Category: Benefits

A previous post here at Benefitsblog entitled “Perils for Plan Fiduciaries: Deciding When and How to Sue For Losses” discussed some worrisome news in the In re WorldCom, Inc. Securities Litigation case about how certain fiduciaries of pension funds had possibly jeopardized their claims on behalf of plan participants by filing individual actions prior to a decision on class action certification and how the judge in the case had followed up with tough criticism of the law firm that represented the fiduciaries. I noted how “there is much for ERISA plan fiduciaries to be wary of in contemplating individual and class action lawsuits on behalf of plan participants.” Apparently, the Department of Labor thinks so too as evidenced in their issuance of final Prohibited Transaction Exemption 2003-39 (pdf version) (html version) covering issues pertaining to the settlement of litigation by employee benefits plans with parties in interest. The main purpose of the exemption is to permit plans to release claims against “parties in interest” in connection with settlements of ongoing or threatened litigation where the DOL is not a party to the litigation. The exemption is an important one for the benefits community in light of the fact that, as discussed previously, many plans will be, or already are, bringing lawsuits on behalf of plan participants trying to recoup losses from recent corporate scandals as well as mutual fund scandals.

Why does the DOL need to issue an exemption for a plan fiduciary to enter into a settlement on behalf of a plan? When plan fiduciaries enter into such agreements on behalf of plans which are suing such entities as the employer, an investment provider, etc, those entities are normally “parties in interest” (i.e. related to the plan under ERISA and DOL regulations). And without going into detail about all of the complicated prohibited transaction rules, suffice it to say that the DOL views a potential claim or “chose in action” as a type of property and that a plan’s release of its claim against such party in interest may constitute a prohibited sale or exchange with the plan, as well as a prohibited transfer or use of plan assets for the benefit of a party in interest. (See DOL Opinion Letter 95-26A which provides some guidance regarding how this type of prohibited transaction can occur. Also, see PTE 1999-31.)

However, in spite of its views, the DOL notes the confusion surrounding the issue and that “some attorneys may have advised their clients that the settlement of litigation with a party in interest is not the type of transaction intended to be covered by section 406 of the Act.” With this in mind, here is what the DOL says about the reason for its issuance of the exemption:

As the Department noted in proposing this exemption, the fact that a transaction is subject to an administrative exemption is not dispositive of whether the transaction is, in fact, a prohibited transaction. Rather, the exemption is being granted in response to uncertainty expressed on the part of plan fiduciaries charged with the responsibility under ERISA for determining whether it is in the interests of a plan’s participants and beneficiaries to enter into a settlement agreement with a party in interest. The comments have confirmed the department’s earlier conclusion that there was considerable uncertainty surrounding this issue. After considering all of the comments, the Department has determined that the exemption, as revised, appropriately balances the concerns of these commentators while allowing plan fiduciaries to properly carry out their responsibilities under ERISA.

The exemption is really narrowly tailored to address those settlement agreements which result in prohibited transactions. However, there is DOL guidance in the exemption which really has application for fiduciaries on a broader scale so that the exemption can serve somewhat as a “manual” for ERISA plan fiduciaries who find themselves having to enter into settlements on behalf of plan participants.

However, I wish to note one aspect of the exemption which is troubling from the standpoint of the effect it will have on the cost of litigation and trying to make plan participants whole–that is, the DOL’s requirement in the exemption that the plan must obtain the opinion of an attorney representing the plan that a “genuine controversy exists.” (Formal legal opinions are almost always a costly endeavor.) Now I suppose I should be singing’ Dixie and praising the DOL for enhancing the flow of work to benefits and ERISA attorneys around the country, but I get concerned when I think of all that is going on here. When you think about the fact that participants have already been harmed in the matter and that attorneys representing the plan will receive a sizable portion of any settlement, and when you add to that, the requirement that the plan engage an “independent fiduciary” as well as this requirement that the plan engage an attorney to write an opinion that there is a “genuine controversy,” all of this adds up to a great deal of cost which will eat away at any recovery for plan participants. Apparently, according to language in the original proposed exemption, the purpose of the attorney opinion requirement is as follows:

The Department believes that this condition is necessary to prevent the plan and parties in interest from engaging in a sham transaction purporting to fall within this class exemption, thus shielding a transaction, such as an extension of credit, that would otherwise be prohibited. The existence of a genuine controversy must be determined by an attorney retained to advise the plan. That attorney must be independent of the other parties to the litigation.

