Supreme Court's heightened interest in ERISA
Increase in Department of Labour investigations
New standards of fiduciary prudence
De-risking your pension liabilities
New definition of 'fiduciary'
Growing 'conflict of interest' claims in benefits litigation
Expansive remedies in litigation
Risk of attorneys' fees in lawsuits
Dangerous ERISA fiduciary exception to attorney-client privilege
Nearly every large US company, whether public or private, offers pension and welfare benefits to its employees. In the 40 years since the Employee Retirement Income Security Act (ERISA) was enacted, the courts and the Department of Labour have generated a morass of confusing and inconsistent rules that companies, benefit plans and plan fiduciaries must follow. Trying to stay on top of these rules and opinions can be daunting, and failure to do so can be expensive. Here are 10 reasons to consult an ERISA litigator regularly.
Over the past five years, the Supreme Court has ramped up its interest in ERISA. It has:
- significantly expanded the remedies available (CIGNA v Amara);
- confirmed the right of employers to choose plan terms that place time bars on lawsuits (Heimeshoff);
- acknowledged that fiduciaries have a duty to monitor past investment decisions (Tibble);
- instructed how courts should decide preliminarily whether fiduciary breach lawsuits are valid (Dudenhoeffer); and
- determined the standards for contract interpretation over the vesting of retiree medical benefits (Tackett).
Companies would be wise to evaluate the relevance of each of these pronouncements in administering their own benefit plans.
The number of Department of Labour investigations of pension plans has increased dramatically in recent years. These audits are often unfocused and protracted, with the department asserting that its enforcement authority is seemingly unlimited. An experienced ERISA litigator can help to expedite the process, decide whether tolling agreements are warranted and identify and address any trouble spots. Equally important, experience has shown that, with effective negotiation, the Department of Labour often alters its positions.
What matters most in any plan administration is the process followed, not the decision reached. As the courts have written, ERISA requires fiduciaries "to be prudent, not prescient". The best protection plan that fiduciaries can have against a lawsuit is a carefully contemplated and followed process for making plan decisions. Recent court cases have resulted in large settlements, if not judgments, as a result of poor documentation of plan committee deliberations or an inability to show prudent decision making.
Trying to keep retirement plans adequately funded is a challenge when interest rates are low and capital markets are volatile. An emerging solution is de-risking of pension liabilities. Companies can liquidate uncertain liabilities by purchasing group annuity contracts to pay future benefits. Done correctly, de-risking can be a win-win for employers and employees. However, any company considering de-risking must be mindful of the best practices to avoid litigation and enforcement actions.
The past decade has shone a light on how plans disclose the fees that participants pay for investments and plan administration. Aggressive class counsel (often plaintiffs' securities firms) have made this area a focal point in recent years, filing nationwide class actions and extracting large settlements. On the heels of the uptick in litigation, the Department of Labour put into effect a new rule requiring plan fiduciaries to obtain detailed fee disclosures from service providers. Those disclosures may well prompt a new wave of litigation.
Since ERISA was passed, the courts have struggled with the threshold question of whether defendants named in a fiduciary breach lawsuit constitute plan fiduciaries. The result of this struggle has left little predictability as to whether boards of directors, chief executive officers or other senior officers named as defendants will be dismissed early or have to face the distraction of litigation. Compounding this conundrum is the Department of Labour's recent attempt to broaden ERISA's fiduciary definition through formal rulemaking. While the extent of the department's success remains uncertain, this is a good time to review their structure, with an eye towards cordoning off the board and most senior officers from plan investment decisions.
In Glenn v Metropolitan Life the Supreme Court identified the circumstances in which discovery might be appropriate in benefits litigation. Before the court's intervention, these benefits cases were typically handled without any discovery, with a court deciding – based only on the administrative record – whether the plan administrator's decision was reasonable. As a result of Glenn, plaintiffs' counsel routinely plead a conflict of interest by the plan administrator, opening the door to expansive (and expensive) discovery. Plans can reduce the breadth and cost of discovery demands by strengthening the plan language and internal procedures for deciding benefit claims.
Until the Supreme Court decided CIGNA v Amara in 2011, relief in ERISA cases was generally limited either to the benefits owed or to equitable, non-monetary remedies. In CIGNA the court revisited and reinterpreted its past precedents. Reflecting on equitable remedies, the court identified three mechanisms that courts of equity traditionally used to exact monetary penalties, including a surcharge for harm suffered in unlimited amounts. Nearly every lawsuit since then seeks a surcharge, opening the door for plaintiffs' attorneys to demand a greater settlement or to seek a higher award.
The Supreme Court expanded the ability of participants to recover their attorneys' fees in benefits lawsuits. Before the Supreme Court's ruling in Hardt v Reliance Standard Life, courts typically applied a bad-faith standard to decide whether a party was entitled to fees under ERISA's discretionary fee provision. As a result of Hardt, courts must now award fees if there has been a reasonable degree of success by the participant. Courts have interpreted Hardt to entitle participants to recover attorneys' fees even when benefit determinations are only remanded to the plan administrator for further review. A prudent, documented and followed process for handling benefits can go far in achieving success in the courtroom and mitigating this risk.
Leaving the most troubling ERISA doctrine for last, this exception is a trap for the unwary. Courts have been slow to issue applicable rulings, but those opinions that exist might be your most formidable opponent. Essentially, the doctrine holds that when legal advice is given for purposes of plan administration, the participants – and not the fiduciaries – are the beneficiaries of that advice. The result is that a fiduciary who obtains problematic or concerning legal advice may be unable to protect that advice from disclosure in court.
For further information on this topic please contact Nancy G Ross or Samuel Myler at Mayer Brown LLP's Chicago office by telephone (+1 312 782 0600) or email (firstname.lastname@example.org or email@example.com). Alternatively, contact Brian D Netter at Mayer Brown LLP's Washington DC office by telephone (+1 202 263 3000) or email (firstname.lastname@example.org). The Mayer Brown International LLP website can be accessed at www.mayerbrown.com.
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