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Fiduciary Update

Fiduciary Update | August 2018

In this quarter’s Fiduciary Update, CAPTRUST’s Drew McCorkle provides an update on topics such as retirement summary plan descriptions, fiduciary liability in what is unsaid, liability for prior or subsequent fiduciaries’ actions, and recent fee litigation cases and settlements.

SPD vs. Plan Document? Plan Wins, Unless…

It is not uncommon for conflicts to exist between the provisions of a plan document and the plan’s summary plan description (SPD)—an understandable summary of a plan’s provisions prepared for plan participants. In 2011, the U.S. Supreme Court said that in these conflict situations, the plan document prevails over the SPD. Prior to that, it had been commonly understood that the SPD would prevail.

In a recent case, the provisions of a conflicting SPD may prevail. The case was sent back to the lower court because the error in the SPD was so significant that it could be found to be constructive fraud. Pearce v. Chrysler Group LLC Pension Plan (6th Cir. 2018).

In 2008, as Chrysler faced insolvency, long-time employee Pearce was offered an early retirement benefit. Participant communications on the offer repeatedly directed participants to get plan details from the SPD. One provision in the plan and SPD was an additional retirement benefit for participants who had 30 years or more of service with Chrysler. The SPD, however, lacked an eligibility exclusion for the additional 30-year benefit if the participant was terminated before he retired.

Understanding from the SPD that he would ultimately receive the additional 30-year benefit on top of his regular pension, Pearce declined the early retirement buyout. He was terminated the same day. Later, he applied for the additional 30-year benefit, which was denied because he was no longer employed. An appeal to the pension committee did not change the outcome. Pearce filed suit in U.S. District Court. After protracted litigation, the court ruled against him, concluding that the plan document controls.

On appeal, the results were different. The court of appeals acknowledged that the plan document controls over the SPD. However, it went on to observe that under the right circumstances—if there is fraud or inequitable conduct—the court can reform the plan document. In a reformation, the court rewrites the plan document to be consistent with what was promised. The court of appeals sent the case back to the district court for reconsideration, with instructions on what must be present for there to be constructive fraud in an ERISA case:

  • Information asymmetry where the employer knew the true facts and the participant could not ascertain the true facts;
  • The employer misrepresented the benefits to which the participant was entitled; and
  • The participant investigated his benefits and drew a reasonable conclusion based on the employer’s misrepresentations, even if there was a disclaimer that the plan document would control.

The judge also noted that if the employer took steps to correct the error, citing a situation when a misrepresentation was followed by repeated correction letters, this would be an “honest mistake” rather than constructive fraud.

Fee Litigation: Where We Are and Current Developments

The focus of claims against retirement plan fiduciaries has changed over the past 12 years. During the years surrounding the financial crisis, suits were dominated by allegations of inappropriate investments resulting from improper selection and inadequate monitoring. In the five years ending December 31, 2017, claims alleging excessive fees had taken over as the primary driver of lawsuits, now representing more than 50 percent of cases filed.

Suits alleging excessive fees have raised several issues, including reasonableness of investment and administration fees, fee payment methodology, and share class selection. The importance of making thoughtful decisions through a well- documented process continues to grow.

Several cases have been resolved recently through settlements. Resolution of these cases frequently involves a monetary liability as well as an agreement by plan fiduciaries to take the following types of actions:

  • Conduct a request for proposal (RFP) process for plan recordkeeping services;
  • Pay for recordkeeping services on a flat, per-head basis;
  • Utilize the least expensive reasonable share classes of investments in the plan; or
  • Consider using a stable value fund rather than a money market fund.

Recent settlements include:

  • SunTrust Banks—$4.75 million
  • Fujitsu Technology and Business of America—$14 million

A previously reported case against a smaller plan with $25 million in assets has been dismissed. Bernaola v. Checksmart Financial LLC (SD OH 2018). Fiduciaries of this plan were alleged to have breached their duties by offering investments with excessive fees and not offering more indexed funds. The judge found that the lawsuit was not filed within the applicable three-year statute of limitations that began when Bernaola, the participant, knew of the actions that allegedly were a breach.

Fiduciary Liability in What You Don’t Say?

