Investment Fiduciary Monitoring, Economic Damages and Tibble

Following the publication of "An Economist's Perspective of Fiduciary Monitoring of Investments" by yours truly, Dr. Susan Mangiero (Pensions & Benefits Daily, May 26, 2015), I decided to write a second article on the topic as there is so much to say. This next article is co-authored with Dr. Lee Heavner (managing principal with the Analysis Group) and continues the discussion about investment monitoring from an economic viewpoint. Entitled "Economic Analysis in Fiduciary Monitoring Disputes Following the Supreme Court's 'Tibble' Ruling" (Pensions & Benefits Daily, June 24, 2015), we address the case-specific nature of investment monitoring by fiduciaries and the complexities of quantifying possible harm "but for" alleged imprudent monitoring.

Noting the discussion of changed circumstances by the High Court as part of its Tibble v. Edison International decision, it is imperative to understand that investment monitoring involves multiple steps, each of which takes a certain number of days to complete. "In the world of dispute resolutions, every complaint, expert report, and decision by a trier of fact is specific to a date or period of time. Time is no less a crucial variable with regard to the creation and implementation of an adequate investment monitoring program." While "changed circumstances" are likely to vary across plans and plan sponsors, exogenous events can spur further monitoring. "The departure of a key executive, a large loss, or a government investigation for malfeasance are a few of the events that may lead plan fiduciaries to subject an investment to enhanced scrutiny."

The expense of monitoring is another issue altogether, one that is nuanced, important and necessary to quantify. We point out that (a) there are different types of costs (b) expenses occur at different points in time and (c) some costs may be difficult to assess right away. "For example, when monitoring leads to a change in vendor or investment that in turn results in participant confusion, blackout dates, account errors, or a lengthy delay in setting up a new reporting system, the true costs may not be known until well after the transition is completed."

There are no freebies. There is a cost to taking action as the result of monitoring. There can be a cost to inaction as well. Investment selection and investment monitoring are different activities. Categories of investment monitoring costs include: (a) use of third parties (b) search costs (c) change costs and (d) opportunity costs. Any or all of these categories may come to bear in a calculation of "but for" economic damages. As a result, "there may be substantial variation to when prudent fiduciaries would act let alone how long it would take an investment committee to complete each action." An assessment of economic damages - whether for discovery, mediation, settlement or trial purposes - requires care, consideration and an understanding of the complex investment monitoring process.

For further insights and to read about this timely topic, download our article by clicking here.

ERISA Litigation and Enforcement: Role of Independent Fiduciary and Financial Advisor Best Practices

Mark your calendars to attend an educational webinar entitled "ERISA Litigation and Enforcement: The Role of the Independent Fiduciary and Best Practices for Financial Advisors." Sponsored by fi360 and eligible for continuing education credit, this April 8, 2015 event will take place between 3:00 pm and 4:00 pm EST and address important and timely issues for plan sponsors and their advisors. Details are provided below.

Description: ERISA litigation and enforcement increasingly involves allegations of conflicts of interest and imprudent decision-making on the part of advisors, consultants, banks and asset managers. In several recent matters, regulators and judges have made it clear that the use of an independent fiduciary would be interpreted as a reflection of procedural prudence and the absence of an independent fiduciary could hasten a decision of fiduciary breach.

Learning objectives:

  • Learn about relevant cases and regulatory actions that involve third parties such as financial advisors;
  • Hear a discussion about how advisors, consultants, banks and asset managers can work effectively to demonstrate procedural prudence; and
  • Better understand what state trust law and ERISA oversight activity means for advisors and consultants who work with non-ERISA trusts.

Speakers:

  • Thomas Clark, Esquire (Counsel - The Wagner Law Group)
  • Susan Mangiero, PhD, AIFA, CFA, FRM, PPC (Managing Director - Fiduciary Leadership, LLC)
  • Mitchell Shames, Esquire (Partner - Harrison Fiduciary Group) 

Please join as your schedule permits. Click here to register.

ERISA Litigation and Use of Economic and Fiduciary Experts

On April 29, 2014, I presented with Attorney Joseph Callow and Attorney Ron Kravitz on the topic of case management and the use of experts. Having spoken several times at this relevant periodic conference about ERISA litigation for the American Conference Institute, I heard attorneys repeatedly emphasize the importance of good experts without ever going into much detail. As a result, I volunteered to develop this program and am appreciative of the time and knowledge of my esteemed panelists. Entitled "Expert Coordination: Working With Financial and Fiduciary Experts," the workshop consisted of a perspective from the defense, courtesy of Keating Muething & Klekamp PLL partner, Joseph M. Callow. The plaintiff's view about the use of experts was presented by Shepherd, Finkelman, Miller & Shah, LLP partner, Attorney Ronald S. Kravitz. I offered comments from the perspective of someone who has served as a testifying expert, calculated damages and provided forensic analyses as a behind-the-scenes economist.

