BNA Pension and Benefits Blog

Now the DOL is FAQuing It - Having Fun with "Funds" on the Form 5500

Issues relating to fees to service providers have become high-profile issues, with a proliferation of indirect-fee class actions and the inevitable follow-on press reports.  These issues have generated activity in four theaters: (i) the regulations under ERISA Section 408(b)(2), (ii) the rules governing Form 5500, Schedule C, (iii) the "404(c)" rules for covered plans with participant-directed investments, and (iv) a number of legislative proposals in Congress.  The DOL has moved forward in the first of these two arenas with proposed 408(b)(2) regulations and new rules for Form 5500, Schedule C, which have turned out to be flashpoints in the market for a firestorm of controversy affecting financial services organizations and plan sponsors alike.  Much (but not all) of the controversy has centered around the DOL's attempt to expand certain rules to a variety of types of indirect compensation and, apparently, in some cases, compensation for supposed indirect services, particularly in the context of fees surrounding "investment funds."

On July 14, the DOL issued FAQs intended to help with the administration and implementation of the new 5500 rules.  To its credit, using the efficient FAQ mechanic, the DOL is reacting quickly to a real need in the marketplace for guidance as to how these rules will work.  Putting aside the question as to whether everyone will agree with everything the DOL has done in the FAQs, it was critical that the DOL start to get on the record as to a range of seminal interpretive questions.  (And, thankfully, the FAQs were released almost a full week before the release of the The Dark Knight, so that I could read them without being distracted by what I'm anxiously hoping will be One of the Greatest Movies Ever Made.)

I'm writing here to take note of an arguably arcane but ultimately critical and interesting feature of the FAQs, relating to the nature of what is an "investment fund" for purposes of the new 5500 rules.  It did not go unnoticed by some that the new rules seemed to latch onto the concept of "investment funds" as a major underpinning of when the new indirect-type rules apply; however, the concept appeared to spring suddenly from within the authority, and didn't have a firm express basis is that which had come before.  (Yeah, it's a "lawyer point," I guess, in a group of FAQs with more direct practical implications, but, then again, I'm a lawyer.)  The issue was made more vexing by the fact that the new rules did not tap into the existing regime for look-throughs to investing plans, the so-called "plan asset" regulations (as modified by ERISA as recently amended), but rather went down this new, undefined "investment fund" road.

Thus, the scope of the "investment fund" concept, and by extension the very scope of a substantial portion of the new rules, became subject to something of a cloud right from the get-go.  For example, what is an "investment fund" anyway?  How do hybrid entities, like REOCs (real estate operating companies) and VCOCs (venture capital operating companies) under the "plan asset" regulations fit in?  How does the general "operating company" concept overlay on top of the fund analysis?  These questions, and the lack of any answers (or even discussion) regarding them, resulted in a significant analytical detour right out of the interpretive gate.

Well, Q&A 7 of the new FAQs is packed with a lot of information and goes a long way towards shedding light on how the DOL views these matters.  There is the description by example of what "investment fund" means, where the DOL says in a parenthetical: "e.g., mutual funds, collective investment funds."  (It may not seem like much, but it was more than we had.)  There is the posing of the basic question of whether compensation received in connection with the management of VCOCs, REOCs and other operating companies needs to be reported, and there is the DOL's pithy and straightforward (and, to me, clearly correct and appropriate) answer, "No."  There is the clarification that, notwithstanding the foregoing, fees or commissions received by a manager or adviser in connection with an investment in an operating company could be reportable.  And, underscoring the extent to which the DOL really seems to have created a whole new quasi-"plan asset" framework in the context of the reporting rules, the DOL states: "This answer would not be affected by whether the VCOC, REOC, or other operating company were wholly owned by a plan such that [under the "plan asset" regulations] the assets of the entity would be deemed to be plan assets."

This last nuance indicates that the formalistic approach under the bedrock "plan asset" rules falls, in the reporting context, to what may be a more intuitive analysis.  As a result, essentially all that matters here is whether there is an operating company present effectively to block the look-through, not whether the entity's assets technically are "plan assets." (The need to apply the technical rules to determine whether an entity is a VCOC or REOC (or other operating company) is still present.)  It remains to be seen whether this new conceptual approach will eventually be given application for other ERISA purposes.

