Fiduciary Issues and Trends in Employee Benefit Plans

Al HolifieldHolifield & Associates11907 Kingston PikeSuite 201Knoxville, TN 37934aholifield@hapc-law.com865-566-0115

Robert RachalProskauer650 Poydras StSuite 1800New Orleans, LA 70130rrachal@proskauer.com504-310-4081

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Program Overview• Fiduciary Basics: ▫What triggers fiduciary liability

• Developing issues:▫Tibble and ongoing monitoring of plan investments▫Tatum and burdens of proof – including what can

happen if don’t periodically monitor plan investments▫U.S. Department of Labor’s proposed new fiduciary

rule – what does it mean for plan sponsors and plan providers?

• Perennial concerns: Managing ERISA’s disclosure duties

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Fiduciary Basics: The Fiduciary Hat

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The Fiduciary HatGenerally, four ways to be a fiduciary:• Named in plan document• Authority to manage/dispose of plan assets & plan

investments• Discretion over plan administration• Investment advice for a fee

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Other Fiduciary Provisions

• Section 405:Co-fiduciary liability

• Sections 406 & 408: Prohibited transactions & exemptions

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Tibble and Ongoing Monitoring of Plan Investments• Tibble v. Edison Int’l, 135 S. Ct. 1823 (2015). Plan selected

more expensive retail class instead of investor class of mutual funds.

• Court found breach of duty for funds selected within 6 years of the lawsuit but held that the claims on those selected before that were time-barred.

• By the time the case gets to the Supremes, everyone agrees there is some ongoing duty to monitor plan investments.

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Tibble and Ongoing Monitoring of Plan Investments• In a 9-0 decision, the Supremes hold:

• ERISA’s fiduciary duties are derived from the common law of trusts.

• Under common law of trusts, managing embraces monitoring of investments, and a fiduciary should systematically consider the investments at regular intervals.

• Leaving to lower courts the scope of consideration, which will depend on the facts and circumstances.

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Tibble and Ongoing Monitoring of Plan Investments: Some Concluding Thoughts

• Some “best practices” to consider: • Conduct regular reviews (common quarterly with a

major review annually). • Document, document, document to show prudent

process in managing plan investments – and see Tatum for what happens if not!

• Consider an investment policy statement, but remember must follow it if adopted.

• Offer a mix of investments (index, target date funds) for 401(k) plan.

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Tatum and Burdens of Proof if No Prudent Fiduciary Process• Tatum v. RJR Reynolds Investment Comm., 761 F.3d 346

(4th Cir. 2014). Case arose out of spin off of Nabisco and elimination of the Nabisco stock fund from the RJR Reynolds 401(k) plan.

• Working group of HR employees, not the plan’s Investment Committee, decide to divest fund after about an hour of consideration. • Consideration focused on liability of holding a single-stock fund,

not on investment fundamentals of Nabisco stock. • Nabisco spun-off because of belief that market was undervaluing

stock because of “tobacco taint”

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Tatum and Burdens of Proof if No Prudent Fiduciary Process• District court found that this was a breach of the fiduciary duty

to follow a prudent process, but that there were no damages because a prudent fiduciary “could have” decided to sell the stock.

• Fourth circuit reversed:• Once plaintiff shows that a fiduciary breached is duty

to follow a prudent process; • The fiduciary has to show that a prudent fiduciary

“would have” come to the same decision

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Tatum and Burdens of Proof if No Prudent Fiduciary Process: Concluding Thoughts

• Difference between “would” and “could” is material, and Fourth Circuit said this was intended to put risk of loss on any fiduciary that does not follow a prudent process in analyzing investments.

• Real hindsight involved here: Nabisco stock took off after the sale, and became subject to a bidding war. ▫But efficient markets teach that this cannot be

“known” to any degree of certainty. ▫Tatum and Tibble put pressure on those who oversee

investments to document and get the process right from the start.

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U.S. DOL’s Proposed New Fiduciary Rule: Overview• Greatly expands “who is a fiduciary” for those advising a plan

related to plan investments. • Defines as a fiduciary anyone making a “recommendation” for

any direct or indirect compensation:• On advisability of acquiring, holding or disposing of

securities or other property or taking a plan distribution or rollover.

• On managing securities or other property.• On appraisals and fairness opinions. F

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U.S. DOL’s Proposed New Fiduciary Rule: Impact on Plan Sponsors• Will limit investment education provided to plan participants• May drive up costs for those who advise plans and limit those

who provides this advice, particularly for smaller plans of less than 100 participants

• Will expand risk of co-fiduciary liability by expanding categories of fiduciaries advising the plan

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U.S. DOL’s Proposed New Fiduciary Rule: Some Problematic Rules• DOL new rule defines “fiduciary” very broadly, which triggers

fiduciary duties and prohibited transaction rules, and then relies on complex exemptions to permit certain advice and transactions.