In the preamble to the final exemption, the DOL notes one commenter who recommended retaining the requirement for a genuine controversy, but without requiring an attorney opinion so that the attorney review would be permitted, but not required, as a safe harbor in certain situations. To me, this makes much more sense and would avoid needless cost for the majority of plans which find themselves in the position of having to recoup losses in litigation, for which the issue of “genuine controversy” is a far-gone conclusion. In other words, requiring all plans to obtain the opinion of counsel to avoid the possible abuse which can occur in the minority of cases is rather like trying to kill a fly with a bazooka. Nevertheless, this final exemption will require the opinion of counsel, except in situations where the case has been certified for class-action.

Some additional comments about the exemption:

(1) The DOL has eliminated the requirement that the independent fiduciary “negotiate” the settlement because it realizes that in class action settlements, the “plan fiduciary’s role in negotiating the terms of the settlement may be limited.” However, the DOL warns that “even where negotiation does not take place between the plan and the defendant, a fiduciary will be compelled, consistent with ERISA’s fiduciary responsibility provisions, to make a decision regarding the settlement on behalf of the plan, even if that decision is merely to accept or reject a proposed settlement negotiated by other class members.”

(2) Regarding class action lawsuits, the DOL had much to say in the exemption. A Plan fiduciary, faced with a non-opt out class action settlement, “must take such actions as are appropriate under the particular circumstances” and “object to its terms” where necessary on behalf of plan participants. “If the fiduciary takes no action, and the case is settled for far less than the full value of the plan’s losses, the burden will be on the fiduciary to justify its inaction.”

(3) The original proposed exemption only allowed the receipt of cash in exchange for a release. The final exemption permits “assets other than cash” where necessary to rescind a transaction that is the subject of the litigation, or where such assets are qualifying employer securities for which there is a generally recognized market and value.

(5) The final exemption provides that the settlement must be reasonable in light of the plan’s likelihood of full recovery, the risks and costs of litigation, and the value of claims foregone.

(6) Finally, the DOL addresses the fact that it is not uncommon for the same transactions to give rise to both ERISA and securities fraud claims and that participants and/or fiduciaries have been able to modify the terms of a release to permit the plan to receive a share of the securities fraud settlement without releasing its ERISA claims against the parties in interest. The DOL notes “that plan fiduciaries should consider whether additional relief may be available for the ERISA claims before agreeing to a broad release.”

How about starting out the new year with a song? No joke here. Someone has actually written a song called the “Sarbanes-Oxley Blues” which you can access here. (Thanks to PCAOB Online for the pointer.)

Well, it is time for that last 2003 Benefitsblog post. Thanks to all of my readers and new friends who have made this first year of Benefitsblog such an enriching experience. Happy New Year and many blessings to you for the coming year!

And for those who like this sort of thing, I have put together some interesting quotations from cases, news items, government press releases, blogs, etc. which remind us of what went on in the Benefits world in 2003. See if you can guess the author or speaker (answers are below):

1. “Perhaps one of the beneficial side effects of the unfortunate spate of corporate fraud and mutual fund investigations is a renewed emphasis on good corporate governance and good plan governance.”

2. “After extensive research, this Court concludes for the reasons discussed supra that even where the named fiduciary appears to have been granted full control, authority and/or discretion over that portion of activity of plan management and/or plan assets at issue in a suit and the plan trustee is directed to perform certain actions within that area, the directed trustee still retains a degree of discretion, authority, and responsibility that may expose him to liability, as reflected in the structure and language of provisions of ERISA. At least some fiduciary status and duties of a directed trustee are preserved, even though the scope of its “exclusive authority and discretion to manage and control the assets of the plan” has been substantially constricted by the directing named fiduciary’s correspondingly broadened role, and breach of those duties may result in liability.”

