DOL Fiduciary Rule: Part I

After much nail-biting by many in the industry, the Department of Labor (DOL) recently released its anticipated and long-awaited final fiduciary rule, which it touts as the fulfillment of its mission to protect the retirement of investors through education and empowerment.[i] In this first installment of a multi-part series, we take a quick look at the rule responsible for making waves in the American financial sector.

The rule is the culmination of a multi-year project to modernize the Employee Retirement Income Security Act (ERISA) of 1974, in response to the growth of unregulated market products. The consequence of this growth has been an array of investment professionals who could advise in the direction of their own personal gain over the best interests of their clients, so long as the recommendation was “suitable;” unacceptable behavior for fiduciaries.[ii]

The DOL rule expands the scope of those who qualify as “fiduciaries,” such as those related to individual retirement accounts or IRAs. “Any advisor who makes investment recommendations …in exchange for compensation will be considered a fiduciary (and)…are legally required to recommend investments that are in their client’s best interest, not their own.”[iii]  According to the White House, the conflicts of interest that exist when the client’s needs do not take precedent cost American families an estimated $17 billion a year.[iv]In the same manner, another goal of the rule was to curb billions of dollars currently being lost by investors in fees paid when transferring money out of 401ks and into IRAs.[v]

Some don’t consider this the fail-safe that the government is touting it to be. Situations in which conflicts are present, such as with mutual fund families and broker-dealers, will still continue to operate, only with the additional “Best Interest Contract Exemption” (BICE) disclosure.[vi]  As one author surmised, “Just picture the speed with which you click ‘Agree’ everytime (sic) iTunes does a software update, and you can imagine how little of an impediment this sort of thing represents.”[vii] 

The former head of the DOL’s Employee Benefits Security Administration, Brad Campbell, considers BICE to represent the most significant issue in the rule. “’There are frivolous litigation risks and liability risks in the BICE that still remain, and that are going to increase costs for small businesses where advisors are willing to use the BICE exemption at all.’”[viii]  There are others who have expressed concerns regarding the DOL rule, including the Securities and Exchange Commission, the insurance and securities industries, as well as politicians, which shall be discussed in future postings.

Still, many in the government feel the rule is a victory. Department of Labor Secretary Tom Perez expressed that putting the client first is, “now the law,”[ix] while Senator Elizabeth Warren (D., Mass) proclaimed the rule a day in which the government was working, “for the people.” [x]  This is assuming, of course, the next administration doesn’t kill it altogether before the final 2018 implementation deadline.

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[i] United States Department of Labor. (2016, April 13) Department of Labor Finalizes Rule to Address Conflicts of Interest in Retirement Advice, Saving Middle-Class Families Billions of Dollars Every Year [Electronic format]. Retrieved from http://www.dol.gov/ebsa/newsroom/fs-conflict-of-interest.html

[ii] Ibid.

[iii] Brandon, E. (2016, April 8) The New Retirement Account Fiduciary Standard [Electronic format]. Retrieved from http://money.usnews.com/money/blogs/planning-to-retire/articles/2016-04-08/the-new-retirement-account-fiduciary-standard

[iv] The White House. (2016, April 13) Fact Sheet: Middle Class Economics: Strengthening Retirement Security by Cracking Down on Conflicts of Interest in Retirement Savings [Electronic format]. Retrieved from http://www.whitehouse.gov/the-press-office/2016/04/06/fact-sheet-middle-class-economics-strengthening-retirement-security

[v] Hayashi Y. & Prior A. (2016, April 6) U.S. Unveils Retirement-Savings Revamp, but With a Few Concessions to Industry [Electronic format]. Retrieved from http://www.wsj.com/articles/u-s-unveils-retirement-savings-revamp-but-with-a-few-concessions-to-industry-1459936802

[vi] Brown, J. (2016, April 6) Wall Street Dodged a Bullet on the Retirement Fiduciary Rule [Electronic format]. Retrieved from http://www.fortune.com/2016/04/06/retirement-savings-fiduciary-rule/

[vii] (Brown, J., 2016, April 6)

[viii] Campbell, B. (2016, April 11) DOL Fiduciary Rule: The Good, the Bad and the Ugly [Electronic format]. Retrieved from http://www.thinkadvisor.com/2016/04/11/dol-fiduciary-rule-the-good-the-bad-and-the-ugle

[ix] (Ebeling, A., 2016, April 7)

[x] (Hayashi Y. & Prior A., 2016, April 6)

The Importance of Creating an Administrative Record in ERISA Claims

ERISA requires employees to exhaust all administrative remedies before pursuing claims in court.  This means that an employee must follow the claims procedures outlined in his or her Summary Plan Description.  Abiding by these requirements and taking this phase of the process seriously is crucial.   

Typically, a claim is filed with the plan administrator in accordance with the plan’s procedures.  The plan administrator then must provide adequate notice to the employee in writing, setting forth the specific reasons for such denial.  ERISA provides that every plan participant must be afforded a full and fair review of the decision denying the claim.  Any documentation, records, or other relevant information submitted by the claimant along with additional evidence, documentation and records used by the plan administrator constitutes the administrative record. 

