney who has practiced in the employee benefits field for over 30 years. This post was originally published at Pensions & Benefits Law.

Sometimes you appreciate confirmation that actions – you always thought were permissible – continue to be viable options.  We have just received confirmation from the U.S. Court of Appeals for the Fifth Circuit that the long-standing practice of de-risking by purchasing annuities from insurance companies remains permissible.

In 2012, Verizon decided to annuitize the benefits of current retirees by purchasing annuities from Prudential.  A group of those retirees attempted  to stop the transaction from going forward, and when that failed, proceeded to attempt to undo the transaction on the grounds that it involved fiduciary breaches and violated various provisions of ERISA.

The plaintiffs lost repeatedly at the district court level, which ruled that they had no causes of action, but they kept coming back.  Remaining participants in the plans were even added as another potential class of plaintiffs to challenge the impact of the purchase on the ongoing plan.  Readers of this blog know that I have predicted that the plaintiffs would likely lose because their claims were inconsistent with existing interpretations of ERISA.  In an unpublished opinion, the U.S. Court of Appeals for the Fifth Circuit  agreed, upholding the district court’s dismissal of all of the claims of both groups of plaintiffs after de novo review.

The court made the following rulings in rejecting the plaintiffs’ claims:

  • The decision to annuitize was not a fiduciary act.  The court cited longstanding authority going back to the common law of trusts that the decision to purchase annuities was a settlor, not a fiduciary activity.
  • The possibility of annuitization was not required to be disclosed in the summary plan description (SPD).   The court  concluded that ERISA does not require advance disclosure of  events which are contingent on a plan amendment, and noted that the possibility of plan amendment had been clearly disclosed.  The plaintiffs also claimed that annuitization was required to be disclosed because it was an event reducing or resulting in loss of their benefits, but the court found no basis for concluding that a loss of PBGC insurance was a reduction in benefits.  (Nonetheless, it may be a good practice to include notice that annuity contracts may be distributed in satisfaction of benefit obligations in an SPD.)
  • Participant consent was not required for annuitization of their benefits.  There was no precedent for requiring consent.
  • Section 510 of ERISA, which prohibits discrimination against participants for asserting protected rights, was not violated merely because the plaintiffs did not have rights to continued plan participation, ERISA coverage or PBGC insurance.
  • Paying $1 billion in fees and expenses as part of  the $8.4 -billion annuitization was not a fiduciary breach.  The plaintiffs did not plead with any specificity as to why the amount was unreasonable, and the court would not assume that the total fees were unreasonable solely from the amount.
  • It was not imprudent to purchase one group annuity contract from Prudential rather than from multiple insurers.
  • Current participants had no standing to challenge the transaction.  Because there are no individual accounts in a defined benefit plan and the plan sponsor must make trust losses, they suffered no current harm.  They could not bring suit as a quasi-representative of the plan

It should be noted that Verizon did not make lump sum offers to the retirees, a practice which the Internal Revenue Service has announced will no longer be permitted, and that issue was not before the court.

Hopefully, this decision is final and will end whatever legal uncertainty had surrounded annuitization under current law, though unpublished opinions are technically not precedent.  While no appeals court  has ruled that employers do not have the  right to annuitize benefits,  as I stated in a recent post, new controls on de-risking practices are under consideration, and the possibility of future changes in the law should be part of the decision tree for employers considering de-risking.

The Estopped Fiduciary: When May Participants Rely on Incorrect Calculations?

Balancing The Account

Carol Buckmann is an attorney who has practiced in the employee benefits field for over 30 years. This post was originally published at Pensions & Benefits Law.

Mistakes happen. Even in the best-run plans, occasional errors in estimating and calculating benefits are inevitable and sometimes they are caught only years after payments commenced.  Fiduciaries are required to follow plan terms, so improper payments are typically cut off.  Plans may also seek to recoup past overpayments once the mistake is discovered.

In the Mistaken Fiduciary, I described a situation in which Gabriel, a retiree who had never qualified for benefits at all, sued a plan to prevent it from cutting off his benefits.  His suit claimed fiduciary breach and sought to estop the plan from applying its terms to him. The retiree also sought other forms of relief for fiduciary breach.

