SooJin Chun Buzelli Creative Director Portfolio, part 3
sbuzelli@mac.com
O
2008 PLANSPONSOR HRO BuyeR’s Guide
Boundaries HRO seeks a new level set
40 PLANSPONSOR August 2008
IllUStratIon by ChrIS bUzellI
Having long espoused the wisdom of adhering to “core competencies,” Corporate America has, in large part, been unwilling to offload in bulk its commitment to human resources. Consequently, while the outsourcing of human resources functions—HRO as it is commonly referred to—clearly has appeal as a concept, the take-up rates have proved to be relatively modest, certainly compared with the aspirations of providers and the prognostications of the consulting community. If plan sponsors have been reluctant to embrace HRO as an holistic solution, they nonetheless have evidenced a heightened interest in picking and choosing applicable services from what, by any measure, is an impressive and growing list of capabilities. However, what initially was seen as hesitancy to accept the concept (some were inclined to see the hesitancy as a job preservation response) may have a more practical explanation. Mike Wright, HR Outsourcing Sales & Product Development Leader at Hewitt Associates, notes that many clients want to see bottom-line results from their outsourcing efforts quickly. Going with a broader bundled arrangement not only is more potentially disruptive organizationally, with so many moving parts, but also can take longer for cost savings to emerge. “For many organizations, they’re looking at an [outsourced] initiative, and they want to see action more quickly,” Wright says. “When it comes to seeing a [quick]
PLANSPONSOR August 2008 41
O
2008 PLANSPONSOR HRO BuyeR’s Guide
ut of Boundaries HRO seeks a new level set
40 PLANSPONSOR August 2008
IllUStratIon by ChrIS bUzellI
Having long espoused the wisdom of adhering to “core competencies,” Corporate America has, in large part, been unwilling to offload in bulk its commitment to human resources. Consequently, while the outsourcing of human resources functions—HRO as it is commonly referred to—clearly has appeal as a concept, the take-up rates have proved to be relatively modest, certainly compared with the aspirations of providers and the prognostications of the consulting community. If plan sponsors have been reluctant to embrace HRO as an holistic solution, they nonetheless have evidenced a heightened interest in picking and choosing applicable services from what, by any measure, is an impressive and growing list of capabilities. However, what initially was seen as hesitancy to accept the concept (some were inclined to see the hesitancy as a job preservation response) may have a more practical explanation. Mike Wright, HR Outsourcing Sales & Product Development Leader at Hewitt Associates, notes that many clients want to see bottom-line results from their outsourcing efforts quickly. Going with a broader bundled arrangement not only is more potentially disruptive organizationally, with so many moving parts, but also can take longer for cost savings to emerge. “For many organizations, they’re looking at an [outsourced] initiative, and they want to see action more quickly,” Wright says. “When it comes to seeing a [quick]
PLANSPONSOR August 2008 41
nt eme g a n a on M siti n a r T ard For d n a t S A New ets S e v Initiati c g b P E TH
For most pension plans, the short bursts of hard, unpleasant work known as portfolio transitions are an infrequent event—maybe one episode every three or four years, assuming all goes well with the investment managers. So in spite of transitions’ complexity and cost, the typical sponsor can justify assigning an as-needed priority to grasping the finer points of this complicated area. Not so for Charles Millard, Director of the Pension Benefit Guaranty Corporation (PBGC) since December 2007: “When our staff looked at the number of transitions coming from our organic growth and added what we expected from the change in our strategic allocation, we saw that transitions could be taking a lot from our portfolio. With so many providers, and variations in business models and cost structures, I realized that the transition management industry needed a set of best practices.”
34 PLANSPONSOR September 2008
ILLUSTRATION BY Bob Staake
PLANSPONSOR September 2008 35
nt eme g a n a on M siti n a r T ard For d n a t S A New ets S e v Initiati c g b P E TH
For most pension plans, the short bursts of hard, unpleasant work known as portfolio transitions are an infrequent event—maybe one episode every three or four years, assuming all goes well with the investment managers. So in spite of transitions’ complexity and cost, the typical sponsor can justify assigning an as-needed priority to grasping the finer points of this complicated area. Not so for Charles Millard, Director of the Pension Benefit Guaranty Corporation (PBGC) since December 2007: “When our staff looked at the number of transitions coming from our organic growth and added what we expected from the change in our strategic allocation, we saw that transitions could be taking a lot from our portfolio. With so many providers, and variations in business models and cost structures, I realized that the transition management industry needed a set of best practices.”
