RECENT ERISA LITIGATION AND RELATED TITLE I ISSUES

1. RECENT ERISA LITIGATION AND RELATED TITLE I ISSUES Marcia S. Wagner, Esq. August 26, 2014

2. agenda • Employer Stock Funds – the Demise of Moench • Lessons from Excess Fee Cases • Proprietary Funds Litigation • Equitable Remedies after Cigna v. Amara • Evolving Definition of an ERISA Fiduciary • Statute of Limitations Developments • Fiduciary Breach • Heimeshoff Limitation on Claims for Benefit Denial • Same-Sex spouse Litigation

3. Demise of Moench Presumption

4. DEMISE OF MOENCH PRESUMPTION • Moench presumption • Plan holding or buying employer stock is presumptively prudent; the presumption applied to: • ESOPs • 401(k) Plans invested in employer stock • Moench doctrine had been spreading since 1995 • Result was early stage dismissal in many stock drop cases • Dudenhoeffer holding: no presumption of prudence • Supreme Court rules that a presumption of prudence exists only as to the diversification of plan assets • Supreme Court’s suggestions for weeding out meritless cases favor plan fiduciaries

5. DEMISE OF MOENCH PRESUMPTION • Post dudenhoeffer Motion to dismiss • Plan fiduciaries generally entitled to rely on market price of employer stock in making buy/sell decisions • To overcome defendant’s reliance on the market, plaintiffs will need to allege special circumstances • Lower courts to work out what special circumstances can overcome reliance on the market • Plaintiffs will need to allege specific facts in support of special circumstances

6. DEMISE OF MOENCH PRESUMPTION • Actions taken by fiduciaries must be consistent with securities laws • Duty of prudence does not require fiduciary to break the law, including insider trading restrictions • Cannot require divestiture of employer stock on the basis of inside information • Acts should not be more likely to harm the employer stock fund than help it • Supreme Court’s instructions to lower courts: • Potential conflicts with insider trading that must be avoided • Requiring a sale of employer stock on the basis of inside information • Disclosure of nonpublic information • Viable complaint must allege that prudent fiduciary could not have concluded that alternative actions would do plan more harm than good • Stopping purchase of employer stock • Disclosing nonpublic information

7. DEMISE OF MOENCH PRESUMPTION • Takeaways • Consider excluding insiders from serving on plan committees • Consider appointment of independent fiduciary to make employer stock decisions • Review Securities Law requirements • Review employer’s public statements and filings • Apply a prudent process to decision making

8. Lessons from excess fee cases

9. Lessons from Excess fee cases • Excess fee cases assert fiduciary breach due to unreasonably high fees paid by plan • ERISA Sec. 404(c) regulations provide exemption from fiduciary liability • Plan must give participant discretion to select investments • Participant must exercise control over investment selection • Hecker v. Deere: over 2,500 available funds give participants requisite choice to pick expensive or low priced funds • Market regulates fund fees

10. Lessons from Excess fee cases • Hecker v. Deere progeny holding participants have adequate choice: • Renfro v. Unisys – 73 investment options • Loomis v. Excelon Corp. – 32 investment options • Cases are limited to their particular facts • Tipping point: offering a wide range of fund fees

11. Lessons from Excess fee cases • Tibble v. Edison International (2013) - 50 investment options • Inclusion of retail class mutual funds with high fees held imprudent • Plan fiduciaries fail to investigate institutional class alternatives • Unquestioning reliance on consultant who fails to recommend alternatives • Evolution of complaints in excess fee cases • Complaints focus on overcompensation of service providers by mutual funds • Overall fees no longer relevant • Large array of funds no longer protects fiduciaries from liability

12. Lessons from Excess fee cases • Tussey v. ABB (2014) liability imposed on plan fiduciaries • Fiduciaries fail to carry out prudent fiduciary process • Revenue sharing received by recordkeeper not calculated • Fees not evaluated for competitiveness • Court denies that wide range of investment options bars claim of unreasonable recordkeeping fees • New Arguments: • Investment options should be limited to enable qualification for lower priced institutional shares • Plan fiduciaries have duty to seek rebates of revenue sharing from service providers • $12 million settlement in Bilewicz and Yeaw cases v. Fidelity

13. Proprietary funds litigation

14. Proprietary funds litigation • First Union precedent • Plan invested exclusively in proprietary funds • $26 million settlement • Typical defendants: • Ameriprise Financial • Bank of America • Fidelity • Sun Trust • Causes of Action • Fiduciary breach • Excess fees received by service provider from mutual funds • Prohibited transaction • Seed money for new fund

15. Proprietary funds litigation • Statute of Limitations Defense • Applies to prohibited transaction claims • Protection for funds selected for inclusion on menu before commencement of limitations period • Less successful with breach of prudence / loyalty claims • Continuing duty to monitor • Standing Requirement • Plan investor needed for each challenged mutual fund

16. Equitable Remedies after Cigna v. Amara

17. Equitable Remedies • Cigna v. Amara (2011) • Plan document v. SPD • Dispute over transition formula for conversion of DB pension to cash balance plan • Held: no legal authority under section 502(a)(1)(B) to order plan amendments • Guidance on equitable remedies under ERISA 502(a)(3)(B) • 3 traditional equitable remedies discussed • Concurring opinion refers to discourse as nonbinding dictum • On remand, district court orders plan reformation • Same remedy • New rationale, i.e., equitable reformation

18. Equitable Remedies • Contract Reformation • Mutual mistake • Fraud • Reliance • Contract principles not a good fit for benefit plans • Equitable Estoppel • Promise • Reliance (action or forbearance induced by promise) • Surcharge • Breach of fiduciary duty causing loss • Unjust enrichment • Disagreement over whether loss to plan is required

