Illinois ERISA Lawyer Blog

Illinois Governor Unveils Pension Reform Proposal

Sun, 22 Apr 2012 19:55:00 -0600

State employees in Chicago and the rest of Illinois should closely monitor developments in Illinois pension law reform. Recently, Govern Pat Quinn released a proposal to manage the State's pension woes. The five state pension systems impacted would be the State Employees Retirement System of Illinois, , State Universities Retirement System, Judges Retirement System, the Teachers Retirement System, and the Public School Retirement System (for cities over 500,000 inhabitants).

Currently, Illinois faces $83 billion in unfunded pension liability, largely created by failure to make contributions in the past and declining asset values in recent years. Governor Quinn has cited the increased annual cost of maintaining the pensions, becoming 15% of state expenditures as opposed to 6% several years ago. This increase comes as a result of a few factors, though: retiring baby boomers, and previous failures to adequately fund the plan.

The current proposal aims to achieve full funding within 30 years. In addition to modifying entitlements, it does so by mandating contributions sufficient to achieve full funding status by 2042. One of the reasons the plans are so underfunded is because of the lack of required funding as is present in federal ERISA governed plans. The proposal modifies entitlements in the following ways. Employees must increase their own contribution by 3% of salary. Retirement age is increased to 67. Cost of living adjustments would be capped at the lesser of 3% or half the consumer price index. Also, the adjustments would not kick in until the later of age 67, or five years after retirement. Also, the funding obligation for local schools, colleges, and universities will be shifted to the employer, rather than the state. This last measure will eliminate abuses that have been present whereby the schools would negotiate early retirement for an employee by artificially raising the employee's final earnings, thereby boosting the pension, in exchange for the employee voluntarily leaving the employer early. It was a loophole whereby many schools reduced their own budget by increasing the state's pension obligation.

This proposal has already been criticized by unions as unconstitutional, though it appears to have governmental support. The criticizers, however, have not come forward with an alternative proposal, and have not yet proceeded with a court challenge, as it is not law yet. The state believes it can overcome any unconstitutional challenge because the reform will be "opt in" for any employees. They would have to elect to have the entitlements modified in return for continued retiree health care subsidies from the state. If this proposal becomes enacted, it surely will make its way to the Illinois Supreme Court. In this author's view, with so many employers terminating defined benefit plans in favor of 401(k) style plans, a measure that preserves lifetime income for employees through a sustainable and funded system is a better measure than the plan terminations, freezing, and conversions present in the private sector. If you are a state employee and have questions about how the pension modifications could affect you, contact a pension lawyer.

Fiduciary of Retirement Plans Liable Because of Losses Attributable to Investment in Subprime Mortgage Backed Securities

Fri, 10 Feb 2012 10:27:13 -0600

Millions of Americans have lost a significant amount of their retirement savings due to the collapse of the subprime mortgage backed securities market. While several groups of plaintiffs (either plan participants or other plan fiduciaries) have challenged the prudence of plan fiduciaries' and money managers' decision to expose the plan to risks of those securities, those challenges have largely failed. A recent decision held that Citigroup did not breach its fiduciary duty to its retirement plan participants by leaving its own company stock in its retirement plan after it allegedly knew the stock price would tumble because of the company's heavy exposure to subprime mortgages. In re Citigroup ERISA Litigation, 662 F.3d 128 (2d Cir. 2011). But most recently, following a trial, a judge in New York determined that State Street Bank breached its fiduciary duty to its clients by ignoring stated risk guidelines and failing to diversify the assets in several of its bond funds because those bond funds were between 70% and 80% invested in mortgage backed securities. In re State Street Bank & Trust Co. Fixed Income Funds ERISA Litigation, 2012 U.S. Dist. LEXIS 13556 (S.D.N.Y. Feb. 3, 2012).

This decision is finally some consolation to the plan participants who lost so much money in their retirement savings. Prior cases have been distinguishable, though, because they largely involved claims that an employer imprudently continued to offer its own stock as a retirement investment despite knowing it would lose value. Unfortunately, where a plan explicitly states that offering employer stock is part of the plan, or so "hardwired," many courts imply a presumption of prudence on behalf of the administrator for leaving that stock in the plan, also known as the Moench presumption. While many pension practitioners have long questioned whether the typical retirement landscape today, which has transitioned from the traditional defined benefit pension plan to the individual account structure (such as a 401(k), can really provide the original stated objectives of ERISA--retirement income security. More and more baby boomers are delaying retirement to recoup investment losses because otherwise they will not have enough income to last them through retirement. Is this system really working?

If you have questions about the assets in which your retirement plan is invested and the prudence of such investments, contact an ERISA lawyer.

If You Win Your Disability Case, How Are You Compensated for the Time You Did Not Have Benefits?

Wed, 07 Dec 2011 10:43:01 -0600

Employees in Chicago with an employer-sponsored disability plan who had a claim denied often fear two things: what will they do if they do not get their benefits, what will they do for money until the insurer does pay? Disability cases can drag on, in some cases only being resolved several years after the insurer initially denied a claim. But even assuming your case goes to litigation in court, and you win your case, is merely paying you today what you should have received three years ago really adequate? Often the answer is: no. Courts may, in their discretion, award a prevailing plaintiff in an ERISA case prejudgment interest. A court in California recently did just that. Letvinuck v. Aetna Life Ins. Co., No. 06-2831 (C.D. Cal. Dec. 2, 2011). After Letvinuck successfully appealed her case to the Ninth Circuit, and obtained a reversal in her favor, she moved for prejudgment interest, and the District Court awarded it.