3. “We are sending a message to every pension plan officer, director and fiduciary: you have a solemn duty to safeguard your employees’ pension assets. If you put those assets in jeopardy through neglect or malfeasance, we will hold you accountable.”

4. “We continue to believe that sunshine is the best disinfectant for abusive transactions.”

5. “Fund lawyers, under SEC rules that became effective August 5, 2003, have a similar “reporting up” duty. The SEC’s attorney conduct rules apply to any attorney employed by an investment manager who prepares, or assists in preparing, materials for a fund that the attorney has reason to believe will be submitted to or filed with the Commission by or on behalf of a fund. Under these rules, an attorney who is aware of credible evidence of a material violation of the securities laws, or a material breach of fiduciary duty, must report this evidence up the chain-of-command or ladder to the fund’s chief legal officer, and ultimately, to the independent members of the mutual fund board.”

6. ” . . .ERISA generally, and section 514(a) particularly, have become virtually impenetrable shields that insulate plan sponsors from any meaningful liability for negligent or malfeasant acts committed against plan beneficiaries in all too many cases. This has unfolded in a line of Supreme Court cases that have created a ‘regulatory vacuum’ in which virtually all state law remedies are preempted but very few federal substitutes are provided. . . Unfortunately, the price of all this has been descent into a Serbonian bog wherein judges are forced to don logical blinders and split the linguistic atom to decide even the most routine cases.”

7. “Defendants question why Congress would use different language in succeeding subparagraphs (accrued benefit and benefit accrual) unless it intended the subparagraphs to cover different types of benefits. The answer is simple. Congress chose to be grammatically correct. (In the footnote of the opinion: “For a simpler example, consider the word popcorn. Popcorn is the word used to describe the product created by exposing corn kernels to extreme heat. If asked to draft a phrase grammatically correct, one would say “the rate corn pops.”)

8. “The aspect of the job I like most is that all I have to do is do right. Every day when I come to work and pick up a file, that is my only job. Let right be done.”

9. “Despite the uncertainty one thing is true, however – a struggling pension is better than no pension at all.”

10. “In their brief, plaintiffs attempt to salvage this claim by arguing that, while the SPD may have contained a general reference to limitations on excessive trading, the plan never defined excessive trading in any way, nor were plan employees able to explain what it meant when plaintiffs inquired into the matter. Since no one could explain the specifics of this limitation, they conclude, by implication “no such limitation on ‘excessive trading’ existed . . .Such reasoning is clearly spurious. A non-specific limitation is nonetheless a limitation. To argue as plaintiffs have is akin to arguing that since your mother did not tell you how long you were grounded for, you must not be grounded. Indeed, such arguments only serve to prove the opposite point, namely that a general limitation was in place and that plaintiffs were well aware of its existence.”

Answers: 1. Remarks of Assistant Secretary Ann L. Combs Before the Annual Conference of The National Defined Contribution Council October 16, 2003. 2. District Court Judge Melinda Harmon for the Southern District of Texas in Tittle v. Enron Corp. 3. U.S. Secretary of Labor Elaine L. Chao in Prepared Announcement of Lawsuit against Enron, Former Enron Executives, And Former Enron Retirement Plan Officials, June 26, 2003. 4. Treasury Assistant Secretary for Tax Policy Pam Olson in December 29, 2003 Press Release entitled “Treasury Issues Rules To Increase Transparency and Halt Abusive Tax Avoidance Transactions: Reins Tightened on Lawyers, Accountants, and Other Tax Advisors.” 5. SEC Commissioner Harvey J. Goldschmid, entitled “Mutual Fund Regulation: A Time for Healing and Reform,” before the ICI 2003 Securities Law Developments Conference on December 4, 2003. 6. 3rd Circuit Court Judge Edward Becker in his eloquent dissent in the case of DiFelice v. Aetna. 7. Chief U.S. District Judge J. Patrick Murphy in Cooper et al. v. the IBM Personal Pension Plan et al. (holding that the IBM cash balance plan violated ERISA). 8. Senior Circuit Judge Richard S. Arnold of the U.S. Court of Appeals for the Eighth Circuit in Howard Bashman‘s November edition of “20 Questions for the Appellate Judge” in which Judge Arnold was asked about his most favorite aspect of being a federal appellate judge. 9. “Don’t bumble in pensions jungle“: September 8, 2003 article by Jane Hall, Liverpool Echo, discussing the U.K.’s pension funding woes. 10. Federal District Judge Raymond J. Dearie in the Eastern District of New York case of Straus v. Prudential Employee Savings Plan.

