RECENT ERISA LITIGATION
AND RELATED TITLE I
ISSUES
Marcia S. Wagner, Esq.
August 26, 2014
AGENDA
Employer Stock Funds – the Demise of Moench
Lessons from Excess Fee Cases
Proprietary Funds Litigation
Equitable Remedies after Cigna v. Amara
Evolving Definition of an ERISA Fiduciary
Statute of Limitations Developments
• Fiduciary Breach
• Heimeshoff Limitation on Claims for Benefit Denial
Same-Sex spouse Litigation
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DEMISE OF MOENCH
PRESUMPTION
DEMISE OF MOENCH PRESUMPTION
MOENCH PRESUMPTION
Plan holding or buying employer stock is presumptively
prudent; the presumption applied to:
• ESOPs
• 401(k) Plans invested in employer stock
Moench doctrine had been spreading since 1995
Result was early stage dismissal in many stock drop cases
DUDENHOEFFER HOLDING: NO PRESUMPTION OF PRUDENCE
Supreme Court rules that a presumption of prudence exists
only as to the diversification of plan assets
Supreme Court’s suggestions for weeding out meritless
cases favor plan fiduciaries
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DEMISE OF MOENCH PRESUMPTION
POST DUDENHOEFFER MOTION TO DISMISS
Plan fiduciaries generally entitled to rely on market price of
employer stock in making buy/sell decisions
To overcome defendant’s reliance on the market, plaintiffs
will need to allege special circumstances
Lower courts to work out what special circumstances can
overcome reliance on the market
• Plaintiffs will need to allege specific facts in support of special
circumstances
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DEMISE OF MOENCH PRESUMPTION
 Actions taken by fiduciaries must be consistent with securities laws
• Duty of prudence does not require fiduciary to break the law, including
insider trading restrictions
• Cannot require divestiture of employer stock on the basis of inside
information
• Acts should not be more likely to harm the employer stock fund than help it
 Supreme Court’s instructions to lower courts:
• Potential conflicts with insider trading that must be avoided
> Requiring a sale of employer stock on the basis of inside information
> Disclosure of nonpublic information
• Viable complaint must allege that prudent fiduciary could not have concluded
that alternative actions would do plan more harm than good
> Stopping purchase of employer stock
> Disclosing nonpublic information
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DEMISE OF MOENCH PRESUMPTION
TAKEAWAYS
Consider excluding insiders from serving on plan
committees
Consider appointment of independent fiduciary to make
employer stock decisions
Review Securities Law requirements
Review employer’s public statements and filings
Apply a prudent process to decision making
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LESSONS FROM
EXCESS FEE
CASES
LESSONS FROM EXCESS FEE CASES
Excess fee cases assert fiduciary breach due to
unreasonably high fees paid by plan
ERISA Sec. 404(c) regulations provide exemption from
fiduciary liability
• Plan must give participant discretion to select investments
• Participant must exercise control over investment selection
Hecker v. Deere: over 2,500 available funds give
participants requisite choice to pick expensive or low
priced funds
• Market regulates fund fees
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LESSONS FROM EXCESS FEE CASES
Hecker v. Deere progeny holding participants
have adequate choice:
• Renfro v. Unisys – 73 investment options
• Loomis v. Excelon Corp. – 32 investment options
Cases are limited to their particular facts
Tipping point: offering a wide range of fund fees
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LESSONS FROM EXCESS FEE CASES
 Tibble v. Edison International (2013) - 50 investment options
• Inclusion of retail class mutual funds with high fees held imprudent
• Plan fiduciaries fail to investigate institutional class alternatives
• Unquestioning reliance on consultant who fails to recommend
alternatives
 Evolution of complaints in excess fee cases
• Complaints focus on overcompensation of service providers by mutual
funds
• Overall fees no longer relevant
 Large array of funds no longer protects fiduciaries from liability
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LESSONS FROM EXCESS FEE CASES
Tussey v. ABB (2014) liability imposed on plan fiduciaries
• Fiduciaries fail to carry out prudent fiduciary process
> Revenue sharing received by recordkeeper not calculated
> Fees not evaluated for competitiveness