34 PLANSPONSOR September 2008
ILLUSTRATION BY Bob Staake
PLANSPONSOR September 2008 35
40 3(
b) mspo ee ns t c or oms s pl cra ian m ce ble de to ad lin e
C ( ( b C )ho o im m n i n f (b r g )h o m in d As the January 1, 2009, deadline for compliance with new 403(b) regulations approaches, the industry is seeing some scrambling among plan sponsors. Kevin Watt, Vice President of Business Development, Security Benefit, says plan sponsors have not been focused on the issue of compliance until very recently, and they are generally behind. “We see there is going to be a lot of activity between now and the beginning of the year,� Watt notes. Chris Cumming, Senior Vice President, Great-West Retirement Services, says that, within the K-12 market, approximately 20% are still in the process of plan decisionmaking and sending out and evaluating requests for proposals (RFPs) of vendors. Most school districts have not done RFPs in the past, so the bigger ones are hiring consultants, according to Cumming. However, Faye Godwin, Manager of Retirement Programs, The University of Texas System, covering nine education and six health institutions and more than 90,000 participants, says
16 PLANSPONSOR 403(b) Special Issue 2008
ILLUSTRATION BY Yuko Shimizu
PLANSPONSOR 403(b) Special Issue 2008 17
40 3(
b) mspo ee ns t c or oms s pl cra ian m ce ble de to ad lin e
C ( ( b C )ho o im m n i n f (b r g )h o m in d As the January 1, 2009, deadline for compliance with new 403(b) regulations approaches, the industry is seeing some scrambling among plan sponsors. Kevin Watt, Vice President of Business Development, Security Benefit, says plan sponsors have not been focused on the issue of compliance until very recently, and they are generally behind. “We see there is going to be a lot of activity between now and the beginning of the year,� Watt notes. Chris Cumming, Senior Vice President, Great-West Retirement Services, says that, within the K-12 market, approximately 20% are still in the process of plan decisionmaking and sending out and evaluating requests for proposals (RFPs) of vendors. Most school districts have not done RFPs in the past, so the bigger ones are hiring consultants, according to Cumming. However, Faye Godwin, Manager of Retirement Programs, The University of Texas System, covering nine education and six health institutions and more than 90,000 participants, says
16 PLANSPONSOR 403(b) Special Issue 2008
ILLUSTRATION BY Yuko Shimizu
PLANSPONSOR 403(b) Special Issue 2008 17
winnowing the herd
Vendor consolidation appears inevitable as 403(b) plans respond to new regulations Ask people in the industry what impact the new 403(b) regs will have on plans’ use of vendors, and one word comes up more than any other: consolidation. Investment providers traditionally have marketed their products directly to 403(b) participants, resulting in many 403(b) plans having a dozen or more providers. Says Andy Adams, a founding Principal at benefits-consulting firm Strategic Benefits Advisors Inc. in Atlanta, “They made really good revenues from the business they had, and it was very stable.” However, the new requirement that sponsors oversee plans more carefully seems destined to lead plan sponsors to curb those numbers. “We will see an awful lot of vendor consolidation in this market,” Adams predicts. “The IRS has started this, but pure market competition is going to accelerate it. The vendors that ‘get it’ are going to be the ones that start capturing more and more business going forward, and there will settle out to be a handful of vendors.” Those that shake out as leading providers may compete against each other or may focus on distinct 403(b) market segments, generally delineated as K-12, higher education, and not-for-profit/health care.
