1 erisa update roberta j. ufford groom law group, chartered april 29, 2009

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  • *ERISA UpdateRoberta J. UffordGroom Law Group, CharteredApril 29, 2009

  • *Litigation and Enforcement UpdateEmployer Securities401(k) Fee CasesSecurities LendingInvestment Fraud - MadoffValuationDelinquent Contributions Meals and Gifts Received by FiduciariesCorrectionsOther New DOL Guidance

  • *Litigation Update - Employer Securities2008 Surge in New Stock-Drop ClaimsParticipants claim plan sponsor fiduciaries breached their duties by (a) offering or retaining stock as an investment option and (b) failing to disclose key (insider) information about company financial matters.Financial Industry is New TargetBear Sterns; Wachovia; Lehman Bros. Holdings, Inc.; Regions Financial Corp; Fifth Third Bancorp; Citigroup, Inc.

  • *Litigation Update - Employer Securities2008 Stock Drop DecisionsParticipants did not rebut presumption that fiduciaries should follow plan terms requiring the plan to invest in and hold employer stock; plan fiduciaries should not be in untenable position of having to predict future performance.Kirschbaum v. Reliant Energy, Inc., 526 F.3d 243 (5th Cir. 2008); see also Ward v. Avaya Inc., 45 EBC 1449 (3d Cir. 2008) (employee was not able to overcome presumption that, if the plan that mandates employer stock investment, fiduciaries are presumed prudent in following plan terms under Moench v. Robertson, 62 F. 3d 553 (3d Cir. 1995)).

  • *Litigation Update - Employer Securities2008 Stock Drop DecisionsCourts are mixed in recognizing claims that employers breached their fiduciary duties by not disclosing information about employers financial situation.In re Guidant Corp. ERISA Litigation, 44 EBC 1236 (S.D. Ind. 2008) (court did not dismiss failure to disclose claims) but see, Urban v. Comcast Corp., 45 EBC1161 (E.D. Pa. 2008) (court dismissed claims that failure to disclose was a fiduciary breach).

  • *Litigation Update - Employer SecuritiesShirk v. Fifth Third Bancorp (W.D. Ohio Jan 29, 2009)Plaintiffs alleged breach of fiduciary duty in light of negative effects of merger of Fifth Third with Old Kent Corp., Fifth Third offered employer stock as a plan option and also matched contributions with stock.Court granted summary judgment to Fifth Third: Plaintiffs did not overcome the Moench presumption; stock price increased during class period; expert testified that investment in the stock was prudent. Plaintiffs did not show that defendants were acting in a fiduciary capacity when making alleged misrepresentations.

  • *Litigation Update - Employer SecuritiesReverse Stock Drop - Bunch v. W.R. Grace Independent fiduciary did not breach fiduciary duties by divesting investments in W.R. Grace.Court recognizes sound fiduciary decision process based on facts known at the time; rejects using Moench presumption against fiduciaries.532 F. Supp. 2d. 283 (D. Mass. 2008), affd 555 F. 3d 1 (1st Cir. 2009).But see Stanford v. Foamex LP, 44 EBC 2072 (E.D. Pa. 2008) (refusal to dismiss claims that fiduciaries breached duties by liquidating employer stock); Tatum v. Reynolds Co., 44 EBC 2859 (M.D.N.C. 2008) (claims that fiduciaries should not have sold Nabisco stock).

  • *Litigation Update - 401(k) Fee LawsuitsClaims by participants against plan sponsors allege:service arrangements with unreasonable fees and hidden and excessive fees were imprudent; fiduciaries did not understand/recognize revenue sharing arrangements; andfiduciaries did not disclose to participants in proper detail and clarity the transactions, fees and expenses.Claims by participants and/or plan sponsors allege:service provider is a fiduciary based on selection of plan options and/or failure to disclose fees, and breached fiduciary duties by failing to disclose and engaging in prohibited transactions, e.g.,using plan assets, self-dealing, receiving kickbacks.

  • *Litigation 401(k) Fee LawsuitsService Provider Fiduciary StatusHecker v. Deere & Co., 496 F. Supp. 967 (W.D. Wisc. 2007), affd 45 EBC 2761 (7th Cir. 2009) (Fidelity Trust not fiduciary responsible for selecting plan investment options); Columbia Air Services, Inc. v. Fidelity Management Trust Co., Civ. Act. No. 1:07-cv-11344 (9/30/08 D. Mass.) (granting Fidelity motion to dismiss); but see Tussey v. ABB Inc.; 2008 WL 379666 (W.D. Mo. 2008) (Fidelity could be a fiduciary with respect to choosing plan investment options).Charters v. John Hancock Life Ins. Co., 1:07-CV-11371-NMG (9/30/08 D. Mass. (on motion for summary judgment, holds that Hancock is a fiduciary based on ability to change funds under annuity contract); Phones Plus, Inc. v. The Hartford Financial Services Group, Inc., 2007 WL 3124733 (D. Conn 2007) (Hartford could be a fiduciary based on ability to change funds available under annuity contract).

