10 ERISA Insights for Employers

The American Conference Institute’s ERISA Litigation Conference was held over two days in October in New York and featured more than 25 in-house counsel, more than 20 federal judges from eight circuits and dozens of ERISA litigation practitioners from around the country. The in-house counsel and judges were the stars of the show, providing insights for employers who wish to prepare for ERISA litigation—or better yet, avoid it. Here are my top 10 insights from the conference, along with brief explanations of how they might be of help to your company and your plan’s fiduciaries. Following these practical suggestions will greatly improve your company’s chances of avoiding ERISA litigation, and winning any such litigation that is filed.

1. Make the most of the administrative claims appeal process: The record from your claims-appeal process can be your best defense—or your Achilles heel—when the litigation hits. Involve your lawyers in the appeal process, so they can help you reach the correct decision, consider all of the relevant issues and create the best record possible. The record should include all relevant documents, and the denial letter should describe clearly any and all reasons the claim is being denied, as well as the specific plan terms at issue. Always comply with the deadlines and procedures established by the claims regulations.

2. Coordinate and communicate with your third-party vendors: Several of the in-house counsel at the conference discussed the importance of ensuring you are on the same page as your third-party administrators, particularly if they are involved in the claims process. Make sure they know your plan and how you have interpreted it in the past. Articulate respective roles clearly. Consider a training session or an audit of their claims files to ensure that you are in agreement and well-coordinated with regard to the handling of claims.

3. Create facts lessening the “conflict of interest” identified in the U.S. Supreme Court case Glenn v. MetLife: Perhaps the most-discussed topic at the conference was the U.S. Supreme Court’s 2008 decision in Glenn v. MetLife. The justices’ remarks in that case suggest that a “structural” conflict of interest exists anytime the employer pays for a benefit and its employees are the ones who decide the final appeal.

Both judges and in-house counsel focused on this topic, as it is of tremendous concern to employers. Some panelists suggested screening the fiduciaries from any compensation incentives based on appeals decisions, including any ties between the fiduciaries’ personal compensation or bonus and the value of the employer’s stock or the company’s performance.

Others suggested creating a record in the employees’ personnel evaluation and review process that makes it clear they are expected to follow their fiduciary duties and not deny claims out of hand or improperly. Providing fiduciaries with training and guidance regarding their fiduciary duties may be helpful, as would be the involvement of outside attorneys in the role of counsel to the fiduciaries—not as counsel to the company. This would lend independence to the process. Several of the judges indicated that they are allowing more discovery into facts surrounding the conflict issue, so employers should anticipate such discovery and focus on building a positive factual record that lessens the chance of the “conflict” having any actual impact on the fiduciaries’ decisions.

4. Educate the judge: Many of the judges at the conference indicated that when it comes to ERISA litigation, they rely on counsel to educate them as to the issues and the law. Although they see many individual benefit claims, they are often unfamiliar with the specific issues and law involved in the class-action claims involving such elements as employer stock, 401(k) fees and defined-benefit plans. Several judges recommended that attorneys request oral argument as an opportunity to further educate them on the arguments and law at issue. They also recommended thorough research and a more scholarly approach to briefs, recognizing that the area is likely to be less familiar to the judge.

5. Prepare for the “employer stock-drop case”: Employers that have company stock in their plans can and should take a number of steps to protect themselves. For example, plan documents should make it absolutely clear that including the employer stock in the plan is mandatory and not a matter of discretion for the plan fiduciaries. Along the same lines, it is a good idea to designate the employer stock in the plan as an ESOP. Consider removing the board of directors from any role in appointing the plan’s fiduciaries, thus avoiding them being sued as co-fiduciaries and for failure to monitor their appointees. The summary plan description and the prospectus for the company stock should be entirely separate documents, and public filings should not be incorporated by reference into the summary plan description—only do so in the separate prospectus. Be sure to tell employees in the summary plan description that the employer stock is the riskiest investment option, because it is a single security and inherently undiversified. Demand that plan fiduciaries pay attention to the stock in the plan, and create a record of procedural due diligence surrounding the stock. Finally, if trouble or crisis looms, consider engaging help—both outside counsel to advise the fiduciaries and an independent fiduciary if critical inside information could create conflicts of interest.

6. Be diligent in monitoring and evaluating plan fees: One of the hottest new trends in ERISA litigation is cases that accuse fiduciaries of being asleep at the switch—or worse—when it comes to plan fees. Know what fees are paid by the plan, how service providers and vendors are compensated, and whether there are any fees shared by the plan’s mutual funds with them. Periodically evaluate how the plan’s fees compare with the market, and make sure you are getting the lowest fee class of share possible for your plan. Stay on top of the new and proposed legislation and regulations regarding disclosure of fees, and consider complying with them even before they are implemented.

7. Be diligent in monitoring your plan’s investments: Another area of increasing litigation is the performance of plans’ investments. Employer stock is not the only type of investment that spawns fiduciary litigation, particularly in a down economy. Claims against investment managers and others are increasing, and due diligence concerning your plan’s investments is vitally important.

Plan fiduciaries should have the requisite investment expertise, and document the procedural steps taken to monitor and track the performance of the plan’s investments. Consider meeting quarterly. Establish an investment policy with benchmarks and other objective elements, and having established such a policy, be sure to follow it. Meet with investment managers periodically, and monitor changes in personnel, style or makeup of the fund. Do not be hesitant about removing a fund that consistently underperforms its peers or that fails to meet the benchmarks you have established.

8. Know whether you have the attorney-client privilege: A common mistake of employers (and many benefits attorneys) is assuming the attorney-client privilege will apply, even if the communications at issue may be subject to the fiduciary exception to the attorney-client privilege. Be sure to consider and document who the client is for a particular engagement, and even for a particular communication. In significant instances, such as a claims appeal that has far-reaching consequences, consider hiring separate outside counsel for your plan fiduciaries who are not the company’s normal benefits counsel. Make sure the plan is not paying counsel’s fees for communications in which you might want to claim the attorney-client privilege.

9. Make sure your ERISA fiduciaries are covered by insurance: One of the panels featuring in-house counsel also included representatives of carriers who provide fiduciary liability insurance. There, and throughout the conference, the need for adequate insurance was mentioned repeatedly. Consider the size of your plan and its investments when selecting a level of coverage, and always understand the policy you are buying. Special endorsements for claims involving employer stock, combined limits with directors and officers coverage, the “benefits-due exclusion” and other terms can have a huge effect on the adequacy of the protection you are buying. You want to make sure your plan’s fiduciaries are well protected, since ERISA imposes personal liability on individual fiduciaries.

10. If hit with ERISA litigation, hire an ERISA litigator: Early in the conference, one of the in-house counsel was asked what was more important when considering who to hire to defend an ERISA litigation matter: ERISA expertise or litigation skills? The response was that both are necessary, in the person of someone who knows the substantive law of ERISA and also has the necessary litigation experience and skills to get the best result. As this area of litigation has grown, firms have developed ERISA litigation specialists who focus their practice exclusively in this area. Employers would be well-advised to look into the specifics of the ERISA litigation experience of the counsel they are considering for their ERISA litigation matters.

The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion. Also remember that state laws may differ from the federal law.