There are two primary situations for which plan fiduciaries can be liable for not disclosing information to plan participants. They are:

  • Not telling a participant about a future benefit that is under serious consideration, knowledge of which would be material to the participant; and
  • Leaving out information about a current benefit when the fiduciary knows that silence might be harmful.

In Kovarikova v. Wellspan Good Samaritan Hospital (MD PA 2016), a retirement plan participant was told her benefits would not change if she remained in her current residency program. At the time, a benefit change was being worked on but had not reached the stage of being under “serious consideration.” Later, the benefit program was changed to the participant’s detriment. The participant sued, alleging that the change should have been disclosed. Her claim was denied because, although material, the change was not under “serious consideration” when she was told her benefits would not change.

In Erwood v. Life Insurance Company of North America (W.D. PA 2017), a plan participant with $1 million of life insurance coverage was diagnosed with terminal brain cancer. As the employee and his wife planned for his imminent death, they reached out to his employer to be sure their employee benefits issues were in order. Over the course of conversations with the employer’s human resources department, the employee and his wife were not informed of the steps necessary to convert his group life insurance to an individual policy.

The group policy was not converted to an individual policy, so when the employee died, the coverage had lapsed. The surviving spouse sued, alleging that it was a fiduciary breach to not inform the employee about the conversion requirement to keep coverage in place. Finding the employer liable for the life insurance benefit, the court said, “The fiduciary has an obligation to convey complete and accurate information material to the beneficiary’s circumstance, even if that information comprises information about which the beneficiary has not specifically inquired.”

Fiduciaries Not Liable for Prior or Subsequent Fiduciaries’ Actions

New management came into an organization and changed the benefit program. Along with the management change, new plan fiduciaries were appointed. The new management team reduced health benefits and increased their costs. Plan participants sued, claiming that the prior plan fiduciaries, acting in a fiduciary capacity, gave assurances that benefits would not be changed. Hatmaker v. Consolidated Nuclear Security, LLC (ED TN 2018).

The participants acknowledged that the plan reserved the right for the plan sponsor to change the plan design. Nonetheless, they argued that they should be able to compel the current fiduciaries to take responsibility for prior fiduciaries’ promises of benefits that were later inconsistent with the changed plan. The court quickly concluded that the participants’ claim would fail. The current plan fiduciaries were not fiduciaries when the mistaken promises of unchanged benefits were made, and current fiduciaries cannot be held responsible for the prior fiduciaries’ actions. Underpinning this is the express provision in ERISA that, “no fiduciary shall be liable with respect to a breach of a fiduciary duty … if such breach was committed before he became a fiduciary or after he ceased to be a fiduciary.” ERISA §409(b)

Recover a Mistaken Plan Distribution Quickly, or It May Be Lost

The Continental Airlines Inc. 401(k) Savings Plan inadvertently rolled over approximately $150,000 into the wrong participant’s account. Before the unexpected rollover, the receiving participant’s account balance was zero. Approximately six weeks after the rollover, the participant requested a total distribution, which after taxes was $122,000. After the error was realized, the plan reached out to the participant, seeking repayment of the distribution, but the participant was not responsive.

The plan filed suit, seeking return of the distribution. The participant again did not respond, so a default judgment was entered. The plan then asked to have the improperly distributed funds placed in a constructive trust, which would allow the plan to recover them. However, a constructive trust is available only if the specific assets sought can still be identified. The plan could not reasonably identify the improperly distributed plan assets, so the request was denied. This leaves the plan in the position of a general creditor of the participant. Continental Airlines Inc. 401(k) Savings Plan v. Almodovar-Roman (D NJ 2018).

Fiduciary Rule Is Finally Gone

As widely reported, the U.S. Court of Appeals for the Fifth Circuit decided on March 15 to vacate the U.S. Department of Labor’s regulation and prohibited transaction exemptions expanding the activities covered by ERISA’s fiduciary rule. The clerk of the court issued the mandate on June 21, putting the decision into force. Many businesses took action based on the new regulation and exemptions. With those vacated, some new services and structures are likely illegal. The DOL has indicated that it will approach such situations with lenience, and it is formulating guidance to address them.