24 PLANSPONSOR 403(b) Special Issue 2008
ILLUSTRATION BY Olaf Hajeck
PLANSPONSOR 403(b) Special Issue 2008 25
winnowing the herd
Vendor consolidation appears inevitable as 403(b) plans respond to new regulations Ask people in the industry what impact the new 403(b) regs will have on plans’ use of vendors, and one word comes up more than any other: consolidation. Investment providers traditionally have marketed their products directly to 403(b) participants, resulting in many 403(b) plans having a dozen or more providers. Says Andy Adams, a founding Principal at benefits-consulting firm Strategic Benefits Advisors Inc. in Atlanta, “They made really good revenues from the business they had, and it was very stable.” However, the new requirement that sponsors oversee plans more carefully seems destined to lead plan sponsors to curb those numbers. “We will see an awful lot of vendor consolidation in this market,” Adams predicts. “The IRS has started this, but pure market competition is going to accelerate it. The vendors that ‘get it’ are going to be the ones that start capturing more and more business going forward, and there will settle out to be a handful of vendors.” Those that shake out as leading providers may compete against each other or may focus on distinct 403(b) market segments, generally delineated as K-12, higher education, and not-for-profit/health care.
24 PLANSPONSOR 403(b) Special Issue 2008
ILLUSTRATION BY Olaf Hajeck
PLANSPONSOR 403(b) Special Issue 2008 25
Treasury rules that current law stops financial firms from taking over frozen pension plans, but leaves the door open for legislation to allow it
“The brothel is not yet open, but there is a line of sailors around the block.” That’s one unnamed observer’s comment on the growing number of financial entities—investment banks, private equity firms, insurance companies, and hedge funds—that are looking to position themselves for the next great opportunity in defined benefit investment management: risk transfer. However, a recent Treasury Department ruling underlines that the grand prize will remain elusive a little longer—Treasury has reiterated that current law prevents financial firms from taking over frozen plans, but it also left the door open for legislation to allow it.
38 PLANSPONSOR October 2008
ILLUSTRATION BY CHRIS BUZELLI
PLANSPONSOR October 2008 39
Treasury rules that current law stops financial firms from taking over frozen pension plans, but leaves the door open for legislation to allow it
Outward Bound? “The brothel is not yet open, but there is a line of sailors around the block.” That’s one unnamed observer’s comment on the growing number of financial entities—investment banks, private equity firms, insurance companies, and hedge funds—that are looking to position themselves for the next great opportunity in defined benefit investment management: risk transfer. However, a recent Treasury Department ruling underlines that the grand prize will remain elusive a little longer—Treasury has reiterated that current law prevents financial firms from taking over frozen plans, but it also left the door open for legislation to allow it.
38 PLANSPONSOR October 2008
ILLUSTRATION BY CHRIS BUZELLI
PLANSPONSOR October 2008 39
ILLUSTRATION BY CHRIstopher silas neal
While financial pundits are prone to trace cyclical “corrections” to the bursting of “bubbles”—housing, tech— the resulting declines generally are not that sudden, nor are they, generally speaking, wholly unanticipated. Rather, they are the result of pressures on our financial system that, like geological pressures, often result in earthquakes or the eruption of volcanoes and, like those geophysical manifestations, there are often precursors to the actual “big event” as well as significant aftereffects. It seems fair, even at this relatively early stage, to characterize the recent market upheavals as a “once in a century” event. The Dow Jones Industrial Average fluctuated between 11,500 and 10,600 in September and then slid below the 9,000 mark at press time, while venerable financial institutions such as Lehman Brothers, Merrill Lynch, Washington Mutual, and AIG found themselves in bankruptcy or in need of rescue.
Public pension funds (again) ride out the storm
38 PLANSPONSOR October 2008
ILLUSTRATION BY CHRIstopher silas neal
While financial pundits are prone to trace cyclical “corrections” to the bursting of “bubbles”—housing, tech— the resulting declines generally are not that sudden, nor are they, generally speaking, wholly unanticipated. Rather, they are the result of pressures on our financial system that, like geological pressures, often result in earthquakes or the eruption of volcanoes and, like those geophysical manifestations, there are often precursors to the actual “big event” as well as significant aftereffects. It seems fair, even at this relatively early stage, to characterize the recent market upheavals as a “once in a century” event. The Dow Jones Industrial Average fluctuated between 11,500 and 10,600 in September and then slid below the 9,000 mark at press time, while venerable financial institutions such as Lehman Brothers, Merrill Lynch, Washington Mutual, and AIG found themselves in bankruptcy or in need of rescue.