As part of a broader effort to strengthen professional standards, the IRS today announced the appointment of Cono Namorato as the Director of the Office of Professional Responsibility. The New York Times reports on the appointment: “I.R.S. Unit Will Focus on Lawyers and Accountants.” The article reports that the IRS is intending to weed out “attorneys and accountants who sacrifice their independence and integrity at the altar of higher fees.” According to the article, IRS Commissioner Mark Everson, in announcing the appointment, stated: “We need to have a complete attack on abuses of integrity,” he said, and disciplining “fast and loose attorneys and accountants who are working to undermine the system at the high end” is central to that strategy.

In addition, the IRS also announced the issuance of four items of administrative guidance as part of their ongoing effort to halt abusive tax avoidance transactions and maximize effective use of IRS audit resources:

• Proposed changes to Circular 230 that set high standards for the tax advisors and firms that provide opinions supporting tax-motivated transactions.
• Final regulations that will increase the cost of failing to disclose abusive tax avoidance transactions.
• Revised final regulations clarifying that the disclosure of confidential transactions on a return is limited to transactions for which a promoter has imposed confidentiality on a taxpayer to protect the promoter?s tax strategies from disclosure.
• Proposed new Form 8858 requiring information reporting by U.S. persons that own foreign entities that are disregarded for U.S. tax purposes.

Quote of Note from the Press Release: ?Taken together, the actions we are announcing today represent another significant step to end the proliferation of abusive tax avoidance transactions that has undermined confidence in our tax system,? said Treasury Assistant Secretary for Tax Policy Pam Olson. ?We are proposing a set of best practices that makes clear that tax professionals should adhere to the highest ethical standards and ensure that their clients are well-advised of the law and any risks they are taking.?

You can access the IRS Penalty Policy Statement issued in conjunction with the regulations here.

Also, Mike O’Sullivan at Corp Law Blog.com discusses the developments. Mike notes an interesting article from the Washington Post: “IRS Speeds Corporate Tax Audits.” The article quotes Charles O. Rossotti, the former internal revenue commissioner, as saying that some IRS agents, who might spend years auditing routine matters, appear to be in the archaeology business, rather than the audit business.

Private retirement plans established under the provisions of ERISA now hold a large part of the population’s personal assets. Untold numbers of participants in these plans have found and will find themselves seeking the protection of the bankruptcy courts. Prior to the 1992 U.S. Supreme Court case of Pattersen v. Shumate, the law was in a state of disarray and the courts were split over whether or not the anti-alienation provisions of ERISA protected these assets from bankruptcy. Shumate seemed to lay to rest some of the confusion surrounding the interplay between the bankruptcy laws and ERISA, holding that participants could exclude their interests in “ERISA qualified plans” from the bankruptcy estate in a bankruptcy proceeding.

However, with bankruptcies on the rise and ERISA plans becoming many times the only source of assets, creditors and bankruptcy trustees have become more determined in pursuing these assets. One such pursuit ended in a very unhappy result for participants in the recent case of Rhiel v. Adams in which the Sixth Circuit Court of Appeals reached a surprising conclusion in the 403(b) arena, throwing the state of the law in disarray once again at least with respect to 403(b) plans.