The foregoing is just one small aspect of an important set of FAQs, and shows, even standing alone, how interesting the development of the reaction to the fees issue has been and probably will continue to be.  In this regard, note also that, in Q&A 40, the DOL states: "In an effort to address the concerns of both service providers and plans, the Department has decided that, with respect to those employee benefit plans which are dependent on service providers for information necessary to complete the Schedule C, the plan administrator will not be required for 2009 plan year reports to list a service provider on line 4 of the Schedule C [which basically calls for the listing of uncooperative service providers] as failing to provide information necessary to complete the Schedule C if the plan administrator receives from the service provider a statement that (i) the service provider made a good faith effort to make any necessary recordkeeping and information system changes in a timely fashion, and (ii) despite such efforts, the service provider was unable to complete the changes for the 2009 plan year."  Bravo - this relief (which presumably will spawn quite a lot of "statements") is extremely welcome in light of the fact that, as shown above, on even the most basic gateway issues there is a great deal of new concepts, analyses and information to digest.   

Social Investing Revisited?

   There appears to be a continuing debate, with the Department of Labor’s involvement, between the AFL-CIO and the U.S. Chamber of Commerce concerning use of plan assets in proxy voting and shareholder related activities as well as in connection with union organizing campaigns and union goals in collective bargaining negotiations.  The debate takes place in the context of two recently published Advisory Opinions, both issued to the U.S. Chamber of Commerce, one in response to an inquiry by the Chamber as to whether the fiduciary rules of ERISA prohibit the use of plan assets to promote union organizing campaigns and union goals in collective bargaining negotiations (Advisory Opinion 2008-05A) and another concerning whether pension plan assets may be used by plan fiduciaries to further public policy debates and political activities through proxy resolutions that “have no connection to enhancing the value of the plan’s investment in a company”  (Advisory Opinion 2007-07A).

     The DOL’s response in both cases appears to be consistent with earlier Advisory Opinions concerning use of plan assets for what was once described as “social investment.”  Earlier advisory letters on social investing were issued in the 1980s to Gregory Ridella, Chrysler Corp. (AO 88-16A), Jim Ray (July 8, 1988), Mr. Reed Larson (July 14, 1986) and Mr. Ralph Katz (March 15, 1982).  These 1988 opinions state, in general, that fiduciaries, in deciding whether and to what extent to invest in a particular investment, must consider only factors relating to the interests of plan participants and beneficiaries.  A decision to make an investment may not be influenced by non-economic factors unless the investment when judged solely on the basis of its economic value to the plan, would be equal or superior to alternative investments available to the plan.

     The DOL’s responses to the Chamber also represent a further clarification of Interpretive Bulletin 94-2 (concerning a fiduciary’s role in voting proxies) in which the DOL said that an “investment policy that contemplates activities intended to monitor or influence management of corporations in which the plan owns stock is consistent with fiduciary obligations under ERISA where a responsible fiduciary concludes that there is a reasonable expectation that such monitoring or communication with management…. is likely to enhance the value of the plan investment….”  (emphasis added)

     Query:  Has the DOL’s position on shareholder activism and social investment changed since 1988 or are Advisory Opinions 2007-07A and 2008-05A no more than the DOL’s effort to reiterate its earlier positions when asked by the Chamber to reflect on what the Chamber seems to suggest are questionable new AFL-CIO positions concerning the permitted use of assets?

     The issue is important in light of concerns about providing investment education to plan participants and given that there may be a new movement on the part of institutional investors to boycott investments in certain companies and countries.

     See the attached links for the two recent advisory opinions to the Chamber of Commerce and a letter issued by Alan Lebowitz, DOL Deputy Assistant Secretary for Program Operations, to the AFL-CIO (May 3, 2005). https://www.dol.gov/ebsa/pdf/ao2007-07attachment.pdf;    http://www.dol.gov/ebsa/regs/aos/ao2008-05a.html; http://www.dol.gov/ebsa/regs/aos/ao2007-07a.html

What's a DB Plan Administrator/Advisor to Do

Disclaimer:  The comments below represent my own opinion and do not necessarily represent those of my employer or any organization to which I may belong.