Developing a sufficient administrative record is imperative because after an administrative appeal and once a claim is filed in court, various circumstances determine whether or not the court’s review of the administrator’s decision is limited to the evidence in the administrative record or if additional discovery is allowed. Certain language in a plan along with an employee’s location can determine his or her rights.    

The first step in determining whether discovery is allowed outside the administrative record is to decide the applicable standard of review.  As discussed in my prior article, the Supreme Court in Firestone Tire and Rubber Co. v. Bruch, decided that a de novo standard (allowing the court to substitute its own judgment) applies when reviewing a claim denial, unless the language of the plan gives the plan administrator discretion to interpret and apply the plan.  If a plan provides such discretion, the reviewing court applies an abuse of discretion standard and gives the benefit denial deferential treatment. 

Since the abuse of discretion standard assesses the reasonableness of the benefit decision based upon the facts known to the plan administrator at the time, consideration of evidence outside the record is extremely rare. 

However, when a de novo standard applies, the circuits have articulated a variety of rules concerning discovery outside the administrative record. 

• The Fifth and Sixth Circuits do not permit the introduction of extrinsic evidence reasoning that federal courts are not to function as substitute plan administrators.
• The Seventh and Eleventh Circuits allow the admission of all extrinsic evidence because de novo review requires an independent decision rather than an independent review. 
• The First and Second Circuits have limited discovery of extrinsic evidence to show procedural irregularities or conflict of interest
• The Fourth and Tenth Circuits apply a multi-factor approach.  Generally, review is limited to evidence in the administrative record except where the court finds that additional evidence is necessary for resolution of the claim.  These circuits have discussed a number of exceptional circumstances which may warrant a court to exercise its discretion, such as cases with concerns of impartiality or procedure, complex medical issues, or circumstances where the claimant would not have been able to present the evidence during the administrative process. 
• The Eighth and Ninth Circuits permit extrinsic evidence upon a showing of good cause.  “Good cause” is similar to the exceptional circumstances articulated by the Fourth and Tenth Circuits.  However, if the plan participant had multiple opportunities to submit evidence to the plan administrator but failed to do so, such evidence will be excluded at trial.   
• The Third Circuit looks to whether the administrative record was sufficiently developed and may allow the admission of additional evidence where there is a lack of an administrative record. 

Savvy employers will likely include language in the plan that gives the plan administrator discretion to interpret and apply the plan, thus limiting review of the benefit denial to the administrative record.  However, even if a plan does not contain discretionary language, de novo review does not guarantee the admission of extrinsic evidence.  In sum, creating an adequate administrative record is crucial for Plaintiffs. 

If you are a claimant needing assistance in handling a claim, contact the attorneys at Cosgrove Law Group, LLC.

Circuit Split. Which Standard of Review Applies to ERISA Top-Hat Plans?

The Employee Retirement Income Security Act (“ERISA”) regulates the operation of private sector employee benefit plans once a plan has been established by an employer. ERISA requires employers to implement certain safeguards for employee benefit plans by setting minimum standards for things such as for participation, vesting, benefit accrual, funding, and reporting.  In addition, ERISA establishes fiduciary responsibilities for plan administrators.  ERISA generally defines a fiduciary as anyone who exercises discretionary authority or control over a plan's management or assets, including anyone who provides investment advice to the plan.

Generally, when a plan participant has a claim for benefits, there are specific procedures that must be exhausted.  The claims and review process is usually spelled out in the Summary Plan Description.  If a claim for benefits is denied, ERISA requires that the reason for any denial of benefits is explained to the employee in writing and that employee must be given an opportunity for full and fair review of the decision through an internal appeals process. 

If benefits are again denied after the internal appeals process, the employee can then file a claim in court.  Generally, the reviewing court applies a de novo standard (allowing the court to substitute its own judgment) when reviewing a claim denial, unless the language of the plan gives the plan administrator discretion to interpret and apply the plan.  If a plan provides such discretion, the reviewing court applies an abuse of discretion standard and gives the benefit denial deferential treatment.  When announcing this standard of review, the Supreme Court in Firestone Tire and Rubber Co. v. Bruch reasoned that since the plan administrator is a fiduciary, his or her exercise of discretion should not be subject to control by the court. 

This standard of review poses significant problems for ERISA top-hat plans.  To be designated a top hat plan, ERISA requires that the plan be (1) unfunded and (2) maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees.  Top hat plans are specifically exempt from ERISA’s provisions on participation, vesting, funding, and fiduciary responsibility but are subject to ERISA’s enforcement provisions.  Thus, top-hat plans are merely contractual agreements. 

Top-hat plans are unique in that plan participants must utilize ERISA’s enforcement provisions when challenging benefit denials, yet none of the substantive and fiduciary provisions apply to such plans.  Under ERISA (modeled after trust law) a plan administrator or fiduciary is required to make all decisions in the plan participant’s best interest.  However, since top-hat administrators are not fiduciaries, they are not required to make any decisions in the best interest of the top-hat plan participant.  Since an unfunded top-hat plan is essentially an unsecured promise to pay benefits at termination or later, an inherent conflict of interest is present when the role of the plan administrator and employer overlap.  Paying the benefits to the top-hat plan participants will always have a direct and immediate impact on the cost to the employer.

