Articles Posted in ERISA

ERISA-DOL Discusses The Selection Of A Default Investment For A Participant-Directed Account Plan

In an Information Letter, the DOL responded to a request regarding the application of ERISA to TIAA’s “Income for Life Custom Portfolios” (the “ILCPs”).  TIAA had represented that the ILCP product meets all the conditions of a “qualified default investment alternative” (a “QDIA”) under ERISA section 404(c)(5) and 29 CFR 2550.404c-5, except that the ILCP contains certain liquidity and transferability restrictions attributable to an annuity component that fail the frequency of transfer requirement described in paragraph (c)(5)(i) of the regulation.  TIAA asked the DOL whether: (1) the ILCPs nonetheless should still be appropriate for a plan fiduciary to select as a default investment alternative, because the annuity component allows the ILCP to provide in-plan access to an investment with a guaranteed rate of return and guaranteed lifetime income at retirement and (2) whether Title I of ERISA prohibits a plan fiduciary from selecting the ILCP as a default investment alternative for a participant-directed individual account plan.

The DOL responded to these questions, by stating that since the ILCPs failed to meet the frequency of transfer requirement in the regulations, the ILCPs could not qualify as QDIAs. Nevertheless, the QDIA regulation, at 29 CFR 2550.404c-5(a)(2) and 2550.404c-5(f)(4), states that the QDIA standards are not intended to be the exclusive means by which a fiduciary might satisfy his or her responsibilities with respect to selection of a default investment for assets in the individual account of a participant or beneficiary.  In the DOL’s view, a fiduciary may be able to conclude, without regard to the fiduciary relief available under ERISA section 404(c)(5) and the regulation, that an investment product or portfolio is a prudent default investment for a plan.

In Reese v. CNH Industrial, N.V., No. 15-2382 (6th Cir. 2017), the trial court had granted summary judgment for plaintiffs, finding they had a vested right to lifetime healthcare benefits.

In this appeal, defendant CNH was asking the Sixth Circuit Court of Appeals (the “Court”) to find that plaintiffs’ right to lifetime healthcare benefits failed to vest. Further, claimed CNH, even if the Court were to find that plaintiffs’ right had vested, CNH believes the district court erred in finding that CNH’s proposed changes were not “reasonably commensurate” with plaintiffs’ current plan.

In analyzing the case, the Court said that this matter is complicated by a change in the law since this long-running litigation began.  In light of M & G Polymers USA, LLC v. Tackett, 135 S. Ct. 926 (2015), which abrogated this circuit’s Yard-Man line of cases, the district court had to revisit the question of whether plaintiffs had a vested right to lifetime healthcare benefits. The court ultimately found that they did. The Court then said that, because we find that the applicable collective bargaining agreement is ambiguous, and because the extrinsic evidence indicates that parties intended for the healthcare benefits to vest for life, the Court affirms the district court’s vesting determination. The Court noted that reasonable changes to the healthcare benefits is permitted even with the vesting, so that remand to the district court is proper, however, because the district court had failed to properly weigh the costs and the benefits of CNH’s proposed plan.

In Saumer v. Cliffs Natural Resources Inc., No. 16-3449 (6th Cir. 2017), the Sixth Circuit Court of Appeals (the “Court”) began by noting that ERISA requires plan fiduciaries to, among other things, manage plan assets prudently and diversify investments so as to minimize the risk of large losses.  For the past forty years, however, ERISA has also encouraged employee ownership of employer stock.  To promote this goal, ERISA permits companies to offer an Employee Stock Ownership Plan (an “ESOP”)—a retirement option designed to invest primarily in employer stock.  Because ESOPs are, by definition, not prudently diversified, Congress fashioned an exemption to these core fiduciary duties: the diversification requirement and the prudence requirement (only to the extent that it requires diversification) of ERISA are not violated by acquisition or holding of employer stock.  In this case, the Court is being asked to reconcile ERISA’s requirement that a fiduciary act prudently with Congress’s blessing of undiversified ESOPs.

In this case, Cliffs Natural Resources (“Cliffs”) is a publicly traded iron-ore and coal-mining company.  Its business depends on the price of iron ore, which in turn depends on Chinese economic growth.  In 2011, Chinese construction projects drove iron-ore prices to all-time highs.  Betting on continued high prices,Cliffs financed the purchase of a mine located in Northern Quebec (“Bloom Lake Mine”). Projecting that the mine would increase cash-flow, Cliffs upped its stock dividend to double the S&P 500 average.  Unfortunately, in 2012, a global demand slump halved the price of iron ore, cutting deeply into Cliffs’s revenue.  The Bloom Lake Mine quickly turned from the company’s lifeblood to, in the words of Cliffs’s CEO, “the cancer that we have to take out.” The mine’s costs exceeded predictions, often by significant margins.  And the company’s decreased revenue and high costs exacerbated its financial weakness.  The market responded: in 2013, Cliffs stock performed worse than any other company in the S&P 500.  All told, Cliffs lost 95% of its value between 2011 and 2015 (compared to a roughly 50% gain for the broader market during the same period).

