ERISA Update
Roberta J. Ufford
Groom Law Group, Chartered
April 29, 2009
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


Litigation and Enforcement Update
 Employer Securities
 401(k) Fee Cases
 Securities Lending
 Investment Fraud - Madoff
 Valuation
 Delinquent Contributions
 Meals and Gifts Received by Fiduciaries
Corrections
Other New DOL Guidance
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Litigation Update - Employer Securities


2008 Surge in New Stock-Drop Claims
 Participants claim plan sponsor fiduciaries breached
their duties by (a) offering or retaining stock as an
investment option and (b) failing to disclose key
(insider) information about company financial matters.
Financial Industry is New Target
 Bear Sterns; Wachovia; Lehman Bros. Holdings, Inc.;
Regions Financial Corp; Fifth Third Bancorp; Citigroup,
Inc.
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Litigation Update - Employer Securities

2008 Stock Drop Decisions
 Participants did not rebut presumption that fiduciaries
should follow plan terms requiring the plan to invest in
and hold employer stock; plan fiduciaries should not be
in “untenable position” of having to predict future
performance.

Kirschbaum v. Reliant Energy, Inc., 526 F.3d 243 (5th Cir.
2008); see also Ward v. Avaya Inc., 45 EBC 1449 (3d Cir.
2008) (employee was not able to overcome presumption
that, if the plan that mandates employer stock investment,
fiduciaries are presumed prudent in following plan terms
under Moench v. Robertson, 62 F. 3d 553 (3d Cir. 1995)).
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Litigation Update - Employer Securities

2008 Stock Drop Decisions
 Courts are mixed in recognizing claims that employers
breached their fiduciary duties by not disclosing
information about employer’s financial situation.

In re Guidant Corp. ERISA Litigation, 44 EBC 1236 (S.D.
Ind. 2008) (court did not dismiss failure to disclose claims)
but see, Urban v. Comcast Corp., 45 EBC1161 (E.D. Pa.
2008) (court dismissed claims that failure to disclose was
a fiduciary breach).
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Litigation Update - Employer Securities

Shirk v. Fifth Third Bancorp (W.D. Ohio Jan 29, 2009)
 Plaintiffs alleged breach of fiduciary duty in light of
negative effects of merger of Fifth Third with Old Kent
Corp., Fifth Third offered employer stock as a plan option
and also matched contributions with stock.
 Court granted summary judgment to Fifth Third:
 Plaintiffs did not overcome the Moench presumption;
stock price increased during class period; expert
testified that investment in the stock was prudent.
 Plaintiffs did not show that defendants were acting in
a fiduciary capacity when making alleged
misrepresentations.
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Litigation Update - Employer Securities

“Reverse” Stock Drop - Bunch v. W.R. Grace
 Independent fiduciary did not breach fiduciary duties by
divesting investments in W.R. Grace.
 Court recognizes sound fiduciary decision process
based on facts known at the time; rejects using Moench
presumption against fiduciaries.


532 F. Supp. 2d. 283 (D. Mass. 2008), aff’d 555 F. 3d 1 (1st Cir. 2009).
But see Stanford v. Foamex LP, 44 EBC 2072 (E.D. Pa.
2008) (refusal to dismiss claims that fiduciaries breached
duties by liquidating employer stock); Tatum v. Reynolds Co.,
44 EBC 2859 (M.D.N.C. 2008) (claims that fiduciaries should
not have sold Nabisco stock).
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Litigation Update - 401(k) Fee Lawsuits

Claims by participants against plan sponsors allege:
service arrangements with “unreasonable fees” and “hidden and
excessive fees” were imprudent;
 fiduciaries did not understand/recognize revenue sharing
arrangements; and
 fiduciaries did not disclose to participants in “proper detail and
clarity” the transactions, fees and expenses.