Furthermore, when a plan confers discretion upon the administrator in a top-hat plan, the trust principals relied on by the Supreme Court in Firestone are not present.  If following the holding in Firestone, the decision of a plan administrator with discretion to interpret and apply the plan, owing no fiduciary duties to the top-hat employees and where a conflict of interest is present, would still be subject to an abuse of discretion standard.  This hardly seems fair when top-hat employees are afforded no remedies under fiduciary duty claim and their plans are not required to be funded. This nearly renders the promises and obligations of the employer illusory.    

After the holding in Firestone, courts have grappled with whether or not to apply the abuse of discretion standard to top-hat plans because of their unique nature.  The Eight Circuit has concluded de novo review applies to top hat plans even when it give their administrators interpretive discretion because “a top hat administrator has no fiduciary responsibilities” under ERISA.  The Third Circuit has also declined to extend the holding in Firestone to top-hat plans because top-hat plans are unilateral contracts and the principals of federal common law should be applied. 

However, without a discussion distinguishing top-hat plans from ordinary ERISA plans, the Seventh and Second Circuits have held that the abuse of discretion standard articulated in Firestone applies to top-hat plans that provide the administrator with discretion.  The Ninth Circuit also held that abuse of discretion standard applies to top-hat plans with discretionary language reasoning that the application of a de novo standard does not materially change the outcome and applying a different standard to top-hat plans would create unnecessary confusion.  The Sixth Circuit sided with the Ninth Circuit’s reasoning that “the same conclusion would be reached under either standard,” although it was unclear whether it was applying that reasoning solely to the case at bar or more broadly.  The remaining Circuits have taken no position.    

Therefore, top-hat ERISA participants have a higher burden to overcome in “abuse of discretion” circuits than in “de novo” circuits.   

The Wrongful Distribution of Retirement Benefits to a Plan Fiduciary is Prohibited by ERISA Section 406(b)

Although the distribution of benefits to a plan participant is not a “transaction” as that term is used in Section 406(a), the wrongful distribution of benefits to a plan fiduciary is clearly prohibited conduct under Section 406(b). For example, in Lockheed Corp. v. Spink, 517 U.S. 882 (1996), the plaintiff brought suit against his employer (administrator of his 401(k) plan) under Section 406(a)(1)(D) because the employer wrongfully allowed some of its employees to receive early retirement benefits that the plaintiff was unable to receive. Id. at 892-93. The respondent argued that the payment of benefits is not a “transaction” under Section 406(a). Id. at 892. In its holding, the Court agreed with the respondent, but made clear that its holding was strictly limited to the language of Section 406(a). Indeed, the Court clarified that “the payment of benefits is in fact not a ‘transaction’ in the sense that Congress used that term in § 406(a).” Id. at 892 (emphasis added).

The narrow scope of Lockheed becomes clear upon a review of subsequent federal caselaw. See Armstrong, 2004 WL 1745774, at *10 (holding “payments to participants in accordance with plan terms not to be transactions within the meaning of [Section 406(a)]”); Owen v. SoundView Financial Group, Inc., 54 F.Supp.2d 305, 323 (S.D. N.Y. 1999) (holding that “ERISA's “Prohibited Transaction” rules, see 29 U.S.C. §§ 1106(a) [ERISA Section 406(a)]…are not applicable to the payment of Plan benefits to a Plan beneficiary, because the beneficiary is not a “party in interest”). The limited scope of Lockheed is confirmed by the equally limited scope of Section 406(a). For instance, Section 406(a), entitled, “Transactions between plan and party in interest,” is plainly intended to govern only those transactions in which fiduciaries cause a plan to engage. Indeed, Section 406(a)(1) begins with the following language: “A fiduciary with respect to a plan shall not cause the plan to engage in a transaction, if he knows or should know that such transaction constitutes a direct or indirect. . . .” (emphasis added). Section 406(a)(1) then lists five narrow types of transactions in which a fiduciary should not cause a plan to engage. Courts have determined that the purpose of Section 406(a) is limited to “prevent[ing] plan fiduciaries from engaging in certain transactions that benefit third parties at the expense of plan participants and beneficiaries.” Armstrong v. Amsted Industries, Inc., 2004 WL 1745774, at *10 (N.D. Ill. 2004); Marks v. Independence Blue Cross, 71 F.Supp.2d 432, 437 (E.D. Pa. 1999).

The limited holding of Lockheed (and the subsequent federal court decisions) does not, however, apply in many cases. Indeed, a plaintiff’s prohibited transactions claim against a defendant may be brought under a completely separate ERISA provision: Section 406(b). This Section, entitled “Transactions between plan and fiduciary,” may more clearly apply to a defendant’s conduct. Importantly, unlike Section 406(a), Section 406(b) does not specifically limit which types of transactions apply to the Section. As such, the “transactions” contemplated under Section 406(b) are much broader in scope than those specifically set forth in Section 406(a). Moreover, rather than aiming to prevent plan fiduciaries from engaging in transactions that benefit third parties at the expense of plan participants and beneficiaries, Section 406(b) aims to prevent—among other things—plan fiduciaries from engaging in prohibited transactions for their own account. A plan fiduciary wrongfully using his or her power to obtain a higher distribution than is warranted, for example, obviously falls under the broad conduct contemplated under Section 406(b).