Public pension funds (again) ride out the storm
38 PLANSPONSOR October 2008
ubprime What are investors to do when bond funds, marketed as investment grade, turn out to be risky? One choice is to make a federal case out of the issue
{ 40 } PLANSPONSOR January 2008
Illustration by Chris Buzelli
urprise
S
When a conservative investment fund suffers a big loss, who’s at fault and who’s responsible? That is at the heart of a controversy involving two institutional commingled trust funds offered by State Street Global Advisors (SSgA), a manager of $2 trillion in passive, enhanced, and active strategies in markets all around the world. During the credit crunch of summer 2007, in particular the subprime mortgage meltdown, SSgA’s Intermediate Bond Fund and Government Credit Bond Fund turned in devastating results for the funds’ owners, which include defined benefit plans and defined contribution plan participants.
A complaint filed in the U.S. District Court for the Southern District of New York states that, during July and August 2007, the SSgA Intermediate Bond Fund lost 12%, while its benchmark earned 3%. The Government Credit Bond Fund lost a stunning 25% for the two months, versus a 2% gain for its benchmark. At the end of August, Prudential Retirement Insurance and Annuity Co., which brought one of several actions against SSgA and its parent, State Street Bank, instructed SSgA to liquidate its clients’ holdings in the funds, generating a loss estimated at $80 million to 28,000 participants in 165 plans. In addition to suing SSgA for breach of fiduciary duties as an investment manager under section 404(a) of ERISA, Prudential aims to recover $80 million in order to make those clients whole.
PLANSPONSOR January 2008 { 41 }
ubprime What are investors to do when bond funds, marketed as investment grade, turn out to be risky? One choice is to make a federal case out of the issue
{ 40 } PLANSPONSOR January 2008
Illustration by Chris Buzelli
urprise
S
When a conservative investment fund suffers a big loss, who’s at fault and who’s responsible? That is at the heart of a controversy involving two institutional commingled trust funds offered by State Street Global Advisors (SSgA), a manager of $2 trillion in passive, enhanced, and active strategies in markets all around the world. During the credit crunch of summer 2007, in particular the subprime mortgage meltdown, SSgA’s Intermediate Bond Fund and Government Credit Bond Fund turned in devastating results for the funds’ owners, which include defined benefit plans and defined contribution plan participants.
A complaint filed in the U.S. District Court for the Southern District of New York states that, during July and August 2007, the SSgA Intermediate Bond Fund lost 12%, while its benchmark earned 3%. The Government Credit Bond Fund lost a stunning 25% for the two months, versus a 2% gain for its benchmark. At the end of August, Prudential Retirement Insurance and Annuity Co., which brought one of several actions against SSgA and its parent, State Street Bank, instructed SSgA to liquidate its clients’ holdings in the funds, generating a loss estimated at $80 million to 28,000 participants in 165 plans. In addition to suing SSgA for breach of fiduciary duties as an investment manager under section 404(a) of ERISA, Prudential aims to recover $80 million in order to make those clients whole.
