how to avoid the 502(a) train: protecting your fiduciaries from erisa litigation 1 presented by:...

How To Avoid the 502(a) Train:

Protecting Your Fiduciaries from ERISA Litigation

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Presented by: René Thorne, Esq.

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The Impact of MetLife v. Glenn on Claims Procedures, Judicial Review and Discovery in

ERISA Cases

Structural Conflict

• Exists whenever claim decisionmaker both evaluates claims for benefits and pays benefits claims

– Self-Insured Plans– Insured Plans

Glenn, 128 S. Ct. 2343, 2348-50 (2008)

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Structural Conflict

• “We do not believe that Firestone's statement implies a change in the standard of review, say, from deferential to de novo review.”

• Continue deferential standard of review even for “conflicted” fiduciary

• Judge takes account of the conflict as one of many factors in determining abuse of discretion

Glenn, 128 S. Ct. 2343, 2350-51 (2008)

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Increased Significance of Conflict

• Glenn, 128 S. Ct. 2343, 2351-52 (2008) Circumstances that -“suggest a higher likelihood that [the conflict] affected the benefits decision:”

– History of biased claims administration– “Ignoring” SSD award

• Justified adding weight to conflict -“seemingly inconsistent positions were both financially advantageous”

• Also a procedural irregularity “in its own right”

– Emphasis on Evidence Supporting Denial• De-emphasizing other reports “suggest[ing] a contrary

conclusion”

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Decreased Significance of Conflict

Glenn, 128 S. Ct. 2343, 2351 (2008) (the Conflict is “less important (perhaps to the vanishing point))”

• “[A]ctive steps to reduce potential bias and to promote accuracy”– “walling off claims administrators from those

interested in firm finances”

– “imposing management checks”• “penalize inaccurate decisionmaking irrespective

of whom the inaccuracy benefits”

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Implications For Discovery

• Glenn gives individual judges/courts more latitude with regard to:– determining the existence of a structural conflict– whether to allow discovery and, if so, how much– the impact of a “conflict” on the final decision of the

courtMyers v. Prudential Life Ins. Co. of America, 581 F. Supp.

2d 904, 925 (E.D. Tenn. 2008) “Much of discovery is a fishing expedition of sorts, but the

Federal Rules of Civil Procedure allow the Courts to determine the pond, the type of lure, and how long the parties can leave their lines in the water.”

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Implications For Discovery

Denmark v. Liberty Life Assurance Co. of Boston, 566 F. 3d (1st Cir. 2009)

“The majority opinion in Glenn fairly can be read as contemplating some discovery on the issue of whether a structural conflict has morphed into an actual conflict.”

–Seems to be the prevailing view

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Creating Structural Barriers to the Structural Conflict

• Ultimate Solution:– Avoid the Conflict Altogether– Delegate Authority for Final

Decision to a Third Party

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• Walling Off Claims Administrators from Those Interested in Firm Finances– No Interpretative Case Law to Date– References in Glenn

• Herzel & Colling, The Chinese Wall and Conflict of Interest in Banks, 34 Bus. Law 73, 114 (1978) (recommending interdepartmental information walls to reduce bank conflicts)

• J. Mashaw, Bureaucratic Justice (1983) (discussing internal controls as a sound method of producing administrative accuracy)

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• “Imposing Management Checks”

– “penalize inaccurate decisionmaking irrespective of whom the inaccuracy benefits” Glenn

– Again, No Interpretive Case Law to Date– Practical Suggestions

• Establish Procedures for Routine, Random Review of Claim Decisions

• Procedures Should Emphasize Scrutiny for Errors Favoring Plan as Strongly – or More So – as Errors Favoring Claimants

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• “Imposing Management Checks”

– Practical Suggestions (Continued)

• Ensure Findings of Errors in Plan’s Favor Are Treated with Equal Disfavor as Errors Favoring Claimants

• Maintain Records of Reviews and Response to Errors

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• Reducing the Potential Influence of Bias with Procedural ProtectionsReimann v. Anthem Ins. Cos., 2008 U.S. Dist. LEXIS

88562, at * 93-95 (S.D. Ind. Oct. 31, 2008)– Utilization of Multiple Independent Medical Peer

Reviews– Utilization of Third Parties to Select Peer Review

Physicians– Require the Reviewers to Certify their Financial and

Professional Independence Dove v. Prudential Ins. Co. of Am., 2009 U.S. Dist. LEXIS

41896 (D. Kan. May 18, 2009) (use of three different reviewing physicians at each stage of claim review was evidence of “active steps to reduce potential bias”) (reversed and remanded by 10th Cir. Feb. 4, 2010 (2010 U.S. App. LEXIS 2363)).

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• Reducing the Potential Influence of Bias with Procedural Protections (Continued)– Utilize Independent Third Party Administrators

for Initial DeterminationsPrince v. Metro. Life Ins. Co., 2010 DNH 46

(D.N.H. 2010)“Here, Verizon took a number of insulating

steps. Most notably, it delegated to two outside insurance companies … the authority for making the initial benefits determination and hearing Prince's first-level administrative appeal.”

