Ways and Means Discussess How to Encourage Small Business Owners To Offer Retirement Savings Vehicles

You can access the testimony presented at the Ways and Means Committee Hearing on Individual Retirement Accounts (IRAs) and their role in our retirement system here. The focus of the hearing was a recently issued GAO Report: Individual Retirement Accounts, Government Actions Could Encourage More Employers to Offer IRAs to Employees. If you want to read a good summary about the current law relating to IRAs as well as about all of the state and federal proposals to expand the IRA concept, read the Joint Committee of Taxation’s Report entitled, “Present Law and Analysis Relating to Individual Retirement Arrangements,” which was released in connection with the hearing.

The bottom-line, of course, is that people generally aren’t saving enough, small employers are not offering retirement plan vehicles for their employees, and Congress is looking at ways to encourage savings. It is no surprise that the GAO Report indicates IRAs are being used primarily as a “parking spot” for individual rollovers from employer-sponsored retirement plans, rather than as a savings vehicle. However, mandating that small employers must offer some type of automatic IRA program, as discussed in the hearing, is definitely not the answer. Perhaps, permitting small employers to offer an automatic IRA program might help, but then again that would be adding another option to the expanding plethora of retirement vehicles already available for the small employer (SIMPLE IRA, SEP IRA, payroll deduction IRA–traditional or Roth, and qualified plans). Having that many options, unfortunately, tends to confuse them into inaction.

The IRS has taken great steps in the last few years to help alleviate this confusion by providing on their website some helpful materials for small business owners (which Tom Reeder, IRS Benefits Tax Counsel, describes here in his testimony). You can access some of their materials here: Retirement Plan Product Navigator, the IRA Online Resource Guide – Information for Business Owners, Check-Up for Your SIMPLE IRA, SEP or Similar Plan, Publication 3998, Choosing A Retirement Solution for Your Small Business, and the 2008 Small Business Resource Guide.

Impact of Metlife for Plan Sponsors

For years, practitioners have been wondering when the U.S. Supreme Court might re-visit the Firestone decision in light of the Circuit Court of Appeals’ decisions going different ways on the issue of how a plan administrator’s conflict of interest should affect a court’s standard of review in a benefit denial case. However, after reviewing the recent MetLife v. Glenn decision (read about the case and its facts here), it doesn’t appear that the opinion has brought much clarity, except to say that perhaps those Circuits which have appeared to have been opposed to recognizing the “structural” conflict of interest in the plan administration context may now be brought more in line with the other Circuits. You can read about the differences in the Circuits in this law review article: Barbara C. Long, Conflict of Interest and the Standard of Review in ERISA Cases: The Seventh Circuit’s Refusal to Acknowledge What Other Circuits Already Know, 1 Seventh Circuit Rev. 152 (2006). However, one of the most interesting aspects about the recent Supreme Court decision is the fact that there are now appear to be about as many differences of opinion among the Supreme Court Justices as to how the issue should be resolved as there are differences among the Circuits. (See Notable Quotes below to view the disparity in views over the issue.)

What is the impact of the decision for plan sponsors? As noted below, Justices Scalia and Thomas emphasize that the Majority’s holding is mere dictum when it is applied to employers who administer their own ERISA-governed plans in determining whether or not they are “conflicted” as the insurance company was deemed conflicted in the Majority’s holding. However, it is uncertain how courts may or may not rely on this dictum, when grappling with how to align themselves under the Supreme Court’s Majority opinion. (If you recall, there was a humorous moment related to dictum in the oral arguments portion of this case which you can read about here.) Certainly, Justices Scalia and Thomas have pointed out in their concurring opinion how the Majority opinion appeared to take what they called “throwaway dictum” in the Firestone case and built a “castle” upon it. Therefore, it seems naive to minimize the impact of this case based upon the theory that the language relating to plan sponsors is mere dictum.

To be cautious, employers may wish to consider the language espoused by the Majority and Justice Kennedy of taking “active steps to reduce potential bias and to promote accuracy” in whatever ways they and their benefits lawyers may deem advisable in the claims review process. This may or may not involve a re-evaluation of the types of employees or officers who are selected to serve on plan committees which review benefits claims. However, it seems hard to believe that employers would go so far as to hire “independent fiduciaries” to make those determinations in light of this decision. At a minimum though, plan committees who make these determinations should continue to ensure that their practices and procedures regarding benefits claims comply with DOL claims procedure regulations, and that their decisions are well-reasoned, documented, and properly communicated to claimants.