PLANSPONSOR January 2008 { 41 }
Fiduciary
Forces Plan sponsors looking for help can find plenty in our first-ever list of employee benefits attorneys
You are not in this business very long before you find yourself confronted with—if not confounded by—the law. The Employee Retirement Income Security Act (ERISA) is perhaps most commonly invoked, but there are, of course, others—not to mention a whole sector of employee benefit programs that operate beyond ERISA’s structures. Sadly, you can easily get through law school— and pass the bar—without ever stumbling across much more than a sidelong reference to the laws that guide and direct so much of our daily lives. Fortunately, that does not mean there is a shortage of legal expertise available to plan sponsors—and, in this, our first Employee Benefits Attorneys Guide, you will find a great starting point for some of the best available. While the questionnaire itself was developed by PLANSPONSOR, it is worth noting that it includes a number of categories suggested by online readers earlier this summer—an expanded version is available online at www.plansponsor.com. I’d like to thank the readers who contributed, both by submitting questions and by nominating the firm(s) you work with—and the law firms that participated in this guide. If you have a firm you’d like to nominate for a future guide—or if you are a law firm/ lawyer who missed the call for this issue—please e-mail me at nevin.adams@plansponsor.com. —NEA
48 PLANSPONSOR October 2008
ILLUSTRATION BY JOSh COChRAN
PLANSPONSOR October 2008 49
Fiduciary
Forces Plan sponsors looking for help can find plenty in our first-ever list of employee benefits attorneys
You are not in this business very long before you find yourself confronted with—if not confounded by—the law. The Employee Retirement Income Security Act (ERISA) is perhaps most commonly invoked, but there are, of course, others—not to mention a whole sector of employee benefit programs that operate beyond ERISA’s structures. Sadly, you can easily get through law school— and pass the bar—without ever stumbling across much more than a sidelong reference to the laws that guide and direct so much of our daily lives. Fortunately, that does not mean there is a shortage of legal expertise available to plan sponsors—and, in this, our first Employee Benefits Attorneys Guide, you will find a great starting point for some of the best available. While the questionnaire itself was developed by PLANSPONSOR, it is worth noting that it includes a number of categories suggested by online readers earlier this summer—an expanded version is available online at www.plansponsor.com. I’d like to thank the readers who contributed, both by submitting questions and by nominating the firm(s) you work with—and the law firms that participated in this guide. If you have a firm you’d like to nominate for a future guide—or if you are a law firm/ lawyer who missed the call for this issue—please e-mail me at nevin.adams@plansponsor.com. —NEA
48 PLANSPONSOR October 2008
ILLUSTRATION BY JOSh COChRAN
PLANSPONSOR October 2008 49
Those rumors that the new Congress may kill 401(k) plans may be just that—but Washington appears ready to think about making some substantial changes
Illustration by Gérard dubois
When the U.S. House of Representatives Committee on Education and Labor held hearings in October on the financial crisis’ impact on workers’ retirement security, some people got the message that 401(k)s’ days could be numbered. Teresa Ghilarducci, a Professor of economic policy analysis at The New School for Social Research in New York, gave controversial testimony that some interpreted as calling for the dismantling of the 401(k) system and the substitution of a new mandatory, government-run retirement-savings system for Americans. The committee’s chair, Rep. George Miller (D-California), was quoted as saying that “the 401(k) was never really designed for the retirement reliance that we have on it today. What would be better would be a comprehensive supplemental savings program for retirement, and that’s not the 401(k) program.” Media and blog reports with headlines like “Congressional Democrats Want To Take Away Your 401(k)” followed. However, sources say that Miller subsequently expanded on his thinking in at least one interview after the uproar. “He made it very clear that he is not supporting anything that would take away 401(k) plans,” says Brian Graff, Executive Director and CEO of the Arlington, Virginia-based American Society of Pension Professionals & Actuaries (ASPPA). “He was quite clear that his view is we need to reform the system.” (Efforts to arrange an interview with Miller’s office for this story were unsuccessful. However, in a response to a Wall Street Journal editorial on November 18, Miller said, “I do not support abolishing 401(k)s, forcing these plans into government programs, or changing their tax status. We must preserve and strengthen 401(k)s, not end them.”)
PLANSPONSOR December 2008 39
Those rumors that the new Congress may kill 401(k) plans may be just that—but Washington appears ready to think about making some substantial changes
Illustration by Gérard dubois
When the U.S. House of Representatives Committee on Education and Labor held hearings in October on the financial crisis’ impact on workers’ retirement security, some people got the message that 401(k)s’ days could be numbered. Teresa Ghilarducci, a Professor of economic policy analysis at The New School for Social Research in New York, gave controversial testimony that some interpreted as calling for the dismantling of the 401(k) system and the substitution of a new mandatory, government-run retirement-savings system for Americans. The committee’s chair, Rep. George Miller (D-California), was quoted as saying that “the 401(k) was never really designed for the retirement reliance that we have on it today. What would be better would be a comprehensive supplemental savings program for retirement, and that’s not the 401(k) program.” Media and blog reports with headlines like “Congressional Democrats Want To Take Away Your 401(k)” followed. However, sources say that Miller subsequently expanded on his thinking in at least one interview after the uproar. “He made it very clear that he is not supporting anything that would take away 401(k) plans,” says Brian Graff, Executive Director and CEO of the Arlington, Virginia-based American Society of Pension Professionals & Actuaries (ASPPA). “He was quite clear that his view is we need to reform the system.” (Efforts to arrange an interview with Miller’s office for this story were unsuccessful. However, in a response to a Wall Street Journal editorial on November 18, Miller said, “I do not support abolishing 401(k)s, forcing these plans into government programs, or changing their tax status. We must preserve and strengthen 401(k)s, not end them.”)
