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  Chicago, Illinois 60602
  (312) 696-1373

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Retirement and 401K Plan Trustees: Emerging Protection Strategies

Recent developments from the regulators and the courts present new compliance challenges for 401(k) and other retirement plan trustees.  Traditional strategies for protecting retirement plan fiduciaries need to be supplemented with new approaches.  Consider the following developments that impose additional duties and expand the potential liability of “responsible plan fiduciaries”:

The Regulatory Challenge

Whether you have responsibilities as a CFO, staff attorney or HR professional, or instead serve as an independent plan service provider (third party administrator, record keeper, or investment advisor), you should be concerned about the duties of retirement plan fiduciaries under Department of Labor fee disclosure regulations. 

Plan fiduciaries are those responsible for operating the plan and include the sponsoring employer (which frequently is designated as the "plan administrator"), members of any investment or administrative committee, and employees serving as plan trustee or co-trustee.

The retirement plan fee disclosure rules have imposed specific responsibilities on plan fiduciaries. Also, cases like Tussey v. ABB, Inc. make it clear that retirement plan fiduciaries can be held accountable for non-compliance with applicable standards of conduct (see HERE for details).  Many plan fiduciaries will need to take action to assure compliance.

Consider the following questions that can help determine whether or not plan fiduciaries are properly responding to the fee disclosure rules and standards of conduct reflected in the Tussey decision:

  • Have plan fiduciaries reviewed and evaluated service provider fee disclosures to make sure all covered service providers have provided compliant disclosures?
  • Have plan fiduciaries determined the reasonableness of the fees disclosed by plan service providers and memorialized that determination in writing?
  • Have plan fiduciaries who have not delegated investment responsibilities to an outside investment manager (not just an “investment advisor”) deliberated over the plan's investment offerings?
  • Have plan fiduciaries made a written record of their deliberations?
  • Do plan fiduciaries meet on a regular basis to review the plan's investment performance and provider fees?

If the answer to any of the above questions is "no," then the plan fiduciaries need to take corrective action.

Plan service providers (TPAs, record keepers and investment advisors) also should think about the fiduciary practices of their clients. Although advising clients on fiduciaries' practices may be beyond the scope of their service agreements, if the plan fiduciaries' conduct results in liability, those fiduciaries may want to share that liability with you. Consider referring your clients to providers who can assist plan fiduciaries with their compliance concerns if you are not in a position to do so.

If plan fiduciaries need to remedy any deficiencies in their current practices, consider the best way to proceed. Do the fiduciaries want to work directly with their current plan service providers in disclosing and evaluating these deficiencies? Do they want to acknowledge these deficiencies in communications that are subject to discovery by government agencies and aggrieved participants? Do they want to create a "roadmap" to be followed by any claimant that may seek damages for past compliance deficiencies?

Consider engaging special legal counsel to work directly with plan fiduciaries and to act as a conduit for input from plan service providers. By engaging special counsel that works only for the plan fiduciaries, any communications concerning compliance deficiencies can be protected from unintended disclosure as confidential attorney-client communications and attorney work product.

The Judicial Challenge

A flurry of court decisions following in the wake of the Supreme Court decision in Cigna Corp. v. Amara, 131 S. Ct. 1866 (2011), has expanded the scope of ERISA “equitable” relief to include monetary damages.  Monetary damages are now available to participants in actions for misconduct by plan administrators and other plan fiduciaries.  “Plan fiduciaries” include anyone who exercises any discretion over plan administration or plan investment decisions.  This means that employers (usually the designated “plan administrator”), members of investment and administrative committees, investment managers and advisors, and trustees are plan fiduciaries.

Kenseth v. Dean Health Plan, Inc., No. 11-1560 (2013), a recent decision of the U.S. Court of Appeals for the Seventh Circuit, has received significant press attention as a case which permits the recovery of monetary damages in an ERISA breach of fiduciary duty case.  In Kenseth, the aggrieved participant in a group health plan contacted the plan’s customer service representative and was assured that her proposed surgical procedure (correction of vertical banded gastroplasty surgery undertaken years before to treat obesity) would be covered under the plan.  Following the current corrective surgical procedure, coverage under the plan was then denied on the grounds that it was excluded as a service relating to a “non-covered benefit or service.”  This exclusion was held to be ambiguous because the original gastroplasty surgery, although excluded from coverage under the current plan, was covered under the plan in effect at the time of that surgery.

