Category: Benefits

Plan Sponsor has an interesting article: “Businessman Threatens To Pull K Plan From ING Due to Outsourcing.” The article reports that Fred Tedesco, president and co-owner of Pa-Ted Spring Co. Inc., sent a letter to ING Group threatening to take his company’s 70-person 401(k) plan business elsewhere if the company outsourced any more computer jobs.” Quote of Note:

Even though Tedesco said he realizes that losing his firm’s small 401(k), with several million dollars of assets, would mean little to ING, which has administered the plan for a year. . .”the whole point is to set the stage for other people to look at” the issue. . . The move by Tedesco may be the initial ripples of an oncoming small business tsunami. Several pro-American business groups are expected to start urging small businesses to take similar stands against insurers and financial services firms. Leading the charge is MADe in USA, a coalition of employees and owners of small and medium manufacturers that Tedesco helped create more than a year ago.

While I applaud Mr. Tadesco’s efforts (anyone who is a regular reader at Benefitsblog knows my great concerns about this whole outsourcing movement), this is another area where ERISA plan fiduciaries need to tread carefully. Generally, plan fiduciaries may not make investment decisions based on social, moral and other noneconomic criteria (referred to as “social investing”) unless the policy also satisfies ERISA’s fiduciary requirements of loyalty to plan participants, prudence, and diversification. The DOL has addressed these concerns in DOL IB 94-1 (1994), also known as DOL Reg. section 2509.94-1. See also, Advisory Opinion 98-04A in which the DOL stated:

The Department has expressed the view that the fiduciary standards of sections 403 and 404 do not preclude consideration of collateral benefits, such as those offered by a “socially- responsible” fund, in a fiduciary’s evaluation of a particular investment opportunity. However, the existence of such collateral benefits may be decisive only if the fiduciary determines that the investment offering the collateral benefits is expected to provide an investment return commensurate to alternative investments having similar risks. In this regard, the Department has construed the requirements that a fiduciary act solely in the interest of, and for the exclusive purpose of providing benefits to participants and beneficiaries, as prohibiting a fiduciary from subordinating the interests of participants and beneficiaries in their retirement income to unrelated objectives. In other words, in deciding whether and to what extent to invest in a particular investment, or to make a particular fund available as a designated investment alternative, a fiduciary must ordinarily consider only factors relating to the interests of plan participants and beneficiaries in their retirement income. A decision to make an investment, or to designate an investment alternative, may not be influenced by non-economic factors unless the investment ultimately chosen for the plan, when judged solely on the basis of its economic value, would be equal to or superior to alternative available investments.2

In discharging investment duties, it is the view of the Department that fiduciaries must, among other things, consider the role the particular investment or investment course of action in the plan’s investment portfolio, taking into account such factors as diversification, liquidity, and risk/return characteristics. Because every investment necessarily causes a plan to forgo other investment opportunities, fiduciaries also must consider expected return on alternative investments with similar risks available to the plan.

(It may very well be that the plan fiduciaries of the 401(k) plan mentioned in the Plan Sponsor article have dealt with these fiduciary concerns, but the article does not mention it.)

Regarding outsourcing in general, the New York Times reported last week: “Who Wins and Who Loses as Jobs Move Overseas?” In answer to the question “How big an issue is job migration?” an economist states:

Offshore outsourcing is a huge deal. We do not have a data series called jobs lost to offshore outsourcing, but 23 months into the recovery, private sector jobs are running nearly seven million workers below the norm of the typical hiring cycle. Something new is going on. America is short of jobs as never before, and the major candidates for our offshore outsourcing are ramping up employment as never before. So yes, I think two and two is four.

Also, Business Week Online had this: “The Rise Of India: Growth is only just starting, but the country’s brainpower is already reshaping Corporate America.”

Also, this from Philip Greenspun’s Weblog: “Outsourcing to India in Business Week and at MIT” (which by the way, inspired 86 comments with respect to one post.)

UPDATE: David Giacalone has a great post on developments in legal services outsourcing: “Corporate Outsourcing May Bring Trickle-Down Competition and Options in Legal Services.” You can access a brief post here at Benefitsblog on outsourcing of legal services to India.

How about this? (Brief Disclaimer: No financial incentives here at all. No guarantees about this product or the company selling this product.)

