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Tuesday, September 15, 2015

What is ERISA: Retirement Benefits & Fiduciary Duties

ERISA was enacted primarily to regulate something that we would all like to have, but hardly exists anymore: the private-sector traditional pension plan.  These plans promise retirees a certain payment every month for the rest of their life, and sometimes a reduced for the life of a spouse.  These are called “defined benefit plans” under ERISA, since the plan promises to pay definite amount every month.  No matter what happens with the market, the amount you get doesn’t change. 

In the other type of retirement plan, the plan promises that a certain amount of money will go into the plan each year, and the amount you get each month when you retire depends on what happens with the stock market.  These are called “defined contribution plans.”  These are the 401k plans and cash balance plans that most of us have now.  In the defined benefit plan, the risk of market changes rests with the employer.  With the defined contribution plan, the risk of market changes rests on the retiree. 

As discussed in my first post in the “What is ERISA?” series of post, the primary purpose of ERISA was to protect the traditional defined benefit pension plan. Most employers have moved to defined contribution plan, ERISA applies to these plans, too. 

In the prior post on ERISA and welfare benefits, I discussed some of the differences between the way ERISA treats welfare benefits versus retirement benefits: retirement benefits are vested prior to you actually receiving the benefit; and ERISA imposes substantive requirements on retirement plans while imposing few on welfare benefit plans.

The most significant effect of ERISA on retirement plans is that it imposes fiduciary duties on the people who administer retirement plans.  A fiduciary duty means that someone has the obligation to act in another’s interest, rather than his or her own interest.  So, a plan fiduciary responsible for investing the plans assets is supposed to seek the best/safest return possible, rather than investing in the hot new club opening down the block.  Huge treatises have been written on the scope of fiduciary duties, but below are some examples of cases involving fiduciary duties under ERISA:

  • Nationwide Life Insurance administers 401k plans for small and medium-sized companies, and chooses the investment options to be offered to the plan participants.   The companies that it managed the plans for sued Nationwide for allegedly choosing mutual fund companies based on what the mutual fund companies paid Nationwide, rather than choosing the companies that offered the best investment options at the lowest cost.  Such an action, acting in its own interest rather than the interests of those it owed fiduciary duties to, would violate ERISA’s fiduciary duties.  Northwestern settled the case for $140 million, a record settlement.  

  • In Amara v. Cigna, a  Connecticut ERISA litigation matter,that has already gone to the U.S. Supreme Court once, and is likely to go again, CIGNA was sued for telling plan participants that the change from a defined benefit plan to a defined contribution plan would have no effect on benefits, and that it was not being done to save money.  In fact, the benefits were worse for many participants, particularly those eligible for early retirement, and there were internal emails stating that the change was intended to save CIGNA money.    One of the most notable things about this case is that even though the plan fiduciary was flat out lying to the participants, courts have struggled to come up for a remedy.  As I have discussed in other posts, the courts have severely limited the remedies available under ERISA.  That is may take two trips to the Supreme Court to figure out how to fix this wrong shows how messed up the ERISA remedial scheme is.  Some courts are making baby steps towards removing the shackles on ERISA remedies (see this post  and this one), and the Amara case may be the case that ultimately unchains ERISA’s remedies.
  • How plan fiduciaries invest plan assets has been fertile grounds for ERISA fiduciary litigation.  After the 2008 stock market crash, many cases, called “stock drop cases,” were brought against plans that invested in the employer’s stock.  While few of the cases succeeded, they generated a lot of law about the scope of an ERISA fiduciary’s duties in investing plan assets.  See, for instance, the U.S. Supreme Court case Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459 (2014). This case is an example of why ERISA drives lawyers nuts.  The one line summary of the case is pro-plaintiff, as the Court rejected a defense commonly used by plan fiduciaries in these cases.  In the body of the case, though, the Court sets for rules for what a plaintiff must prove to win that are so difficult that few plaintiffs will be able to satisfy them.  Little is simple with ERISA litigation.

ERISA fiduciary duties have a significant impact on retirement plans, but the duties also apply to welfare benefit plans.  For instance, in Devine v. Combustion Engineering, a case where I was counsel for plaintiffs in a nationwide class action, we alleged Combustion Engineering had breached its fiduciary duty to the participants by promising lifetime free health benefits in connection with an early retirement programs, and then reducing the benefits after they had retired. 

The distinction between retirement benefits and non-retirement benefit under ERISA is one of the arcane distinctions that scare away many attorneys from practicing ERISA law.  If you choose to have a lawyer represent you in these matters, make sure he or she is comfortable with this and the other arcane aspects of ERISA. 

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