Category: Erisa

Scott Burns, Dallas Morning News personal finance columnist nationally syndicated by Universal Press, has been writing about fiduciary issues in articles which have been published in the Houston Chronicle. This one–“It’s a bird! It’s a plane! It’s a fiduciary adviser!”–features Don Trone, founder of the Center for Fiduciary Studies and likens him to an “action hero for 401(k) plans.”

Another article–“Even large, profitable funds might fail the fiduciary test–mentions ERISAblog. (Thanks to a reader for the pointer.)

(The Dallas Morning News version of the articles are here and here.)

You can read more articles by Mr. Burns at www.scottburns.com.

There’s a very interesting subrogation opinion just issued by the Eastern District of Pennsylvania: Benefit Concepts v. Carmelann Macera. The facts of the case are as follows:

The plaintiff was an administrator of a self-funded health plan and was also a fiduciary of the plan, and the plan document contained a standard subrogation clause. When the defendant was injured in an automobile accident, she filed suit against the party involved in the automobile accident and the suit was settled for $60,000. The subrogation agent for the plan administrator of the health plan which had paid for part of the defendant’s medical bills incurred in the accident demanded that the defendant reimburse the plan for the medical expenses which the plan had paid. (Before the plan paid the defendant’s medical bills, the defendant had signed a Subrogation Agreement in which she agreed to abide by the plan’s subrogation clause, but the defendant had added language to the effect that the defendant recognized the plan’s claim only “to the extent allowed by Act VI [the Pennsylvania’s Motor Vehicle Financial Responsibility Law (“MVFRL”)] and all other laws regarding payment of reasonable expenses.”)

The plan administrator brought suit seeking to enforce the plan’s subrogation rights and the defendant asserted a counterclaim alleging that the plan administrator breached its fiduciary duties by overpaying her medical providers, arguing that the plan administrator should not have paid the medical bills in full due to section 1797(a) of the MVFRL. That provision provided statutorily specified limitations on how much could be paid to medical providers under the MVFRL.

Preemption Analysis: The court held that section 1797(a) was preempted by ERISA under the “deemer clause” of ERISA because the plan was a self-funded plan. However, before reaching the “deemer clause” analysis, the court first analyzed whether the provision would be “saved” from preemption as a law regulating insurance under the “savings clause” of ERISA, utilizing the two-part test promulgated by the U.S. Supreme Court case of Kentucky Ass’n of Health Plans v. Miller , 538 U.S. 329, 341-42, 123 S. Ct. 1471, 1479 (2003) (read about the Miller case here and here):

For a state law to “regulate insurance,” and thus be saved from preemption, it must (1) “be specifically directed toward entities engaged in insurance”; and (2) “substantially affect the risk pooling arrangement between the insurer and the insured.”

The court went on to hold that the provision met the Miller test, and was thus saved from preemption under the “savings clause.” With respect to the first prong of the test, the court reasoned that Section 1797(a) is specifically directed toward the insurance industry because it was enacted “to reduce the rising cost of purchasing motor vehicle insurance.” With respect to the second prong of the test, the court opined that Section 1797(a) substantially affects the risk pooling arrangement between insurers and their insureds because it limits the rates that medical providers can charge insurers, thus reducing insurers’ actuarial risk and in turn permitting them to pass the cost savings onto the insureds.

However, the court then stated that since the Plan was a self-funded employee benefit plan, “the deemer clause forecloses any possibility that Section 1797(a) could apply”, noting in footnote 8:

To the extent that Section 1797(a) regulates entities other than self-funded employee benefit plans, such as automobile insurance companies, the deemer clause does not apply, and ERISA does not preempt the application of Section 1797(a) to those entities.

Comment: Under the court’s analysis, it would appear that fully insured health plans would also likely be included as entities which would be subject to section 1797(a) of the MVFRL which leads to this query: How would the court have ruled on the fiduciary breach issue if the plan had not been self-funded? (The court did not reach a decision on that issue since the provision was preempted under the “deemer clause.”) Could fiduciaries of insured health plans be deemed personally liable for failure to comply with section 1797(a) of the MVFRL?

Read more about the case in this article from Law.com: “ERISA Found to Pre-empt Motor Vehicle Law’s Medical Caps.”

Also, remember the U.S. Supreme Court case of FMC Corporation v. Cynthia Ann Holliday, 498 U.S. 52, 111 S. Ct. 403, 112 L.Ed. 356 (1990), which held that ERISA preempted the application of section 1720 of Pennsylvania’s MVFRL under a pre-Miller analysis.

The ERISA Blog will not be updated again until next week (June 13th).

