ERISA Litigation Update - October 2012

The U.S. Court of Appeals for the Sixth Circuit affirmed a district court decision dismissing claims brought by a participant in a defined contribution plan against his employer for losses incurred when his plan account was transferred from a stable value fund to a life cycle fund that qualified as a QDIA. The case is Bidwell v. University Medical Center, Inc., 685 F.3d 613 (6th Cir. June 29, 2012).

In Bidwell, the plan allowed participants to allocate their plan accounts among various investment funds made available under the plan, including a stable value fund. The plaintiff elected to allocate 100% of his plan account to the stable value fund. At the time of the plaintiff’s election, the stable value fund also served as the plan’s “default” fund – i.e., if a participant failed to make an investment election the entirety of his account would be invested in the stable value fund.

In 2008, the employer maintaining the plan decided to change the plan’s default fund from the stable value fund to a life cycle fund. This decision was made in light of regulations adopted by the DOL in 2008 under ERISA Section 404(c)(5), 29 U.S.C. § 1104(c)(5). Those regulations provide a safe harbor from potential ERISA fiduciary liability (the “Safe Harbor”) in specified circumstances: if certain conditions are met, a fiduciary of a plan that provides for participant direction of investments is not liable for any loss that is the direct and necessary result of investing all or part of a participant’s account in a QDIA. A “QDIA” is defined to include (among other things) a life cycle fund that satisfies certain requirements. In general, the Safe Harbor protection applies if (i) the participant’s account is invested in a QDIA; (ii) the participant has an opportunity to provide investment direction, but does not; (iii) the participant receives specified notices and materials relating to the QDIA; and (iv) the participant has the ability to direct investment out of the QDIA as frequently as from other plan investments.

In establishing the life cycle fund as the QDIA under its plan, the employer in Bidwell decided that all amounts invested in the prior default fund – the stable value fund – would be transferred to the new QDIA unless the participant specifically directed that his plan account should remain in the stable value fund. The employer mailed the notices required by the QDIA regulations, specifically noting the deadline for participants to direct that their plan accounts should continue in the stable value fund. However, the plaintiff maintained that he never received this notice. Because the plaintiff did not direct otherwise, his account was transferred from the stable value fund to the QDIA. When he discovered this, the plaintiff immediately transferred his account back to the stable value fund, but his account had lost $85,000 during the time it was invested in the QDIA.

The plaintiff filed a claim under the plan’s administrative claims procedure, but that claim was denied. He then sued the employer in federal district court alleging that the transfer was a violation of the employer’s ERISA fiduciary duties. The district court dismissed the claim as a matter of law (based on the administrative record), holding that the employer was entitled to protection from liability under the QDIA Safe Harbor.

On appeal, the Sixth Circuit affirmed. First, the Court of Appeals rejected the plaintiff’s argument that the QDIA Safe Harbor applies only in situations where a participant has never made an investment election with regard to the funds invested in the QDIA, and should not protect a fiduciary in a case where the participant had originally provided an investment direction (as the plaintiff had in directing investment in the stable value fund). Based on the language of the regulation and DOL’s explanation in the regulation’s preamble, the court concluded that the Safe Harbor is available whenever a participant has the opportunity to direct investment and fails to do so.

Second, the Sixth Circuit disagreed with the plaintiff’s assertion that the employer’s transfer of accounts from the stable value fund to the QDIA was not governed by the Safe Harbor and constituted an independent breach of the plan document. The court determined that the transfer fell within the plain words of the regulation’s Safe Harbor language. Further, the court found that authority of the employer under the plan document to establish rules for plan administration and to direct investment of a participant’s account where no election is made reasonably included the power to require participants to confirm their investment direction or have their account transferred to a new investment fund such as the QDIA.

On September 26, 2012, Judge Hall of the U.S. District Court for the District of Connecticut certified a class in an ERISA case alleging breach of fiduciary duty and prohibited transactions against an insurance company in connection with revenue sharing practices under group annuity contracts issued to administrators of defined contribution retirement plans. The case is Healthcare Strategies, Inc. v. ING Life Ins. & Annuity Co., No. 11-282 (D. Conn.).

The suit was brought by a plan administrator who purchased a group annuity contract issued by ING Life Insurance & Annuity Company (the “Insurer”). Under the contract, the Insurer offers administrative services and makes available to the plan a platform of investment options. The Insurer’s investment platform is made up of sub-accounts that in turn invest in underlying mutual funds. The Insurer selects the funds in which the sub-accounts invest, and retains authority to change the funds available on the platform, including by removing funds. The Insurer also receives revenue sharing from certain of the funds in which the sub-accounts invest.