Plaintiffs are Cliffs employees who participated in the company’s defined-contribution plan, commonly known as a 401(k).  The plan allowed participants to invest in twenty-eight mutual funds, including an array of target-date, stock, and bond funds.  The plan also offered an ESOP that invested solely in Cliff’s stock. Employees enjoyed discretion about whether to invest their income and matching contributions in the ESOP.  If the employee failed to choose an investment option, the fiduciary directed contributions into a money-market fund.  After Cliffs stock cratered, plaintiffs filed a class action claiming that the plan’s fiduciaries—investment-committee members and corporate officers—imprudently retained Cliffs stock as an investment option.  In particular, plaintiffs allege that it was imprudent to continue investing in Cliffs because: (1) the company’s risk profile and business prospects dramatically changed from when the investment was introduced due to the collapse of iron ore and coal prices and Cliffs’s deteriorating financial condition, and (2) the fiduciaries possessed inside information showing that the stock was overvalued.

In Roche v. Aetna, Inc., No. 16-1712 (3rd Cir. 2017) (Non Precedential Decision), Aetna Life Insurance Company (“Aetna”), a health care plan administrator, took the position that Michelle Roche, a plan member, had to reimburse it for medical expenses it paid on behalf of Roche under the relevant benefits plan (since Roche settled with the tortfeasor who injured her, giving rise to those medical expenses).  Roche reimbursed Aetna but then filed this action, contending that she should not have had to reimburse Aetna.  The district court concluded that, before filing this action, Roche needed to exhaust her administrative remedies, and denied her claim.  On appeal, Roche argues that she was not required to exhaust those remedies.

Upon review, the Third Circuit Court of Appeals (the “Court”) held that, because the plan unambiguously requires Roche to exhaust her remedies-which she apparently did not do- the Court will affirm the judgment of the district court.

In Stephanie v. Blue Cross Blue Shield of Massachusetts HMO Blue, Inc., No. 16-1997 (1st Cir. 2017), the plaintiff, Stephanie C. (“Stephanie”), was continuing to seek reimbursement under an ERISA covered plan (the “Plan”) for certain medical expenses connected with the treatment of her teenage son, M.G.  The plan administrator, defendant Blue Cross Blue Shield of Massachusetts HMO Blue, Inc. (“BCBS”), denied the portions of her claim that are now in dispute.  The district court, reviewing the denial de novo, upheld BCBS’s action.  Stephanie appeals.

Upon reviewing the case, the First Circuit Court of Appeals (the “Court”) said that an ERISA plan-such as the Plan here- is a form of contract.  Thus, contract-law principles inform the construction of an ERISA plan, and the plain language of the Plan provisions should normally be given effect.  Seen in this light, the dispositive issue here is not whether M.G.’s course of treatment at Gateway was beneficial to him but, rather, whether that course of treatment was covered under the Plan. Applying the plain language of the Plan, the Court held that the clear weight of the evidence dictates a finding that the disputed medical charges were not medically necessary (as defined by the Plan) and, thus, were not covered.  Accordingly, the Court affirmed the district court’s decision.

Further, to yesterdays’ blog, the DOL had issued earlier FAQs (in December 2012) pertaining to the ERISA claims procedure regulations.  The earlier FAQs are here.  They make one interesting suggestion, that would appear to apply to the prior and new provisions in those regulations relating to disability claims. The earlier FAQs indicate that, when the plan determines whether a participant is disabled, and thus entitled to disability benefits, based on a determination of disability made by a third party (not the plan), then the following obtains: a claim for disability benefits, filed by a participant, is treated as any other claim for pension benefits, and the prior and rules in the claims procedure regulations pertaining to disability claims do not apply.

More specifically, the earlier FAQs say the following, in Q-A9:

“However, if a plan provides a benefit the availability of which is conditioned on a finding of disability, and that finding is made by a party other than the plan for purposes other than making a benefit determination under the plan, then the special rules for disability claims need not be applied to a claim for such benefits.  For example, if a pension plan provides that pension benefits shall be paid to a person who has been determined to be disabled by the Social Security Administration or under the employer’s long-term disability plan, a claim for pension benefits based on the prior determination that the claimant is disabled would be subject to the regulation’s procedural rules for pension claims, not disability claims.”