Gabriel lost his estoppel claim at the district court level, and this result was subsequently affirmed by the U.S. Court of Appeals for the Ninth Circuit.  The Ninth Circuit decision clearly states that estoppel is not available where relief, as in Gabriel’s case, would contradict the written plan provisions.   However, we have just had another decision in Michigan in which a retiree named Paul successfully sued to estop a plan from correcting pension overpayments. Why did Paul succeed and should plan fiduciaries be worried about this decision? 

When is a Fiduciary Estopped from Correcting Overpayments?

It seems to require special circumstances, including harm to the retiree from relying on the incorrect calculation, and not just an honest mistake.

When is a Mistake Equivalent to Fraud?

In Paul, the plaintiff began work as a temporary employee and switched from union to non-union positions at the company.  He and his wife met with company representatives prior to his retirement and received a pension calculation statement which overstated his benefit service.  The retiree was told that the Company reserved the right to correct errors and  that he would be notified if final benefit calculations changed the pension amount.  The retiree asked the company representative several times to confirm that the service shown on the statement was correct, and was assured that it was.  Notice of the error was not sent until two and one half years after retirement, when it was discovered by the sponsor on self-audit.

The court found that Paul was not just the victim of an honest mistake, but that the Company representatives’s gross negligence in not investigating the answer to Paul’s questions amounted to constructive fraud. Paul claimed that he would not have retired when he did  had he known the correct amount of his pension. The court further found that Paul was unaware of the mistake, since he could not calculate his own benefit. The bottom line was that Paul could not be required to repay past overpayments and the plan was estopped from reducing his future payments.

What Can Plans Still Do?

Despite the fact that they didn’t help the plan’s case against Paul, use of  clear disclaimers is still a good practice.  Regular self-audits should still permit plan sponsors to correct typical honest mistakes. And this whole lawsuit could have been avoided if the elements of Paul’s calculation had been carefully checked when he asked about his service.

Sometimes fiduciaries raise the concern that they are stuck between “a rock and a hard place” if they don’t recoup overpayments, because in addition to worrying about equitable remedies such as estoppel, they may have caused a plan qualification error by not following plan terms.  There may also be some relief for this concern: the IRS has just “clarified” its position on correcting defined benefit plan overpayments to permit more leeway. It appears that pension plan sponsors will not always have to request a return of overpayments if they are willing to make up the loss to the plan.

IRS has requested comments on what else it should do about correcting overpayments. The U.S. Supreme Court has also accepted a case to determine whether overpayments of disability benefits need to be tracked in order to be recoverable.  That future decision may impact other ERISA plans as well.  The law in this area is still in flux, so fiduciaries should stay tuned for further developments.


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Double Jeopardy for Pension Plan Sponsors Selling Businesses: Have You Provided Spinoff Notices?


Carol Buckmann is an attorney who has practiced in the employee benefits field for over 30 years. This post was originally published at Pensions & Benefits Law.

There are many benefits issues that must be dealt with when businesses are sold, including the potential involvement of the Pension Benefit Guaranty Corporation (“PBGC”)    See, e.g,  my prior blog post.  Not all of these issues are resolved at the time of sale.

It is becoming increasingly common for plan sponsors who have sold businesses to hear from former participants who were spun off to a buyer’s plan, but who claim to still have benefits owing under the seller’s plan. Sometimes this is because the buyer has gone into bankruptcy or attempted to pass its plan on to the PBGC, but one very frustrating aspect of these former employee requests is that they arrive almost always many years after the sale. Sellers typically respond that no benefits are owed because the buyer assumed full responsibility for their pensions. But is this sufficient?  Maybe not, as a federal district court in Utah has ruled that former participants are entitled to benefits under both their original plan and their new plan for the same period of service because they were not notified of the transfer of their benefits.  Here is the decision. This is clearly a result that the parties never intended.  This award could also create unanticipated funding problems for the seller’s plan, since these benefits were assumed by a new plan and thus were not being pre-funded. How can plan sponsors avoid it?

Defendants’ Mistakes. Plaintiffs requested pension benefits from a successor to their original plan sponsor, even though they were currently receiving or entitled to receive benefits from their new plan for the same service. The original plan sponsor responded that the successor company indicated that it had assumed liabilities for the claimed benefits, but did not cite any plan provision. The original plan failed to produce evidence for the court that participants had received notice of their transfer from one plan to the other.

The Violation. The court cited ERISA’s rules for providing summaries of material plan modifications within 210 days following the end of the plan year in which the change occurred. Since defendants couldn’t show they had provided the notice, the court found that the spinoff amendment was ineffective and defendants abused their discretion in denying benefits.