19. Equitable Remedies • Cigna v. Amara – district ct. imposes additive transition formula under contract reformation rationale • Implicit / questionable assumption that participants could reject amendment • Osberg v. Foot Locker – facts similar to Cigna v. Amara but different result • Alleged harm held to be speculative • Several appellate decisions apply surcharge remedy to give money damages • 9th Circuit rejects surcharge because plan must suffer loss • Application of equitable remedies continues to evolve

20. The Evolving definition of a functional fiduciary

21. Evolving definition of functional fiduciary • Definition of Investment Advice Fiduciary to be reproposed by DOL • DOL taking aggressive positions in litigation that powers of platform providers result in fiduciary status even if not exercised • Advisory Opinion 97-16A – power to change investment options on platform does not result in fiduciary status • Final decision must rest with plan sponsor • Platform provider must provide full disclosure • Negative elections permitted

22. Evolving definition of functional fiduciary • Leimkuehler v. American United Life Ins. Co. (2013) • Provider’s receipt of revenue sharing would violate ERISA if fiduciary status imposed • DOL argues that offering a fund on investment platform is equivalent to exercise of right to make substitutions • 7th Circuit limits functional fiduciary characterization to actual exercise of authority

23. Evolving definition of functional fiduciary • Healthcare Strategies v. ING(2013) • Group annuity does not give plan right to reject investment option substitutions • Insurer exercises substitution authority only twice • Court construes services as “plan administration, not “plan management” • Under administration prong of fiduciary definition only authority to make substitutions (not actual exercise) sufficient for fiduciary status • Case settled 2014 • $15 million • Procedures consistent with Advisory Opinion 97-16A

24. Evolving definition of functional fiduciary • Golden Star v. MassMutual Life Ins. Co. (2014) • Management prong of fiduciary definition • Court hold that actual exercise of authority to substitute investment options is required to confer fiduciary status • Plan administration prong of fiduciary definition • No decision on possession of authority vs. actual exercise issue • Control over its own compensation confers fiduciary status on service provider • Court holds there is triable issue, because service provider could assess management fees up to 1% of account market value

25. Statute of Limitations Developments

26. Statute of Limitations – Fiduciary breach • ERISA statute of limitations for fiduciary violations • 6 years from last act constituting a violation • 3 years after earliest date plaintiff had actual knowledge of violation • Fuller v. SunTrust Bank (2014) • 3 year limitation period not applicable • Proving plaintiff’s knowledge requires showing that plaintiff actually received plan documents • 6 year limitation period results in case dismissal • Limitations period runs from initial fund selection • Potentially different result if complaint reflects new violations resulting from changed circumstances

27. Statute of Limitations – Fiduciary breach • David v. Alphin (2013) • Fiduciary breach claim barred by 6-year statute of limitations • Limitations period commences with initial fund selection • Viable claim requires changed circumstances during limitations period • Poor performance • Increased fees • Tibble v. Edison International (2013) • Fiduciary breach claim barred by 6-year statute of limitations • Result unchanged by ongoing nature of ERISA fiduciary duties • New 6-year period begins if changed circumstances create new breach

28. Statute of Limitations – Benefit denial • No ERISA statute of limitations for benefit claims • Limitations period borrowed from state law • Date of accrual: when plaintiff should have discovered injury • Contractual provisions can limit time for bringing lawsuit • Restrict limitations period • Specify date of claims accrual • Heimeshoff v. Hartford Life (2013) holds contract restrictions are enforceable • Shorter limitations period than allowed by state law but must be reasonable • May specify accrual period • Not barred by statute • Participant put on notice

29. Statute of Limitations – Benefit denial • New cases following-up on Heimeshoff • Barriero v. NJ Bac Health Fund (2013) • 3-year plan limitation period upheld • Plan limits found reasonable even though limitations period begins to run before internal claims procedure was exhausted • Munro-Kienstra v. Carpenters’ Health Fund (2014) • 2-year limitations period upheld • Participant informed of limit • Steps to limit stale claims • Amend plan to provide reasonable limitations period • Include reasonable rules for accrual of claims in the amendment • Notify participants

30. Post Windsor Developments regarding same sex spouses

31. Same-sex spouse developments • United States v. Windsor(2014) • DOMA held unconstitutional • Place of Celebration Rule • IRS and DOL release guidance • Valid same-sex marriage will be recognized even if couple lives in a state that does not recognize same-sex marriage • Prospective effect: from September 16, 2013 • Query retroactive effect of Windsor? • Pre-June 26 (date of Windsor decision)? • Pre- September 16, 2013 (place of celebration rule)?

32. Same-sex spouse developments • Cozen O’Connor, P.C. v. Tobits (2013) • Court holds same-sex spouse entitled to surviving spouse benefit under profit sharing plan • Court looks to Illinois law (place of domicile at time of death) • Query result where domiciliary state hostile to same-sex marriage? • Participant dies in 2010 • Court implicitly applies Windsor retroactively

33. Same-sex spouse developments • Roe v. Empire Blue Cross Blue Shield. (2014) • Holds employee not entitled to enroll same-sex spouse as health plan dependent • Self-insured plan • Plan provision specifically excludes same-sex spouses • Court holds that ERISA grants broad discretion as to welfare plan coverage • Cozen O’Connor case distinguished

34. RECENT ERISA LITIGATION AND RELATED TITLE I ISSUESMarcia S. Wagner, Esq. August 26, 2014A0128252.pptx