Notable quotes from the Opinion:

(1) Majority:

“The first question asks whether the fact that a plan administrator both evaluates claims for benefits and pays benefits claims creates the kind of “conflict of interest” to which Firestone’s fourth principle refers. In our view, it does. . . ”

“. . . [A] legal rule that treats insurance company administrators and employers alike in respect to the existence of a conflict can nonetheless take account of the circumstances to which MetLife points so far as it treats those, or similar, circumstances as diminishing the significance or severity of the conflict in individual cases. See Part IV, infra. . . ”

“We turn to the question of “how” the conflict we have just identified should “be taken into account on judicial review of a discretionary benefit determination.”

“In doing so, we elucidate what this Court set forth in Firestone, namely, that a conflict should “be weighed as a ‘factor in determining whether there is an abuse of discretion.’ ” 489 U. S., at 115 (quoting Restatement §187, Comment d; alteration omitted). We do not believe that Firestone’s statement implies a change in the standard of review, say, from deferential to de novo review. . . Nor would we overturn Firestone by adopting a rule that in practice could bring about near universal review by judges de novo—i.e., without deference—of the lion’s share of ERISA plan claims denials. . . Neither do we believe it necessary or desirable for courts to create special burden-of-proof rules, or other special procedural or evidentiary rules, focused narrowly upon the evaluator/payor conflict. In principle, as we have said, conflicts are but one factor among many that a reviewing judge must take into account. Benefits decisions arise in too many contexts, concern too many circumstances, and can relate in too many different ways to conflicts—which themselves vary in kind and in degree of seriousness—for us to come up with a one-size-fits-all procedural system that is likely to promote fair and accurate review. Indeed, special procedural rules would create further complexity, adding time and expense to a process that may already be too costly for many of those who seek redress. We believe that Firestone means what the word “factor” implies, namely, that when judges review the lawfulness of benefit denials, they will often take account of several different considerations of which a conflict of interest is one.”

“. . . [A]ny one factor will act as a tiebreaker when the other factors are closely balanced, the degree of closeness necessary depending upon the tiebreaking factor’s inherent or case-specific importance. The conflict of interest at issue here, for example, should prove more important (perhaps of great importance) where circumstances suggest a higher likelihood that it affected the benefits decision, including, but not limited to, cases where an insurance company administrator has a history of biased claims administration. . . It should prove less important (perhaps to the vanishing point) where the administrator has taken active steps to reduce potential bias and to promote accuracy, for example, by walling off claims administrators from those interested in firm finances, or by imposing management checks that penalize inaccurate decisionmaking irrespective of whom the inaccuracy benefits.”

“. . . Finally, we note that our elucidation of Firestone’s standard does not consist of a detailed set of instructions. . . In this respect, we find pertinent this Court’s comments made in a somewhat different context, the context of court review of agency factfinding. See Universal Camera Corp., supra. In explaining how a reviewing court should take account of the agency’s reversal of its own examiner’s factual findings, this Court did not lay down a detailed set of instructions. It simply held that the reviewing judge should take account of that circumstance as a factor in determining the ultimate adequacy of the record’s support for the agency’s own factual conclusion. Id., at 492–497. In so holding, the Court noted that it had not enunciated a precise standard. See, e.g., id., at 493. But it warned against creating formulas that will “falsif[y] the actual process of judging” or serve as “instrument[s] of futile casuistry.” Id., at 489. The Court added that there “are no talismanic words that can avoid the process of judgment.”

(2) Chief Justice Roberts, concurring in part and concurring in the judgment:

“I agree that a third-party insurer’s dual role as a claims administrator and plan funder gives rise to a conflict of interest that is pertinent in reviewing claims decisions. I part ways with the majority, however, when it comes to how such a conflict should matter. . . I would instead consider the conflict of interest on review only where there is evidence that the benefits denial was motivated or affected by the administrator’s conflict. No such evidence was presented in this case.”