The plaintiff alleges that the Insurer is an ERISA fiduciary because of its control over the selection of investment options for the platform and that it breached its fiduciary duties and engaged in prohibited transactions by using that control to obtain revenue sharing payments for its own benefit. The plaintiff further alleges that revenue sharing payments received from investment options are plan assets. The plaintiff moved to certify a class consisting of all plan administrators who hold group annuity contracts issued by the Insurer in connection with which contracts the Insurer has received revenue sharing payments.

In opposing class certification, the Insurer argued that factual and legal issues concerning whether the Insurer was an ERISA fiduciary and whether revenue sharing payments were plan assets were not amenable to common proof and required plan-by-plan examination. The Insurer also argued that it could not be an ERISA fiduciary with respect to the selection of investment options for plans because it merely creates a menu of options that the contractholder (i.e., the plan administrator or other relevant plan fiduciary) can choose or reject for its plan.

The court rejected these arguments. The court was not persuaded that, because the Insurer provided contractholders notice of fund changes, ultimate decision-making authority was reserved to the contractholders. The court concluded that contractholders did not have the ability to reject fund changes and keep their current investment options. Accordingly, the court held that, for class certification purposes, the Insurer was an ERISA fiduciary because it had a contractual right to delete or substitute mutual funds from its menu, which gave it discretion over the administration of the plan sufficient to render it a fiduciary with respect to its receipt of revenue sharing in exchange for inclusion of certain funds on its platform. The court further held that the plaintiff had identified a common issue as to whether the Insurer had used plans assets in its own interest or for its own account by accepting revenue sharing payments.

Finding that these issues predominate across the class as required under Rule 23(b)(3), and that the plaintiff had otherwise met the Rule 23(a) requirements, the court granted the motion to certify.

A year after the Supreme Court decided CIGNA Corp. v. Amara, courts continue to weigh the impact of that decision, particularly the scope of the available remedies against breaching fiduciaries under ERISA’s “catch-all” provision, Section 502(a)(3), which authorizes “other appropriate equitable relief.”  Because Amara held only that a different section of ERISA – Section 502(a)(1)(B) – did not provide a remedy for plan disclosure violations, its discussion of the relief available under the catch-all provision was seen by the Amara concurrence and commentators as dictum, as we reported in the June 15, 2011 ERISA Litigation Update, available here. On July 5, 2012, the Fourth Circuit Court of Appeals weighed in by adopting Amara’s dictum, holding that ERISA’s catch-all provision allows wide-ranging relief against breaching fiduciaries, including a surcharge (“make-whole relief”) and equitable estoppel. Its decision is McCravy v. Metropolitan Life Insurance Company, 690 F.3d 176 (4th Cir. 2012).

The facts of McCravy are straightforward, though tragic. The plaintiff participated in her employer’s life insurance and accidental death and dismemberment plan. She filed a claim for benefits upon the untimely death of her 25-year-old daughter. The defendant insurer denied coverage because the policy provided only for benefits for dependent children up to age 19, or age 24 if the child was enrolled as a full-time student. The plaintiff sued the insurer under multiple provisions of ERISA, including Section 502(a)(3). The district court ruled that the insurer had violated fiduciary duties, but that under Section 502(a)(3) the plaintiff was entitled only to the premiums wrongfully retained by the insurer.

Before the Amara decision was announced, the Fourth Circuit had affirmed the decision of the district court, limiting the remedy available to the plaintiff under Section 502(a)(3) to the premiums paid to the insurer. Joined by the DOL as an amicus curiae, the plaintiff urged reconsideration, which the Fourth Circuit granted after Amara. The Fourth Circuit began its opinion on reconsideration by noting that, “[b]efore Amara, various lower courts, including this one, had (mis)construed Supreme Court precedent to limit severely the remedies available to plaintiffs suing fiduciaries under Section [502(a)(3)].”  It agreed, however, that Amara was “a striking development,” that “expanded the relief and remedies available to plaintiffs asserting breach of fiduciary duty under Section [502(a)(3)].”  The Fourth Circuit specifically held “that remedies traditionally available in courts of equity, expressly including estoppel and surcharge, are indeed available to plaintiffs suing fiduciaries under Section [502(a)(3)].”  Accordingly, it reversed the district court’s decision on the plaintiff’s claim and remanded the case to the district court to determine the appropriate remedies to which the plaintiff would be eligible.

The Fourth Circuit summarily rejected the argument that Amara’s discussion of the relief available under Section 502(a)(3) should not be controlling because it was dictum. It stated that even if the Supreme Court’s discussion of the relief available under ERISA’s catch-all provision was dictum, it could not “simply override a legal pronouncement endorsed just last year by a majority of the Supreme Court.”

Pension & Investments Annual West Coast Defined Contribution Conference
November 4-6, 2012
San Francisco, CA

Jamie Fleckner will present at this conference.

Thomson Reuters 25th Annual ERISA Litigation Conference
November 8, 2012
New York, NY

Jamie Fleckner will provide an ERISA litigation update at this conference.