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ERISA Litigation Costs

Posted on March 2, 2015 by Susan Mangiero

After having just blogged about the April 13-14, 2015 American Conference Institute program about ERISA litigation in Chicago, it was somewhat coincidental that an article on the same topic crossed my desk today, painting a grim picture of what could happen to a plan sponsor in the event of a lawsuit.

While only two pages long, An Ounce of Prevention: Top Ten Reasons to Have an ERISA Litigator on Speed Dial invites readers to consider the advantages of staying abreast of increasingly complex rules and regulations as part of a holistic prescription for mitigating legal risk. Authors Nancy Ross and Brian Netter (both partners with Mayer Brown) cite heightened interest in ERISA by U.S. Supreme Court justices, a rise in U.S. Department of Labor enforcement and court decisions about the importance of having a prudent process. They add that de-risking compliance, disclosure requirements, conflicts of interest, large settlements and attorney-client privilege restrictions are other potential landmines for a public or private company that offers retirement benefits.

Elsewhere, Employee Benefit Adviser contributor, Paula Aven Gladych, predicts that the U.S. Supreme Court review of Tibble v. Edison International (Tibble) could increase ERISA litigation risk for plan sponsors, regardless of its decision. In Edison decision could be ‘slippery slope’ for plan fiduciaries (February 26, 2015), she writes that the court focused its attention on duty to monitor fees and investments, generally by investment committees and plan administrators of 401(k) plans. Interested readers can download the February 24 2015 Tibble hearing transcript.

Recent events reflect multi-million dollar resolutions, even when an ERISA litigation defendant feels strongly that it is in the right. In Settlements offer lessons in breach suits (Pensions & Investments. February 23, 2015), Robert Steyer reports that publicly available documents can shed light about what types of disputes are being settled, the dollar amounts involved and any non-monetary requests made by the plaintiffs. Competitive bidding as part of selecting a vendor is one example. He goes on to say that regulatory opinions are thought to be particularly helpful when they are viewed by the retirement industry as de facto guidance.

I will report back after attending the ERISA litigation conference in a few weeks although I suspect that judges, litigators and corporate counsel who speak will convey a similar message with respect to fiduciary scrutiny. As Bob Dylan sang, the times they are a-changing.

U.S. Supreme Court and Tibble v Edison International

Posted on August 21, 2014 by Susan Mangiero

According to SCOTUSBLOG.com. Glenn Tibble, et al. v. Edison International, et al (Tibble v Edison) is seeing continued action after a petition for a writ of certiorari was filed on October 30, 2013 by counsel of record for the petitioners. Click here to download the 319 page document. On February 7, 2014, attorneys for respondents filed a brief in opposition. On March 3, petitioners’ counsel filed a supplemental brief. Thereafter, on March 24 of this year, the Solicitor General was asked to file a brief in this ERISA fee case. That brief has now been filed and can be accessed by clicking here. (Thank you to Fiduciary Matters lead blogger, Attorney Thomas Clark. for sending the file.)

As an economist who leaves the legal issues for attorneys to vet, it seems that this filing opens the door to another review of ERISA matters by the U.S. Supreme Court. Whether that is good or bad, depends on your perspective. I would like to think that further discussions about fiduciary best practices by the highest U.S. court would be a positive outcome.

401(k) Fee Letter to Trustees

Posted on July 26, 2013 by Susan Mangiero

If you were one of the lucky ones, you may have noticed a new item in your mailbox. According to Wall Street Journal reporter Kelly Greene, a letter about 401(k) fees has been sent to roughly 6,000 companies. The author, Ian Ayres, is a law professor at Yale University. The message is that some companies are paying too much in fees and that offenders can expect to see their name in lights. In Letters About 401(k) Plan Costs Stir Tempes t (July 24, 2013), Greene writes that critics have pounced on the age of the data used to determine whether monies paid to service providers are too much or just right. Certainly stale inputs or numbers that are overly broad could lead to accusations of a Goldilocks porridge test instead of a rigorous assessment of costs. Since the final paper is not yet published, it is impossible to gauge details of the rigor applied in assessing fee levels.

What is particularly interesting to me is that various articles about the letter have generated large numbers of comments with no apparent consensus about the helpfulness of the forthcoming study. (The study is said to have extracted data from federal regulatory filings.) Some readers say bravo to a topic that demands attention. Others say not so fast unless you incorporate an assessment of fund performance, identify what services are being offered and review the quality of vendor support.