“Lawyers Are Warned on Mutual Fund Roles“: the New York Times is reporting. According to the article, the SEC is saying that regulators may soon open a new front in their investigation of possible wrongdoing at mutual funds, focusing on the role of lawyers who represent them. This focus on lawyers was revealed in a speech by 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. Here are some of his remarks:

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.

This “reporting up” requirement should significantly enhance the flow of key legal information (involving “reasonably likely” material violations) to independent members of the fund board. “Reporting up” also empowers lawyers. The requirement will allow dispassionate, independent fund directors ? not conflicted fund investment managers ? to resolve key securities law and conflict-of-interest issues. Everyone should understand that the SEC’s rules are now a matter of substantive federal law. As of August 5, available for violations are the Commission’s traditional broad spectrum of remedies, penalties, and other sanctions.

Mike O’Sullivan at Corp Law Blog weighs in on this development here as well as Professor Bainbridge here.

Regarding the mutual fund scandals in general, the December 15th issue of Business Week has an article entitled “Breach of Trust.” The article makes the interesting point that “changes in retirement plans–particularly innovations in 401(k) plans”–provided fuel for the mutual fund scandals. The article states that just a decade ago, “participants had few funds to choose from and were limited to one trade each quarter.” The article goes on to say that with plans offering so many choices and participants being able to trade daily, it is these innovations which “paved the way for abuses, such as market timing by 401(k) participants.”

The Wall Street Journal today has this article discussing how employers and fund companies “are cracking down on workers who make frequent in-and-out trades in their 401(k) plans”: “The Crackdown on Funds Hits Your 401(k).” Here are what some of the companies are doing to curb market-timing, according to the article:

• Imposing one-day timeouts between trades to make it more difficult for market timers to engage in market-timing.
• Imposing a 15, 30, or even 90-day holding period for certain international funds.
• Imposing redemption fees designed to take some of the profit out of market timing. Fees range from a 1% to 1.5% fee on redemptions of investments in certain international funds, if employees hold the funds for less than 30 days. The move is designed to help compensate participants in the fund for the transaction costs generated by the frequent trading.
• Barring employees from investing in a fund if they engage in market timing.
• Temporarily barring employees from telephone and online exchanges if they make too many trades.

Finally, CBS Market Watch reports: “It’s the expenses, stupid: Illegal timing and trading are distractions.” The article describes how mutual funds are skimming off your money in what is called the “fund industry casino.”

From the New York Times: “Memo Shows MFS Funds Let Favored Clients Trade When Others Couldn’t.”

And would you believe the “Fed Cracks Down on Trading in Its Own Employee Fund.” (From Yahoo! News.com)

You can now access the weather channel here at Benefitsblog. (Scroll down on the right.) If this addition to the website causes any page loading problems for readers, please let me know.

Unlikely. The Wall Street Journal is reporting: “US House Departs, Leaving Airline Pension Break For ’04.” Also, Forbes is reporting: “U.S. House snubs Senate-proposed pension relief.” The latter article notes:

Senate aides were not optimistic that either of the House-passed pension relief bills could move through their chamber when it returns to work on Tuesday, possibly its last day of work this year. Both chambers must pass the same version of legislation before it can become law.

Baby Tyler has arrived–congratulations to Denise! Also, welcome back David Giacalone of the former, but now renamed, Ethical Esq! (David has posted some wonderful Haiku poetry.)

In addition, Howard last week posted 20 Questions for Circuit Judge Richard A. Posner of the U.S. Court of Appeals for the Seventh Circuit. (For those who do not know, Judge Posner will likely be the author of an opinion in the appeal of the IBM cash balance plan decision.) Howard notes that a 1998 study of federal appellate judicial opinions issued between 1982 and 1995 found that Judge Posner’s opinions were, “by an ‘unusual’ statistical margin, cited by judges in other circuits more often than opinions written by any other judge.” I particularly enjoyed Judge Posner’s remarks about his most favorite opinions:

I can’t pick out my five favorite opinions; that would require me to have all 2000-odd in my head, or to reread them all, which would be impossible. It’s almost as if you were asking me to choose among my children. But I’ll name a few that I think of fondly, most of which involve art (in however debased a sense) and intellectual property: Mucha, Piarowski, Gracen, Douglass, Nelson, and my absurdly frequent beanie-baby opinions. I would also count among my favorites several of my tort and contract opinions, my dissent in the partial birth abortion case (Hope Clinic), some of my class-action opinions, like Rhone-Poulenc, my recent IP opinions in Apotex (a district court opinion) and Aimster, my privacy opinion in Haynes, and my recent antitrust opinion in the High Fructose case–but I could extend the list quite a bit, to include a number of tax, ERISA, religion, and Indian cases, without going back and reading all 2000+.