  • *Litigation 401(k) Fees - In-House PlansRecent lawsuits allege prohibited transactions and breach of duty of prudence in connection with in-house plan investments in plan sponsor investment products.Gipson v. Wells Fargo & Co., No. 08-4546 (D. Minn. March 13, 2009) (participants could go forward with claims that company breached its fiduciary duties and engaged in prohibited transactions by investing in affiliated mutual funds).See also Leber v. Citigroup, Inc., 07-9329 (S.D.N.Y. filed Oct. 18, 2007); David v. Alphin, No. 07-0011 (W.D.N.C. filed July 1, 2007).

  • *Litigation 401(k) Fees - In-House PlansOne court recently held that in-house fiduciaries were prudent when investing in the sponsors investment products, where there was appropriate due diligence and procedural prudence in selecting proposed investments and monitoring the Plans performance. Court noted that fiduciaries:Considered other products;Regularly reviewed performance and fees; andRetained an independent consultantDupree v. Prudential Life Ins. Co. of America, 2007 WL 2263892 (S.D. Fla. 2007).

  • *Litigation Sales of AffiliatesPlaintiffs allege that plan sponsor benefited by using an affiliated investment management unit and/or from a sale of a recordkeeping unit.Nolte v. Cigna, 2:07-cv-02046-HAB-DBG (C.D. Ill. filed Feb. 26, 2007)DOL has brought similar claims in connection with the sale of investment management units.

  • *Litigation Securities LendingRecently filed cases allege:Plan participating in collective trust (CIT) incurred losses and could not redeem from CIT where CIT had losses and received illiquid securities because of participation in securities lending.BP Corp. North America Inc. Savings Plan Investment Oversight Committee v. Northern Trust Investments, N.A., Case No. 08CV6029 (N.D. Ill.) (filed October 21, 2008).Collateral imprudently invested in risky and illiquid securities; inaccurate valuation; fraudulent concealment; refusing to redeem client from securities lending program.Workers Compensation Reinsurance Assoc., et. al., v. Wells Fargo Bank, N.A., et. al., Case No. 62-CV-08-10825 (State of Minn., 2d Jud. Dist., Cty of Ramsey) (filed Oct. 22, 2008); see also AFTRA Retirement Fund v. JP Morgan Chase Bank, N.A., (S.D.N.Y., No. 1:09-cv-00686-SAS, filed Jan. 23, 2009) (investment of collateral was imprudent).

  • *Litigation - Investment Fraud - MadoffDOL Statement re: Duties of Fiduciaries (Feb. 5, 2009) Plan fiduciaries should take appropriate steps -request disclosure from investment and fund managers and other intermediaries about possible exposure;seek advice about likelihood of losses;appropriate disclosures to other fiduciaries/participants;consider whether the plan has claims that should be asserted and ensure claims are filed within required deadlines.http://www.dol.gov/ebsa/pdf/madoffguidance.pdf

  • *Litigation - Investment Fraud - Madoff

    Multiple lawsuits against consultants and managers are expected.E.g., Pension Fund for Hospital and Health Care Employees v. Austin Capital Management Ltd., 09-00615 (E.D. Pa., filed Feb. 12, 2009). Madoff Plea Agreement, included (among others) a charge of theft from an employee benefit plan. DOL-EBSA involved in the investigation.www.dol.gov/ebsa/pdf/cepr031209.pdf

  • *Litigation and Enforcement - Valuation Boston regional office 10-day letter alleging ERISA violations in connection with plan holding of LP interests, including (i) failure to establish a process to evaluate valuation procedures, (ii) failure to report LP interests at current value when valued at cost, and (iii) failure to report current value of LP interest when valued using unaudited financial statements.

    DOL explained [i]t is incumbent on the [plan fiduciary] to establish a process to evaluate the fair market value of any hard to value assets held by the [p]an and the plan fiduciary should have thorough knowledge of the general partners valuation methodology to assure it comports with the funds written valuation provisions and reflects fair market value.

  • *Litigation and Enforcement - Valuation Ludwig Letter (March 21,1996) discusses fiduciary rules for derivatives; applies to any hard to value asset.Fiduciaries must consider whether they have access to appropriate information to evaluate risk/return and appropriately value assets.Court holds pension trustee breached fiduciary duty by undervaluing plan assets resulting in a reduction of benefits paid to participants when plan was terminated.Solis v. Current Development Corp., No. 08-1228 (7th Cir. March 5, 2009).

  • *Litigation and Enforcement - Delinquent ContributionsRecovering delinquent contributions continues to be a DOL enforcement priority. See www.dol.gov/ebsa/newsroom/fsecp.html.Proposed safe harbor for deposits of employee contributions. See 73 Fed Reg. 11070 (Feb. 29, 2008).Current rule: contributions must be transmitted as soon as reasonably segregated but no later than 15th business day of the month following when wages were paid.Proposed rule for plans with fewer than 100 par