Several senior ERISA attorneys have been quick to comment, perhaps because 401(k) fee litigation is still a reality for more than a few sponsors. In Much ado about nothing. or is it? (July 18, 2013) Nixon Peabody lawyers Jo Ann Butler and Eric Paley point out that even the U.S. Government Accountability Office (GAO) document entitled 401(K) Plans. Increased Educational Outreach and Broader Oversight May Help Reduce Plan Fees (April 2012) addressed limitations of the Form 5500. Attorneys Butler and Paley add that high fees do not necessarily constitute a fiduciary breach and that ERISA does not require a plan to offer the lowest cost investments available, nor that they even fall within a particular range. Instead, decision-makers with fiduciary responsibilities must select investments with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. When I asked Attorney Paley for a comment about what he deemed the key take away point, he replied that the letter may upset the plan sponsor community, though it remains to be seen whether Ayres’ study will serve as a catalyst to more expansive plan fee litigation.

Advocates point out that any heightened transparency about 401(k) fees that participants pay is a good thing. In A Professor Puts the Scare in Plan Sponsors (July 22, 2013), John Rekenthaler describes annoyances as part of the deal. A Vice President with Morningstar, he adds that The 401(k) plan has given fund companies nearly $3 trillion in incremental assets — $15 billion in annual revenues. and permitted corporations to shed the burden of guaranteeing pensions. He states that Those benefits for fund companies and plan sponsors don’t come for nothing. They come with a spotlight.

What should be a point of universal agreement is that facts and circumstances must be considered in evaluating the prudence of any fee arrangements and the related monitoring of service providers.

Tibble v. Edison and ERISA Fiduciary Breach Issues

Posted on March 22, 2013 by Susan Mangiero

Speedy and insightful as always, ERISA attorney Stephen Rosenberg has commenced a series of blog posts that describes his view of the hot off the press conclusions made by the United States Court of Appeals for the Ninth Circuit in Tibble v. Edison. Click to access the March 21, 2013 Tibble v. Edison opinion. This ruling will no doubt receive much attention in the coming days as jurists and ERISA fiduciaries digest its content. Some will view this adjudication as yet another reminder that prudent process must be undertaken and can be demonstrated with respect to a host of issues (although the outcome is mixed in terms of plaintiff versus defendant wins). Issues include the selection of investment choices and the fees paid accordingly. Click to access the amicus brief filed by the U.S. Department of Labor in support of the plaintiffs.

I will leave court commentary to the legal experts. Click to access the Boston ERISA & Insurance Litigation Blog for his analysis about this case and many more.

SEC and Revenue Sharing Enforcement

Posted on September 16, 2012 by Susan Mangiero

According to its September 6, 2012 press release, the U.S. Securities and Exchange Commission (SEC) settled with two Portland, Oregon investment advisory firms for $1.1 million. At issue was whether investors were harmed due to the allegedly hidden revenue-sharing arrangements in place that may have resulted in a less than neutral basis for recommending certain funds. Neither party admitted or denied the regulator’s charges. See SEC Charges Oregon-Based Investment Adviser for Failing to Disclose Revenue Sharing Payments , September 6, 2012.

The issue of revenue sharing is unlikely to go away, especially with multiple regulators paying close attention now. The SEC had said that it plans to ask more questions about the independence, or lack thereof, that characterizes the relationship between professionals who give advice and the brokers and/or asset managers they use. Mr. Marc J. Fagel, Director of the SEC’s San Francisco Regional Office, states that there will be a continued focus on enforcement and examination efforts related to uncovering arrangements where advisers receive undisclosed compensation and conceal conflicts of interest from investors.

The U.S. Department of Labor (DOL) is likewise investigating whether revenue-sharing arrangements are being adequately disclosed. A few months ago, DOL settled with Morgan Keegan and Co. According to published accounts, monies will be returned to nearly a dozen pension plans by Morgan Keegan for having received a fee in exchange for recommendations it made about hedge fund vehicles. Morgan Keegan will also need to disclose whether it is acting as an ERISA fiduciary. See Morgan Keegan settles with DOL over revenue-sharing accusations by Darla Mercado (Investment News. April 16, 2012).