The following article from the Poughkeepsie Journal highlights what, I think, is becoming an area of litigation which more and more companies will have to deal with as baby boomers continue to age and as companies try to deal with the rising costs of health care and pension liabilities for older workers: “Ex-IBMers: Data show age bias.” The article notes how an IBM employee allegedly compiled data showing that older workers at IBM were being terminated at rates that exceeded those of their younger worker counterparts. Apparently, the employee started going through the data, making charts, and “was struck by what he saw happening.” (According to the article, the employee states that, in his group, 16 were let go and all were over 50, some having 33 years with the company.) The article notes that a complaint was filed October 7, 2003 against IBM alleging violations of the ADEA, the OWBPA, and ERISA. With respect to the ERISA claims, the complaint alleges employees were terminated in order to avoid increasing pension cost obligation for employees with greater years of service.

A more famous case involving a section 510 ERISA claim that received a great deal of publicity this year was the case of Millsap v. McDonnell Douglas Corp., No. 94-CV-633-H, from the Northern District of Oklahoma, which is in the process of being appealed. You can access some articles here and here discussing the Millsap case. The case was particularly significant because some of the evidence used to prove the ERISA 510 claims were certain memos from the actuaries showing that the defendants had analyzed the reduction in benefits which would occur if the plant were closed and such information had been memorialized in memos. One such memo prepared by the actuaries considered “various “what if” scenarios, analyzing the effect on costs and savings if the company decided to reduce heads.” The kinds of costs analyzed included “pension cost, savings cost, savings plan cost, health care cost, and just direct overhead cost.”

With more and more benefits work being done by consultants (as in the Millsap case), plaintiffs lawyers could have an easier job of proving their section 510 ERISA claims since employers who obtain advice from consultants will likely have more of these “smoking gun” type of memos in their files which demonstrate that certain employees were chosen for termination due to benefits costs. Because these memos are being derived from consultants, they will not be protected by attorney-client privilege, and could be used in an ERISA section 510 case to prove that the employer terminated employees based on benefits.

The court in Millsap stated as follows:

Plaintiffs’ prima facie case establishes that Defendant valued its pension surplus in a number of ways and it provided income on the corporation’s balance sheet. [Defendant] was being instructed by its outside actuaries with respect to how it could maximize the pension surplus by selecting for layoff or plant closing its older, more senior employees. Defendant also knew that there were significant costs that would occur if the Tulsa plant stayed open after 1993, when many employees would cross over to age 55 and qualify for greater pension benefits. This $24.7 million in cost savings would be material in a transaction the company says would have otherwise saved it $19 million.”

By the way, on a different note, the Wall Street Journal today notes a development in the IBM cash balance plan case: “IBM Says Pension-Plan Members Are Using ‘Unreasonable’ Formula.” Also, from the Seattle Post-Intelligencer: “IBM tells court it doesn’t owe back pay.”

With all of the fallout from corporate, accounting and now mutual fund scandals pointing to possible lawsuits by pension and 401(k) plans seeking to recover losses, there is much discussion about whether, when and how ERISA plan fiduciaries must pursue recovery of losses for plan participants in possible lawsuits against the alleged wrongdoers. The Securities Litigation Watch (here) and the 10b-5 Daily (here) have both had discussions about the recent WorldCom decisions in which claims by public pension funds have been dismissed. An article at Law.com entitled “U.S. Judge Dismisses Several Claims in WorldCom Securities Class Action” (referred to at the Securities Law Beacon) states: “The federal judge overseeing securities litigation over accounting fraud at the former WorldCom Inc. has followed up tough criticism of the tactics of [a certain law firm] by dismissing several claims the plaintiff’s firm has brought on behalf of groups that have opted out of the class action.” In the decision–In State of Alaska Dept. of Revenue v. Ebbers, 2003 WL 22738546 (S.D.N.Y. Nov. 21, 2003)–the judge threw out claims brought by the State of Alaska Department of Revenue and the Alaska State Pension Investment Board, saying the claims were time-barred.