PLANSPONSOR December 2008 39
IllUStration by Jordin Isip
Hawaii health insurance mandate an upstream swim for employers With Congress considering whether to make it easier for states to adopt comprehensive health insurance reform in the face of federal inertia, one such experiment that just officially marked its silver anniversary could very well provide a glimpse of things to come. Hawaii’s Prepaid Health Care Act (PHCA) was enacted in June 1974, just three months before the Employee Retirement Income Security Act (ERISA) was signed into law. After a series of court challenges, the U.S. Supreme Court, in 1981, upheld lower court rulings that determined the PHCA was preempted by ERISA. Two years later, Congress enacted a specific exemption to ERISA allowing the PHCA to continue without any substantive changes. Although cited as a model for other states to emulate, the Aloha State is literally an island unto itself concerning this issue—the sole state to have been granted a waiver from ERISA in 1983 when employers were required to cover employees who work at least 20 hours a week. However, no volcanic meltdowns have occurred from an operational standpoint, and very few residents are uninsured at a time when the state is basking in prosperity, though this could be coming at the expense of multistate employers and small businesses.
38 PLANSPONSOR JULY 2008
An Island unto ERISA Waivers
IllUStration by Jordin Isip
Hawaii health insurance mandate an upstream swim for employers With Congress considering whether to make it easier for states to adopt comprehensive health insurance reform in the face of federal inertia, one such experiment that just officially marked its silver anniversary could very well provide a glimpse of things to come. Hawaii’s Prepaid Health Care Act (PHCA) was enacted in June 1974, just three months before the Employee Retirement Income Security Act (ERISA) was signed into law. After a series of court challenges, the U.S. Supreme Court, in 1981, upheld lower court rulings that determined the PHCA was preempted by ERISA. Two years later, Congress enacted a specific exemption to ERISA allowing the PHCA to continue without any substantive changes. Although cited as a model for other states to emulate, the Aloha State is literally an island unto itself concerning this issue—the sole state to have been granted a waiver from ERISA in 1983 when employers were required to cover employees who work at least 20 hours a week. However, no volcanic meltdowns have occurred from an operational standpoint, and very few residents are uninsured at a time when the state is basking in prosperity, though this could be coming at the expense of multistate employers and small businesses.