Finally, Section 408(c)(1) reads as follows:

Nothing in [ERISA Section 406] shall be construed to prohibit any fiduciary from—

(1) receiving any benefit to which he may be entitled as a participant or beneficiary in the plan, so long as the benefit is computed and paid on a basis which is consistent with the terms of the plan as applied to all other participants and beneficiaries.

A plain reading of this Section establishes that Section 406 should be construed to prohibit a fiduciary from receiving a benefit that is computed and paid on a basis which is inconsistent with the terms of the plan as applied to all other participants and beneficiaries.

Can a 401(k) plan member recover damages to his individual account caused by a Plan Administrator’s breach of fiduciary duty?

An ERISA Plaintiff cannot seek individual monetary damages for a Plan Administrator’s breach of fiduciary duty to the plan. Importantly, however, seeking damages on behalf of the 401(k) Plan as a result of a Plaintiff’s losses in his individual account is explicitly permitted under LaRue v. DeWolff, Boberg & Associates, Inc., 552 U.S. 248 (2008), which held that ERISA Section 502(a)(2) authorizes recovery by a plan participant for fiduciary breaches “that impair the value of plan assets in a participant's individual account.” 522 U.S. at 256. The Supreme Court in LaRue made clear its reasoning for this holding:

Whether a fiduciary breach diminishes plan assets payable to all participants and beneficiaries, or only to persons tied to particular individual accounts, it creates the kind of harms that concerned the draftsmen of § 409.

Id. at 256.

For instance, a Plaintiff may rely upon ERISA Section 502(a)(1)(B) for a Defendant’s failure to provide the Plaintiff with the full 401(k) benefits owed to him under the 401(k) Plan at issue. And the Plaintiff may also rely upon ERISA Section 502(a)(2) for a Defendant’s breaches of fiduciary duties. A plain reading of Sections 502(a)(1)(B) and 502(a)(2) establishes that the two sections provide for different relief. Indeed, as the 9th Circuit explicitly noted in Harris v. Amgen, Inc.:

Section 502(a)(1)(B) allows a plan participant “to recover benefits due to him under the terms of his plan.” By contrast, Section 502(a)(2) encompasses claims based on breach of fiduciary duty and allows for the more expansive recovery of “appropriate relief,” including disgorgement of profits and equitable remedies.

573 F.3d 728, 734, n. 4 (9th Cir. 2009) (citations omitted).

Regardless, some defendants incorrectly assert that “the Eighth Circuit and other courts alike have repeatedly held that participants cannot state claims for breach of fiduciary duty under ERISA Section 502(a) when they are also seeking to recover the same benefits under ERISA Section 502(a)(1)(B).” The falsity of this assertion is clear upon a review of the federal caselaw. Indeed, the cases usually cited are inapplicable in that each is either irrelevant or is limited in scope to claims brought under ERISA Sections 502(a)(1)(B) and 502(a)(3), not Sections 502(a)(1)(B) and 502(a)(2). See Geissal ex rel. Estate of Geissal v. Moore Medical Corp., 338 F.3d 926, 933 (8th Cir. 2003) (narrowly holding that a beneficiary cannot bring a claim for benefits under Section 502(a)(1)(B) and Section 502(a)(3)(B)); Conley v. Pitney Bowes, 176 F.3d 1044, 1047 (8th Cir. 1999) (citing Wald v. Southwestern Bell Corporation Customcare Medical Plan, 83 F.3d 1002, 1006 (8th Cir. 1996) in holding that “where a plaintiff is ‘provided adequate relief by [the] right to bring a claim for benefits under [Section 502(a)(1)(B)],’ the plaintiff does not have a cause of action to seek the same remedy under [Section 502(a)(3)(B)]”). Some defendants also cite Coyne & Delaney Co. v. BCBS of Va., Inc., 102 F.3d 712 (4th Cir. 1996). However, Coyne is not relevant in that it analyses whether a plan fiduciary can bring a claim for benefits under ERISA Section 502(a)(3). 102 F.3d at 713.

Some plan defendants also rely upon the U.S. Supreme Court’s holding in LaRue v. DeWolff, Boberg & Assoc., Inc., 552 U.S. 248 (2008) for the proposition that duplicative claims under ERISA Section 502(a)(1)(B) and 502(a)(2) are inappropriate. Specifically, defendants may rely upon commentary by Chief Justice Roberts in that case, without revealing that Justice Roberts wrote the concurring opinion rather than the opinion of the Court. Accordingly, his analysis is not binding. Id. at 249. In fact, at the conclusion of his concurring opinion, Justice Roberts acknowledged that his analysis is not binding on the issue: “In any event, other courts in other cases remain free to consider what we have not—what effect the availability of relief under § 502(a)(1)(B) may have on a plan participant's ability to proceed under § 502(a)(2).” Id. at 260.

