Month: February 2009

The PBGC has added their “two cents” to the DOL’s guidance (highlighted in a previous post) in this Notice to Defined Benefit Plans Concerning Funds Invested With Bernard L. Madoff Investment Securities LLC:

If the losses of a single-employer plan are sufficient to render the plan unable to pay benefits when due, the plan administrator or sponsor is required by section 4043 of ERISA to notify PBGC of this event within 30 days of knowing or having reason to know that this reportable event has occurred. The plan administrator must notify PBGC of a reportable event by filing PBGC Form 10. . . ”

The PBGC also urges plan sponsors to “consult a qualified advisor concerning recovery of funds invested directly or indirectly with Madoff Securities.”

Plan Sponsor.com has a detailed article on related developments here which includes a link to the Bankruptcy Trustee’s list of Madoff victims. According to the list, there were many profit sharing and pension plans impacted (which Plan Sponsor refers to as “Madoff-maimed plans”).

From a press release:

The department is providing guidance to fiduciaries, investment managers and other investment service providers to plans who believe they may have exposure to losses on investments with entities related to the Madoff firm. The guidance also provides steps that can be taken to assess and protect the interests of plans, participants and beneficiaries under the Employee Retirement Income Security Act (ERISA).

The main theme of the guidance here is to remind fiduciaries that they are required under ERISA to take “appropriate steps. . . to assess and protect the interests of the plan and its participants and beneficiaries.” The DOL provides a list of recommended steps, but indicates through the language “may include” that fiduciaries may need to take other steps as they deem appropriate. The list of steps provided by the DOL are as follows:

Request disclosures from investment managers, fund managers, and other investment intermediaries regarding the plan’s potential exposure to Madoff-related losses;

Seek advice regarding the likelihood of losses due to investments that may be at risk;

Make appropriate disclosures to other plan fiduciaries and plan participants and beneficiaries; and

Consider whether the plan has claims that are reasonably likely to lead to recovery of Madoff-related losses that should be asserted against responsible fiduciaries or other intermediaries who placed plan assets with Madoff entities, as well as claims against the Madoff bankruptcy estate.

The DOL warns fiduciaries to make sure that “claims are filed in accordance with applicable filing deadlines such as those applicable to bankruptcy claims and for coverage by the Securities Investor Protection Corporation (SIPC).”

Plan Advisor.com has more info on the deadlines for claims here.

From the Press Release:

Today, the Treasury Department is issuing a new set of guidelines on executive pay for financial institutions that are receiving government assistance to address our current financial crisis. . .

As part of President Obama’s efforts to promote systemic regulatory reform, the standards today mark the beginning of a long-term effort to examine both the degree that executive compensation structures at financial institutions contributed to our current financial crisis and how corporate governance and compensation rules can be reformed to better promote long-term value and growth for shareholders, companies, workers and the economy at large and to prevent such financial crises from occurring again.

Most practitioners are aware of the prodigious amount of stock-drop cases which have been brought against fiduciaries involving ERISA plans containing employer stock. The bulk of these cases have involved situations where the stock has plummeted in value due to various circumstances and the fiduciaries have been accused of violating their fiduciary duty for allowing the plan to hold on to the stock or for continuing to offer the stock as an investment of the plan. The case of Bunch v. W.R. Grace & Co. Savings and Investment Plan, an employer stock case recently decided by the First Circuit in favor of the fiduciaries, involves an interesting variation on this theme: the plaintiffs are complaining because the fiduciaries did not hold on to the stock. The stock was sold after it declined in value, but right before there was an upturn in value due to a third party who wanted to purchase the stock.

The case is good news for employers for the following reasons:

(1) For employers who are going through difficult times financially and have retirement plans holding employer stock, the case acts as a sort of “roadmap” for the fiduciaries of the plan on the “prudent process and procedures” fiduciaries should adhere to in managing the employer stock as an investment of the plan. The court particularly noted the following as being “prudent processes”:

The recognition by the appointed fiduciaries of the “potential conflict of interest” which they had in making the decision about whether the stock remained a prudent investment;

The resulting appointment of an independent fiduciary to make the decision;

The hiring of legal counsel and a financial advisor to assist the independent fiduciary in making its decision;

The independent fiduciary’s request for additional information from the financial advisor even after the financial advisor presented its findings;

The independent fiduciary’s documentation of its reason for determining that selling the stock was “the best course”;

Communication to participants that it was proceeding to divest the stock and that it would monitor the situation and might decide to end the sales effort if circumstances required it.