• Court denies that wide range of investment options bars claim
of unreasonable recordkeeping fees
New Arguments:
• Investment options should be limited to enable qualification for
lower priced institutional shares
• Plan fiduciaries have duty to seek rebates of revenue sharing
from service providers
• $12 million settlement in Bilewicz and Yeaw cases v. Fidelity
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PROPRIETARY
FUNDS LITIGATION
PROPRIETARY FUNDS LITIGATION
First Union precedent
• Plan invested exclusively in proprietary funds
• $26 million settlement
Typical defendants:
•
•
•
•
Ameriprise Financial
Bank of America
Fidelity
Sun Trust
Causes of Action
• Fiduciary breach
> Excess fees received by service provider from mutual funds
• Prohibited transaction
> Seed money for new fund
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PROPRIETARY FUNDS LITIGATION
Statute of Limitations Defense
• Applies to prohibited transaction claims
> Protection for funds selected for inclusion on menu before
commencement of limitations period
• Less successful with breach of prudence / loyalty claims
> Continuing duty to monitor
Standing Requirement
• Plan investor needed for each challenged mutual fund
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EQUITABLE
REMEDIES AFTER
CIGNA V. AMARA
EQUITABLE REMEDIES
 Cigna v. Amara (2011)
• Plan document v. SPD
• Dispute over transition formula for conversion of DB pension to cash
balance plan
• Held: no legal authority under section 502(a)(1)(B) to order plan
amendments
Guidance on equitable remedies under ERISA 502(a)(3)(B)
• 3 traditional equitable remedies discussed
• Concurring opinion refers to discourse as nonbinding dictum
• On remand, district court orders plan reformation
> Same remedy
> New rationale, i.e., equitable reformation
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EQUITABLE REMEDIES
Contract Reformation
•
•
•
•
Mutual mistake
Fraud
Reliance
Contract principles not a good fit for benefit plans
Equitable Estoppel
• Promise
• Reliance (action or forbearance induced by promise)
Surcharge
• Breach of fiduciary duty causing loss
• Unjust enrichment
• Disagreement over whether loss to plan is required
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EQUITABLE REMEDIES
Cigna v. Amara – district ct. imposes additive transition
formula under contract reformation rationale
• Implicit / questionable assumption that participants could reject
amendment
Osberg v. Foot Locker – facts similar to Cigna v. Amara but
different result
• Alleged harm held to be speculative
Several appellate decisions apply surcharge remedy to
give money damages
9th Circuit rejects surcharge because plan must suffer loss
Application of equitable remedies continues to evolve
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THE EVOLVING
DEFINITION OF A
FUNCTIONAL
FIDUCIARY
EVOLVING DEFINITION OF FUNCTIONAL FIDUCIARY
Definition of Investment Advice Fiduciary to be reproposed
by DOL
DOL taking aggressive positions in litigation that powers of
platform providers result in fiduciary status even if not
exercised
Advisory Opinion 97-16A – power to change investment
options on platform does not result in fiduciary status
• Final decision must rest with plan sponsor
• Platform provider must provide full disclosure
• Negative elections permitted
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EVOLVING DEFINITION OF FUNCTIONAL FIDUCIARY
Leimkuehler v. American United Life Ins. Co. (2013)
• Provider’s receipt of revenue sharing would violate
ERISA if fiduciary status imposed
• DOL argues that offering a fund on investment platform is
equivalent to exercise of right to make substitutions
• 7th Circuit limits functional fiduciary characterization to
actual exercise of authority
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EVOLVING DEFINITION OF FUNCTIONAL FIDUCIARY
Healthcare Strategies v. ING(2013)
• Group annuity does not give plan right to reject
investment option substitutions
• Insurer exercises substitution authority only twice
• Court construes services as “plan administration, not
“plan management”
> Under administration prong of fiduciary definition only
authority to make substitutions (not actual exercise)
sufficient for fiduciary status
• Case settled 2014
> $15 million
> Procedures consistent with Advisory Opinion 97-16A
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EVOLVING DEFINITION OF FUNCTIONAL FIDUCIARY
Golden Star v. MassMutual Life Ins. Co. (2014)