Indeed, in Crider v. Life Ins. Co. of N. Am., 2008 WL 2782871 (W.D. Ky. 2008), the Western District of Kentucky acknowledged that Justice Roberts’ analysis in LaRue is not binding, and therefore noted that in deciding whether to allow a claim under both ERISA Section 502(a)(1)(B) and Section 502(a)(2), the question for the court is whether the facts the plaintiff alleges “state a claim for breach of fiduciary duty under Section 502(a)(2) which is separate from her claim for benefits under Section 502(a)(1)(B).” Id. at *2. The court further noted that in deciding this question, the Sixth Circuit has on at least three occasions “allowed plaintiffs to pursue both a claim for benefits under Section 502(a)(1) and also to attempt to hold a plan responsible for breaches of fiduciary duty under a separate Section 502(a) action.” Id. Finally, In Hill v. Blue Cross & Blue Shield of Mich., the Sixth Circuit observed that plan-wide claims are distinct from claims seeking to correct the denial of individual benefits. 409 F.3d 710, 718 (6th Cir. 2005).

Finally, it is well-established that “[i]n ruling on a motion to dismiss, a court must view the allegations of the complaint in the light most favorable to the plaintiff.” Guarantee Co. of North America, USA v. Middleton Bros., Inc., 2010 WL 2553693, at *2 (E.D. Mo. June 23, 2010). To survive a motion to dismiss, a claim need only be facially plausible, “meaning that the factual content…allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. (quoting Cole v. Homier Dist. Co., Inc., 599 F.3d 856, 861 (8th Cir. 2010)).

When has an ERISA Plaintiff failed to state a claim for failure to exhaust administrative remedies?

Point #1: Not all ERISA Plaintiffs are required to exhaust administrative remedies prior to filing suit. Indeed, the Eastern District of Missouri has a well-established rule that “ERISA plaintiffs [must] exhaust the plan review procedures before bringing suit, when the plan clearly requires exhaustion.” Wootten v. Monumental Life Ins. Co., 412 F. Supp. 2d 1020, 1024 (E.D. Mo. 2006). So -- does the 401(k) Plan at issue in your case require exhaustion of administrative remedies if a claim for benefits was never denied.

By way of example, some 401(k) Plans provide that:

“[a]ny Participant or Beneficiary who is entitled to a payment of a benefit for which provision is made in this Plan shall file a written claim with the Plan Administrator on such forms as shall be furnished to him by the Plan Administrator…If a claim for benefit is denied by the Plan Administrator, in whole or in part, the Plan Administrator shall provide adequate notice in writing to the Participant or Beneficiary. . . .

As clearly set forth in this 401(k) Plan example, the plan participant need only exhaust administrative remedies—i.e., file a notice of appeal—if the Plan Administrator denied the participant’s claim for benefits. So the next question is: did the Plan Administrator deny, either in whole or in part, a claim for benefits (equivalent to their requests for distribution)? They likely did if, after requesting distribution, the Plaintiff received a distribution notice which clearly stated, “[y]ou are entitled to distribution under the 401(k) Retirement Plan and Trust.”

Some Plan defendants may rely upon a 1997, non-binding Arizona District Court case, McElwaine v. U.S. West, 1997 WL 34609606 (D. Ariz. 1997), to improperly assert that a miscalculation of retirement benefits is somehow a “separate and new claim.” However, the 401(k) Plan at issue in our example does not set forth such a distinction. And again, at least the Eastern District of Missouri has previously held that exhaustion of remedies is only required if a plan “clearly requires exhaustion.” Wootten, 412 F. Supp. 2d at 1024. Since the 401(k) Plan language above does not “clearly require exhaustion” for a miscalculation (as opposed to a denial) of benefits, the Plaintiff in our example should not be required to exhaust his administrative remedies.

Even if the Court deems that a Plaintiff’s claims for benefits were “denied,” a Plaintiff is still not required to exhaust his administrative remedies if he never received any notice of the proper appeals procedure. The Eastern District is clear that plan participants must only exhaust their administrative remedies “when exhaustion is clearly required by the particular plan involved and the beneficiary has notice of the procedure.” Chorosevic v. MetLife Choices, 2009 WL 723357, at *4 (E.D. Mo. 2009).

The Eighth Circuit is also clear that ERISA plaintiffs are not required to exhaust administrative remedies if doing so would be futile. Brown v. J.B. Hunt Transport Services, Inc., 586 F.3d 1079, 1085 (8th Cir. 2009). “When exhaustion is futile, an ERISA beneficiary's claim accrue[s] at the time at which it became futile to apply for benefits, because…at that time there was a de facto denial of [the beneficiary's] claim.” Union Pacific R. Co. v. Beckham, 138 F.3d 325, 332, n. 4 (8th Cir. 1998). A Defendant’s conduct toward a Plaintiff, both before and after the disbursement of their 401(k) funds, may establish that an exhaustion of Plaintiffs’ administrative remedies would be futile.

