EMPLOYEE BENEFITS BLOG
EMPLOYEE BENEFITS BLOG
Insights on employee benefits and executive compensation
EMPLOYEE BENEFITS BLOG
Insights on employee benefits and executive compensation
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Fiduciary Risks Involved in Transferring Assets from a Seller’s 401(k) Plan to the Buyer’s Plan

by | Jun 2, 2015 | , , ,

In many transactions, particularly those where the buyer is a portfolio company of a private equity fund, the buyer agrees to cause its 401(k) plan to accept a transfer of assets from the seller’s 401(k) plan. The asset transfer from the seller’s plan provides the buyer’s with an asset base with which to negotiate the best possible administrative fee structure, and seamlessly transfers the retirement plan benefits of employees being retained or hired by the buyer. If the seller’s plan contains employer stock as an investment however, the buyer should be aware of fiduciary concerns that may arise under the Employee Retirement Income Security Act of 1974 (ERISA), as amended.

“Stock-drop” litigation is a well-known phenomenon centering on plan fiduciary liability to plan participants when the value of employer stock investments in a retirement plan drops significantly. Less well-known is the fiduciary liability exposure facing new 401(k) plan sponsors and fiduciaries accepting a transfer of assets from the seller’s plan that includes former employer stock. Holding a significant block of a single security that is not company stock implicates ERISA prudence and diversification issues, and must be closely monitored.

Fiduciaries of 401(k) plans considering accepting asset transfers of former employer stock have often been advised to engage counsel to evaluate the prudence of holding the former employer stock in the buyer’s plan as an investment alternative (even if “frozen” to new investment) and establish a timeline for requiring that plan participants divest the former employer stock within one to two years of the asset transfer from the seller’s plan.

In light of the decision in Tatum v RJR Pension Inv. Comm., 2014 U.S. App. LEXIS 14924 (4th Cir. Aug. 4, 2014), buyer 401(k) plan sponsors and plan fiduciaries must now be even more careful to engage in a process that separates fiduciary from non-fiduciary acts and carefully follows established procedures for implementing any required divestitures of former employer stock. In Tatum, the plan was not properly amended to require the divestiture of former employer stock. This failure to properly amend the plan converted a plan design decision, which was a non-fiduciary or “settlor” decision, into a fiduciary act. In Tatum, the plan fiduciaries also failed to follow a prudent process for determining whether or not to eliminate former employer stock and for determining the timeline for implementing such divestitures.

The Tatum decision highlights that, in addition to fiduciary risk in holding former employer stock in the buyer’s 401(k) plan as an investment, there is also fiduciary risk in the process of eliminating former employer stock as an investment in the buyer’s plan.

When establishing a new 401(k) plan, the buyer should consult with legal counsel regarding the risks involved in accepting an asset transfer from a seller’s plan that includes former employer stock. Any new plan sponsors or plan fiduciaries that are contemplating accepting former employer stock as part of an asset transfer should consider whether or not they should engage an independent third party to monitor the former employer [...]

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Supreme Court Acknowledges Fiduciaries Have Continuous Duty to Monitor Plan Investments, Remove Imprudent Investments

by | May 21, 2015 | ,

On May 18, 2015, the Supreme Court of the United States issued its opinion in the Tibble v. Edison Int’l, 575 U.S. ___ (2015) case, finding that the U.S. Court of Appeals for the Ninth Circuit erred in applying the six-year statutory bar in the Employee Retirement Income Security Act (ERISA) to plaintiff’s claim alleging that respondents owed a continuing duty to monitor and remove imprudent investment selections. Through the decision, the Supreme Court expressly held that ERISA fiduciaries have a continuing duty to monitor plan investments and to remove imprudent investments.

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View From McDermott: 2014 ERISA Litigation Review–Decisions From the Supreme Court and Beyond

by | Apr 7, 2015 |

Recently, the U.S. Supreme Court issued a number of significant ERISA cases.  In its 2013-14 term, the Supreme Court decided two ERISA-based appeals – Fifth Third Bancorp v. Dudenhoeffer and Heimeshoff v. Hartford Life & Acc. Ins. Co.  In the current 2014-15 term, the Supreme Court already issued one ERISA decision in M&G Polymers USA, LLC v. Tackett, and will issue another ERISA decision soon in Tibble v. Edison Int’l.  Although these four cases have received much attention within the ERISA community, each year there are hundreds of other decisions issued by federal appellate and district courts that also impact a plan sponsor’s daily administration of welfare and retirement plans.  In fact, many of these district court and appellate decisions are interpreting issues raised or addressed in these Supreme Court opinions.  This article will address a few of these cases, which may not have received a lot of attention by the press, but could have long-lasting impacts on plan administration and litigation in future years.

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Sixth Circuit Rejects Claim that Disgorgement of Profits Is Appropriate Remedy in ERISA Benefit Denial Action

by and | Mar 31, 2015 | ,

On March 5, 2015, the U.S. Court of Appeals for the Sixth Circuit reversed the finding of a prior Sixth Circuit panel that allowed successful plaintiffs to recover additional equitable relief in the form of disgorgement of profits under a return-on-equity analysis in addition to the recovery of the denied benefits. This decision realigns the Sixth Circuit with the other circuits by requiring that plaintiffs prove a separate injury in order to receive additional equitable relief under ERISA.

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SEC No-Action Letter Permits Non-ERISA Retirement Plans to Issue Participant Fee Disclosures Without Violating Securities Laws

by , and | Mar 26, 2015 |

The U.S. Securities and Exchange Commission (SEC) issued a no-action letter on February 18, 2015, that extends relief from SEC Rule 482 to sponsors of certain retirement plans exempt from ERISA. The relief permits sponsors of non-ERISA plans to follow final U.S. Department of Labor regulations for participant-level fee disclosures, provided the sponsor complies with several conditions set forth by the SEC.