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• History of Biased Decisions• Treatment of Social Security Disability Awards

(LTD)• Emphasis on Evidence Supporting Denial

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Heeding the Warnings of Glenn

• Denmark v. Liberty Life Assurance Co. of Boston, 566 F.3d 1, 10 (1st Cir. 2009)

– “In future cases, plan administrators, aware of Glenn, can be expected as a matter of course to document [in the administrative record ] the procedures used to prevent or mitigate the effect of structural conflicts.”

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Softening The Impact: Preemptive Documentation


• Abatie v. Alta Health & Life Ins. Co., 458 F.3d 955, 969 (9th Cir. 2006) (“a conflicted administrator, facing closer scrutiny, may find it advisable to bring forth affirmative evidence that any conflict did not influence its decisionmaking process”) – “truly independent medical examiners” – “neutral, independent review process” – No employee incentives to deny claims– Consistent plan interpretations – Prohibit potential financial gain business

structure (e.g., retroactive payment system)

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• Practical Suggestions– Establish Procedures/Instructions for Claims Review

that Are Included in Every Administrative Record• Use the “Magic Words,” e.g., “Procedures Adopted

to Mitigate Effect of Any Structural Conflict”• Default Rule – Always Seek Independent Medical

Review– For Initial Determination & Every Level of Appeal– Require Written Documentation Explaining

Variation from Rule– Always Use Third-Party Service to Select

Reviewers – Require Reviewers to Sign a Pre-Prepared

Statement Establishing No Incentive for Reaching a Particular Result

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• Practical Suggestions– Establish Procedures/Instructions for Claims

Review that Are Included in Every Administrative Record (Continued)

• Require All Decision-Makers To Sign Pre-Prepared Statement Verifying No Incentives for Denial

• Consider Statement By Appropriate Executive Verifying Same and Generally Describing Compensation

– (E.g., compensation is straight salary with no bonus tied to claim denials)

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that Are Included in Every Administrative Record (Continued)

• Where Possible, Base Internal Guidelines on External, Impartial Sources, Such as Recognized Medical Literature

– Reimann v. Anthem Ins. Cos., 2008 U.S. Dist. LEXIS 88562, at * 95-96 (S.D. Ind. Oct. 31, 2008) (use of internal guidelines based upon “an expert and impartial source”… can promote fair and consistent decision-making and can avoid the need for case-by-case battles of experts”)

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that Are Included in Every Administrative Record (Continued)

• Verification by Appropriate Executive Describing How Decision-Makers Are Insulated from Persons/Groups Concerned with Financial Results

• Provide Description of Random/Periodic Quality Reviews

– Remember, Procedures Should Emphasize Scrutiny for Errors Favoring Plan as Strongly – or More So – as Errors Favoring Claimants

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Summary

• Post Glenn, Increased Discovery Is – on the Whole – A Fact of Life

• For Some Courts, Thorough Review Procedures and Detailed Written Decisions May Be Persuasive that Conflict Not a Factor

• For Now, Preemptive Documentation of Conflict “Vanishing Point” Factors Appears to Be Expected by Many Courts

– At Best, May Preclude Discovery– At Least, May Substantially Limit Discovery

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Avoiding ERISA Penalties In Responding To Documents

Requests

Avoiding ERISA Penalties In Responding To Documents Requests

• Section 104(b)(4) governs a plan administrator’s obligation to provide certain documents:

“The administrator shall, upon written request of any participant or beneficiary, furnish a copy of the latest updated summary plan description, and the latest annual report, any terminal report, the bargaining agreement, trust agreement, contract, or other instruments under which the plan is established or operated.”

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• Under Section 502(c)(1), a Plan Administrator who fails to respond within 30 days to a document request under Section 104(b)(4) may be personally liable for a monetary penalty of up to $110 for every day of the violation.

• May also be liable for participant’s attorney’s fees

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• Increasingly, plan participants are including claim for penalties in benefits and breach of fiduciary duty cases

• They use penalty claim as point of leverage in an otherwise weak cause of action

• These penalties can accumulate to significant amounts

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Elements Of A Proper Request Under Section 104(b)(4).

1. The request must be made to plan administrator.

2. The request must give administrator “clear notice” of information sought.

3. The request must be from plan participant or beneficiary.

4. Requested documents must relate to operation of plan.

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Best Practices For Handling Document Requests

• Train, Train, Train– Ensure that personnel who are not the plan

administrator know to whom the request should be redirected if they receive

– Ensure that personnel who receive an inquiry about documents clearly communicate that the request must be in writing and to the plan administrator

• Consider amending plan docs to clarify that document request must be sent to plan administrator

• Understand the nature of the request– Is it a request under 104(b)(4) or some other

request• Construe requests liberally

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The Changing Landscape of Fiduciary Responsibility

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Exactly Who is a Fiduciary?

• ERISA’s Definition:“[A] person is a fiduciary with respect to a plan to the extent (i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan.” 29 U.S.C. § 1002(21)(A).

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Exactly Who is a Fiduciary

• In determining who is a fiduciary, courts also consider whether a party has exercised discretionary authority or control over a plan’s management, assets, or administration.