Given recent court activity, more will be said later on by this blogger about when the practice of revenue-sharing could make sense and when there could be problems.

Pension Limited Partners and Private Equity Fees

Posted on July 15, 2012 by Susan Mangiero

News about private equity scions has dominated the headlines during this almost home stretch of the 2012 U.S. presidential campaign but other reasons abound as to why we should pay attention to this $2.5 trillion market, not the least of which is a continued allocation to this asset class by plan sponsors.

According to Top 200 pension funds still carrying torch for alternatives , Pensions & Investments writer Arleen Jacobius (February 6, 2012) describes a 16% increase to $313 billion for the year ending September 30 or about three times the commitment to hedge funds for the same time period. Seeking diversification and higher returns are common explanations for the attraction.

The flip side is that private equity funds want pension money. In Private equity courts pension funds for M&A finance , Reuters ‘ Simon Meads writes that private equity firms in Europe are sounding out yield-hungry institutional investors as an alternative to hard-pressed banks.

Pensions, endowments and foundations are getting the message that they may be in the cat bird seat in terms of power and the ability to negotiate on their terms (assuming that they are not creating an in-house private equity bench or partnering with industry giants as co-investors to source deals). In Private equity LPs draw favorable deals from GPs (The Deal. July 12, 2012), Vyvyan Tenorio writes that the current supply-demand relationship is allowing institutional investors to enjoy a bigger slice of transaction fees charged to portfolio companies when they exit. Pensions may receive a break on management fees too, depending on the willingness of market leaders to budge for large check-writers, many of which are asking that a separately managed account be established.

Besides the tug of war between general partners and limited partners over fees, the institutional presence is being felt in discussions about compliance and best practices.

Foley & Lardner LLP attorneys Roger A. Lane and Courtney Worcester cite valuation methodologies and the use of debt to finance deals as two areas that keep Private Equity In The Crosshairs (Law360.com. July 11, 2012). Referencing several current lawsuits to illustrate each issue, they write that private equity funds are likely to face certain specific legal hurdles and challenges in the near future.

Law professor Steven Davidoff and New York Times contributor adds that limited and costly credit, slower fund-raising, a decline in returns and more expensive transactions are some of the reasons that small and medium players are heading for the hills. Even investing outside the United States could be a problem if local economies slow down and/or finding a partner is difficult and expensive. According to For Private Equity, Fewer Deals in Leaner Times (Deal Book, New York Times. May 29, 2012), Davidoff adds that industry consolidation will continue, activist deals may become more popular (when they offer more bang for the buck) and pursuing targets will require aggressive attention.

All in all, the prognosis for the private equity industry reflects structural changes in the global markets and the relationship between investors like pension plans and their general partners.

ERISA Litigation Against Service Providers

Posted on July 7, 2012 by Susan Mangiero

Seyfarth Shaw ERISA attorneys Ian Morrison and Violet Borowski wrote an interesting blog post about what they describe as a discernible growth in lawsuits filed by (or on behalf of) ERISA plans (sometimes class actions) against investment providers for charging excessive fees or otherwise gleaning improper profits from investments used in ERISA plans.

What they point out as noteworthy is the fact that the plans’ fiduciaries frequently have no involvement in filing a complaint against a service provider(s) since several courts have allowed plan participants to seek redress without getting permission or even having an obligation to inform a company sponsor.

At first blush, they offer that this situation may seem benign and possibly even helpful to a sponsor if the result of litigation against a service provider(s) results in reduced costs for everyone. The plot thickens however if a participant’s complaint and related discovery later leads to legal scrutiny of a plan’s fiduciaries, alleging that they knew about problems but did little or nothing to rectify a bad situation.

Attorneys Morrison and Borowski point out the challenges that fiduciaries must confront when a participant(s) files a lawsuit.

• Do they join with the service provider on the theory that a common defense is the best defense?
• Should they join the participant plaintiffs in attacking the provider and at the same time potentially implicating themselves?
• Or, should they remain on the sidelines, potentially risking being sued for taking no post-litigation action to recover for the provider’s alleged breach?

According to Wait, You Mean My Plan Is A Plaintiff? (May 24, 2012), attorneys Morrison and Borowski suggest that plan sponsors set up Google alerts to track any lawsuits that involve a company’s benefit plan(s).