In a previous post entitled “Lessons for ERISA Plan Fiduciaries From a District Court Case, Part II,” I noted that there is much for ERISA plan fiduciaries to be wary of in contemplating individual and class action lawsuits on behalf of plan participants. The aforementioned decision is a case which illustrates how not getting the proper advice and how not taking action in a timely fashion can end up with institutional investors losing out entirely from any recovery. The court notes:

Plaintiffs who choose, as is their right, to pursue separate litigation may not enjoy the benefits of that separate litigation without bearing its burdens. One of the burdens plaintiffs bear is the obligation to commence their actions within the applicable statute of limitations . . .Having chosen to pursue an individual action prior to a decision on class certification, the Alaska Plaintiffs are not protected by the American Pipe tolling doctrine. Since they failed to amend their pleading with the period provided by Section 13, the Alaska Plaintiffs’ claims against the Additional Underwriter Defendants and the Individual Defendants are time-barred and dismissed with prejudice.

In another twist to the story, the Securities Litigation Watch in this post links to this letter by lead plaintiff’s counsel in the In re WorldCom, Inc. Securities Litigation in which he argues that Individual Action plaintiffs whose claims will be dismissed as being time-barred (like the Alaska claims) should instead be allowed to participate in the Class Action instead of having their claims dismissed with prejudice as to the Class Action:

[T]here is a significant risk that the Individual Action plaintiffs who filed cases . . . may not have understood the risks associated with filing that action, including that such action could be time-barred. Indeed, the Court has already determined that counsel to certain Individual Action plaintiffs engaged in an active campaign to solicit plaintiffs to file individual actions by inducing confusion and misunderstanding regarding the benefits of an individual action and by derogating the class action option. . . This is further reason for fashioning an outcome which refrains from punishing these otherwise innocent investors for a decision that may have been the product of a misguided solicitation campaign.

On a related issue, the Securities Litigation Watch also has this article: “Puncturing the Myths of Opting Out.”

Also, the Securities Law Beacon refers to this press release–“WorldCom Investors and Employees Choose Arbitration Over Class Action“–in which it is announced that a law firm is “pursuing claims in excess of $50 million against Salomon Smith Barney, on behalf of present and former WorldCom investors and employees whose portfolios were concentrated in WorldCom stock and who do not wish to participate in any class actions.” The press release points to some helpful information for those institutional investors weighing litigation options against brokerage firms. You can access some information entitled “Understanding the Securities Arbitration Process” as well as “Securities Class Action Lawsuits Against Wall Street Brokerages vs. Securities Arbitration Claims: A Study to Determine the Appropriate Path for Securities Dispute Resolution.“

Boston.com is reporting: “Funds Sued for Not Using ‘Fair Value’.” According to the article, the 20-odd complaints filed by the Illinois firm, Korein Tillery, focus on a fund’s net asset value, instead of market timing. The law suits argue that there would be no room for market timing if asset managers had used “fair value” to set the price of a fund’s share price. The lawsuits filed seek class action status and damages of more than $50,000 per plaintiff or class member, but not more than $75,000.

You can access the SEC‘s Press Release regarding action taken in a meeting to address the mutual fund scandals here. According to the press release, the SEC voted to do the following:

• The Commission voted to propose a rule requiring that fund orders be received by 4:00 p.m.
• The Commission also voted to adopt a compliance rule that will require funds and advisers to (i) have compliance policies and procedures, (ii) annually review them and (iii) designate a chief compliance officer who, for funds, must report to the board of directors.
• The Commission voted to propose enhanced disclosure requirements. These enhancements would require funds to disclose (i) market timing policies and procedures, (ii) practices regarding “fair valuation” of their portfolio securities and (iii) policies and procedures with respect to the disclosure of their portfolio holdings.

You can access the speech by SEC Chairman, William H. Donaldson, in his opening statement at the meeting here.

You can also access a speech by SEC Commissioner, Harvey J. Goldschmid, entitled “Mutual Fund Regulation: A Time for Healing and Reform” and a statement of Division of Investment Management Director Paul F. Roye here (via the American Benefits Council website.)

Finally, the American Benefits Council website has also posted the SEC Fact Sheet on the Mutual Fund Scandals.