Claims by participants and/or plan sponsors allege:

service provider is a fiduciary based on selection of plan options
and/or failure to disclose fees, and
 breached fiduciary duties by failing to disclose and engaging in
prohibited transactions, e.g.,“using” plan assets, self-dealing,
receiving kickbacks.
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Litigation – 401(k) Fee Lawsuits
Service Provider Fiduciary Status


Hecker v. Deere & Co., 496 F. Supp. 967 (W.D. Wisc. 2007), aff’d
45 EBC 2761 (7th Cir. 2009) (Fidelity Trust not fiduciary
responsible for selecting plan investment options); Columbia Air
Services, Inc. v. Fidelity Management Trust Co., Civ. Act. No. 1:07cv-11344 (9/30/08 D. Mass.) (granting Fidelity motion to dismiss);
but see Tussey v. ABB Inc.; 2008 WL 379666 (W.D. Mo. 2008)
(Fidelity could be a fiduciary with respect to choosing plan
investment options).
Charters v. John Hancock Life Ins. Co., 1:07-CV-11371-NMG
(9/30/08 D. Mass. (on motion for summary judgment, holds that
Hancock is a fiduciary based on ability to change funds under
annuity contract); Phones Plus, Inc. v. The Hartford Financial
Services Group, Inc., 2007 WL 3124733 (D. Conn 2007) (Hartford
could be a fiduciary based on ability to change funds available
under annuity contract).
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Litigation – 401(k) Fees - In-House Plans

Recent lawsuits allege prohibited transactions and breach of
duty of prudence in connection with in-house plan
investments in plan sponsor investment products.

Gipson v. Wells Fargo & Co., No. 08-4546 (D. Minn. March 13,
2009) (participants could go forward with claims that company
breached its fiduciary duties and engaged in prohibited
transactions by investing in affiliated mutual funds).
 See also Leber v. Citigroup, Inc., 07-9329 (S.D.N.Y. filed Oct.
18, 2007); David v. Alphin, No. 07-0011 (W.D.N.C. filed July 1,
2007).
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Litigation – 401(k) Fees - In-House Plans

One court recently held that “in-house fiduciaries” were
prudent when investing in the sponsor’s investment
products, where there was “appropriate due diligence and
procedural prudence in selecting proposed investments
and monitoring the Plan’s performance.” Court noted that
fiduciaries:
 Considered other products;
 Regularly reviewed performance and fees; and
 Retained an independent consultant

Dupree v. Prudential Life Ins. Co. of America, 2007 WL
2263892 (S.D. Fla. 2007).
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Litigation – Sales of Affiliates


Plaintiffs allege that plan sponsor benefited by using an
affiliated investment management unit and/or from a sale
of a recordkeeping unit.
 Nolte v. Cigna, 2:07-cv-02046-HAB-DBG (C.D. Ill.
filed Feb. 26, 2007)
DOL has brought similar claims in connection with the
sale of investment management units.
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Litigation – Securities Lending

Recently filed cases allege:

Plan participating in collective trust (CIT) incurred losses and
could not redeem from CIT where CIT had losses and received
illiquid securities because of participation in securities lending.


BP Corp. North America Inc. Savings Plan Investment Oversight
Committee v. Northern Trust Investments, N.A., Case No. 08CV6029 (N.D.
Ill.) (filed October 21, 2008).
Collateral imprudently invested in “risky” and “illiquid” securities;
inaccurate valuation; fraudulent concealment; refusing to redeem
client from securities lending program.

Workers Compensation Reinsurance Assoc., et. al., v. Wells Fargo Bank,
N.A., et. al., Case No. 62-CV-08-10825 (State of Minn., 2d Jud. Dist., Cty of
Ramsey) (filed Oct. 22, 2008); see also AFTRA Retirement Fund v. JP
Morgan Chase Bank, N.A., (S.D.N.Y., No. 1:09-cv-00686-SAS, filed Jan.
23, 2009) (investment of collateral was imprudent).
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Litigation - Investment Fraud - Madoff

DOL Statement re: Duties of Fiduciaries (Feb. 5, 2009)
Plan fiduciaries should take “appropriate steps”  request disclosure from investment and fund managers
and other intermediaries about possible exposure;
 seek advice about likelihood of losses;
 appropriate disclosures to other fiduciaries/participants;
 consider whether the plan has claims that should be
asserted and ensure claims are filed within required
deadlines.

http://www.dol.gov/ebsa/pdf/madoffguidance.pdf
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Litigation - Investment Fraud - Madoff
 Multiple
lawsuits against consultants and managers
are expected.