In the Adams case, the court held that a husband and wife’s interests in 403(b) plans were included in the bankruptcy estate and not exempt under section 542(c)(2) of the Bankruptcy Code. Section 541(a) of the Bankruptcy Code provides that the bankruptcy estate is comprised of all legal and equitable interests of the debtor(s) while section 542(c)(2) then provides an exclusion from the estate as follows:

A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title. 11 U.S.C. § 542(c)(2).

The lower federal district court had held that the 403(b) plans were ‘ERISA-qualified’ as contemplated by the Supreme Court in Pattersen v. Shumate. As such, they were not the property of the bankruptcy estate, and were not subject to administration by the bankruptcy Trustee. However, on appeal, the Sixth Circuit reversed the lower court and remanded the case for further proceedings based upon the fact that the husband and wife had not shown that the section 542(c)(2) “in a trust” language had been satisfied. According to the Sixth Circuit, the interest of the debtor had to have been held “in a trust” in order for section 542(c)(2) to apply, meaning that the 403(b) annuities did not satisfy this trust requirement and that the annuities were not exempt from the bankruptcy estate.

The court in reaching its conclusion seems to almost ignore the U.S. Supreme Court case of Pattersen v. Shumate. The U.S. Supreme Court in Shumate had held that the § 541(c)(2) language–“applicable nonbankruptcy law”–included ERISA and that the anti-alienation provision contained in the ERISA qualified plan at issue in the Shumate case (a pension plan) satisfied the literal terms of § 541(c)(2). The court in Shumate held further that the sections of ERISA and the Internal Revenue Code requiring a plan to provide that benefits may not be assigned or alienated clearly imposed a “restriction on the transfer” of a debtor’s “beneficial interest” within § 541(c)(2)’s meaning, and that the terms of the plan provision in question complied with those requirements.

Although the Shumate case did not involve a 403(b) plan, but rather a pension plan, there is language in the Shumate case (which the dissent in the Adams case emphasizes) which could have been used to support a result that the 403(b) interests should not have been included in the estate as follows:

The natural reading of the provision [e.g. § 541(c)(2)] entitles a debtor to exclude from property of the estate any interest in a plan or trust that contains a transfer restriction enforceable under any relevant nonbankruptcy law.

As the dissent states, the Sixth Circuit could have reached a different result by relying on this language in Shumate–“any interest in a plan or trust”–as well as on the reasoning espoused by the Supreme Court in Shumate, i.e. that of (1) ensuring that the treatment of pension benefits not “vary based on the beneficiary’s bankruptcy status”; (2) giving “full and appropriate effect to ERISA’s goal of protecting pension benefits” and (3) ensuring that the “important policy underlying ERISA: uniform national treatment of pension benefits” be preserved.

In my opinion, the following arguments of Sixth Circuit Judge Jennie D. Latta’s dissent are highly persuasive:

(1) Judge Latta notes the Sixth Circuit’s own language in which it stated that it would not “rely on the literal language of the statute where such reliance would lead to absurd results or an interpretation which is inconsistent with the intent of Congress.” As Judge Latta aptly states, “[t]he majority’s reading is inconsistent with the clear intent of Congress that ERISA-qualified pension plans not be subject to creditor claims.”

(2) “Outside of bankruptcy, no creditor of the Adams would be able to reach the debtors’ beneficial interests in their pension plans to satisfy claims, and this is true not because these interests are exempt from execution pursuant to state law, but because they are exempt from execution pursuant to federal law. See Guidry v. Sheet Metal Workers Nat. Pension Fund, 493 U.S. 365, 110 S. Ct. 680 (1990)(permitting no equitable exception to ERISA’s anti-alienation provision). The filing of a bankruptcy case should not change this result.”