• If a person's authority or control does not concern “management” or “plan assets”, that person is not a fiduciary. Similarly, if a person’s discretionary authority does not concern “administration” of a plan, that person is not a fiduciary.

• However, plan trustees, by the very nature of the

position, have “discretionary authority or discretionary responsibility in administration” of the plan within the meaning of Section 3(21)(A)(iii) of the Act. Individuals who hold those positions, therefore, will be fiduciaries.

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• DOL Regulation – Ministerial Exception

– A person who performs a purely ministerial function for an employee benefit plan within a framework of policies, interpretations, rules, practices, and procedures made by other persons is not a fiduciary because that person does not perform a fiduciary function. 29 C.F.R. section 2509.75-8.

– Courts are increasingly finding, however, that more functions create a fiduciary duty. See LaRue v. DeWolff, 552 U.S. 248 (2008).

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Exactly Who is a Fiduciary

• LaRue and its anticipated impact on the ministerial exception

• Distinguishing between settlor and fiduciary functions

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Exactly Who is a Fiduciary?

The Essence of a Fiduciary Duty

• ERISA assigns to plan fiduciaries “a number of detailed duties and responsibilities, which include ‘the proper management, administration, and investment of [plan] assets, the maintenance of proper records, the disclosure of specified information, and the avoidance of conflicts of interest.’” Mertens v. Hewitt Associates, 508 U.S. 248, 251-52, 113 S. Ct. 2063, 124 L. Ed. 2d 161 (1993).

• Prudence is the core of proper management,

administration, and investment. To fulfill their duty of prudence, fiduciaries must thoroughly investigate the substantive merit of each decision affecting the plan.

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The Essence of a Fiduciary Duty

• Section 404(a)(1)(b) requires a fiduciary to act with the “care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”

• Prudence is an objective and stringent standard characterized as the “highest known to the law.” Donovan v. Bierwirth, 680 F.2d 263, 272 n.8 (2d Cir. 1982).

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• “Flowchart” the process• Identify who carries out each function• Identify any policies needed (e.g., investment

policy statement)• Determine outside assistance needed (e.g.,

investment advisor, RFP)

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Structuring the Fiduciary Relationship

Select Points on Fiduciary Duty

• Prudence, loyalty, disclosure• Corporate officer as plan fiduciary – the “two hat”

issue• Use of and reliance on professionals and other

experts• Regular review and updating of all plan-related

documents

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Prudence in Investments

• Diversification and investment selection

• Portfolio performance and periodic review

• Inclusion and retention of employer stock

• QDIA issues and stable value funds

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Company Stock as an Investment Option in ESOPs and 401 (k) Plans

• Cases arise when – company stock is offered as

investment option in 401(k) or ESOP– company stock suffers dramatic

decline– results in losses to plan participants

who invested in company stock.

• Employees/Plan participants allege fiduciaries breached their duties under ERISA by– offering company stock as an investment

option in the plan when it was imprudent to do so;

– failing to disclose the risks associated with investment in company stock;

– failing to disclose or misrepresenting material information about the company; and

– failing to monitor the conduct of other fiduciaries.


• Case law widely divergent on the merits of these cases– Sims v. First Horizon Nat’l Corp., 47 EBC

2451 (W.D. Tenn. 2009) – Morrison v. MoneyGram Int’l Inc., 46 EBC

1673 (D. Minn. 2009); – Johnson v. Radian Group Inc., 47 EBC 2066

(E.D. Pa. 2009) – In re Citigroup ERISA Litigation, 47 EBC

2025 (S.D.N.Y. 2009) – In re Huntington Bancshares Inc. ERISA

Litigation, 45 EBC 2773 (S.D. Ohio 2009) – Brieger v. Tellabs, Inc., 46 EBC 2569 (N.D.

Ill. 2009)


With Respect To Company Stock

• Consider – Prohibiting Or Freezing Purchases

Of Company Stock– Eliminating Company Stock Fund– Adopting A Trigger Point For

Selling Company Stock

Prudence Regarding Fees

• Reasonable fees generally

• Particular fees to evaluate (e.g., revenue sharing)

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Prudence in Monitoring

• Regularly scheduled monitoring of plan performance (pension and welfare plans) – monthly/quarterly

• Evaluate need for outside expert assistance (investment advisor, broker)

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Procedural Prudence--Documentation

• Need to demonstrate compliance with fiduciary standard

• Document meetings (detailed minutes, all documents received/considered) and retain

• Document benefit claim and appeal decisions – consider MetLife v. Glenn

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Fiduciary Education – The Next Frontier

• The best practice approach to an uncertain future

• Inform those who are fiduciaries

• Train them on their role and related roles of others

• Not time consuming or expensive

• Places fiduciaries in good light for depositions and written discovery responses.

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THANK YOU!

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how to avoid the 502(a) train: protecting your fiduciaries from erisa litigation 1 presented by:...

Documents

actual conflict

structural barriers

benefits decision

structural conflictwe

claims administrators

claims procedures

inaccuracy benefits

deferential standard