Administrators of defined benefit plans and other professionals dealing with them have had a real problem on their hands this year.  2008 is now half over and a significant amount of clear, final guidance on how the Pension Protection Act applies to plans has not been issued.  We have a new law.  Many provisions are effective for the 2008 plan year (some act provisions were effective even earlier).  We really can’t blame the IRS for this because Congress passed the biggest overhaul of pension law since ERISA and then dumped the whole regulatory mess in the lap of the Service.

We have some proposed regulations.  The effective date of the [yet to be issued] final regulations have been put off until 2009.  What are we to do in the meantime?  A “reasonable interpretation” will be acceptable.  This seems to have replaced “good faith reliance”.  At times, “reasonable’, like beauty, is in the eye of the beholder. We can also rely on the proposed regulations.  In the preambles, we have been asked for comments on certain issues that the Service is considering.  Can we rely on this request for comments?  Are administrators, actuaries, and lawyers going to be left holding the bag when final regulations are issued?  What worries me is that what many think is a reasonable interpretation of the language of the law may turn out to be not reasonable when the final rules are in.

My question to this forum is, what have you been doing in 2008 when dealing with your defined benefit plans, especially in two areas:  where no proposed regulations have been issued and where musings in preambles and in open forums by government representatives are disagreed with by practitioners?

Some Additional Reflections on MetLife

Way back in 1989, in the Bruch v. Firestone decision, the Supreme Court told us that a plan decision-maker’s rejection of a benefit application would be subject to de novo judicial review . . . unless the plan included magic words vesting the decision-maker with DISCRETION.  If the decision-maker has discretion, the trial court’s review of the decision must be deferential, only to be reversed if “an abuse of discretion,” “unreasonable” or “arbitrary and capricious.” 

Within 30 minutes of the decision, every lawyer worth his salt or at least seeing an opportunity to generate some fees, wrote a letter to every client with an employee benefit plan saying, in effect, pay me some money to review your plan to make sure it gives you discretionary authority and, if it does not, pay me a little more money to amend your plan to give you discretionary authority.  Any plan today whose benefit rejections are subject to de novo judicial review (for lack of the magic words) probably has a potential malpractice action against its attorney.  In the real world we live in, the default principle of de novo review of Firestone is a dead letter.

But the Supreme Court said something else in Firestone:  a court, when it is reviewing a benefit rejection by a decision-maker armed with discretionary review, should consider, as a factor, any conflict of interest of the decision-maker.  One clause in one sentence is all we got explaining this.  We didn’t know, for example, how to tell whether a decision-maker had a Firestone conflict, and we didn’t know what a reviewing court was to make of such a conflict?  Does it mean de novo review?  Does it mean a little bit less deference?  Or something else entirely? 

Well now, 19 years later, the Supreme Court has decided to give us an answer to these questions.  It was not worth the wait.

Look first at the majority opinion.  Here is the two sentence version of the majority opinion: in deciding whether a conflicted plan decision-maker’s rejection of a benefit claim is an abuse of discretion, a district judge should consider and weigh all factors, of which a conflict is one factor.  The conflict is not too important, though, if the plan has structural safeguards against decision-maker bias, such as erecting a wall between the “claims administrators and those interested in firm finances.”

Here are three problems with the majority opinion.

1.    There are now two levels of discretionary review: first, the plan claims administrator has discretion in deciding whether the plan should pay benefits, and second, the district court has discretion in deciding whether the plan claims administrator’s decision was an abuse of discretion.  (When a district court is given authority to “balance” all relevant factors, an appellate court will generally not reverse the district court’s decision unless the district court abused its discretion.) 

The cynic in me says that this means that most cases will turn on whether a district court judge is philosophically oriented toward business autonomy or consumer protection.  Of course, the cynic in me also says that this will not be a very serious break from the past.  What may be a break from the past, though, is that an appellate court will have a bit more trouble reversing a decision it does not like.  (Frank Cummings makes these points in a comment he wrote in response to Andrew Oringer’s discussion of MetLife.)

