Month: September 2004

The Kaiser Family Foundation has published their “Employer Health Benefits 2004 Annual Survey.” Here are some interesting items in the report:

(1) Employer-sponsored health insurance premiums increased an average of 11.2% in 2004 — the fourth consecutive year of double-digit increases.

(2) Some slight good news–this was a decrease from last year’s average premium increase of 13.9%.

(3) However, since 2000, premiums for family coverage have increased by 59%, compared with inflation growth of 9.7% and wage growth of 12.3%.

(4) Workers on average contribute $558 of the $3,695 annual cost of single coverage and $2,661 of the $9,950 annual cost of family coverage toward premiums.

(5) Employers offering health benefits continue to vary substantially by firm size: only 52% of the smallest companies (3-9 workers) offer health benefits, while 74% of firms with 10-24 workers, and 87% of firms with 25-49 workers, and nearly all firms with 50 or more workers offer health benefits. Employers offering worker health benefits in 2004 decreased to 63% from 68% in 2001.

Here is a compilation of response to the data from Kaiser’s Daily Health Report:

Altman said, “There is a great sense that there is just no answer to this problem” (Vrana, Los Angeles Times, 9/10). The issue of increasing health costs is “a persistent and long-term problem that has no simple fixes,” HRET President Mary Pittman said. She added, “There’s an elephant in the middle of the room, and we cannot afford any longer to ignore it” (Atlanta Journal Constitution, 9/10). Kate Sullivan Hare, health policy director for the U.S. Chamber of Commerce, said, “There just aren’t that many options left for small business. When you’re a small business and you’ve got a $30,000-a-year employee, you just can’t afford to spend $10,000 on health coverage” (Baltimore Sun, 9/10).

Also, the Wall Street Journal reports that the “cost of family health insurance is rapidly approaching the gross earnings of a full-time minimum-wage worker.” (“Health-Care Costs For Companies, Employees Surge.”)

There is an informative article in the Wall Street Journal today summarizing how health savings accounts are being utilized: “Health Savings Accounts Gain Momentum.” The article reports that about “20 financial institutions, including J.P. Morgan Chase & Co. and Mellon Financial Corp., are marketing HSAs” and that “[s]ome 50 insurers, including Aetna Inc., Cigna Corp. and Anthem Blue Cross & Blue Shield . . have introduced the high-deductible health policies that people must have to open an HSA.” Regarding the types of investment choices being offered, the article reports:

The HSAs themselves are available either through the health insurer or an independent “trustee,” such as First HSA, Entrust New Direction IRA and Health Savings Administrators. . . Insurers generally offer simple interest-bearing accounts that don’t offer investment choices. But some are also teaming up with financial-services firms that act as trustees and offer accounts with more investment options. For instance, J.P. Morgan Chase has joined with several insurers, including Cigna and Anthem, to offer HSAs that invest in stocks, bonds and mutual funds. The independent trustees also offer a range of investment options.

(You can access previous posts about HSAs here.)

Two websites of interest:

• The National Association of Stock Plan Professionals. Please note some of the excellent events held from time to time in the Philadelphia region at this link. (Access information regarding other chapters here.)
• CompensationStandards.com. The upcoming conference on “What Every Compensation Committee (and Advisor) Needs to Know–and Do–Now!” looks great and contains a lot of useful information, including such items as “Directors That Oversee Retirement Plans May Be Subject to Higher Standard of Review” and “Directors Beware: D&O Coverage Exclusions for Breach of ERISA Fiduciary Duty.” Agenda for the conference is here. (Readers must register for the conference to access the materials.)

The Third Circuit issued an opinion today, putting to rest the controversy that stemmed from several federal district court cases* in Pennsylvania which had held that ERISA does not preempt bad faith insurance claims brought under 42 Pa. C.S. section 8371**. The Third Circuit opinion issued today in Barber v. Unum Life Ins. Co. of Am., holds that, under the doctrine of conflict preemption, ERISA preempts the statute because it provides “a form of ultimate relief in a judicial forum that [adds] to the judicial remedies [already] provided by ERISA,” citing the very recent and well-known U.S. Supreme Court case of Aetna Health Inc. v. Davila, 124 S. Ct. 2488 (2004) as authority. (You can read about the Aetna case here and here.)