The Court in Kenseth went on to explain that, in the case of an ambiguity in a plan document, proper exercise of fiduciary responsibility required that the plan administrator provide a means by which a participant could obtain an “authoritative determination” on coverage for a particular medical service in advance.  The Court determined that the participant could have been harmed by her reliance on the misinformation provided by the customer service representative in that she would otherwise have checked to see if she had coverage under her husband’s health plan or undertaken alternative medical approaches.  The Court then observed that the participant would be entitled to “make-whole” relief in the form of money damages under Amara if she could show that the above fiduciary breaches damaged her.  The case was remanded to the trial court to fashion an appropriate remedy. 

Other post-Amara cases include Gearlds v. Entergy Servs., Inc., 709 F.3d 448 (5th Cir. 2013) and McCravy v. Metropolitan Life Ins. Co., 690 F.3d 176 (4th Cir. 2012).

In Gearlds, the participant (Gearlds) elected early retirement after he was advised by a plan administrator that he would continue to receive medical benefits as a retiree.  Gearlds waived benefits under his wife’s retirement plan in reliance on the coverage assurances from the administrator.  Years later, Gearlds was notified that his medical benefits were being discontinued because he never had been eligible for retiree coverage (the administrator had mistakenly assumed that Gearlds was receiving long term disability benefits at the time of his retirement, which was an eligibility requirement for retiree medical coverage).  The trial court dismissed Gearlds’ suit for payment of his past and future medical expenses on the basis of pre-Amara law.  The Fifth Circuit reversed and remanded noting that Gearlds was entitled to ask that plan fiduciaries be “surcharged” to cover Gearlds’ medical expenses as compensation for the misinformation provided to him as an “equitable form of money damages.”

In McCravy, an employee (McCravy) purchased life insurance for her daughter through an employer sponsored accidental death and dismemberment plan.  McCravy continued to pay premiums until her daughter died at age 25, at which time the plan administrator refused to pay the insurance claim because under the terms of the plan, the daughter was no longer eligible for coverage after she attained age 24.  McCravy’s complaint alleged that the plan’s actions amounted to a breach of fiduciary duty in that the plan continued to accept premium payments after her daughter was no longer eligible for coverage.  This lead McCravy to believe that her daughter was still covered.  Because she believed her daughter was insured, McCravy did not purchase alternate insurance on her daughter’s life.  The Fourth Circuit held that McCravy’s claim for make-whole relief in an amount equal to the life insurance proceeds was appropriate because the plan’s benefits were not available as a result of the fiduciary “wrongfully” accepting premium payments.

While these cases do extend the availability of money damages as “equitable” relief in fiduciary breach actions, they also underscore the need for clear and unambiguous plan documents.  Although it goes without saying that participant communications should accurately reflect the terms of the plan document, even written misrepresentation of plan provisions may not be actionable if the plan document itself is unambiguous.

Recommendations:

The first line of defense for fiduciaries to any fiduciary claim is a clear and unambiguous plan document.  Also bear in mind that, as to qualified retirement plans, participants can waive fiduciary breach claims and can be asked to do so upon payment of their retirement plan benefits (see here).  Additional possibilities include permitted delegation of investment responsibilities to investment managers or even plan participants in the case of self-directed individual account plans.  So plan fiduciaries still have significant legal defenses as well as viable mitigation strategies.  And there is optional fiduciary liability insurance.  However, such insurance should not be confused with the mandatory ERISA fiduciary bond.  The ERISA bond protects the plan not its fiduciaries.

Plan fiduciaries do not have to make perfect decisions but they do need to exercise prudence in their deliberations.  Cases in which fiduciary investment decisions are questioned frequently turn on the nature of the process followed by plan fiduciaries rather than the specific investment decisions that result from that process.  But bear in mind that the service provider fee disclosure rules for retirement plans provide specific new responsibilities that require plan fiduciaries to review and evaluate provider services and fees as well as the compliance of provider fee disclosures.

Finally, plan fiduciaries who may have concerns about their past conduct should review and consider their situation.  They may need to engage advisors or legal counsel to assist.  Both can assist and their communications can be protected from unintended disclosure by attorney-client privilege.  But bear in mind that communication with the employer’s regular corporate or benefits attorney may not be privileged.  It may make sense to seek independent legal counsel to assure such confidentiality.


Andrew S. Williams
Golan Christie Taglia LLP
70 West Madison St.
Suite 1500
Chicago, Illinois 60602
(312) 696-1373
aswilliams@GCT.law

 

   
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