2.  The issue that no one discusses about Firestone is the standard against which a claims administrator’s discretion is tested.  (And this should be a key issue whether or not there is a conflict.)  What does it mean to abuse discretion?  Courts talk endlessly around this issue but never focus on exactly on how discretion is evaluated.  Oh sure, we know some things.  You can’t treat some participants radically differently from other participants: that would be arbitrary.  You can't ignore undisputed evidence.  That would be wrong. But these are examples of arbitrary decisions.  They do not define the boundaries of the discretion that a plan administrator may not abuse. 

So when we say that an administrator has discretion, what do we mean?  Here are a few possible suggestions:

1)  When a plan vests an administrator with discretion, it means that the administrator will resolve all interpretative and evidentiary questions against the claimant.  (And if this is what it means, should plans make some sort of disclosure to participants so that they understand this?)  Here, the standard against which decisions are evaluated is “defensible even if not correct result.”

2)  When a plan vests an administrator with discretion, it means that the administrator will strive to reach a correct legal judgment.  Note that the reason for judicial discretion here is not to save money by reducing benefits, but to minimize litigation costs, since the plan’s expenses in litigating a benefit denial would arguably be lower than under de novo judicial review.  Here, the standard against which decisions are evaluated would be “the process was fair and the administrator was neutral and fair.”

3)  When a plan vests an administrator with discretion, it means that the administrator will apply his special understanding of the employer and its employees in resolving benefit claims.  Here the standard against which decisions would be evaluated would be “legally correct unless the special circumstances of the employer and employee make a different approach defensible.”

4)  When a plan vests an administrator with discretion, it means that the administrator knows the price point at which the employer will terminate or cutback the plan and will consider this point in deciding close benefit questions. I’m not even going to attempt to construct the standard against which decisions would be evaluated under this understanding of discretion.

5)  When a plan vests an administrator with discretion, it means that the administrator will endeavor to make benefit decisions that conform to employee understanding of the plan.  Here the standard against which decisions would be evaluated would be “reasonably in accord with the reasonable expectations of plan participants.” 

The majority opinion probably best accords to 2), but most plan sponsors, at least at some level, probably would endorse 1), and 1) certainly comes closest to explaining judicial decision-making, at least in the pre-MetLife world.  But all of these standards are consistent with the idea of a plan administrator exercising discretion, even though they would sometimes produce markedly different outcomes. 

3.  The majority opinion does not fully resolve the question of when a plan administrator has a conflict, but certainly hints that conflicts are the rule, not the exception.  (Justice Robert’s dissent emphasizes this point.)  The question, though, is whether there are always conflicts. 

Let me posit two the two classic situations where at least some people would have argued, pre-MetLife, that the claims administrator did not face a conflict:  First, an overfunded defined benefit plan.  The approval of a claim will not come directly out of the employer’s pocket, but the employer will be affected by the approval, either in the form of increased future contributions or a reduced potential reversion.  But does this a conflict make?  (Maybe the one situation where there would be no conflict is where a defined benefit plan is overfunded and provides that all surplus assets will be allocated to plan participants.)  Second, an employer who contracts with a third party claims decision-maker who decides but does not pay claims.  Since the employer will choose the firm, and the employer may want to choose a firm that will reduce its costs, the firm may have a financial interest in rejecting close claims. 

(The majority opinion sort of endorses, or almost endorses, a similar argument about employers selecting insurance companies, since the premiums they charge will partly reflect their claim review policies.  It says “For one thing, the employer’s own conflict may extend to its selection of an insurance company to administer its plan.  An employer choosing an administrator in effect buys insurance for others and consequently (when compared to the marketplace customer who buys for himself) may be more interested n an insurance company with low rates than in one with accurate claims processing.”) 

So, will almost every case pose a conflict, as Justice Roberts suggests in his dissent?  And will this mean elevated review in all situations?  The majority opinion is a bit circular here.  The conflict will not count much if the one who makes decisions is walled off from the folks concerned about his or her employer’s bottom line.  But if the decision maker is sufficiently walled off so as not to care about the employer’s profitability, why is there a conflict at all?  If we say, well, there is still some potential for conflict because you cannot really wall off any employee from concerns about the employer’s bottom line, how can we say with any real confidence that the conflict is really only a small one, as the majority seems to want us to say?