This paragraph of the opinion sums it up:

There can be little doubt on this record that the state of Grace’s corporate health was thoroughly studied by experts who debated and considered ad nauseam the pros and cons of retaining or selling the stock held in the Plan’s portfolio. The unanimous conclusion of those charged with making the decision was that divestment of this stock was the only action consistent with the prudence required of a responsible fiduciary under ERISA. Without question, State Street engaged in a substantively sound, reasonable analysis of all relevant circumstances appropriate to the decision to sell the Grace stock. We cannot say that the district court’s approval of these actions was in error.

Please note that the case only analyzes whether the fiduciaries fulfilled their duties during the period between the time that the stock had dropped in price through the time that it was later sold. Another case involving a separate group of participants (noted below) may involve an analysis of the time frame involved when the stock was declining in value.

(2) Even for employers who do not have employer stock in their plans, the case demonstrates that “prudent processes and procedures” win the day. Fiduciaries need not be right in predicting what the market will do, but are only asked to employ prudent processes in making decisions. As the court stated:

Although hindsight is 20/20, as we have already stated, that is not the lens by which we view a fiduciary’s actions under ERISA. . . The district court ruled that the test was not whether the best possible action was taken by State Street, but whether it had considered all relevant factors at the time of the divestment decision.

Further notes:

Plaintiffs tried to argue that the “efficient market theory” dictated that the only prudent course of action was to hold on to the stock. The court upheld the district court’s conclusion that “the relevant inquiry was not whether the market price was the best predictor of share value, as claimed by appellants, but whether State Street took into account all relevant information in carrying out its fiduciary duties under ERISA.”

There is another group of plaintiffs which have sued the fiduciaries, asserting a a more traditional theory of liability. You can access the First Circuit’s opinion in that case here.

One of the unfortunate results of this economic crisis is that employers are cutting benefits, i.e. the 401(k) match, pension benefits, retiree medical, etc. Thus, the outcome of this Sixth Circuit case–Winnett, et al v. Caterpillar, Inc.–is very relevant because it deals with the issue of whether retiree medical benefits had “vested.” While qualified plans are subject to formal vesting rules under ERISA, retiree medical plans are not. Therefore, many times the outcome of litigation over retiree medical benefits will depend upon the plan language and collective bargaining agreements involved. That is exactly what happened in the Winnett case.

An interesting twist to the case was the fact that the plaintiffs had retired between the time that a 1988 collective bargaining agreement (“CBA”) had expired and before the time that the employer and the UAW had agreed to a successor agreement. Therefore, because they had retired after the expiration of the CBA, the only way the plaintiffs could prevail was to argue that their right to no-cost retiree medical benefits had “vested” when they became eligible to retiree, even though they did not actually enter retirement until after the CBA had expired.

The District Court had concluded that the right to the retiree medical benefits “vested when the employees attained retirement or pension eligibility,” even for those who continued working after becoming retirement-eligible. Winnett v. Caterpillar, 496 F. Supp. 2d 904, 922 (M.D. Tenn. 2007). However, the Sixth Circuit overturned the District Court, saying that the earlier Sixth Circuit cases which the District Court had relied on had involved cases where contract language linked retiree medical benefits to pension eligibility and where the plaintiffs had actually retired under such contract language. Here the Court emphasized that the retirees had not retired until after the expiration of the CBA.

Generally, when retiree medical benefits are offered, they are often referenced in a number of documents involving benefits. Here there was (1) a collective bargaining agreement (2) a summary plan description, and a (3) Group Insurance Plan with scant language really describing the extent of the benefits being offered. Interestingly enough, the document a court would normally look to for such answers–the retiree medical plan document itself–was apparently non-existent. While ERISA would generally require that a retiree medical plan be evidenced by plan documents, courts will generally look to whatever documents they can find for trying to determine the intent of the parties.

Employers who wish to avoid litigation in this area should make sure that the terms of their retiree medical plans are set forth in plan documents and that the right to terminate, amend or change the terms of such benefits is clearly stated in the plan document, the summary plan description, and in any written communications to retirees. Employers should not assume that a benefits booklet supplied by a health insurance provider will contain the language which is necessary to protect the employer from costly litigation.