(3) “The narrow reading of § 541(c)(2) advanced by the majority of the Panel nullifies the anti-alienation provision of ERISA for non-trust, qualified pension plans. The majority advances no policy argument in favor of this reading. Were we called upon simply to construe § 541(c)(2), without the benefit of the Supreme Court’s opinions in Guidry and Shumate, then a narrow, “plain-meaning” reading would be appropriate, but I believe that we must go beyond § 541(c)(2) and include within our discussion the plain meaning of ERISA’s anti-alienation requirement. When this is done, it is clear that ERISA-qualified pension plans, whether held in trust or not held in trust, are excluded from the bankruptcy estate.”

Robert Ambrogi here notes the discussion going on about how Jaffe Associates, in a newsletter, endorses blogs as one of the hottest law firm marketing trends of the coming year. The article by Jaffe states:

Blogs, the equivalent of an online diary, have been popular among tech-savvy folks for years, but in 2003 they emerged in the legal profession as “blawgs” – online diaries by lawyers and legal professionals. These virtual soapboxes give legal professionals an unparalleled opportunity to voice their comments and share their expertise. You are sure to hear more about blogs and blog-related technology in 2004.

Ambrogi who joined Jaffe last August writes:

At Jaffe, we have made blogs a standard element of our consulting with larger law firms on their Web sites. We build blogs for law firms and even help them plan and execute the editorial content. Clearly, there are many lawyers in larger law firms who have not even heard of blogs, but the people at law firms who are responsible for marketing are intensely interested in them.

The Financial Accounting Standards Board (FASB) has issued FASB Statement No. 132 (revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits. According to the FASB News Release, the Statement seeks to improve financial statement disclosures for defined benefit plans. “These disclosures will provide investors with greater visibility into plan assets and a clearer picture of cash requirements for benefit payments and contributions to fund pension and other postretirement benefit plans,” said FASB Project Manager Peter Proestakes. According to the News Release, the Statement does the following:

For the first time, companies are required to provide financial statement users with a breakdown of plan assets by category, such as equity, debt and real estate. A description of investment policies and strategies and target allocation percentages, or target ranges, for these asset categories also are required in financial statements.

Cash flows will include projections of future benefit payments and an estimate of contributions to be made in the next year to fund pension and other postretirement benefit plans.

In addition to expanded annual disclosures, the FASB is improving the information available to investors in interim financial statements. Companies are required to report the various elements of pension and other postretirement benefit costs on a quarterly basis.

The guidance is effective for fiscal years ending after December 15, 2003, and for quarters beginning after December 15, 2003.

You can access FASB’s FAQs about the Statement here.

Articles discussing the new disclosure requirements:

• Boston Globe: “FASB issues new rules for pension plans.”
• Baltimore Sun: “Pension strategy must be revealed.”
• Seattle Times: “Employers must disclose more about pensions.”

“Fidelity Seeks a Clearinghouse for Trades“: the New York Times reports. The article discusses “the hard 4” deadline which is being proposed by the SEC to prevent late trading and how this “could hurt the millions of Americans who invest through 401(k) plans that rely on intermediaries to submit orders.” The article notes how Fidelity Investments and the National Securities Clearing Corporation “are leading an effort to transform an existing fund-order processing service at the clearing corporation into the kind of time-stamped “lockbox” that would give fund middlemen more time to process orders while assuring that no late orders could be taken that would satisfy regulators and industry executives without penalizing investors.” According to the article, the solution has received a “little-noticed nod from the Securities and Exchange Commission.”

Some great Christmas links:

“Good News of Great Joy.” (Thanks to Benefitslink.com for today’s Benefits Buzz pointer.)

“The Best Gift Of All.” (Thanks to the Sophorist for the pointer.)

EthicalEsq. has a great post discussing the ethical and practical implications of lawyers utilizing the Google Adsense ads on their blawgs for revenue. He is getting some good comments too from the blawging community. It is interesting to note that many lawyers who sign up for blawgs using the Blogger tool, automatically have these ads inserted on their blawg until they pay the yearly fee.

Speaking of Blogger, did you forget to get a Christmas gift for someone special? Blogger apparently has the answer here.