Should a Court find that a Plaintiff did in fact fail to exhaust his or her administrative remedies, the Plaintiff should move to stay the proceedings in the case to allow him or her sufficient time to exhaust his or her remedies. Both the Eastern District of Missouri and Eighth Circuit (along with other federal courts) have either held or suggested that a stay of court proceedings is a proper procedure to allow an ERISA plaintiff to exhaust administrative remedies. And courts have generally allowed a stay of the proceedings upon request, either directly or in the alternative. For instance, in a recent 2006 case, the defendants moved for a stay or dismissal of the ERISA suit because the plaintiff had not exhausted administrative remedies. Michael v. American Intern. Group, Inc., 2006 WL 5736351, at *1 (E.D. Mo. 2006). Rather than dismissing the plaintiff’s suit, the District Court stayed the case, noting the Eighth Circuit’s previous holding that “where a claimant has prematurely filed suit, a court may stay proceedings to allow the claimant to complete the administrative review process.” Id. at *1; (citing the Eighth Circuit’s holding in Galman v. Prudential Ins. Co. of Am., 254 F.3d 768, 769 (8th Cir. 2001), wherein the Eighth Circuit affirmed the district court’s stay of proceedings to allow for exhaustion of administrative remedies where claimant prematurely filed suit). Moreover, in Painter v. Golden Rule Ins. Co., 121 F.3d 436 (8th Cir. 1997), the Eighth Circuit suggested that a stay of court proceedings to allow time for a plaintiff to exhaust remedies is a proper procedure upon the plaintiff’s request:

We also reject Painter's suggestion that dismissal of Golden Rule's declaratory judgment action was inevitable. The district court never considered Golden Rule's alternative motion to stay the action while contract remedies were exhausted; had Golden Rule pressed that point after the court corrected its subject matter jurisdiction ruling, a stay might have been granted.

Id. at 441. In its opinion, the Eighth Circuit ratified the district court’s determination that a failure to exhaust remedies is not a jurisdictional defect depriving a court of power over a case. See id. at 440.

Other circuits have similarly held that a stay of the case is proper when a court finds that an ERISA plaintiff failed to exhaust administrative remedies. For instance, the Southern District of West Virginia recently held that a stay is proper in an ERISA case to allow a plaintiff to exhaust administrative remedies. In re Workman, 2005 WL 3481509, at *1 (S.D. W.Va. 2005). In that case, the defendants moved to stay the action, and the only issue before the Southern District was whether a stay of the case was proper. Id. After determining that the plaintiff had not exhausted administrative remedies, the court granted the defendants’ motion to stay pending the plaintiff’s exhaustion of administrative remedies. Id. In addition, in Caldwell v. Western Atlas Intern., 871 F. Supp. 1392 (D. Kan. 1994), the Kansas District Court stayed the case pending the ERISA plaintiff’s exhaustion of administrative remedies instead of dismissing the case. 871 F. Supp. at 1397. In its holding, the court opined that “judicial economy will better be served by staying the proceedings related to plaintiff's ERISA claim, rather than dismissing the claim.” Id.

DEPARTMENT OF LABOR PROPOSES RULE TO EXPAND THE DEFINITION OF “FIDUCIARY” UNDER ERISA

On October 21, 2010, in an effort to further protect employee benefit plan participants and beneficiaries, the U.S. Department of Labor’s Employee Benefits Security Administration announced a proposed rule to expand the definition of “fiduciary” under ERISA. Specifically, the proposed rule would more broadly define the circumstances under which a person is considered to be a “fiduciary” by reason of giving investment advice to an employee benefit plan or a plan’s participants.

ERISA Section 504 imposes a number of duties on plan fiduciaries, including a duty of undivided loyalty, a duty to act for the exclusive purposes of providing plan benefits and defraying reasonable expenses of administering the plan, and a duty of care grounded in the prudent man standard. Despite the care taken to protect plan participants from poor fiduciary conduct, the definition of “fiduciary” has been left unchanged since ERISA’s enactment in 1975. And given the significant changes to employee benefit plans, the financial industry and the expectations of plan participants, the Department of Labor recognizes that the current definition of “fiduciary” may inappropriately limit the types of investment advisory relationships that give rise to fiduciary duties on the part of the investment advisor. Indeed, the Department of Labor noted in the new proposed rule that since 1975:

the retirement plan community has changed significantly, with a shift from defined benefit (DB) plans to defined contribution (DC) plans. The financial marketplace also has changed significantly, and the types and complexity of investment products and services available to plans have increased. With the resulting changes in plan investment practices, and relationships between advisers and their plan clients, the Department [of Labor] believes there is a need to re-examine the types of advisory relationships that should give rise to fiduciary duties on the part of those providing advisory services.

The proposed rule was published in the Federal Register on October 22, 2010, and written comments on the proposed regulations must be submitted to the Department of Labor on or before January 20, 2011.

A complete copy of the proposed rule can be found here.

U.S. DEPARTMENT OF LABOR ISSUES FINAL RULE MANDATING GREATER DISCLOSURES IN PARTICIPANT-DIRECTED RETIREMENT PLANS

On October 14, 2010, the U.S. Department of Labor issued a final rule requiring the disclosure of certain plan and investment-related information, including fee and expense information, to participants and beneficiaries in participant-directed individual account plans (e.g., 401(k) plans). The regulation is intended to help ERISA plan participants better manage their retirement savings by ensuring that they have the information they need to make informed decisions about their investments.

