ERISA Litigation Webinar Transcript Now Available

Seeking to accomplish a goal without having the right tools can result in frustration and possible failure. One solution is to get outside help when needed as long as the party being hired is knowledgeable and independent. Otherwise, what looks like a solution could quickly become a problem. Applied to ERISA plans, trouble might take the form of costly and time-consuming enforcement and/or litigation. Over the last few years, that reality has set in for more than a few employers.

Recognizing the importance of abiding by good governance principles, several of us agreed to speak as part of an educational webinar on April 8, 2015 about fiduciary tools, pitfalls and lessons learned. Sponsored by fi360 and entitled "ERISA Litigation and Enforcement: The Role of the Independent Fiduciary and Best Practices for Financial Advisors," this webinar joined Attorney Tom Clark (Counsel with the Wagner Law Group), Dr. Susan Mangiero (Managing Director with Fiduciary Leadership, LLC) and Mitchell Shames, Esquire (Partner with the Harrison Fiduciary Group) to address the (a) use of an independent fiduciary (b) clarifying what an outside vendor should be doing and (c) avoiding legal and economic landmines that have revealed themselves in prominent court cases and regulatory examinations.

If you missed the event, email contact@fiduciaryleadership.com for a copy of the slides. Click here to download the written transcript. Edited for clarity (and because the audio file is spotty in some places), this fourteen page document lays out cornerstone concepts and includes suggestions for plan sponsors and the advisers who serve them. These include, but are not limited to, the following:

  • The outsourced fiduciary market is growing in the United States and elsewhere.
  • When an outside party is hired by a plan sponsor, it is critical to specify responsibilities and contract accordingly. When an "expectations gap" exists, some critical tasks may be left wanting or not addressed at all.
  • When multiple fiduciaries are in place, a plan sponsor must ensure that a central person or team is adequately coordinating the efforts of all fiduciaries.
  • The newly proposed Conflict of Interest rule is predicted to materially change the landscape of fiduciary relationships between plan participants and retirement advisers.
  • A fiduciary status may exist due to either a contractual agreement or by virtue of the functions assumed by an individual or organization.
  • ERISA litigation is getting more attention these days, with a particular focus on fees, use of proprietary funds, revenue-sharing and disclosure of compensation paid to investment consultants, advisers and asset managers.
  • Demonstrating procedural prudence in part depends on what others in the industry are doing (or not doing as the case may be) and whether actions make sense for a given plan.
  • A renewed focus on disclosure and transparency is in the works according to comments made by the U.S. Department of Labor.
  • An independent fiduciary can be engaged for a singular transaction or for a task that continues over a long period of time.
  • An independent fiduciary can be engaged by either a defined contribution plan or defined benefit plan or both.
  • When there is a perception or reality of a conflict of interest, it may be prudent for an independent fiduciary to be engaged. The participants pay for said party because the independent fiduciary works on behalf of the participants.
  • The concept of co-fiduciary status is important and should be paid heed by any adviser who has an ERISA plan as a client.
  • Before delegating duties (to the extent allowed) to a third party, a plan sponsor should decide what financial issues should be vetted. Liquidity, the use of leverage by asset managers and asset allocation are a few of the many topics that a delegated fiduciary could be asked to measure, monitor and manage.
  • A fiduciary audit can be extremely helpful as a tool for identifying areas of improvement for an ERISA plan sponsor.

It may be no surprise that over 500 people registered for this educational webinar about fiduciary foibles. After forty years since its inception, ERISA remains a force that cannot be ignored.

Employee Ownership and ERISA Litigation

I had the pleasure of speaking at the sold-out National Center of Employee Ownership ("NCEO") conference on April 21 about board education, compensation metrics and procedural prudence. Consonant with NCEO's commitment to providing trustee and director education about Employee Stock Ownership Plan ("ESOP") administration and governance, my co-speakers and I fielded lots of questions from the audience relating to insurance coverage, selection of directors, board composition, training, governance red flags to avoid and long-term versus short-term strategy.

In conversing with some of the ESOP company CEOs and independent trustees who traveled to Denver for this annual convening (last held in Atlanta), the message was clear. Employee ownership is working for their respective companies. The sentiment struck me as quite different from what I heard last week when I attended the American Conference Institute meeting about ERISA litigation. Post Dudenhoeffer (courtesy of the U.S. Supreme Court), there seems to be a lot of caution on the part of large company counsel about how much equity should be in the hands of employees.

Clearly, facts and circumstances will determine the appropriateness of any particular structure. That said, results of a recent survey reflect a growth in employee power, at least as of several years ago. According to NCEO's research project director, Nancy Wiefek, the tabulated results show that 214 Employee Stock Ownership Plans commenced between 2001 and 2012, a rise of 44 percent from earlier periods. Out of 502 ESOP company responses, 317 were reported as fully owned at 100 percent. Click here to read more about the complete survey.

Whether the 2014 Dudenhoeffer decision will have an impact on the mostly private businesses that consider ESOP implementation remains to be seen. For now, it is important that venues exist to allow for an exchange of ideas about what works and what to avoid, should a company's management decide to embark on putting company stock in the hands of employees.

ERISA Litigation Predicted To Rise

I have just returned from Chicago where I spent two days listening to transaction attorneys, litigators and insurance company executives talk about trends in ERISA enforcement and legal disputes. Sponsored by the American Conference Institute, this assembly about ERISA litigation included sessions on class actions, Employer Stock Ownership Plan ("ESOP") problem areas, the role of economic experts in litigation, challenges to the church plan exemption, questions about excessive fees, de-risking, stock drop defense strategies, health care reform, how much ERISA fiduciary liability insurance to purchase and much more.