As an expert who has been involved in service provider cases, Dr. Susan Mangiero adds that a good offense is to conduct a comprehensive review of agreements on a regular basis. Should litigation occur and an expert is engaged, that person(s) will likely have to review whatever communications were provided to plan participants during the relevant time period as well as the contracts between the plan sponsor and a vendor(s). Another prescriptive course of action is to ensure that communications are robust, especially now with new fee disclosure rules in place.

New Focus of ERISA Fee Litigation

Posted on June 9, 2012 by Susan Mangiero

According to Troutman Sanders ERISA attorneys Jonathan A. Kenter and Gail H. Cutler. the outcome of a recent 401(k) plan lawsuit known as Tussey v. ABB did more than force the sponsor to write a check for $37 million. It led to lessons learned about the need to regularly review record-keeping and investment management fees, negotiate for rebates if possible and adhere to documented investment guidelines. What it did not resolve was whether the record keeping costs of a 401(k) plan may be borne exclusively by those participants whose investment funds enjoy revenue sharing. while participants whose accounts are invested in investment funds with no revenue sharing pay little or nothing.

In The Next Frontier in Fiduciary Oversight Litigation? (April 27, 2012) they suggest that courts will likely be asked to opine as to whether ERISA fiduciaries have justified prevailing revenue sharing arrangements, taking allocation and class-based fee levels into account. Their recommendation is to decide on a disciplined approach that makes sense rather than making arbitrary decisions. Allocation rules to consider include the following:

• Apportion record keeping fees on a pro-rata basis so that each participant is only charged his or her fair share. Credit any revenue sharing received back to the funds or participants as part of a periodic expense balance true-up.
• Levy the same record keeping fee for each participant. Allocate revenue sharing monies ratably to all investment funds or participants.
• Adopt a combined pro-rata and per capital allocation such that a record keeping fee would consist of a fixed amount and a variable amount. Imposing a cap on total fees could be included.
• Hard wire the allocation method in the plan document so that how record keeping fees are charged becomes a settlor function versus a fiduciary task.

In 2007, the ERISA Advisory Council’s Working Group on Fiduciary Responsibilities and Revenue Sharing Practices reviewed industry practices as a way to improve disclosure for 401(k) plan participants. One recommendation made to the U.S. Department of Labor thereafter was to categorize payments for certain professional services as settlor functions and thereby protect fiduciaries from allegations of breach. Another request was for clarification that revenue sharing is not a plan asset unless and until it is credited to the plan in accordance with the documents governing the revenue sharing.

With ERISA Rule 408(b)(2) fee disclosure compliance just ahead, numerous questions remain. This had led litigators and transaction attorneys alike to comment that further lawsuits and enforcement actions are likely to follow.

Note: Interested persons can read Final Regulation Relating to Service Provider Disclosures Under Section 408(b)(2) , published the U.S. Department of Labor in February 2012.

Pension Advisors: A Percentage of What?

Posted on May 1, 2012 by Susan Mangiero

I visited a local department store tonight after work. In search of new rain boots, I ended up buying a navy blue jacket but that’s another story for another day. What irked me and ended up costing me time was ignorance on the part of the sales lady about simple math and the amount to which the markdown percentage should be applied.

Here is what happened.

The jacket was originally priced at $150 but marked down by 40 percent — good designer but last season’s color. A sign atop the rack said that another 25 percent would be deducted from the ticketed price. A quick calculation on my part led me to believe that a $90 jacket would be sold at $67.50. Instead the woman behind the register insisted that the price of $90 was final and that it reflected a 25 mark down from the original price of $150. As hard as I tried, I could not convince her that $90 differed from 75 percent of $150. Finally, out of sheer frustration I am sure, she referred me to the manager and abruptly left her station. When I checked out, my receipt reflected a 25 percent discount from $90.

Walking home from my mini shopping spree, I wondered about the state of math education in this locale and why a simple calculation did not resonate. Worse yet, this lady was supposed to know better. It would be one thing to say I don’t know but it is quite another thing to insist on being right when she was obviously wrong.

In the world of investing, it is arguably even more important to get expert advice. Instead of a few dollars at stake, inexperienced and/or ill-informed financial intermediaries could put $17.1 trillion in U.S. retirement industry assets at serious risk. In addition, countless financial advisers are retiring alongside their clients with worries that inexperienced persons will take their place. This could be troublesome since most experts predict that the complexities of a retirement crisis are unlikely to go away anytime soon.