The Department of Labor estimates that 72 million people are invested in participant-directed retirement plans nationwide, compiling a total of nearly $3 trillion in assets. A “participant-directed plan” is one that provides for the allocation of investment responsibilities to participants or beneficiaries. While participants in these plans are responsible for making their own investment decisions, “current law does not require that all workers be given the information they need to make informed investment decisions or, when information is given, that it is furnished in a user-friendly format.” This is particularly true with respect to the fees and expenses associated with certain investment choices.

The final rule aims to assist plan participants in this regard, and will impact plan sponsors, fiduciaries, participants and beneficiaries, as well as the service providers of such plans. To be sure, the final rule provides that when a plan allocates investment responsibilities to participants or beneficiaries, the plan administrator must take steps to ensure that such participants and beneficiaries (1) are made aware of their rights and responsibilities with respect to the investment of their assets, and (2) are provided sufficient information regarding the plan and the plan's investment options to make informed decisions with regard to the management of their individual accounts. The plan administrator must also provide each participant with certain plan-related and investment-related information.

In addition, the final rule provides that the investment of plan assets is governed by the fiduciary duties set forth within ERISA Section 404(a)(1)(A)-(B), which require plan fiduciaries to act prudently and solely in the interest of the plan’s participants and beneficiaries. Accordingly, the regulation requires plan fiduciaries to:

• Provide plan participants with quarterly statements of plan fees and expenses deducted from their accounts;

• Provide plan participants with core information about investments available under their plan, including the cost of these investments;

• Use standard methodologies when calculating and disclosing expense and return information to achieve uniformity across the spectrum of investments that exist in plans;

• Present the information in a format that makes it easier for plan participants to comparison shop among the plan's investment options; and

• Provide plan participants with access to supplemental investment information in addition to the basic information required under the final rule.

A complete copy of the final rule can be found here. In addition, for a concise overview of the final rule, please click here.

THE U.S. DEPARTMENT OF LABOR PROVIDES A HELPING HAND FOR EMPLOYEE BENEFIT PLAN FIDUCIARIES

On July 16, 2010, the U.S. Department of Labor issued an interim final rule aimed at enhancing disclosure requirements to fiduciaries of employee benefit plans. Specifically, the rule requires that certain service providers disclose specified information to assist plan fiduciaries in assessing the reasonableness of contracts or arrangements, including the reasonableness of the compensation paid for services and the conflicts of interest that may affect a service provider’s performance of services to the plan.

As the Department of Labor points out, in recent years, employee benefit plans have undergone a number of changes to improve efficiency and reduce the cost of administrative services for the plans and their participants. However, these changes are quite complex, making it difficult for plan fiduciaries to understand what service providers are actually paid for the specific services they render. Nonetheless, ERISA § 404(a)(1) provides in pertinent part that:

[A] fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and—

(A) for the exclusive purpose of:

(i) providing benefits to participants and their beneficiaries; and

(ii) defraying reasonable expenses of administering the plan.

In order to comply with Section 404(a)(1), fiduciaries must have access to information sufficient to determine the reasonableness of the compensation paid for administrative services. The interim final rule is intended to provide fiduciaries with this key information by requiring certain service providers to disclose both the direct and indirect compensation they receive in connection with the services they provide to the plan. According to Phyllis Borzi, Assistant Secretary for the Employee Benefits Security Administration, the rule should allow plan fiduciaries to make more informed decisions about plan services, including the costs of services and potential conflicts of interest.

In addition to protecting and assisting plan fiduciaries, the Department of Labor believes that “mandatory proactive disclosure will reduce sponsor information costs, discourage harmful conflicts, and enhance service value.”

A complete copy of the final interim rule is available here.

FEDERAL COURTS ADOPT A LIBERAL PLEADING STANDARD FOR ERISA PLAINTIFFS UNDER FEDERAL RULE OF CIVIL PROCEDURE 8

On November 25, 2009, the Eighth Circuit Court of Appeals issued an important decision in Braden v. Wal-Mart Stores, Inc. aimed at preserving employee benefit plan participants’ right to bring suit against ERISA plan fiduciaries despite participants’ limited access to inside information about their plan. In Braden, the plaintiffs brought suit alleging that Wal-Mart’s 401(k) plan paid excessive management fees and that the trustee of the plan breached certain fiduciary duties. Wal-Mart and the other defendants moved for dismissal under Rules 12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure—lack of subject matter jurisdiction and failure to state a claim respectively. The District Court for the Western District of Missouri granted the defendants’ motion to dismiss, holding in part that the plaintiff’s complaint was inadequate under Rule 8 of the Federal Rules of Civil Procedure because it did not allege sufficient facts to show how the defendants’ decision-making process was flawed.

On appeal, the Eighth Circuit refused to honor the District Court’s strict interpretation of Rule 8, which requires that a complaint present "a short and plain statement of the claim showing that the pleader is entitled to relief." In order to meet the Rule 8 pleading standard and survive a motion to dismiss under Rule 12(b)(6), a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face. A complaint states a plausible claim for relief if its factual content allows the court to draw a reasonable inference that the defendant is liable for the misconduct alleged in the complaint. In Braden, the Eighth Circuit determined that the District Court erred in two ways: (1) the court ignored reasonable inferences supported by the facts alleged, and (2) the court drew inferences in defendants’ favor. As the Eighth Circuit noted, “[e]ach of these errors violates the familiar axiom that on a motion to dismiss, inferences are to be drawn in favor of the non-moving party.”