I took a lot of notes and intend to write about implications for plan sponsors and their service providers through an economic and governance lens.

It may be coincidental but certainly not trivial that the United States Department of Labor released its fiduciary proposed rule about conflicts of interest on the second day of this important ERISA litigation convening, i.e. on April 14, 2015. The thinking is that the adoption of a more rigorous rule could open the door wide to a multitude of further disputes and heightened examinations. Click here to access the language of the proposed rule and supporting documents.

It sounds like many will be even busier in the coming months.

Calvin Ball and ESOP Governance

Calvin and Hobbes has long been a favorite treat of mine. (I don't have permission to embed a likeness but you can click here for a peek.) This long-running cartoon strip ceased in 1995, ten years after the creation of a mischievous six-year old and his furry feline friend. The brainchild of cartoonist Bill Watterson, Calvin entertained and moralized at the same time, charming a global audience of adults and children alike. In a rare interview, Washington Post reporter Michael Cavna (March 10, 2015) learned from the somewhat reclusive Mr. Watterson that "fantasies are drawn more realistically than reality, since that says a lot about what's going on in Calvin's head." In "America's Most Profound Comic Strip" (Wall Street Journal, March 6, 2015), senior editor at the Weekly Standard, Christopher Caldwell, adds that "...Calvin keeps running into evidence that the world isn't built to his ... specifications" and that his "favorite sport is 'Calvinball,' in which he is entitled to make up the rules as he goes along."

I thought of Calvin and his world views yesterday as I listened to ERISA attorney Ted Becker talk about Employee Stock Ownership Plan ("ESOP") governance. As the lead speaker for an NCEO-sponsored webinar entitled "What the DOL v. GreatBanc Trust Co. ESOP Court Settlement Means for ESOPs," this Drinker Biddle & Reath LLP partner gave some nuts and bolts recommendations that are concrete and therefore radically different from the actions of ERISA trustee "Calvins" who comfort themselves that sloppy work is okay.

Mr. Becker and co-speaker Loren Rodgers (Executive Director of the National Center for Employee Ownership) explained that changing regulatory emphasis on employer security valuation led to what is known as the Fiduciary Process Agreement. Described as a "playbook," the U.S. Department of Labor ("DOL") and "GreatBanc Trust Company agreed that it could be used for future transactions by an ESOP fiduciary in which the ESOP purchases or sells employer securities that are not publicly traded." Engaging an independent and qualified valuation advisor and then adequately reviewing (and understanding) the resulting information used to carry out the valuation are two of the recommendations for trustees.

In the official source file ("Agreement Concerning Fiduciary Engagements And Process Requirements For Employer Stock Transactions" dated June 2, 2014), readers are reminded of the importance of process for multiple tasks. Among other things, this roadmap details what should be documented by the ESOP Trustee when choosing a valuation advisor, to include:

  • "The reason for selecting the particular valuation advisor;
  • A list of all the valuation advisors that the Trustee considered;
  • A discussion of the qualifications of the valuation advisors that the Trustee considered;
  • A list of references checked and discussion of the references' views on the vauation advisors;
  • Whether the valuation advisor was the subject of prior criminal or civil proceedings; and
  • A full explanation of the bases for concluding that the Trustee's selection of the valuation advisor was prudent."

This guiding document likewise lays out suggestions about process regarding the fiduciary review of any potential transaction such as buying or selling employer securities that are not publicly traded, the reliance on the valuation report and much more. As independent fiduciary Mitch Shames writes in "Once Again, Strong Process and Substance Matters" (September 11, 2014), "... DOL requires that the fiduciary be an active participant in an ESOP transaction...far from a passive role."

Having been trained as an appraiser and someone who has (a) rendered opinions of value (b) reviewed others' valuations (c) critiqued valuation models (d) taught valuation courses and (e) served as an expert witness, I know firsthand that inappropriate assumptions, bad data and short cuts are likely to create headaches. Quality of valuations that are used for statutory and commercial reasons can and do vary - sometimes materially so. A "quickie" appraisal that ignores fundamentals about an industry let's say or proceeds from grossly inflated management projections are two potential vulnerabilities. The danger is that an inadequate valuation report potentially creates a domino effect of unwanted outcomes because it is used as a driver to make subsequent decisions. For example, ESOP trustees with multiple suitors may select the "wrong" buyer or approve a recapitalization that would not otherwise occur had a better valuation assessment been used. Valuation numbers are frequently inputs as opposed to the end goal.

Big numbers are involved so it's no surprise that ESOP governance is garnering close scrutiny. According to "The Current State of ESOPs," 2012 ESOP assets exceeded $1.059 trillion with 13.824 million participants in 6,908 plans.

On a separate note, I am speaking at the annual conference of the National Center for Employee Ownership, to be held this year in Denver from April 20, 2015 to April 23, 2015. Entitled "Effective Boards of Directors: Obligations, Recruitment and Compensation," my panel will "cover the standards and responsibilities of directors in the board room, how committees function, building a sustainable board structure and standards and surveys for establishing and measuring compensation to reward the performance of directors." Attorney Kevin G. Long (Shareholder with Chang Ruthenberg & Long PC) and Ms. Nancy Wiefek (Research Project Director with NCEO) will co-present.