“The Court leaves the law more uncertain, more unpredictable than it found it. . . “

“. . . [A] conflict of interest can support a finding that an administrator abused its discretion only where the evidence demonstrates that the conflict actually motivated or influenced the claims decision. Such evidence may take many forms. . . The mere existence of a conflict, however, is not justification for heightening the level of scrutiny, either on its own or by enhancing the significance of other factors. The majority’s application of its approach confirms its overbroad reach and indeterminate nature.”

“In fact, there is no indication that the Sixth Circuit viewed the deficiencies in MetLife’s decision as a product of its conflict of interest. Apart from remarking on the conflict at the outset and the conclusion of its opinion, . . the court never again mentioned MetLife’s inconsistent obligations in the course of reversing the administrator’s decision. . . ”

“In these circumstances, the Court of Appeals was justified in finding an abuse of discretion wholly apart from MetLife’s conflict of interest. I would therefore affirm the judgment below. . . ”

(3) Justice Kennedy, concurring in part and dissenting in part:

“There are two ways to read the Court’s opinion. The Court devotes so much of its discussion to the weight to be given to a conflict of interest that one should conclude this has considerable relevance to the conclusion that MetLife wrongfully terminated respondent’s disability payments. This interpretation is the one consistent with the question the Court should address and with the way the case was presented to us. A second reading is that the Court concludes MetLife’s conduct was so egregious that it was an abuse of discretion even if there were no conflict at all; but if that is so then the first 11 pages of the Court’s opinion is unnecessary to its disposition.

The linchpin. . . is the Court’s recognition that a structural conflict “should prove less important (perhaps to the vanishing point) where the administrator has taken active steps to reduce potential bias and to promote accuracy, for example, by walling off claims administrators from those interested in firm finances, or by imposing management checks that penalize inaccurate decisionmaking irrespective of whom the inaccuracy benefits.”

(4) Justice Scalia, with whom Justice Thomas joins, dissenting:

“I agree with the Court that petitioner Metropolitan Life Insurance Company (hereinafter petitioner) has a conflict of interest. A third-party insurance company that administers an ERISA-governed disability plan and that pays for benefits out of its own coffers profits with each benefits claim it rejects. I see no reason why the Court must volunteer, however, that an employer who administers its own ERISA-governed plan “clear[ly]” has a conflict of interest. See ante, at 5. At least one Court of Appeals has thought that while the insurance-company administrator has a conflict, the employer-administrator does not. See Colucci v. Agfa Corp. Severance Pay Plan, 431 F. 3d 170, 179 (CA4 2005). I would not resolve this question until it has been presented and argued, and the Court’s unnecessary and uninvited resolution must be regarded as dictum.

“Even if the choice were mine as a policy matter, I would not adopt the Court’s totality-of-the-circumstances (so-called) “test,” in which the existence of a conflict is to be put into the mix and given some (unspecified) “weight.” . . . [A] fiduciary with a conflict does not abuse its discretion unless the conflict actually and improperly motivates the decision.”

“. . . [I]n sheer dictum quoting a portion of one comment of the Restatement, our opinion said, “[o]f course, if a benefit plan gives discretion to an administrator or fiduciary who is operating under a conflict of interest, that conflict must be weighed as a ‘facto[r] in determining whether there is an abuse of discretion.’ ” 489 U. S., at 115 (quoting Restatement (Second) of Trusts §187, Comment d). The Court takes that throwaway dictum literally and builds a castle upon it. . . ”

“The opinion is painfully opaque, despite its promise of elucidation. . . In the final analysis, the Court seems to advance a gestalt reasonableness standard (a “combination-of-factors method of review,” the opinion calls it, ante, at 11), by which a reviewing court, mindful of being deferential, should nonetheless consider all the circumstances, weigh them as it thinks best, then divine whether a fiduciary’s discretionary decision should be overturned. . . Notwithstanding the Court’s assurances to the contrary, ante, at 9, that is nothing but de novo review in sheep’s clothing.”

HEART Act Signed Into Law

The Heroes Earnings Assistance and Relief Tax Act of 2008 was signed into law by President Bush yesterday as announced here. Read about the Act in this previous post.

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