E.g., Pension Fund for Hospital and Health Care
Employees v. Austin Capital Management Ltd., 0900615 (E.D. Pa., filed Feb. 12, 2009).
 Madoff
Plea Agreement, included (among others) a
charge of “theft from an employee benefit plan.”
DOL-EBSA involved in the investigation.

www.dol.gov/ebsa/pdf/cepr031209.pdf
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Litigation and Enforcement - Valuation

Boston regional office “10-day” letter alleging ERISA violations in
connection with plan holding of LP interests, including (i) failure
to establish a process to evaluate valuation procedures, (ii)
failure to report LP interests at “current value” when valued at
“cost”, and (iii) failure to report current value of LP interest when
valued using unaudited financial statements.

DOL explained “[i]t is incumbent on the [plan fiduciary] to
establish a process to evaluate the fair market value of any hard
to value assets held by the [p]an” and the plan fiduciary should
“have thorough knowledge of the general partner’s valuation
methodology to assure it comports with the fund’s written
valuation provisions and reflects fair market value.”
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Litigation and Enforcement - Valuation


“Ludwig Letter” (March 21,1996) discusses fiduciary
rules for “derivatives”; applies to any hard to value asset.
 Fiduciaries must consider whether they have access
to appropriate information to evaluate risk/return and
appropriately value assets.
Court holds pension trustee breached fiduciary duty by
undervaluing plan assets resulting in a reduction of
benefits paid to participants when plan was terminated.

Solis v. Current Development Corp., No. 08-1228 (7th Cir.
March 5, 2009).
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Litigation and Enforcement Delinquent Contributions


Recovering delinquent contributions continues to be a DOL
enforcement priority. See www.dol.gov/ebsa/newsroom/fsecp.html.
Proposed “safe harbor” for deposits of employee
contributions. See 73 Fed Reg. 11070 (Feb. 29, 2008).

Current rule: contributions must be transmitted as soon as
“reasonably segregated” but no later than 15th business day of
the month following when wages were paid.
 Proposed rule for plans with fewer than 100 participants:
contributions will be timely if transmitted within 7 business days.
 For large plans, DOL looks to plan’s past practice as
benchmark; may question whether contributions not transmitted
within 3 business days are timely, based on industry standards.
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Litigation and Enforcement Delinquent Contributions

FAB 2008-01 (Feb. 1, 2008) addresses “trustee”
responsibility to collect delinquent contributions and plan
documentation requirements.
 If plan documents state that trustee is not responsible
for collecting contributions; documents must assign
responsibility to another fiduciary.
 Named fiduciary is generally responsible for
whether plan documents assign responsibility.
 A trustee may be liable as a co-fiduciary if trustee is
aware that contributions are delinquent.
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Litigation and Enforcement Delinquent Contributions

Recent Developments
 DOL Letters urge use of VFCP in connection with
delinquent contributions generated from Form 5500.
 DOL case against sponsor of a prototype plan
document in connection with delinquent employer
contributions.
 Chao v. Plan Benefits Services, Inc., Civ. Action #
7-11474-DWP (D. Mass.)
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Litigation and Enforcement Delinquent Contributions

Court decisions re: responsibility for contributions.
 Recordkeeper didn’t have duty to ensure plan was funded
or notify participants that employer did not contribute.

Wilkinson v. Haworth, 186 F. Supp. 2d 687 (S.D. Miss. 2002).
 TPA not liable where sponsor embezzled contributions.
 CSA 401(k) Plan v. Pension Professionals, Inc., 195 F. 3d 1135 (9th
Cir. 1999).
 Recordkeeper/investment
manager could be liable as cofiduciary where sponsor did not transmit assets.