What about the dissents.  We can ignore Kennedy’s dissent, which says I agree with the majority decision but think we should give MetLife a chance to show that its conflict was insignificant. 

Justice Robert’s decision is the opposite:  I agree with the majority that MetLife was really, really wrong when it rejected Glenn’s claim, but I disagree with virtually everything else that the majority opinion says, especially that a district court, in exercising review over a claims denial, must take into account every conflict, no matter how infinitesimal.  Justice Roberts would have preferred a standard that said, in effect, a conflict only matters if it affected the claims process; conflicts don’t matter, in this formulation, unless the plaintiff can demonstrate that the claims administrator in fact yielded to the conflict.  My guess is that under the Roberts’ formulation, plaintiffs would hardly ever be able to persuade a court to consider a conflict, unless of course there is a whole lot of discovery and quite possibly an involved trial, because credibility of witnesses would sometimes if not often be central to the determination of whether a conflict infected the decision-making. 

The difference between Roberts and the majority, then, appears to be on who will bear the burden of proving the importance, or non-importance, of the conflict.  Under the majority, the plan must prove that the conflict probably did not affect the decision, while under Roberts, the participant would have to prove that the conflict probably did affect the decision. 

The separate dissent of Justice Scalia and Thomas found even Justice Roberts’ dissent unconscionably unfair to the employer.  A conflict, in their view, should be irrelevant: all that should matter is whether the decision is reasonable.  There are other plausible ways of thinking about the Scalia/Thomas dissent, but exploring them would be a waste of whatever bandwidth would be required. 

Is it time to require all employers to provide health care for their employees?

Having just returned from a conference at Oxford University in England where we were discussing the effect of pension and health liabilities on global competitiveness, I have been thinking about the question of how our current voluntary benefits system affects intra-business competitiveness within the US, an often overlooked aspect of the problem. 

Instead of fussing with the question of what, if anything, should the states be able to do to reduce the number of uninsured individuals and getting all tangled up in ERISA preemption questions, is it time for Congress to consider the question of whether all employers should have some responsibility for financing a portion of health care costs for their employees?  Should Congress, as part of a broader health care reform proposal, consider adopting a Federal "pay" or "play" approach whereby all employers would have the choice of providing benefits that cost X (e.g., X cents/hour, X percentage of payroll) or contributing an equivalent amount to a public insurance pool under which all individuals without insurance would obtain coverage?  If employers should continue to be in the mix at all in the future, would that be a fairer way to equalize the funding of the system, rather than letting employers that voluntarily provide coverage for their employees continue to subsidize other employers that don't through cost-shifting?

Phyllis Borzi

Distinguishing among Employees Based on Pension Status

[Note to all: what follows are purely personal opinions, in no way attributable to employer or clients.]

The US Supreme Court's decision in Metropolitan Life Ins. Co. v. Glenn (6/19/2008) is commanding a lot of attention from ERISA practitioners.  I suspect that is because the decision is expected to shift the odds in contests over disability claims, which provide a lot of grist for ERISA litigation and now are likely to yield richer settlements. For those of us who focus on retirement plan design and benefit policy, Kentucky Retirement Systems v. EEOC, also handed down on 6/19/2008, is the more interesting decision. The headline: it is legal for employers to discriminate against employees based on their eligibility for a pension.   

In Hazen Paper Co. v. Biggins (1993), the Court held that an employer did not violate the Age Discrimination in Employment Act (ADEA) by terminating an employee shortly before he would have had 10 years of service and therefore vested in his pension.  There the Court held that pension status was not presumptively a “proxy for age”.  Since vesting was not explicitly age-related, a termination based on Mr. Biggins’s pension status was not actionable unless he could show that his age – not his closeness to vesting – was the “actual motivating factor.”

To summarize and oversimplify, in Kentucky Retirement Systems the Court held that it was legal to provide lower benefits to police and firefighters who retire on disability at or near retirement age than to those who would have had to wait longer to qualify for regular retirement.  Relying on Hazen Paper but moving well past it, the Court held that pension status is not a proxy for age here even though, in the Kentucky case, age is an explicit element of pension eligibility. 