In its decision, the Eighth Circuit acknowledged that in interpreting Rule 8’s pleading standard, courts must not “ignore the significant costs of discovery in complex litigation and the attendant waste and expense that can be inflicted upon innocent parties by meritless claims.” However, the court further emphasized that in applying Rule 8, courts must be “attendant to ERISA’s remedial purpose and evident intent to prevent through private civil litigation ‘misuse and mismanagement of plan assets.’" Moreover, the court recognized that ERISA plaintiffs often (and perhaps most of the time) lack important information necessary to plead their claims in detail. Accordingly, the court essentially held that the intent behind ERISA requires courts to interpret Rule 8 loosely for ERISA plaintiffs:

Congress intended that private individuals would play an important role in enforcing ERISA's fiduciary duties—duties which have been described as "the highest known to the law." Donovan v. Bierwirth, 680 F.2d 263, 272 n.8 (2d Cir. 1982). In giving effect to this intent, we must be cognizant of the practical context of ERISA litigation. No matter how clever or diligent, ERISA plaintiffs generally lack the inside information necessary to make out their claims in detail unless and until discovery commences. Thus, while a plaintiff must offer sufficient factual allegations to show that he or she is not merely engaged in a fishing expedition or strike suit, we must also take account of their limited access to crucial information. If plaintiffs cannot state a claim without pleading facts which tend systemically to be in the sole possession of defendants, the remedial scheme of the statute will fail, and the crucial rights secured by ERISA will suffer. These considerations counsel careful and holistic evaluation of an ERISA complaint's factual allegations before concluding that they do not support a plausible inference that the plaintiff is entitled to relief.

In the short time since Braden, federal courts have unanimously upheld the Eighth Circuit’s holding, thereby preserving the intent behind ERISA and giving employee benefit plan participants the means to enforce ERISA’s fiduciary duties. See e.g., Jones v. MEMC Electronic Material, Inc., 2010 WL 1038536, at *3-5 (E.D. Mo. March 17, 2010) (denying the defendants’ motion to dismiss and noting that “ERISA plaintiffs generally lack the inside information necessary to make out their claims in detail).

The Eighth Circuit’s decision in Braden will protect future ERISA plaintiffs from motions to dismiss filed by plan fiduciaries which directly conflict with the intent behind ERISA. This will in turn lead to more lawsuits filed against plan fiduciaries for their wrongful conduct, which should ultimately motivate plan fiduciaries to take better care in the administration of their employee benefit plans.

U.S. DEPARTMENT OF LABOR ADOPTS FINAL SAFE HARBOR REGULATION FOR EMPLOYEE CONTRIBUTIONS TO SMALL PLANS

On January 14, 2010, the U.S. Department of Labor (“DOL”) adopted a final regulation to clarify the safe harbor period during which amounts that an employer has received from employees or withheld from wages for contribution to certain employee benefit plans will not constitute ``plan assets'' for purposes of Title I of the Employee Retirement Income Security Act of 1974 (“ERISA”). The new regulation aims to resolve an ongoing uncertainty by sponsors and fiduciaries of small welfare and pension plans as to when participant contributions will be treated as contributed in a timely manner to such plans.

As set forth in the new final regulation, the DOL, in 1996, published amendments to 53 FR 17628, which modified the outside limit beyond which participant contributions to an employee pension plan become plan assets. Since that time, the outer limit for participant contributions to a pension plan has been the 15th business day of the month following the month in which participant contributions are received by the employer (in the case of amounts that a participant or beneficiary pays to an employer), or the 15th business day of the month following the month in which such amounts would otherwise have been payable to the participant in cash (in the case of amounts withheld by an employer from a participant’s wages). In addition, the general rule has been that amounts paid to or withheld by an employer become plan assets on the earliest date on which they can reasonably be segregated from the employer’s general assets.

The 1996 amendments created uncertainty among employers and plan advisers as to exactly when they must forward participant contributions to the plan in order to avoid the requirements associated with holding plan assets. Accordingly, on February 29, 2008, the DOL proposed a safe harbor with the goal of providing more clarity over the foregoing participant contributions concerns. The DOL ultimately received 28 comments to its proposal, which can be found here.

In response to the public comments, the DOL issued its recent final regulation, which is nearly identical to the 2008 proposal. The final safe harbor rule, and specifically Section 2510.3-102(a)(2), provides that participant contributions to an employee benefit plan with fewer than 100 participants at the beginning of the plan year will be treated as having been made to the plan in accordance with the general rule (the earliest date on which such contributions can reasonably be segregated from the employer's general assets) when contributions are deposited with the plan no later than the 7th business day following the day on which such amount is received by the employer (in the case of amounts that a participant or beneficiary pays to an employer) or the 7th business day following the day on which such amount would otherwise have been payable to the participant in cash (in the case of amounts withheld by an employer from a participant's wages).

Click here for a complete copy of the DOL’s final safe harbor rule.