• Not clear everyone will play, and for those who do, at least some of the increased costs will be passed on to plans and plan sponsors.

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U.S. DOL’s Proposed New Fiduciary Rule: Some Problematic Rules• The participant education quandary:▫ Advice need only be “specifically directed” to the recipient to

trigger fiduciary obligations. What happens to newsletters, investment explanatory materials and

the like sent to participants? DOL says not a “recommendation” to consider making a particular

investment but rule can be read this way.

▫ Can no longer identify actual funds to go with asset allocation models and other investor education.

Fiduciary Issues and Trends 2015

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U.S. DOL’s Proposed New Fiduciary Rule: Some Problematic Rules• The limited “sales” carve out:

• Must give notice that not acting in interests of the plan and its financial interests in the transactions

• NOT apply to IRAs or plan participants, or to plans with less than 100 participants, unless the plan has a fiduciary manager responsible for managing at least $100 million in assets.

• Apparently requires smaller plans to retain a professional asset manager or advisor to evaluate sales proposals, or to fit within “BIC” exemption.

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U.S. DOL’s Proposed New Fiduciary Rule: Some Problematic Rules• The “Best Interest Contract Exemption”: ▫Can receive compensation for services for purchase,

sale or holding of a security by a plan participant, IRA owner, or plan sponsor of non-participant directed plan with less than 100 participants.

BUT▫ Limits assets to which this may apply (e.g., puts, calls,

foreign bonds excluded). ▫Must adhere to impartial conduct standards and limit

any material conflict of interest.

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U.S. DOL’s Proposed New Fiduciary Rule: Some Problematic Rules• The “Best Interest Contract Exemption” (cont.):

• Must agree to be a fiduciary under ERISA, the Code or both. • For IRAs intended to create rights to enforce warranties and

standards as a contract claim under state law. • Seem to be designed to encourage asset/fee-based

compensation rather than transaction-based compensation.

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U.S. DOL’s Proposed New Fiduciary Rule: Some Problematic Rules• The “Best Interest Contract Exemption” (cont.):

• Real question whether DOL can impose standards on IRAs by creating broad prohibited transaction and then create a “voluntary” exemption that imposes those standards through a mandated contract.

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U.S. DOL’s Proposed New Fiduciary Rule: Some Problematic Rules• The “platform provider” exemption: ▫ Can market a set of investment alternatives that ultimately will

be selected by plan fiduciary; ▫ BUT platform provider cannot consider the individualized needs

of the plan in marketing its platforms to the plan. ▫ CF sellers carve out for large plans (over 100).

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U.S. DOL’s Proposed New Fiduciary Rule: Some Final Thoughts• May create opportunities for professional investment advisors

on advising small plans. • If interposed between small plans and sellers of investment

products, small plans can consider and acquire these products.• Encourages a professional/flat-fee approach for small plans.

• Better? Lower costs? Or too paternalistic?

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Fiduciary Pitfalls: Disclosure issues

• Recent cases:• Wagner v. Stifel Laboratories• Christensen v Qwest• Wilkins v MasonTenders

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Disclosure Duties: General Standards• General fiduciary duty not to mislead: ▫Broad view of who is a fiduciary – most who are

talking about benefits will be included. ▫May even apply when caused by negligence.

• BUT also can be a duty to affirmatively inform when: ▫ (1) the facts are “material” to the beneficiary, ▫ (2) the fiduciary “knows” the beneficiary is unaware of

these facts, and ▫ (3) the beneficiary needs to know these facts to

protect his or her interests

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Wagner v Stifel: Recent Illustration of the Duty to Inform • Wagner v Stifel Laboratories, 2015 U.S. Dist. LEXIS 81464 (N.D.

Ga. 2014). Long running saga about the failure to inform ESOP participants in closely held ESOP of potential sale of the ESOP-owned company. • Sale was for five times the appraised value of the ESOP

shares. • Those who cashed out ESOP shares before the

acquisition claimed ESOP fiduciaries had duty to tell them of this potential sale.

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Wagner v Stifel: Recent Illustration of the Duty to Inform • Court refused to dismiss the claim:

• May be duty to affirmatively inform when have “special circumstances” that may materially impact the participant.

• Securities laws bars against insider trading do not apply to a closely held company, and participant did not have the benefit of the market valuing his shares.

• Also may be evidence that the fiduciaries mislead the participant on the future direction of the company and the value of his shares.