At issue was a rule that gave credit to public safety officers retiring on disability pensions for the number of extra years of service they would need to qualify for full retirement. As a result, a younger disabled police officer or firefighter could get more pension credit than an older one who was closer to retirement age and therefore didn't need as much of an eligibility boost.  Since the motivation was to give all police and firefighters decent pensions even if they became disabled early in their careers, rather than to treat older public safety officers worse than younger ones, Justice Breyer and his colleagues in the 5-man majority concluded that this pension-based discrimination was as benign as the one alleged in Hazen Paper.

Doesn’t this turn employment discrimination doctrine on its head?  What happened to the principle that an employer has a mighty burden to prove that its differential treatment of employees was justified, when it draws a line between categories of employees that appears to be based expressly on age?  Compare, for example, Meacham v. Knolls Atomic Power Laboratory, which the Court also handed down on June 19, 2008 and which confirms that employers have that burden even in disparate-impact cases under ADEA.

Cutting through the discussion and legal analysis in the Kentucky case – as perhaps only a non-litigator might dare to do – the answer seems to be that the Supreme Court is uncomfortable with imposing unanticipated costs on pension plans, even if that means living with a little questionable discrimination.  The Court describes six circumstances that demonstrate the conclusion that the pension design was not “actually motivated” by an intent to discriminate against older employees, but five of them basically boil down to the fact that, hey, it’s a pension plan. 

I suspect another powerful concern was the one the Court gives for granting certiorari: “the potentially serious impact of the Circuit’s decision upon pension benefits provided under plans in effect in many states” along with the point made in Kentucky’s brief and highlighted in the opinion: the “large increase in pension liabilities, potential reduction in benefits for all disabled persons, or both…” The Court was more direct in voicing this concern in Manhart and Norris, where it found that Title VII of the Civil Rights Act outlaws gender-based discrimination but made its ruling prospective only, leaving Ms. Manhart and Ms. Norris without relief.  In tone it also calls to mind the raft of lower court decisions rejecting ADEA-based challenges to cash balance conversions, not to mention the Third Circuit’s ultimate Erie County decision.

What does Kentucky Retirement System mean for pension design?  Well, it says that employers can take pension eligibility into account in drawing lines.  For example, it may give comfort to employers considering phased-retirement type programs under which they would offer a little less in the way of current benefits to employees who are continuing to work while drawing part or all of their pension, or offering active employees a choice between receiving a current pension and continuing to accrue additional benefits.  Certainly whatever extra leeway this gives employers will have to be exercised reasonably and without discriminatory intent, including the intent to propel older workers into retirement.

It is refreshing to see Washington institutions opening opportunities for creative benefit plan design, for a change.

A New Firestone Drill: MetLife v. Glenn

Hopefully, the Supreme Court's MetLife decision will turn out to be a welcome clarification of the Firestone case, even if it generates some new uncertainty. Firestone left open the question of how much a conflict of interest in the administrator should affect the level of a court's deference to the administrator's decision. After Firestone, the lower courts went in all different directions on this question, ranging from engaging in a slippery-slope analysis, where there would be less deference, to a de novo approach, where the court would essentially ignore the administrator's decision altogether. MetLife now provides the answer, but in a way that does not provide certainty. Under MetLife, the standard continues to be the abuse-of-discretion standard. However, the degree and nature of any conflict of interest is taken into account as a factor in determining whether there has a been an abuse of discretion. Thus, the governing rules are clear, but the application of those rules may vary with the facts and circumstances of each case. The Court in MetLife recognizes the lack of certainty its decision brings, but asserts that the result is a workable one. As with the fallout from so many Supreme Court decisions, we'll have to wait and see. One interesting passage from the case may give a hint as to how lower courts will proceed. MetLife notes that a conflict may become less important to the analysis as active steps are taken to reduce potential bias and promote accuracy, for example by walling off claims administrators from those interested in firm finances, or by imposing management checks that penalize inaccurate decisionmaking regardless of who benefits. It will be interesting to see if players in the market seize upon steps like this to try to increase the extent to which internal decisionmaking will be entitled to deference in the post-MetLife world The fun never stops . . .