Silverman v. Mutual Benefit Life Ins. Co., 138 F. 3d 98 (2nd Cir.
1998).
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Litigation and Enforcement Meals Gifts and Entertainment

DOL Enforcement Guidance (August 2008)
 DOL may treat as “insubstantial” (and not an “apparent”
ERISA violation) a fiduciary’s receipt of meals and other
gratuities of less than $250/year from a source.
 Special rules for educational conferences allow
reimbursement of conference costs to the plan, if
attendance is related to attendee’s duties and expense
is reasonable in light of the benefit to the plan.
 Plan fiduciaries should maintain policies and
procedures to prevent abuses.

See www.dol.gov/ebsa/oemanual/cha48.html.
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Corrections - Background

Background; Consequences of ERISA violations
 ERISA
section 409 - requires fiduciaries to make plans
whole for any losses resulting from a breach of fiduciary
duty and to disgorge any fiduciary profit from a breach.
 ERISA section 502(l) requires DOL to assess a civil
penalty against fiduciaries in the case of a breach of
fiduciary duty; penalty is 20% of the “applicable
recovery amount” under a court order or settlement
agreement.
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Corrections - Background

Code section 4975 (applies to most pension plans)
 Requires “correction” of a prohibited transaction (PT),
consistent with IRS regulations.
 A “disqualified person” (includes fiduciaries; parties in
interest) who engages in a PT must pay excise tax of 15% of
the “amount involved” each year until correction; for
continuing transactions, a new PT is deemed to occur each
new plan year. If the 15% tax is not paid, IRS may assess a
100% tax.
 Disqualification is penalty for an IRA, if IRA owner engages
in a prohibited transaction (excise taxes not applicable).
 ERISA section 502(i) permits DOL to impose a 5% penalty
on PTs that are not subject to Code section 4975.
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Corrections


Voluntary Fiduciary Compliance Program
 Covered transactions include: correction of delinquent
contributions; sale of illiquid security to a party in interest;
correction of excess fees paid from a plan; below-market
loans; participant loan errors. 71 Fed. Reg. 20261 (Apr. 19, 2006).
Individual Exemptions

DOL recently issued individual PTEs to provide liquidity for
Auction Rate Securities, see, 74 Fed. Reg. 8992 (Feb. 27, 2009)
(granting exemptions for sales of ARS from plans to the plan
sponsor or to selling brokers, and interest-bearing liquidity loans
to plans by a selling broker, if sponsor guarantees).
 See also PTE 2008-03, 73 Fed. Reg. 13582 (Mar. 13, 2008)
(retroactive relief for plan’s acquisition of non-voting securities).
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Corrections

“Expro” Process
 Applicants may obtain exemptions that are substantially
similar to at least two previously issued exemptions
within about 90 days.
 But DOL may reject “expro” process for transactions
that present “opportunity for abuse.”
 PTE 96-62, 61 Fed. Reg. 39988 (July 31, 1996),
amended 67 Fed. Reg. 44622 (July 3, 2002).
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Corrections

Statutory Exemptions
 408(b)(17) exempts a sale of assets between a plan
and party in interest (other than a fiduciary) for
adequate consideration.
 408(b)(2) exempts “inadvertent” transactions involving a
plan’s acquisition, holding or sale of a security, if
corrected within 14 days after discovery that the
transaction was otherwise prohibited.
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Other New Guidance - Bank Deposits

DOL Advisory Opinion 2009-01A
 Discusses application of Section 408(b)(4), which exempts
the investment of plan assets in deposits that bear a
reasonable rate of interest in a plan fiduciary bank, if
authorized by plan documents or an independent
fiduciary.
 Section 408(b)(4) does not provide an exemption from
ERISA’s “anti-kickback” rule (section 406(b)(3)); but DOL
explains that bank’s receipt of a “benefit” – such as
reduced borrowing needs as a result of deposits – is not
received by a party “dealing with the plan” for purposes of
ERISA section 406(b)(3).
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Other Guidance Participant Investment Advice

ERISA § 408(b)(14) – Two “Eligible Arrangements”
 Level-fees: Adviser’s fees do not vary based on advice,
or
 Computer Model: Adviser provides advice using a
computer model certified by an independent expert.
 Plan fiduciary must authorize arrangement for plan.
 Detailed participant disclosure, including all program fees
and the fiduciary adviser’s compensation arrangement.
(DOL required to issue model form).
 Annual independent audit of services is required.
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Other Guidance Participant Investment Advice

FAB 2007-01 interprets Section 408(b)(14)
 Fee Leveling – financial institution and individual
adviser is the “fiduciary adviser” for purposes of the
fee leveling analysis. Fiduciary adviser fees must be
level, but fees of affiliates may vary.
 Existing DOL interpretations that allow participant
advice programs are not disturbed.
 Plan sponsor duties are same where sponsor relies
on other relief to engage a fiduciary adviser.
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Other Guidance Participant Investment Advice

DOL issued final rule and class exemption.

