Month: October 2005

A helpful article from the Wall Street Journal: “How to Choose a Medicare Drug Plan.” However, after reading it, one has no trouble understanding why a USA TODAY/CNN/Gallup Poll indicates that seniors are confused about their options under the new program, as reported here by KaiserNetwork.org.

From Reuters.com: “Airline fight complicates US Senate pension bill.” Excerpt:

Action has stalled on private pension reform legislation in the U.S. Senate while lawmakers try to resolve a dispute about special aid for troubled airlines, a senator and aides said on Tuesday.

Texas Republican Sen. John Cornyn said he placed a “hold” — a procedural maneuver blocking action — on the pension reform bill that might otherwise have moved to the Senate floor this week, until the argument over airline aid is resolved.

Cornyn said he acted after American Airlines, a unit of AMR Corp., and Continental Airlines complained about a provision that would allow bankrupt competitors to postpone payments to their pension plans for many years.

“They (Continental and American) felt the proposal put them at a competitive disadvantage and actually punished them for doing what we would all hope airlines do, and that is avoid bankruptcy,” Cornyn told Reuters outside the Senate.

UPDATE: See also this article from The Hill: “Chairmen scrap for upper hand with pension reform.”

WISER has launched a one-stop web page for Hurricane victims and their families who need up-to-date information on Social Security, 401(k)s and other pensions, and health benefits as well as Medicare and Medicaid. You can access the web page here.

Some interesting data from the 2006 Towers Perrin Health Care Cost Survey (press release is here):

1. U.S. employers are facing an 8% increase in their 2006 health care costs. Moreover, the cumulative effect of years of double-digit increases has produced a record high for employer-sponsored health care costs in America. In flat dollar terms, next year’s gross health care expenditure is expected to rise by an average of $597 per employee, to an average total cost of $8,424 — representing a 140% increase over the last 10 years.

2. Employers continue to shoulder the majority of the burden. Employees on average will pay $155 more in 2006, representing a 10% increase from the year before. Employers, on the other hand, will see an increase of $442 per employee, absorbing 74% of the total cost increase. Overall, employers will pay 80% of premium costs and employees will pay 20%.

3. Employees are paying 64% more in health care costs today than they spent five years ago. Employers, meanwhile, are paying 78% more in health care costs today than five years ago.

Excerpt from the press release indicating that benefits are becoming “a larger piece of the total compensation pie”:

“As health care costs continue to rise faster than the rate of general inflation, it’s more important than ever for employees to actively participate in controlling the overall spend and realize that increasing costs will affect them in both direct and indirect ways,” said Guilmette. “Clearly, as the company’s health care costs increase, the employee’s cost goes up as well. Continuing high inflation rates mean that employees’ out-of-pocket health care expenses will also rise. And, at the end of the day, employees need to recognize that a larger piece of the total compensation pie is being taken up by health care costs.”

“The money has to come from somewhere, and increasingly we’re seeing it come from resources set aside to reward employee performance,” adds Ron Fontanetta, Principal in the Towers Perrin Health and Welfare practice. “Health care has become a tremendous financial burden on employers, and unless health care cost increases moderate, the funds available for compensation and rewards will be reduced. Moreover, as employees plan for retirement, they need to factor in health care premium costs because future retirees will often have to pay the entire amount.”

Excerpt from the press release regarding retiree medical:

Meanwhile, the Medicare Modernization Act is changing the landscape for employer-sponsored retiree medical programs. With a 2006 effective date for Medicare Part D on the horizon, the vast majority (83%) of the survey respondents who offer retiree medical say they will provide prescription drug coverage at least as rich as Medicare’s new program and take the federal subsidy offered to employers who provide this benefit.

For many companies, however, the 2006 approach could be an interim step toward a new strategy for the longer term as the impact of rising costs, changing demographics and the new Medicare law combine. Notably, over half (53%) of responding companies offering retiree medical say the Medicare changes will prompt them to rethink their commitments to all retirement programs, including both medical and retirement income benefits.

The survey includes data on the health benefit programs provided by more than 200 of the nation’s largest employers, covering over five million U.S. employees, retirees and dependents.

For those of you interested in the developing law pertaining to ERISA fiduciary responsibility of directed trustees, please note this recent federal district court opinion from the Eastern District of Virginia–DeFelice v. US Airways. Plaintiffs in the case had brought a class action lawsuit against US Airways and Fidelity, the directed trustee, seeking to recover losses to the Plan resulting from the diminution in value of US Air Group stock between August 1, 2001 and August 11, 2002, the date of the bankruptcy filing.