• Management prong of fiduciary definition
> Court hold that actual exercise of authority to substitute
investment options is required to confer fiduciary status
• Plan administration prong of fiduciary definition
> No decision on possession of authority vs. actual
exercise issue
• Control over its own compensation confers fiduciary
status on service provider
> Court holds there is triable issue, because service
provider could assess management fees up to 1% of
account market value
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STATUTE OF
LIMITATIONS
DEVELOPMENTS
STATUTE OF LIMITATIONS – FIDUCIARY BREACH
ERISA statute of limitations for fiduciary violations
• 6 years from last act constituting a violation
• 3 years after earliest date plaintiff had actual knowledge of
violation
Fuller v. SunTrust Bank (2014)
• 3 year limitation period not applicable
> Proving plaintiff’s knowledge requires showing that plaintiff
actually received plan documents
• 6 year limitation period results in case dismissal
> Limitations period runs from initial fund selection
> Potentially different result if complaint reflects new violations
resulting from changed circumstances
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STATUTE OF LIMITATIONS – FIDUCIARY BREACH
David v. Alphin (2013)
• Fiduciary breach claim barred by 6-year statute of limitations
> Limitations period commences with initial fund selection
• Viable claim requires changed circumstances during
limitations period
> Poor performance
> Increased fees
Tibble v. Edison International (2013)
• Fiduciary breach claim barred by 6-year statute of limitations
• Result unchanged by ongoing nature of ERISA fiduciary duties
• New 6-year period begins if changed circumstances create
new breach
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STATUTE OF LIMITATIONS – BENEFIT DENIAL
No ERISA statute of limitations for benefit claims
• Limitations period borrowed from state law
• Date of accrual: when plaintiff should have discovered injury
Contractual provisions can limit time for bringing lawsuit
• Restrict limitations period
• Specify date of claims accrual
Heimeshoff v. Hartford Life (2013) holds contract
restrictions are enforceable
• Shorter limitations period than allowed by state law but must be
reasonable
• May specify accrual period
• Not barred by statute
• Participant put on notice
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STATUTE OF LIMITATIONS – BENEFIT DENIAL
New cases following-up on Heimeshoff
• Barriero v. NJ Bac Health Fund (2013)
> 3-year plan limitation period upheld
> Plan limits found reasonable even though limitations period begins
to run before internal claims procedure was exhausted
• Munro-Kienstra v. Carpenters’ Health Fund (2014)
> 2-year limitations period upheld
> Participant informed of limit
Steps to limit stale claims
• Amend plan to provide reasonable limitations period
• Include reasonable rules for accrual of claims in the amendment
• Notify participants
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POST WINDSOR
DEVELOPMENTS
REGARDING SAME
SEX SPOUSES
SAME-SEX SPOUSE DEVELOPMENTS
United States v. Windsor(2014)
• DOMA held unconstitutional
Place of Celebration Rule
• IRS and DOL release guidance
• Valid same-sex marriage will be recognized even if
couple lives in a state that does not recognize same-sex
marriage
• Prospective effect: from September 16, 2013
Query retroactive effect of Windsor?
• Pre-June 26 (date of Windsor decision)?
• Pre- September 16, 2013 (place of celebration rule)?
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SAME-SEX SPOUSE DEVELOPMENTS
Cozen O’Connor, P.C. v. Tobits (2013)
• Court holds same-sex spouse entitled to
surviving spouse benefit under profit sharing plan
• Court looks to Illinois law (place of domicile at
time of death)
>Query result where domiciliary state hostile to
same-sex marriage?
• Participant dies in 2010
>Court implicitly applies Windsor retroactively
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SAME-SEX SPOUSE DEVELOPMENTS
Roe v. Empire Blue Cross Blue Shield. (2014)
• Holds employee not entitled to enroll same-sex
spouse as health plan dependent
• Self-insured plan
• Plan provision specifically excludes same-sex
spouses
• Court holds that ERISA grants broad discretion
as to welfare plan coverage
• Cozen O’Connor case distinguished
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RECENT ERISA LITIGATION AND
RELATED TITLE I ISSUES
MARCIA S. WAGNER, ESQ.
AUGUST 26, 2014
A0128252.PPTX