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Christensen v Qwest, 462 F.3d 913 (8th Cir. 2006): Managing the Process

• Plaintiff Christensen requested five benefit estimates by telephone between March and November of 2003, which estimates ranged from $1,715 to $1,763 per month▫ Estimated were generated by an automated system that the

plan used to answer an average of 115,000 telephone and e-mail estimate requests per year

▫ The automated system was run by Watson Wyatt, a vendor hired by the plan's administrative committee to handle ministerial plan administration functions

▫ Both the SPD and each benefit estimate warned that the estimates were not binding and subject to change

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Christensen v Qwest, 462 F.3d 913 (8th Cir. 2006): Managing the Process

• When he retired, Christensen was notified that he would receive $1,485 per month, and subsequently sued arguing that the administrative committee breached its fiduciary duties by telling him incorrectly on at least five occasions that his monthly benefits would exceed $1,700. • The error was apparently caused by classifying Christensen

in a higher pension band than that for which he qualified. • Error caught when did manual check to calculate retirement

benefit; these manual checks are not done for estimates, which are generated automatically off of the data in the file F

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Christensen v Qwest, 462 F.3d 913 (8th Cir. 2006): Managing the Process

• The Eighth Circuit held that the plan administrator did not breach its fiduciary duty

• On the duty of loyalty claim, the court held it is not disloyal to plan participants to adopt a prompt, inexpensive, substantially accurate benefit estimate system to provide benefit estimates, when:• Evidence suggests plan administrator knew of and worked with

vendor to eliminate recurring errors; and • Those estimates were accompanied by adequate disclosures

that the estimates are non-binding and may not always be accurate

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Christensen v Qwest, 462 F.3d 913 (8th Cir. 2006): Managing the Process

• On the duty of care claim, the court also held this error was not a breach:▫ Distinguished between fiduciaries and employee who entered

wrong pension band information to conclude this was a clerical or ministerial error

▫ No evidence plan administrator failed to use reasonable care in selecting and retaining Watson Wyatt or in monitoring the accuracy of the benefit estimate system

▫ Rather, evidence suggested plan administrator worked with Watson Wyatt to eliminate recurring problems

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“Take Aways” from Qwest• In determining whether was a fiduciary breach court

distinguished between fiduciaries and those who act on their behalf to carry out myriad ministerial and clerical tasks ▫ Other courts have done so, e.g., Frahm v. Equitable Assurance,

137 F.3d 955, 959-60 (7th Cir. 1998); Schmidt v. Sheet Metal Workers Nat. Pension Fund, 128 F.3d 541, 544-45, 547-48 (7th Cir. 1997)

• Puts the focus on fiduciary’s management and oversight of these processes

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“Take Aways” from Qwest• Things fiduciaries can do to manage and oversee ministerial

and clerical processes:▫ Review and make sure plan-wide disclosures, particularly SPDs,

are accurate and informative, e.g., in Qwest both SPDs and benefit estimates warned the estimates were not binding and subject to change

▫ Hire and train qualified personnel to perform these tasks, e.g., in Qwest no evidence Watson Wyatt was unqualified or not properly trained

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“Take Aways” from Qwest• Things fiduciaries can do to manage and oversee ministerial

and clerical processes:▫ Have some type of process in place to uncover and correct any

systematic or recurring errors, e.g., in Qwest the HR pension manager worked with Watson Wyatt on these issues

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Background: Special Case of SPDs in ERISA Disclosure Regime• Courts view SPDs as the key ERISA disclosure document for

employees to learn about their employee benefits ▫ Courts thus often treat SPD’s as one-way ratchets: If the SPD is

more favorable to the participant than a conflicting plan term, at least if participant relied on the SPD, the SPD controls

▫ Means must draft SPD with same care draft plans▫ Courts are also expecting SPDs to disclose any material adverse

information that may impact a participant’s ability to qualify for benefits

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SPDs and Wilkins v. Mason Tenders, 445 F.3d 572 (2d Cir. 2006)• Multi-employer plan required participant to provide evidence

was in covered employment if employer under-reported income

• Court held ERISA does not impose a fiduciary duty to continuously audit employers; rather, can be met by reasonable procedures such as random audits of employers

• Court held, however, that it was a breach of disclosure requirements of ERISA § 102(b) to fail to disclose this policy in the SPD

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SPDs and Wilkins v. Mason Tenders, 445 F.3d 572 (2d Cir. 2006)• Court reasoned that § 102(b) ▫ Requires the SPD to set out the “circumstances which may result

in disqualification, ineligibility, or denial or loss of benefits.” ▫ Under-reporting was a persistent, not an isolated problem; and ▫ The participant would reasonably expect he would receive

benefits for covered employment unless told needed to maintain records

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“Take Aways” from Wilkins• Wilkins is consistent with other courts that have required SPDs

to disclose policies or practices that will result in the loss of benefits

• Difficulty is keeping SPDs concise and readable while trying to anticipate various contingencies

• In Wilkins the under-reporting issue was persistent; thus court expected this policy to impact a significant number of participants

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