According to A talent shortage loom as the industry booms by Jeffrey Schoeff. Jr.(Investment News, April 28, 2012), individuals in need of help may end up spending lots of time on a search for experienced and knowledgeable advisers who likewise have the patience to educate clients and recommend an appropriate long-term investment strategy as a result of getting to know needs, risk tolerance levels and constraints.

At the institutional level, staff budgets are being cut at the same time that certain investment strategies require careful diligence as relates to the use of leverage and a financial engineering component. One answer is to outsource to an independent fiduciary and/or external consultant or advisor. Interestingly, numerous firms have the budget to hire contractors but don’t have the approval to hire a full-time person(s) even when salary and benefits could cost less than what a consultant or advisor will charge.

Good service provider due diligence is critical at any time but certainly if a plan sponsor is relying mostly on the capabilities of others, they need to feel confident that their advisors and consultants have a good handle on critical issues and potential solutions. Competency can help to save time and money and reduce stress. The converse is true too. Incompetency can cost an organization time and money and widen any funding gap. Either way, the role of the independent third party is expected to soar.

While robust due diligence takes time, it can help to stave off unwanted inquiries into the nature of risk-taking. Working with someone who is knowledgeable, earnest and dedicated to delivering requisite help should be seen as a big plus.

ERISA Pension Plans: Due Diligence for Hedge Funds and Private Equity Funds

Posted on April 2, 2012 by Susan Mangiero

Join me on May 1, 2012 for a timely and interesting program about alternative investment fund due diligence and other considerations for ERISA plan sponsors, their counsel and consultants. Click here for more information.

This CLE webinar will provide ERISA and asset management counsel with a review of effective due diligence practices by institutional investors. Best practices will be offered to mitigate government scrutiny and suits by plan participants.

Description

With the DOL’s and SEC’s new disclosure rules and heightened concerns about compliance and valuation, corporate pension plans that invest in alternatives must focus on properly vetting asset managers more than ever before or risk being sued for poor governance and excessive risk-taking.

The urgencies are real. The use of private funds by asset managers is crucial for 401(k) and defined benefit plan decision makers. Understanding the obligations of private funds is essential to any retirement funds with limited partnership interests.

In addition, suits and enforcement actions against asset managers make it incumbent on counsel to hedge fund and private equity fund managers to fully grasp and advise on full compliance with the duties of ERISA fiduciaries to plan participants.

Listen as our ERISA-experienced panel provides a guide to the legal and investment landmines that can destroy portfolio values and expose institutional investors and fund managers to liability risks. The panel will outline best practices for implementing effective due diligence procedures.

Outline

• ERISA fiduciary duties for institutional investors
• Hedge funds and private equity funds compared to traditional investments
• Regulatory developments
• Disclosure
• Compliance
• Valuation
• Developments in private litigation involving pension plan fiduciaries and alternative fund managers
• Best practices for developing due diligence plans

Benefits

The panel will review these and other key questions:

Following the speaker presentations, you’ll have an opportunity to get answers to your specific questions during the interactive Q&A.

• Regulatory developments
• Disclosure
• Compliance
• Valuation
• Developments in private litigation involving pension plan fiduciaries and alternative fund managers
• Best practices for developing due diligence plans
• What are the regulatory concerns for ERISA pension plans that allocate assets to hedge funds and private equity funds?
• What are the potential consequences for service providers that fail to comply with new fee, valuation and service provider due diligence regulations?
• What can counsel to pension plans and asset managers learn from recent private fund suits relating to collateral, risk-taking, pricing, insider trading and much more?
• How should ERISA plans and asset managers prepare to comply with expanded fiduciary standards?

Following the speaker presentations, you’ll have an opportunity to get answers to your specific questions during the interactive Q&A.

Faculty

Susan Mangiero, Managing Director

FTI Consulting, New York

She has provided testimony before the ERISA Advisory Council, the OECD and the International Organization of Pension Supervisors as well as offered expert testimony and behind-the-scenes forensic analysis, calculation of damages and rebuttal report commentary for various investment governance, investment performance, fiduciary breach, prudence, risk and valuation matters.