Can a plan fiduciary who has been deemed liable under a plan seek either contribution or indemnification from a co-fiduciary of the plan under ERISA? The question was thoroughly discussed in the recent Opinion and Order issued by the federal district court in Houston approving the $85 million partial settlement on behalf of the Enron participants. The Court pointed out that there is no express right to contribution or indemnity under ERISA in contrast with securities laws where there is an express right. (See fn. 15 of the opinion.) However, after discussing how the federal Circuit Courts of Appeals and the district courts that have addressed the issue are split, the court then adopted the Ninth Circuit view, stating as follows:

After reviewing the law, this Court is persuaded by the reasoning of courts agreeing with the Ninth Circuit’s approach and by the Supreme Court’s consistent reiteration of the exclusivity of the express remedies available under ERISA’s civil enforcement section, and concludes that a remedy for indemnification or contribution among plan fiduciaries is not available under ERISA.

The Court agreed with the view that ERISA is a “comprehensive and intricate statute into which Congress could have injected provisions for indemnification or contribution among fiduciaries but chose not to” and went on to state that “ERISA’s silence about contribution indicates an intent not to recognize remedies not expressly incorporated.”

For those who want to delve further into the issue, try:

ERISA Remedies: Background Materials and Update by Maria O’Brien Hylton and Dana M. Muir (from BNA.com).

Fiduciary Litigation under ERISA by Robert Eccles (also from BNA.com).

Can a plan fiduciary who has been deemed liable under a plan seek either contribution or indemnification from a co-fiduciary of the plan under ERISA? The question was thoroughly discussed in the recent Opinion and Order issued by the federal district court in Houston in connection with the $85 million partial settlement on behalf of the Enron participants. The Court pointed out that there is no express right to contribution or indemnity under ERISA in contrast with securities laws where there is an express right. (See fn. 15 of the opinion.) However, after discussing how the federal Circuit Courts of Appeals and the district courts that have addressed the issue are split, the Court then adopted the Ninth Circuit view, stating as follows:

After reviewing the law, this Court is persuaded by the reasoning of courts agreeing with the Ninth Circuit’s approach and by the Supreme Court’s consistent reiteration of the exclusivity of the express remedies available under ERISA’s civil enforcement section, and concludes that a remedy for indemnification or contribution among plan fiduciaries is not available under ERISA.

The Court agreed with the view that ERISA is a “comprehensive and intricate statute into which Congress could have injected provisions for indemnification or contribution among fiduciaries but chose not to” and went on to state that “ERISA’s silence about contribution indicates an intent not to recognize remedies not expressly incorporated.”

For those who want to delve further into the issue, try:

ERISA Remedies: Background Materials and Update by Maria O’Brien Hylton and Dana M. Muir (from BNA.com).

Fiduciary Litigation under ERISA by Robert Eccles (also from BNA.com).

Yesterday, the SEC and DOL published Tips for Plan Fiduciaries related to examining practices of pension consultants. The DOL has also provided a Fact Sheet entitled “Tips for Selecting and Monitoring Service Providers for your Employee Benefit Plan..” DOL states that the tips are designed for fiduciaries of 401(k) plans and other types of pension plans to assist them in “carrying out their responsibilities under ERISA to prudently select and monitor plan service providers.”

In response to the SEC’s recent release of a “Staff Report Concerning Examinations of Select Pension Consultants” (read about it here and here), the SEC and the DOL have collaborated and developed a set of questions to assist plan fiduciaries in evaluating the objectivity of the recommendations provided by pension consultants. You can access the Tips for Plan Fiduciaries here as well as the press release here. The DOL warns plan fiduciaries that the Staff Report raises “serious questions concerning whether some pension consultants are fully disclosing potential conflicts of interest that may affect the objectivity of the advice they are providing to their pension plan clients.” Thus, plan fiduciaries are urged to use the questions provided in order to gather and analyze information about pension consultant practices in order to help plan fiduciaries prudently select and monitor their pension consultants so as to fulfill their fiduciary duties and obligation under ERISA.

The SEC provides the same Tips for Plan Fiduciaries on their website as well as an announcement here.

The Wirtz Labor Library and the Wirtz Labor Law Library, maintained by the Department of Labor, have provided in their “Law Tip of the Week” a page of information about Labor & Employment Blogs which lists the Employment Law Blog, the Arbitration Blog, ERISAblog and Benefitsblog. Blogs are also listed here in the site’s Law Tips Archive. You can read more about the Wirtz Labor Library here and subscribe to the “Law Tip of the Week” here.

The SEC today announced the release of the “Staff Report Concerning Examinations of Select Pension Consultants.” The Report comes on the heels of an examination by the SEC of 24 pension consultants who are registered with the SEC as investment advisers. The examinations focused on (i) the products and services provided by the pension consultants; (ii) the method of payment for such services; and (iii) the disclosure provided to their clients. The examinations were initiated “as part of the SEC´s program to identify and investigate risks in the securities industry.”