Andrew L. Oringer
White & Case LLP
Andrew.Oringer@whitecase.com

Amschwand? Or am not Schwand?

It's that Dean guy again.  Sheesh. 

In Amschwand v Spherion Corp., 505 F.3d 342, 41 EBC 2697 (5th Cir. 2007), Mr. A was on medical leave for terminal cancer and still covered by Spherion's life insurance plan.  At the end of the year, Spherion changed to a new insurance carrier and was supposed to list Mr. A as one of the carryovers to the new policy -- but didn't.  Mr. A was reassured time and again, orally and in writing, that he would still be covered by the new policy, and there were no writings yet issued from which he would have learned otherwise.  He dies and the life insurance benefits were denied.  Widow sues and loses, because the Circuit says she's seeking damages, not benefits.  Supreme Court asks the Solicitor of Labor for opinion on cert petition, and SOL says they should grant and hold (a) that Mertens/Great-West/Sereboff don't apply because fiduciaries were not defendants in those cases and, since fiduciaries are a creature of trusts which are solely a creature of equity, all remedies against a fiduciary are necessarily "equitable." (b)  in any event, where the action is against a messing up fiduciary, plaintiff is entitled to have the fiduciary make good by way of "surcharge," an equitable remedy.

I think two additional arguments should have been made:  (1) That because Mr. A was no longer a participant in the plan, having been unceremoniously bounced from it, there is no ERISA preemption of a state law claim.  In Miller v Rite-Aid, 504 F.3d 1102, 41 EBC 2537 (9th Cir 2007) on nearly identical facts (apparently the 9th Circuit exists in a parallel universe -- hey, watch your language), the court held that since Miller wasn't a participant there could be no preemption, with that wonderful quote: "Unlike the Cheshire cat, one cannot have the stripes of preemption without the smile of participation."  I think we all know why the Solicitor doesn't like that argument.  (2) Sereboff said money was equitable relief if it were based on an "equitable lien established by agreement."  This is so even if the "fund" on which the lien existed had not yet come into being, as long as it was identifiable.  Here, insurance companies create "reserves" to pay expected benefits.  If I took discovery from the new insurance company, I would find out that if Spherion included one more participant in their list, someone who was terminal with a life expectency of months and whose benefit would be $426,000, I would also learn that Spherion's premium would have been increased by $426,000.  Thus, Spherion had an ill-gotten gain of $426,000, and the "fund" is the diamonds in the lockbox -- with the diamond Spherion kept for itself being worth $426,000.  The indentifiable fund is the whole of the premiums, and the equitable lien by assignment (the reassurances) is on the diamond Spherion kept for itself.

Roy Harmon's blog today mentioned Fitzgerald v. H&R Block Fin. Advisors, 2008 U.S. Dist. LEXIS 45472 (E.D. Mich. June 11, 2008) (115 PBD, 6/16/08) where the district court, upholding an arbitration award, said that under ERISA § 510, where plaintiff said he was prevented from obtaining shares of company stock, plaintiff was indeed claiming equitable relief by identifying a specific fund upon which he claimed an equitable lien by assignment -- the pool of company stock owned by the company. 

So?  Whaddya think?

The Trouble With Estoppel in ERISA Cases

Hard cases really do make bad law. 

Every now and then an estoppel case pops up under ERISA, and the law is twisted and mangled to make it fit.   See, e.g., Livick v. The Gillette Co., U.S. App. Lexis 8261, 43 E.B.C. 2025 (1st Cir. 2008) (dictum), citing Hooven v. Exxon Mobil Corp., 465 F.3d 566, 578 (3d Cir. 2006); Mello v. Sara Lee Corp., 431 F.3d 440, 444 (5th Cir. 2005); Devlin v. Empire Blue Cross & Blue Shield, 274 F.3d 76, 85-86 (2d Cir.2001); Sprague v. General Motors Corp., 133 F.3d 388, 403 & n.13 (6th Cir. 1998) (en banc); Greany v. W. Farm Bureau Life Ins. Co., 973 F.2d 812, 821 (9th Cir. 1992); Kane v. Aetna Life Ins., 893 F.2d 1283, 1285 (11th Cir. 1990). 