The Third Circuit opinion also provides that, under the doctrine of express preemption, the state statute is preempted as well. The court held that the statute does not constitute a law that “regulates insurance,” preventing the statute from being “saved” from preemption under ERISA’s “saving clause.” (ERISA’s saving clause–section 514(b)(2)(A) of ERISA–creates an exception to preemption of a state law when that state law proposes to regulate insurance.) The court relied on another recent U.S. Supreme Court case, Kentucky Association of Health Plans, Inc. v. Miller, 538 U.S. 329 (2003) in reaching its decision under the doctrine of express preemption. (You can read about the Miller case here.) The court applied the two-part test promulgated in Miller that a statute “regulates insurance” and satisfies the saving clause only if it (1) is “specifically directed toward entities engaged in insurance” and (2) “substantially affect[s] the risk pooling arrangement between the insurer and the insured.” The Third Circuit in Barber ruled that the Pennsylvania statute satisfied the first prong of the test, but not the second, in reaching its decision that the statute was not “saved” from preemption.

Read more about the history of the legal controversy in this article from Law.com: “ERISA and Bad-Faith Claim Debate.”

*Rosenbaum v. UNUM Life Insurance Co. of America, No. 01-6758, 2002 U.S. Dist. LEXIS 14155 (E.D. Pa. July 29, 2002); Barber v. UNUM Life Insurance Co. of America, No. 03-3018 (E.D. Pa. filed Sept. 9, 2003); Stone v. Disability Mgmt. Servs., 288 F. Supp. 2d 684 (M.D. Pa. 2003).

**42 Pa. C.S. § 8371 provides:

In an action arising under an insurance policy, if the court finds that the insurer has acted in bad faith toward the insured, the court may take all of the following actions:

(1) Award interest on the amount of the claim from the date the claim was made by the insured in an amount equal to the prime rate of interest plus 3%.
(2) Award punitive damages against the insurer.
(3) Assess court costs and attorney fees against the insurer.

The Associated Press is reporting (via Forbes.com): “Judge OKs McDonnell Douglas Settlement.” The settlement being approved here is $8.1 million in back wages for affected plaintiffs terminated as a result of a plant closing. Last year, plaintiffs in the case had prevailed on ERISA section 510 claims against the company for $36 million with respect to the loss of pension and health benefits. The Tenth Circuit had ruled 2-1 back in May that plaintiffs were not entitled to back pay via their section 510 claims under ERISA. According to the Associated Press, settlement discussions followed.

Read previous posts about the lawsuit here and here.

The Wall Street Journal (subscription required) today has this article: “Mutual-Fund Suit On Marketing Fees Clears Hurdle.” The article reports that “[a] lawsuit accusing a mutual fund of charging investors excessive fees has cleared a legal hurdle and could spell a new round of legal woes for fund companies.” According to the article, “[t]he suit questions how it could be reasonable for the firm to collect twice as much money from shareholders for marketing the fund after it was shut to new investors as it was collecting when the fund was still open and looking for new shareholders.”

The article predicts that the outcome of the lawsuit could prove worrisome to other fund companies because the fees it targets are commonplace in the industry, and quotes John Freeman, a professor at the University of South Carolina Law School and a critic of mutual fund fees, as saying: “Plaintiffs lawyers are going to start teeing up 12b-1 fees and taking a hard look at the logic of how that money is being spent.”