The SEC states that the Report is intended to provide “recommendations to enhance pension consultants’ compliance programs” to help ensure that advisers are fulfilling their fiduciary obligations to their clients. However, the SEC also states that the Report raises “important issues for plan fiduciaries who often rely on the advice and recommendations of pension consultants in operating their plans.” Accordingly, the SEC has promised to work with the Department of Labor to educate pension fund trustees and other plan fiduciaries about the issues raised by the findings in the Report, and has stated that it “will continue to work closely with the Department of Labor on issues of mutual interest.”

The SEC concluded in the Report that pension consultants that are registered investment advisers (1,742 registered investment advisers list that they provide pension consulting services, according to the SEC) should be:

(1) Formalizing “policies and procedures” to address their fiduciary and regulatory obligations under the Advisers Act.

(2) Identifying conflicts of interest and other compliance factors creating risk exposure for the firm and its clients in light of the firm’s particular operations, and then designing policies and procedures that address those risks.

The SEC noted that such policies and procedures should ensure that the firm’s advisory activities are insulated from its other business activities, to eliminate or mitigate conflicts of interest in its advisory activities, and that all disclosures required to fulfill fiduciary obligations are provided to prospective and existing clients, particularly regarding “material” conflicts of interest. The SEC also noted that policies and procedures should be designed to ensure adequate disclosure concerning the consultant’s compensation, including when the pension consultant receives compensation from brokerage transactions from advisory clients or money managers.

After the Report was issued, the DOL commended the SEC here for the Report stating:

While the SEC is responsible for regulating the conduct of investment advisers, including advisers that provide pension consulting services to employee benefit plans, the Labor Department is responsible for the conduct of the plan fiduciaries. This includes, among other things, selecting the providers of pension consulting and other services for plans. The Employee Retirement Income Security Act (ERISA) requires that plan fiduciaries must act prudently in selecting and monitoring service providers. Disclosure of a service provider’s potential conflicts of interests would be an important part of the selection and monitoring process.

The SEC warns in its announcement of the Report that “[a]lthough investment advisers owe their clients a fiduciary obligation — including to adequately disclose all material conflicts of interest — some pension consultants appear to have erroneously concluded that they are not fiduciaries to their clients.”

In light of all of this, plan fiduciaries should make sure that their pension consultants have the policies and procedures in place that the SEC has recommended, as the Report provides a sort of “roadmap” for plan fiduciaries in examining their relationships with pension consultants to make sure that such relationships continue to meet the statutory standards under ERISA.

This quote from Lori Richards, Director of the SEC’s Office of Compliance Inspections and Exminations, in an article from CNN here:

[Pension consultants] sell themselves as being objective or unbiased and independent. Those are important words and they have meaning, and they have meaning to the clients who are deciding to hire the pension consultant, so if a pension consultant says that it is any one of those things: independent, objective, unbiased, it must make sure that it is so.

Article by Mary Williams Walsh for the New York Times: “SEC Investigating Pension Consultants

Alan Lebowitz, Deputy Assistant Secretary for Program Operations, EBSA, has written a letter (which you can access here) to the AFL-CIO setting forth the DOL’s views regarding the ERISA violations that could occur if plan fiduciaries are involved in expending “plan assets to inform participants about the current public debate on Social Security” as well as the “hiring and firing of [plan] services providers based upon their opinions on Social Security reform.”

Regarding the issue of using plan assets to express views or provide information on Social Security policy, the DOL stated that “such expenditures are neither for the payment of benefits nor for plan administration, and accordingly fall outside the limited scope of expenditures permitted by ERISA.” The DOL rejected the assertion that such expenditures were permissible since “current Social Security proposals could have a significant impact on the national economy, financial markets, and plan investments.” The DOL stated, however, that in some very narrow circumstances, such as where a legislative proposal is near enactment and closely tied to plan issues, a “fiduciary could decide to spend plan assets to educate participants about the need to take the legislation into account in making particular decisions about their options under the plan.”

Regarding the issue of considering a service providers’ views on Social Security as a factor in selection and retention decisions, the DOL reiterated ERISA standards imposed on plan fiduciaries of acting with an “eye single to the interests of the participants and beneficiaries” and stated that “it would be unlawful for a plan fiduciary to review the plan’s service providers based, not upon the quality and expense of their services, but rather upon their views on Social Security or any other broad area of public policy.” The DOL went on to state:

Although your counsel’s opinion points out that a fiduciary may consider such collateral factors only when choosing a service provider that is better than or equal to alternative providers . . the Department is concerned that fiduciaries may nevertheless view the AFL-CIO’s recent attention to the question as an invitation to judge service providers first for their positions on Social Security and only second for their ability to meet plans’ particular needs.

DOL’s bottom line: “A fiduciary may never increase a plan’s expenses, sacrifice the security of promised benefits, or reduce the return on plan assets, in order to promote its views on Social Security or any other broad policy issue.”

The Wall Street Journal has an article commenting on the letter entitled “Pension Fund Politics.”

Also, you can access a New York Times article here.