Applies to IRAs and plan participants
 Regulation requires “fee leveling” at the individual adviser
and also to the ”fiduciary adviser” institution; class
exemption limits fee leveling to individual adviser.
 Class exemption permits “off-the-model advice” and for IRAs
only, permits the use of educational materials in place of
computer modeling, if adviser determines no appropriate
model exists.


74 Fed. Reg. 3822 (January 21, 2009).
DOL delayed the effective date until May 22, 2009 and is
expected to revise the regulation and class exemption.

74 Fed. Reg. 11847 (March 20, 2009).
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Other New DOL Guidance

Selection of Annuity Providers – Safe Harbor for Individual
Account Plans, 73 Fed. Reg. 58447 (Oct. 7, 2008) (adopting
29 CFR 2550.404a-4).


Amendment to Interpretative Bulletin 95-1, 73 Fed. Reg. 58445 (Oct.
7, 2008) (clarifies that IB 95-1 only applies to defined benefit pension
plans)
Bonding Requirements - Field Assistance Bulletin No. 200804, Guidance Regarding Fidelity Bonding Requirements,
November 25, 2008.
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Other New DOL Guidance


Economically Targeted Investments - Interpretative Bulletin
Relating to Investing in Economically Targeted Investments,
73 Fed. Reg. 61734 (Oct. 17, 2008) (adopts IB 2509.08-1,
modifying and superceding IB 94-1).
 See also Adv. Op. 2008-05A (June 27, 2008) (use of plan
assets to achieve collective bargaining objectives)
Exercise of Shareholder Rights - Interpretative Bulletin
Relating to Exercise of Shareholder Rights, 73 Fed. Reg.
61731 (Oct. 17, 2008) (adopts IB 2509.08-2, which modifies
and supercedes IB 94-2).
 See also Adv. Op. 2007-07A (Dec. 21, 2007) (use of plan
proxy voting rights to further public policy objectives not
connected to enhancing value of plan investments).
33
Other New DOL Guidance


QDIAs - Field Assistance Bulletin No. 2008-03,
Guidance Regarding Qualified Default Investment
Alternatives, April 29, 2008 (clarifies certain issues under
QDIA regulations at 29 CFR 2550.404c-5).
 See also 73 Fed. Reg. 23349 (Apr. 30, 2008)
(amendments to QDIA regulation modifies definition
of “stable value” QDIA).
Abandoned Plans - Amendments to Safe Harbor for
Distributions From Terminated and Abandoned
Individual Account Plans to Non-Spouse Beneficiaries,
73 Fed. Reg. 58459 (Oct. 7, 2008).
34
Other New DOL Guidance


Statutory Exemption for Cross-Trading of Securities, 73
Fed. Reg. 58450 (Oct. 7, 2008) (final rule at 29 CFR
2550.408b-19 implements content requirements for
written cross trading policies and procedures under
ERISA section 408(b)(19)(H)).
“Householding” Exemption - Proposed individual PTE
would permit Fidelity to combine IRAs sponsored or
custodied by Fidelity with the accountholder's personal
accounts and those of his/her family members
("householding") for purposes of offering higher interest
rates on certain deposit accounts and lower interest
rates or costs on certain loans by Fidelity entities, under
certain conditions. 73 Fed. Reg. 51516 (Sept. 3, 2008).
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Questions?
Roberta J. Ufford, Esq. - (202) 861-6643
Groom Law Group, Chartered
1701 Pennsylvania Avenue, NW
Suite 1200
Washington, DC 20006
rju@groom.com
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