Behold: the good old fashioned set of estoppel requirements is hauled out, and plaintiffs are told that, to prevail, they must show (at least) a misrepresentation of fact made expecting the other person to rely, and then  reasonable and detrimental reliance.  It is a state law doctrine and should be routinely preempted by ERISA unless it is somehow incorporated into ERISA under § 502.

Why not incorporate it into federal employee benefits law?  How shall I reject thee? – let me count the ways.  First, it is basically a contract doctrine, and a benefit plan is not inherently a contract in the first place.  You don’t need offer, acceptance, consideration, mutuality and so forth.  All you need is a plan. You don’t need reliance.  You don’t need to show that the participant even knew the plan existed, much less relied upon it.   Why not?  Because you would end up with people similarly situatated bu getting different benefits depending solely upon their awareness and understanding of the plan, which is exactly the wrong result under an employee benefits law.  Instead, one looks to the plan, the whole plan, and nothing but the plan.  And the plan that must be in writing.  (Described in an SPD that must be in writing). 

What about ambiguity?  Can’t you use estoppel to resolve an ambiguity in the plan?  Well, not estoppel, but parole evidence.  Note the difference: Parole evidence doesn’t require adverse reliance.  And if the parole evidence resolves the ambiguity, then the ambiguity is resolved for all beneficiaries, not just those who relied (or even knew about) the parole.

Are you persuaded?  Well, there are judges in almost every circuit who have heard these arguments, acknowledge them, and then wring their hands and think they are doing justice by knocking holes in the structure of ERISA.  Hard cases.  (Sigh).

Health Care - Is Anyone Asking the Hardest Question?

In a matter of a few days, here are some headlines from the Pension & Benefits Reporter: "Report Says Health Costs Hurt U.S. Firms, Advocates End of Employer Financing System"; "CRS Says Price Transparency May Drive Down Costs"; "Reform Efforts Should Combine Options in Public, Private Sector, Health Group Says"; "Democrats Pounce on GAO Study Finding Taxpayers with HSAs Have Higher Incomes"; "Measure of Family Medical Spending Has Lowest Increase in Past Five Years" and the list goes on and on.

What I haven't seen for example, is a study of how the system will make the hardest decisions about health care: who gets care and who doesn't, especially at the beginning and ending of life, where a large portion of our health care dollars are spent?

In other systems, much of the care we hold so dear is not available to the very young or the very old and sometimes in the middle.  Some European cultures take a much more practical view of the end of life and focus more on dying in comfort rather than fighting a very costly, but losing battle using the most sophisticated (and usually expensive) methods to prolong life.

If a nationalized system is so much better, why is it that U.S. hospitals along the Canadian border have so many Canadians getting heart surgery for example?  Or why is there a three or four month wait in some areas of Canada to have a hernia repaired, when not emergency status?  I can imagine the response of a U.S. parent if he/she were told her/his son could not participate in school athletics because of a hernia and there would be a three month wait to have the repair done on an elective basis.  I have 4 married children living with their own children abroad and all of them are provided by their employers' medical care insurance that allows them to opt out of the national system, because they demand more access to specialists and quicker care than is available in the local system.  I have a close friend who is a physician who complains that people come into his office having decided they have a certain condition and demand a pill which they have seen advertised on TV.  There may be a less expensive alternative but if they don't get what they saw on TV they will go to some other physician down the road who will give it to them.  While these examples are anecdotal and by no means scientific, they do represent the reality that I live in.

Most of us remember well the public outcry when the HMOs and PPOs were first introduced and they had strong mechanisms to regulate access to health care.  State laws were passed to assure access to certain types of care and plaintiffs lawyers had a heyday.  State laws are filled with provisions that guarantee access to certain providers and types of care, at least some which add unnecessarily to the cost of health care.

I believe that without a mechanism to control what care is available and to whom and at what time, costs will continue to be a problem.  We have more technology than we can afford.  In national health care systems care is rationed by either long waits or guidelines that restrict access.  There is no political will in America to suggest that we really can't afford to give everyone everything they want when they want it.  As a result, no one asks the hard question, who is going to decide what care and when?