Did the Court Go Too Far? The Utah decision seems an overreaction to this compliance failure, as ERISA already contains a specific dollar penalty for failure to provide the required notice.   The decision does not discuss another requirement that could have applied if the transfer were done today.  There is a current requirement that participants be given advance notice of amendments that result in a reduction of future accruals. (This requirement might apply in spinoffs, depending on the plan text.)   ERISA specifically authorizes ignoring a plan amendment that would reduce benefits if this new notice was not given and there was an “egregious violation”.   If Congress had intended a similar remedy for failure to provide notice of material plan changes, it presumably would have provided for it.

What Could Defendants Have Done? We don’t know whether other courts will follow this decision, but the following practices put sponsors in a position to respond effectively to double-dipping claimants:

  1. Keep accurate records of former participants whose benefits have been transferred. Do not transfer all copies to the buyer.
  2. Put language in both the plan and the SPD stating that participants will cease to accrue benefits when they terminate employment and, in the case of a spinoff, will have no right to past service benefits under the plan.
  3. Send all affected participants a written notice of the spinoff, specifically stating that they will cease to accrue benefits under the original plan , and identifying the new plan under which they will be covered.
  4. Keep copies of the notices that were sent and evidence of the manner of distribution as part of permanent plan records.
  5. Include offset provisions in the plan document to prevent double accruals for the same period of service.

Photo by Juli via Flickr CC License

Five Ways the Department of Labor Could Improve its Fiduciary Proposal


Carol Buckmann is an attorney who has practiced in the employee benefits field for over 30 years. This post was originally published at Pensions & Benefits Law.

The U.S. Department of Labor last month released its long-awaited re-write of proposed changes to the rules determining who is a fiduciary under ERISA, and the different sides have rushed to respond by calling the proposal either a great step forward in consumer protection or likely to result in less or no advice to small plan fiduciaries and IRA owners.

While it is undeniable that the proposal would meaningfully expand the class of advisers who are fiduciaries, neither of these opposing  responses is likely to be true. Does anyone really believe that advisers will give up such a lucrative market?

The devil is in the details, and objective observers should conclude that it is too early to tell exactly how this complicated proposal will affect the advice market. But it is, in fact, a proposal, not a final rule, and public comments may bring about some needed clarifications and changes.  (A coalition has asked the DOL to extend the comment period to 120 days from the 75-day period in the proposal, but indications are that the DOL response will be negative.)

Here is my list of five steps the Department could take to improve the proposal:

  1. Start by clarifying and narrowing the activities which result in fiduciary status.  People should know when they assume personal liability. The elimination of the current requirements that investment advisers provide advice on a regular basis and that the advice must be individualized and given pursuant to an understanding that it will be a primary basis for plan decisions is a crucial step in extending broker and adviser accountability.  However, the proposal’s definition also sweeps in recommendations that are “specifically directed” to a plan or IRA, even if not individualized,  and it is not at all clear what that means.  Can I become a fiduciary simply because I know that I am speaking with a plan or IRA owner? This vague basis for fiduciary status should be eliminated from the definition, and the inclusion of those who issue appraisals and fairness opinions should be reconsidered.
  2. Provide a clear carve-out for the actuaries, lawyers and accountants who perform typical professional services in connection with investments.  For example,  benefits professionals are often asked by clients whether they are aware of good or bad experiences with particular managers or advisers or which managers or advisers their other clients might typically use.  Under the proposed rule, however, recommending which managers or advisers to hire constitutes “investment advice”.    The rule does not exempt them even though they are not paid any separate fee for such information, but are obviously being compensated generally for advising the client on other typical  plan administrative or legal issues.  It should be made clear that merely providing such information does not make you a fiduciary.
  3. Provide a carve-out for sophisticated IRA investors similar to the carve-out for large plan investors with financial expertise.  This could require a minimum IRA balance and some showing or self-certification of expertise.  While it may be true that many IRA investors are not financially savvy, the former CFO of a business doesn’t need special protections.
  4. Eliminate the “catch 22” for acknowledging fiduciary status.  We should be encouraging acknowledgements of fiduciary status, but under the proposal, anyone who calls herself a fiduciary, regardless of the functions actually performed, seems to be a fiduciary for all purposes and prohibited from taking advantage of any of the carve-outs.  Long-standing DOL authority holds that the same person may sometimes be acting in a fiduciary capacity and at other times may be a mere service provider.   Where appropriate, carve-outs should be available to those who acknowledge fiduciary status.
  5. Fix the “Best Interest” exemption.  This exemption is needed if advisers to IRAs and to fiduciaries of small plans are to receive varying commissions and receive other traditional compensation in the “retail” market, but it should have clear and reasonable conditions.  The proposal includes requirements that the adviser provide a warranty of: compliance with existing law and tell clients that they have a right to sue in class actions. This goes far beyond the DOL’s stated purpose in requiring advisers to put the client’s interest first.  This would also be the first “principles based” exemption, and, if retained, the DOL needs to flesh out what the requirements, such as having policies in place to eliminate conflicts of interest, actually mean.