38 PLANSPONSOR JULY 2008
An Island unto ERISA Waivers
cover story
It’s a Jungle Out There
If there is a Ground Zero in Employee Retirement Income Security Act (ERISA) litigation these days, it surely is the Dirksen Federal Building on Dearborn Street in downtown Chicago. The home of the 7th U.S. Circuit Court of Appeals is where the next battle in the infamous series of revenue-sharing lawsuits will be joined (see “Paying the Price,” PLANSPONSOR, December 2006): Dennis Hecker v. Deere & Company— currently one of the most closely followed pieces of ERISA litigation. A federal judge in Wisconsin tossed the case in June 2007 with prejudice and costs, noting, “[T]he complaint is a rambling 38-page collection long on legal argument, public policy rhetoric, and repetition, but vague in its allegations of facts which might be relevant to the claims alleged.” To no one’s astonishment, the Deere ruling has been appealed—and the 7th Circuit’s ruling could well help determine the future course of plan fee cases, because its eventual decision will directly affect litigation in the three-state area (Illinois, Indiana, and Wisconsin) the 7th Circuit serves. The ruling could, of course, also be relied on as precedent in litigation elsewhere around the country. Since late 2007, the Chicago appellate jurists have been considering assertions by lawyers for a group of Deere 401(k) participants that the farm equipment maker violated ERISA by not properly disclosing revenue-sharing arrangements
with trustee and recordkeeper Fidelity Management Trust Company and Fidelity Management and Research Company, and by imprudently agreeing to the use of funds that charged “excessive” and unreasonable fees. In a friend of the court brief, the ERISA Industry Committee, the American Benefits Council, and the National Association of Manufacturers have said that the Deere workers’ excessive fee claims are vague and contain an “utter lack of substance,” while also broadly labeling similar 401(k) fee cases against large corporations “fishing expeditions.” Still, the Deere appeal is significant because a 7th Circuit decision affirming the District Court’s decision would be a major blow to all of the class-action lawsuits involving big employers, asserts ERISA attorney Jason K. Bortz of the Washington firm of Davis & Harman LLP. “The 7th Circuit is an influential circuit, and this will be the first appellate court to consider the issues that are raised in the class-action lawsuits.” While suits over the excess/improperly disclosed fee issue have generated a good deal of retirement services industry buzz in recent months (the Deere case is but one of more than a dozen similar suits filed since September 2006 by the St. Louis-based law firm of Schlichter, Bogard & Denton), they are only part of a much broader web of potential ERISA legal hazards that plan sponsors must navigate.
ERISA litigation dangers lurk for plan sponsors 30 PLANSPONSOR JULY 2008
Illustration by Olaf Hajek
PLANSPONSOR JULY 2008 31
cover story
It’s a Jungle Out There
If there is a Ground Zero in Employee Retirement Income Security Act (ERISA) litigation these days, it surely is the Dirksen Federal Building on Dearborn Street in downtown Chicago. The home of the 7th U.S. Circuit Court of Appeals is where the next battle in the infamous series of revenue-sharing lawsuits will be joined (see “Paying the Price,” PLANSPONSOR, December 2006): Dennis Hecker v. Deere & Company— currently one of the most closely followed pieces of ERISA litigation. A federal judge in Wisconsin tossed the case in June 2007 with prejudice and costs, noting, “[T]he complaint is a rambling 38-page collection long on legal argument, public policy rhetoric, and repetition, but vague in its allegations of facts which might be relevant to the claims alleged.” To no one’s astonishment, the Deere ruling has been appealed—and the 7th Circuit’s ruling could well help determine the future course of plan fee cases, because its eventual decision will directly affect litigation in the three-state area (Illinois, Indiana, and Wisconsin) the 7th Circuit serves. The ruling could, of course, also be relied on as precedent in litigation elsewhere around the country. Since late 2007, the Chicago appellate jurists have been considering assertions by lawyers for a group of Deere 401(k) participants that the farm equipment maker violated ERISA by not properly disclosing revenue-sharing arrangements
with trustee and recordkeeper Fidelity Management Trust Company and Fidelity Management and Research Company, and by imprudently agreeing to the use of funds that charged “excessive” and unreasonable fees. In a friend of the court brief, the ERISA Industry Committee, the American Benefits Council, and the National Association of Manufacturers have said that the Deere workers’ excessive fee claims are vague and contain an “utter lack of substance,” while also broadly labeling similar 401(k) fee cases against large corporations “fishing expeditions.” Still, the Deere appeal is significant because a 7th Circuit decision affirming the District Court’s decision would be a major blow to all of the class-action lawsuits involving big employers, asserts ERISA attorney Jason K. Bortz of the Washington firm of Davis & Harman LLP. “The 7th Circuit is an influential circuit, and this will be the first appellate court to consider the issues that are raised in the class-action lawsuits.” While suits over the excess/improperly disclosed fee issue have generated a good deal of retirement services industry buzz in recent months (the Deere case is but one of more than a dozen similar suits filed since September 2006 by the St. Louis-based law firm of Schlichter, Bogard & Denton), they are only part of a much broader web of potential ERISA legal hazards that plan sponsors must navigate.
ERISA litigation dangers lurk for plan sponsors 30 PLANSPONSOR JULY 2008
Illustration by Olaf Hajek
PLANSPONSOR JULY 2008 31