One of the key facts of the case as cited by the court was that “the Company Stock Fund remained an investment option available to Plan participants throughout the period of US Airways’ descent into bankruptcy.” The court noted that “[d]uring most of the pre-bankruptcy period, in fact, the Company Stock Fund regularly increased its holdings in US Air Group stock.” Also, of note, was the fact that the Company hired an independent fiduciary in 2002 which immediately upon appointment ceased purchasing the stock and began liquidating the “shares then held to the extent possible without adversely affecting the stock’s market value stock.”

The court framed the issue before the court as “whether a directed trustee under ERISA ? 403(a) has a duty to challenge the continued inclusion of company stock as one of several investment choices in the company?s 401(k) plan where, as here, publicly available information indicated that the company was considering filing for bankruptcy protection, but had not yet done so.”

The court held that § 403(a) of ERISA should not be read as imposing on directed trustees a duty to second guess the wisdom of the named fiduciary’s directions as to Plan investment options. The court reasoned that to hold otherwise would “effectively eviscerate § 403(a) by eliminating any distinction between the duty of a directed trustee under § 403(a) and the duty of the ERISA named fiduciary with investment authority, who has the duty of ordinary care and prudence prescribed by § 404(a).” The court noted that § 403(a) of ERISA was plainly meant by Congress “to create a subset of ERISA fiduciaries with a statutorily defined duty different from and more narrowly circumscribed than the general duty of ordinary care imposed on other ERISA fiduciaries by § 404(a).”

The court expounded further on the issue as follows:

To sum up, then, § 403(a), by its terms and context, plays an appropriately distinctive role in the ERISA scheme: It prescribes the duties of an ERISA fiduciary acting as a directed trustee. Specifically, § 403(a) requires a directed trustee to comply with the directions of a named fiduciary. And importantly, a directed trustee under § 403(a) has no duty to assess the merits of a named fiduciary’s direction and to reject that direction, if, in the exercise of the directed trustee’s independent judgment, the direction is imprudent. Indeed, the directed trustee has no discretion to do so and hence incurs no liability for complying with a direction simply because it may arguably be imprudent. To be sure, Section 403(a) makes unmistakably clear that a directed trustee must implement the named fiduciary’s direction provided the directions are proper, i.e., that they meet certain formal requirements and hence are identifiably genuine or valid directions from an authorized fiduciary, and provided further that they are not violative of the plan or ERISA. Nor do either of these provisos import into § 403(a) a duty of ordinary care to second guess the financial wisdom of the named fiduciary’s directions. Rather, the provisos merely insure (i) that a direction is valid, as distinguished from some spurious order or suggestion from an unauthorized source and (ii) that a direction is not patently violative of ERISA or the plan, for example, by requiring the directed trustee to engage in an explicitly prohibited transaction or where the direction is the product of collusive and fraudulent acts based on non-public information. To hold otherwise- to impose on directed trustees a duty to second guess the prudence of a named fiduciary’s proper directions-would negate the purpose and function of § 403(a) and invite wasteful disputes and litigation between named fiduciaries and directed trustees over the wisdom of each direction. Given the construction of § 403(a) reached here, it follows that Fidelity, as a directed trustee, incurred no liability when it did not countermand US Airways’ continuing direction to retain the Company Stock Fund as an investment option for Plan participants despite a reasonable basis for pessimism about the US Air Group’s financial prospects.

Also of interest was the court’s reference to the DOL’s Field Assistance Bulletin 2004-03 in which the DOL had stated that in certain circumstances [i]t might not be imprudent to purchase or hold stock in a distressed company in bankruptcy.” The court held that where “the directed trustee possesses only publicly available information” that the DOL’s standard imposes liability on a directed trustee “only after the named fiduciary has filed for bankruptcy” and even then only “under circumstances which make it unlikely that there would be any distribution to equity-holders with any value . . . .” The court went on to conclude that “in the view of the DOL, a direction to retain company stock as a plan investment option is not contrary to ERISA until the shares are worthless as a matter of fact, and not as a matter of conjecture or investment judgment about the future.”

PlanSponsor.com discusses the opinion here.

Unfortunately, the problems with my Movable Type (the software which runs my blog) and server continued throughout last week. As a result, I was unable to post anything new here, even though there was so much happening in the benefits world (new proposed 409A regulations for one). However, thankfully tonight the blog seems to be back to normal for no apparent reason. Only time will tell whether it will continue to work properly.

It was a good experiment, though, in what happens to a die-hard blogger when you take away his or her blog. They tend to do things like start a new blog in desperation. . .