Of course, many other comments can and will be made, but these are a starting point.

We have long understood the need to update 1975 regulations to reflect the current market, and a re-write of those regulations is long overdue.  But specialists everywhere are struggling to understand the details and how some of the complicated new rules are intended to work.  We hope that the DOL will keep the important concepts and conditions in the proposal, but eliminate overbroad provisions and complexity that  is extraneous to the proposal’s core purpose.

The Dutiful Fiduciary: What’s Really Important About the Supreme Court’s Tibble Decision


Carol Buckmann is an attorney who has practiced in the employee benefits field for over 30 years. This post was originally published at Pensions & Benefits Law.

Are there time limits on a participant’s ability to challenge imprudent 401(k) investment fund offerings?  Can participants challenge an investment fund selected ten or even twenty years ago? If so, will fiduciaries be subject to potential liability for losses going back decades?

The U.S. Supreme Court has just released its long-awaited decision in Tibble v. Edison, holding that participants are not prevented from challenging a plan fiduciary’s imprudent 401(k) investment choices if the investment was selected more than six years ago. This means that there is not a one-time six year window for challenging imprudent investment offerings.

Since we use these decisions as guides to help our clients avoid being sued, I’ll skip the procedural issues of interest to litigators and focus on what this means for plan committees.

The rules set out by the Supreme Court are fairly simple, though their application may not be.  The Court said that the duty to prudently select investments and the duty to monitor them are separate. Under traditional trust law and ERISA, a trustee/fiduciary has an ongoing duty to monitor investments and remove imprudent ones.  Fiduciary breach claims may be based on positive action  or omissions, and suit may be brought within six years of the last act that constitutes a breach or violation, or the last date the fiduciary could have cured an  omission, clearly extending the period for challenging failure to remove an imprudent fund from the lineup.

The Supreme Court didn’t give us guidance about how to fulfill the duty to monitor, sending the case back to the appellate court for further proceedings.  However, some best practices and some limits on the claims that may be brought can be deduced from the decision and the facts.

What was the alleged violation in Tibble?  The lower courts had found that the Tibble Committee was imprudent in offering three retail class mutual funds when lower cost institutional funds with virtually the same investments were available.  These same claims were raised and erroneously dismissed in connection with three older funds.  The Committee met quarterly to review plan investments and to review reports and recommendations from investment staff, but comparing the  costs of different share classes was apparently not part of the quarterly review.

Obviously, fund costs should have been part of this review, but if committees prepare and use  a review checklist in consultation with ERISA counsel, or have a comprehensive investment policy drafted with the help of ERISA counsel, the likelihood of missing major review items is minimized. Even today, we often see investment policy statements drafted by people who are not lawyers that focus on performance and fail to even mention the importance of reviewing costs and fees.  Having regular meetings won’t help fiduciaries if they don’t focus on the right issues when they meet. And offering the best available investment choices to participants, and not merely avoiding imprudent ones, should be the goal of every committee. That is the best way to avoid investment challenges.

Although not discussed in the Supreme Court decision, in my view it is clear that breaching fiduciaries should not have an open-ended exposure to restore plan losses under the Tibble rules.  The Department of Labor in its amicus brief sets forth its position that fiduciaries don’t have continuous exposure to restore losses because the losses must have occurred within the six years preceding suit.  Further, the plaintiffs in the Tibble case did not try to claim losses for the entire period that the retail funds were in the plan.

At the end of the day, fiduciaries who follow good practices minimize the likelihood that they will ever have to argue that there are specific time limits on restoring plan losses.


Photo by Joe Gratz via Flickr CC License