The thought that came to my mind when reading the article, however, was that the litigation could have an impact on ERISA fiduciaries. For years, lawyers have been predicting lawsuits against fiduciaries based upon excessive fees in retirement plans. Moreover, the DOL has been concerned about excessive fees as well, as indicated in this statement on their web page devoted to retirement plan fees:

Plan fees and expenses are important considerations for all types of retirement plans. As a plan fiduciary, you have an obligation under ERISA to prudently select and monitor plan investments, investment options made available to the plan’s participants and beneficiaries, and the persons providing services to your plan. Understanding and evaluating plan fees and expenses associated with plan investments, investment options, and services are an important part of a fiduciary’s responsibility. This responsibility is ongoing. After careful evaluation during the initial selection, you will want to monitor plan fees and expenses to determine whether they continue to be reasonable in light of the services provided.

In recent years, there has been a dramatic increase in the number of investment options, as well as level and types of services, offered to and by plans in which participants have individual accounts. In determining the number of investment options and the level and type of services for your plan, it is important to understand the fees and expenses for the services you decide to offer. The cumulative effect of fees and expenses on retirement savings can be substantial.

The DOL in this July 28, 1998 Information Letter stated:

In choosing among potential service providers, as well as in monitoring and deciding whether to retain a service provider, the trustees must objectively assess the qualifications of the service provider, the quality of the work product, and the reasonableness of the fees charged in light of the services provided.

See also Advisory Opinion 97-16A dated May 22, 1997 which addresses 12b-1 fees received by a non-fiduciary service provider. The DOL outlines in the Opinion Letter the duties and responsibilities of the “responsible Plan fiduciaries” for the plan as follows:

Finally, it should be noted that ERISA’s general standards of fiduciary conduct also would apply to the proposed arrangement. Under section 404(a)(1) of ERISA, the responsible Plan fiduciaries must act prudently and solely in the interest of the Plan participants and beneficiaries both in deciding whether to enter into, or continue, the above-described arrangement with [the provider], and in determining which investment options to utilize or make available to Plan participants and beneficiaries. In this regard, the responsible Plan fiduciaries must assure that the compensation paid directly or indirectly by the Plan to [the provider] is reasonable, taking into account the services provided to the Plan as well as any other fees or compensation received by [the provider] in connection with the investment of Plan assets. The responsible Plan fiduciaries therefore must obtain sufficient information regarding any fees or other compensation that [the provider] receives with respect to the Plan’s investments in each Unrelated Fund to make an informed decision whether [the provider’s] compensation for services is no more than reasonable.

Sounds like the same sort of determination being made in the recent non-ERISA lawsuit. According to the WSJ article, for plaintiffs to prevail, they will have to demonstrate that the fees were “so disproportionately large that they bore no reasonable relationship to the services actually provided.”

The bottom line is that plan fiduciaries should understand what fees are being charged to the plan and make a determination that they are reasonable in light of the services rendered.

Helpful links on the subject:

• 401(k) Plan Fee Disclosure Form
• Study of 401(k) Plan Fees and Expenses

(Section 404(a) of the ERISA provides: “[A] fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and – (A) for the exclusive purpose of: (i) providing benefits to participants and their beneficiaries; and (ii) defraying reasonable expenses of administering the plan . . . “)

This is a great article by Gardner Carton & Douglas–“Integrating the HR Role with the New SEC Accelerated 8-K Filing Requirement.” The article discusses the new SEC Form 8-K filing requirements which became effective on August 23, 2004 and the impact they will have on HR professionals. As stated in the article:

In the past, SERPs, deferred compensation and similar-type plans and awards would ordinarily be disclosed with the company’s next following Form 10-K or 10-Q. Now, adoption or amendments to these enhanced retirement-type vehicles for executive officers must be reported as the decisions are being made and approved by the board of directors. This may change the board of director’ approval process, because with the immediate disclosure, individual arrangements may now receive increased scrutiny from not only the SEC but from the public and media as well.

The article further notes that “HR professionals should anticipate that the board of directors will likely want (on a going forward basis) more information than [was] required in the past, including adequately documented reasoning behind the structure and size of the compensatory arrangement being considered” and that such information “will need to be assembled and available at the time the plan is being approved or amended.”

(You can access the new rules here.)