There is a new environment facing corporate America when it comes to the administration and management of its tax-qualified, employee pension plans. Many large companies that retained their defined benefit plans moved from conventional defined benefit plans to cash balance plan formulas. Many companies froze their defined benefit plans and instead offered defined contribution/401(k) plans as the sole future vehicle for employee retirement savings. Companies that transition from defined benefit plans to defined contribution/401(k) plans, have many reasons, including as compared to defined benefit plans: the ability to explain retirement benefits to employees in simpler terms; administratively, a simpler plan structure to manage; greater flexibility to offer lump sum distributions to employees leaving the work force; reduced actuarial expenses; the absence of premium payments to the Pension Benefit Guaranty Corporation; and greater employee involvement with the retirement plan because employees are given the flexibility to shift their investments in and out of different investment funds on a 24/7/365 basis.
However, the move to the defined contribution/401(k) plans environment has not been without some "hard knocks" in the form of ERISA litigation. For publicly traded companies, the vast majority of defined contribution/401(k) plans offer an employer stock fund as one of the Plan's many investment options. Most employers match some percentage of employee contributions in the defined contribution/ 401(k) plan in the form of their publicly traded stock. What employers learned was that when their stock prices declined, the balances employees held in the employer stock fund declined as well and the ERISA plaintiffs' bar was poised and ready to take advantage of this situation.
Post-Enron, starting in November 2002, class actions were filed against more than 100 companies who sponsored defined contribution/401(k) plans that had an employer stock fund. The allegations varied, but the theme was that the Directors & Officers knew the company's stock was too risky to be an appropriate investment for a retirement plan. Plaintiffs also alleged defendants failed to act prudently to delete these funds as plan investments when company stock prices fell. These cases have abated somewhat with the recovery of the stock market generally. However, a new type of case has surfaced - litigation attacking the amount of "administrative fees" plans pay to service providers who provide record-keeping services and establish the funds where employees invest their 401(k) dollars. In these "administrative fee" class actions, plaintiffs claim the fiduciaries were "asleep at the switch" because they overpaid plan service providers and failed to get the best "deal" financially for the services rendered.
What was uncommon about these law suits was the identity of the defendants. In the past, plaintiffs sued the fiduciaries who managed the plans, i.e., the plan's administrative committee members or the plan's investment committee members. Now, it has become common for plaintiffs to sue members of the Board of Directors and Officers of the Company. The identity of the defendants, combined with the large potential exposures, caused public companies to take notice of these types of claims.
The question that surfaced naturally was how to insulate Directors & Officers from this type of litigation exposure? One of the keys is the language of the plan document. Frequently, the language of the plan document is difficult to understand and apply. The language delegating responsibilities for critical ERISA fiduciary functions may be imprecise and not well thought out. When defending ERISA class actions in court, the audience is not the typical benefits maven from the company's Human Resources or Benefits Department. Instead, the audience is a United States District Judge who may know little about employee benefits. Thus, the plan design goal should be a document that is simple to read and can be easily understood. This requires a greater focus on the pivotal questions for any plan document: who is charged with what responsibility? Your litigation audience, the United States District Judge, wants to read that plan document only one time to figure that out and does not want to puzzle over what responsibilities a particular Directors & Officer has or does not have.
From the standpoint of plan design, the challenge is clear. Does the company wish to delegate ERISA fiduciary investment and administrative responsibilities to its Directors & Officers? If so, the document should state that clearly and decisively. However, if the company wishes to delegate responsibilities to other levels within the company, such as the Vice President of Human Resources, the Comptroller, the Treasurer, instead of to Board members, the CFO, or the CEO, the plan document must state and define these responsibilities explicitly and with precision. Companies can and do make choices as to who will be assigned responsibilities to administer ERISA plans. The clearer and better thought out these choices are, the more precise is the resulting plan document. With a more precise plan document, the odds improve in litigation to obtain dismissals of defendants who are not actually involved in the fiduciary functions that are the subject of the law suit.
Howard Shapiro is Co-Chair of the ERISA Litigation Group at Proskauer Rose LLP.