Notably, our individual observations about what makes for a smooth process were similar, including the reality of tight litigation budgets and the desires of corporate General Counsel or Litigation Counsel to avoid excessively large invoices. We gave multiple suggestions. For example, one way to keep costs in check is to engage an expert on an incremental analysis basis with each work segment tied to a limited scope. Another idea is for an expert and supporting number crunchers to put together a budget. This disciplined projection of time and related fees, created at the outset, allows counsel and expert to share expectations about what is needed and how much money it will take to accomplish those tasks. Moreover, if an insurance company has to approve defense costs, putting together a detailed budget can help to avoid delays. The creation of a budget is likewise a tool for deciding whether a litigator and/or expert can accept a flat fee for non-testimony work. If the scope of work is ill-defined, it will be harder for either counsel or expert or both to commit to a flat fee at the same time that corporate clients favor the flat fee approach.

We all agreed that the engaging attorney and his or her litigation team reap benefits when the expert provides suggestions about further data and document evaluation. In other words, the attorneys look to the expert to be pro-active and helpful with respect to fact gathering and subsequent assessment of said information. Working with an expert who is relatively easy-going as opposed to an individual with a "difficult" personality is a plus for the legal team.

Timing matters too. If an expert is hired early on, he or she can make recommendations during discovery. If the expert is engaged too late in the process and discovery has ended, that expert's report could be adversely impacted in terms of completeness. 

Attorney Callow repeatedly urged litigators to do their homework when selecting an expert. Attorney Kravitz talked about the high price tag of having to replace an expert, once hired, in the event of poor quality work. In reply to my question about the use of lawyers as fiduciary experts, both gentlemen said that judges may not be receptive to having an attorney testify. If an attorney is needed, the better approach is to have that person serve as a consultant.

Click to access the April 29, 2014 slides for our session about the use of financial and fiduciary experts for ERISA litigation matters. Click here to read "Tips From the Experts: Working Effectively With A Financial Expert Witness" by Dr. Susan Mangiero and published by the American Bar Association.

Private Equity Fund Limited Partners and Pension Funding Levels

Some pension plans invest in private equity funds or funds of funds. Certain private equity funds invest in companies with pension plans. This means that pension funds that invest in this asset class need to be aware of any deficiencies in their plans as well as those portfolio company plans to which they are likewise exposed. While the notion of "my brother's keeper" may not resonate well with stewards of billions of dollars, it is a reality. This is especially true, in the aftermath of the Sun Capital Partners III LP v. New England Teamsters & Trucking Industry Pension Fund decision, No. 12-2312 (1st Circuit, July 24, 2013).

Despite the "record year" described by Wall Street Journal reporter Ryan Dezember, private equity investments, like any other, necessitate careful due diligence on the part of institutional investors that seek a seat at the limited partner table. (See "Private Equity Enjoys a Record Year: Firms That Buy and Sell Companies Are Set to Return More Than $120 Billion to Investors in 2013," December 30, 2013). A critical question is whether continued gains will be diminished if a portfolio company has to divert cash to top off an underfunded pension plan. One way to address the issue is for a pension plan, endowment or foundation to ask the private equity fund general partner how much attention they pay to ERISA economics.

There are numerous other queries to make. In the March/April 2014 issue of CFA Institute Magazine, ERISA attorney David Levine (with Groom Law Group, Chartered) and Dr. Susan Mangiero, CFA (with Fiduciary Leadership, LLC), provide insights for improved due diligence, in a post-Sun Capital world. Suggested action steps include, but are not limited to, the following items:

  • Ask whether a private equity fund is "relying on the position that it is not a 'trade or business' and is therefore not subject to liability for a portfolio company's" ERISA plan deficit;
  • Request to see a list of the holdings for purposes of knowing whether a particular private equity fund has a majority ownership in any or all of its portfolio companies;
  • Investigate whether the Pension Benefit Guaranty Corporation ("PBGC") has red flagged any of the pension plan(s) of a business that is part of a private equity fund's portfolio;
  • Understand how, if at all, a private equity fund is planning to solve a pension plan underfunding problem;
  • Acknowledge that a portfolio company's ERISA liabilities could make an exit difficult, whether via an Initial Public Offering or an acquisition, and that this in turn could lengthen the time before a limited partner can cash out;
  • Identify the extent to which a private equity fund regularly examines the degree to which any or all of its portfolio companies are parties to labor contracts that may be difficult to modify; and
  • Be aware that this important legal decision could invite more litigation and regulatory actions that, regardless of outcome, have a cost and therefore a potential impact on future private equity fund returns.

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