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Supreme Court Rejects Sixth Circuit’s Yard-Man Inferences in M&G Polymers USA, LLC v. Tackett

by , and | Feb 24, 2015 | ,

M&G Polymers USA, LLC v. Tackett, a recent unanimous decision by the Supreme Court of the United States, is a game changer. By expressly repudiating the U.S. Court of Appeals for the Sixth Circuit’s 1983 Yard-Man decision and the many decisions following it, the Supreme Court rejected three decades of Sixth Circuit law inferring that retiree health benefits are vested for retirees’ lives, and provided new clarity in interpretation of retiree medical benefits under collective bargaining agreements.

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Employers with Group Health Plans: Have You Notified State Regulators of the Breach?

by and | Feb 23, 2015 | ,

Data security breaches affecting large segments of the U.S. population continue to dominate the news. Over the past few years, there has been considerable confusion among employers with group health plans regarding the extent of their responsibility to notify state agencies of security breaches when a vendor or other third party with access to participant information suffers a breach. This On the Subject provides answers to several frequently asked questions to help employers with group health plans navigate the challenging regulatory maze.

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The Directed Trustee in the Post-Dudenhoeffer World

by | Jan 22, 2015 | , ,

Court cases challenging the actions of Employee Retirement Income Security Act fiduciaries have continued unabated since the scandal of Enron in 2002.  Since then, a large number of cases are in the “stock drop” area, which encompasses cases relating to employer securities investments when the stock price drops severely.  The litigation has focused on whether a presumption of prudence exists that protects fiduciaries holding employer securities investments on behalf of a retirement plan.  In June 2014, the U.S. Supreme Court ruled in the case of Fifth Third Bancorp v. Dudenhoeffer that ERISA doesn’t provide a presumption of prudence to protect fiduciaries of plans investing in employer securities.  Now that the Dudenhoeffer decision resolves the presumption issue, it is reasonable to expect that ERISA cases may return to focus on the fiduciary duties of a directed license.

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You’ve Acquired a New Qualified Retirement Plan? Time for a Compliance Check

by | Nov 12, 2014 |

In connection with a merger or acquisition, an acquiring company may end up assuming sponsorship of a tax-qualified retirement plan that covers employees of the acquired company.  This article provides a brief summary of some key issues that a company should focus on to ensure that the numerous administrative and fiduciary requirements involved in maintaining a qualified retirement plan will continue to be met on an ongoing basis if the plan will continue to be maintained following the acquisition.

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Supreme Court to Review Application of ERISA’s Six-Year Statute of Limitations in Tibble v. Edison Int’l.

by | Nov 5, 2014 |

On October 2, 2014, the Supreme Court of the United States granted the plaintiffs’ petition for a writ of certiorari in Tibble v. Edison International to answer “Whether a claim that [Employee Retirement Income Security Act] ERISA plan fiduciaries breached their fiduciary obligation by offering higher-cost retail-class mutual funds to plan participants, even though identical lower-cost institutional-class mutual funds were available, is barred by 29 U.S.C. § 1113(1) when fiduciaries initially chose the higher-cost mutual funds as plan investments more than six years before the claim was filed.”  The underlying claim asserts that the investment committee of the Edison 401(k) Savings Plan (the Plan), a defined contribution plan sponsored by Edison International, breached its fiduciary duty, although the issue presented to the Supreme Court focuses on the statute of limitations applicable to that claim.

The Plan’s investment committee selected a variety of funds for the investment of Plan assets.  The funds selected by the investment committee were retail-class funds, which charged higher fees than the comparable institutional-class funds available in the retail market.  Plan participants sued, alleging that lower-cost mutual funds were available and should have been selected for the Plan’s investment portfolio.  The district court dismissed the case and the U.S. Court for the Ninth  Circuit affirmed the dismissal on the basis that the funds were selected more than six years earlier and were therefore barred by ERISA statute of limitations.

ERISA provides a six-year period within which a participant or beneficiary may sue based on allegations of a breach of ERISA fiduciary duties.  In general, the ERISA statute of limitation period begins to run on the date of the last act that constitutes a fiduciary breach owed to the beneficiaries.  The U.S. District Court for the Central District of California dismissed several claims in the plaintiffs’ lawsuit, concluding that these claims were statutorily barred because the plaintiffs’ filed them after expiration of the six-year statute of limitations period.  In addition, the district court ruled that it must defer to the investment committee’s selection of the higher-cost mutual fund by application of the deferential Firestone standard previously set by the Supreme Court.

In its petition for certiorari, the plaintiffs asked that the Supreme Court determine whether ERISA’s six-year limitations period begins on the date that the investment committee initially selected the higher-cost mutual fund options for the Plan’s investment portfolio or whether the on-going offering of such funds constituted a “continuing” fiduciary breach, thereby extending the period.  The Supreme Court elected not to address whether the Firestone deference applies to fiduciary breach actions with respect to whether a fiduciary failed to follow plan terms in the selection of investment options.

This case follows the Supreme Court’s 2013 decision in Heimeshoff v. Hartford Life & Accident Insurance Co.  Heimeshoff concluded that an ERISA plan’s contractual three-year limitations period for benefit claims was enforceable, despite the fact that the statute of limitations began to run before the participant’s benefit claim had been decided by the plan administrator.  Conversely, in Tribble v. Edison, Int’l., the Supreme Court is asked when ERISA’s [...]

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