There is uncertainty about how the Trump administration will ultimately treat the new definition of fiduciary for ERISA purposes, and the related new prohibited transaction exemptions, that have been promulgated by the U.S. Department of Labor (the “DOL”).  Accordingly, the DOL has issued Field Assistance Bulletin No. 2017-01 (the “FAB”), which sets out a temporary enforcement policy for these new rules.  The FAB is here, and says the following.


The FAB announces a temporary enforcement policy related to the DOL’s recent proposal to extend for sixty (60) days the applicability date of:

In DOL Advisory Opinion 2017-01A, the U.S. Department of Labor (the “DOL”) was asked for an advisory opinion, on behalf of the Health Transformation Alliance (the “HTA”), on whether a program of administrative services created by HTA (the “Program”) is an “employee welfare benefit plan” within the meaning of ERISA section 3(1) or a “multiple employer welfare arrangement” (a “MEWA”) within the meaning of section 3(40).

In the Advisory Opinion, the DOL concluded that the Program is not an employee welfare benefit plan.  It said that such a plan does not include a program maintained by an employer (or group or association of employers) which -like the Program here- has no employee participants and does not provide covered benefits to employees or their dependents.  Rather than being established or maintained for the purpose of providing welfare benefits to participants and beneficiaries, the Program operates so as to facilitate the efficient establishment and operation of employee benefit plans by employer-members.

The DOL concluded, further, that the Program is not a MEWA.  This obtains because no component of the Program “offers or provides” any welfare benefit described in section 3(1) of ERISA to the employees of its member-employers.  In addition, the Program does not operate as a MEWA under ERISA section 3(40) because no component of the Program: (1) underwrites or guarantees welfare benefits, (2) provides welfare benefits through group insurance contracts covering more than one employer, (3) pools welfare benefit risk among participating employers, or (4) provides similar insurance or risk spreading functions.  Thus, although section 3(40), unlike section 3(1), does not condition MEWA status on the arrangement being established or maintained by any particular party, in the DOL’s view, offering employer-members the bundle of administrative services the ATA describes does not result in the Program constituting a MEWA, as defined by the statute.

In Hitchcock v. Cumberland University 403(b) DC Plan, No. 16-5942 (6th Cir. 2017), the Plaintiffs were appealing the order entered by the district court, granting the motion of the Defendants (namely, Cumberland University and its 403(b) plan) to dismiss their ERISA claim.  The Sixth Circuit Court of Appeals reversed the district court’s judgment, and remanded the case back to the district court.

In this case, the Plaintiffs were employees of Cumberland University (the “University”), and were participants in its 403(b) plan (the “Plan”).  The Plan is a defined contribution 403(b) plan.  In 2009, the University adopted a five percent matching contribution, whereby the University would match an employee’s contribution to the Plan, up to five percent of the employee’s salary.  On October 9, 2014, the University amended the Plan, retroactive to January 1, 2013, to replace the five percent match with a discretionary match, whereby the University would determine the amount of the employer’s matching contribution on a yearly basis (the “Amendment”).  The University also announced that the employer matching contribution for the 2013-14 year, and for the 2014-15 year, would be zero percent.

With regard to amending the Plan, the 2009 Summary Plan Description (the “2009 SPD”) states that an Employer cannot amend the Plan to take away or reduce protected benefits under the Plan.  That SPD also promises that all Plan Participants shall be entitled to obtain, upon request to the Employer, copies of documents governing the operations of the Plan, including an updated Summary Plan Description.  As of the date of oral argument in this case, January 25, 2017, the University had not produced a summary plan description subsequent to the 2009 SPD, despite Plaintiffs’ repeated requests, and had not provided formal written notice of the Amendment.  The Plaintiffs filed a class action against the Defendants, alleging among other things, an impermissible cutback of benefits and a breach of fiduciary duty, both in violation of ERISA.

In Tussey v. Abb, Inc., No. 15-2792, No. 16-1127 (8th Cir. 2017), a class of employees who participated in ABB, Inc.’s retirement plans-specifically, the “401(k) defined contribution savings plans”- accuse ABB and its agents (collectively, the “ABB fiduciaries”) of managing the plans for their own benefit, rather than the participants’. In an earlier appeal, the Eighth Circuit Court of Appeals (the “Court”) had directed the district court to “reevaluate” how the participants might have been injured if the ABB fiduciaries breached their fiduciary duties under ERISA when they changed the investment options for the plans.

Because the district court apparently mistook that direction for a definitive ruling on how to measure plan losses, and as a result entered judgment in favor of the ABB fiduciaries despite finding they did breach their duties, on this appeal, the Court vacated the judgment on that claim and remanded the case back to the district court for further consideration regarding whether the participants can prove losses to the plans. Because the Court reopened one of the participants’ substantive claims, the Court also vacated and remanded the district court’s award of attorney fees.