In the judicial circuit in which Illinois sits, the Seventh Circuit, a court presumes prejudgment interest is applicable. Fritcher v. Health Care Serv. Corp., 301 F.3d 811, 820 (7th Cir. 2002). But how much interest do you get? Generally, the court can award prejudgment interest for your losses. But that does not necessarily convert to the amount of interest you had to pay if you borrowed money to make ends meet. It is even more problematic when the plaintiff cannot document the amount of interest he or she actually paid. Sometimes courts will apply the post-judgment interest rate to prejudgment interest. The court can vary from that figure with a showing that the lost investment opportunity (i.e., the rate you could have earned had you invested the benefits) was higher than the statutory post-judgment interest rate. This, of course, raises the complexity of getting compensated for the time you were not paid. But when the compounded sum of past due benefits is a significant number, the mental gymnastics, number crunching, and math-letics may be worthwhile.

If you have a question about your rights and potential recoveries in ERISA litigation, consult an ERISA lawyer.

What Should a Benefits Denial Letter Communicate to You?

Mon, 14 Nov 2011 16:10:40 -0600

Employees who are participants in disability plans sponsored by Chicago area employers frequently call my office after receiving a letter denying a claim for benefits. Often times, the reason for the denial may have been a procedural error by the administrator, preventing it from giving you a "full and fair review", as required by ERISA. The denial letter must explain the reason for the denial, it must reference the specific plan provision upon which the denial is based, and it must describe any additional material or information you would need to submit in order to get the benefits. 29 C.F.R. § 2560.503-1(g)(1).

ERISA imposes a high standard of care upon fiduciaries that make decision on claims. Merely telling claimants they need to submit additional medical records will not typically meet this standard. But even where the administrator fails to meet this standard, the question may arise whether the claim was denied for lack of supporting evidence or not. Such was the case recently in Tortora v. SBC Communications, Inc., 2011 U.S. App. LEXIS 22407 (2d Cir. Nov. 3, 2011). Sedgwick, as claims administrator for SBC's disability plan, denied a claim and stated "You may also submit additional medical or vocational information, and any facts, data, questions or comments you deem appropriate for us to give your appeal proper consideration." The court held that language did not meet the standard imposed by ERISA because it did not provide proper notice of how to perfect the claim. However, according to the denial letter, the medical records submitted were not indicative of disability, so the error was harmless.

If you have received a letter denying your claim for benefits and have questions about whether the denial was proper, call an ERISA lawyer.

Court Held BNSF Did Not Interfere with Railworkers' Pension Benefits

Mon, 07 Nov 2011 15:14:18 -0600

Employees in Chicago and the Midwest often find themselves making difficult decisions with regard to compensation and pension benefits in jobs. Sometimes you must sacrifice lucrative benefits for either better job security, more money, or to even have a job at all. Employers are constantly looking for ways to save money, and sometimes even customers of your employer may look for ways to save money. Recently, a local Teamsters union challenged actions taken by BNSF Railway Company as unlawfully interfering with union members' protected benefits under ERISA. Teamsters Local Union 705 v. BNSF Ry. Co., 2011 U.S. Dist. LEXIS 12750 (N.D. Ill. Nov. 3, 2011).

BNSF cancelled a service contract with Rail Terminal Services, and shortly after Rail Terminal Services discontinued its operations. BNSF then hired many of the former employees of Rail Terminal Services to perform essentially the same work they had done before. The difference was that Rail Terminal Services was subject to a collective bargaining agreement, and the employees were receiving pension, health, and other benefits through the union plan. But when BNSF hired them, it did not provide the same level of benefits, thereby reducing its cost.

The Court held this was not an unlawful interference with the employees' benefits. BNSF's cancellation of the service contract was lawful. Not to say that the action taken by BNSF could never be an unlawful interference with benefits, but in this case the Teamsters did not offer any evidence that BNSF intended to interfere with the benefits.

If you have questions about your employee benefits rights, speak with a lawyer concentrating in ERISA.

Employer's Failure to Provide Departing Employee Forms to Request Distribution Was a Breach of Fiduciary Duty

Mon, 31 Oct 2011 14:04:21 -0600

Employees in the Chicago area who participate in an employer-sponsored 401(k) or profit sharing plan almost never have to ask any questions about how to make contributions to the plan. Upon commencing employment, the employer provides you with paperwork including election forms that will designate how much of your salary you wish to defer into the plan. Most of these types of retirement plans, though, provide that if you leave that particular employer, you can either leave the money in that plan, or request a distribution. The plans typically provide a procedure for requesting a distribution. It is not usually as simple as telling Human Resources you want your account balance out. There will typically be at least one form you must fill out to properly make the request under the terms of the plan. But the question arises: where do you get the form? The answer is that the employer must provide it to you, and a failure to do so could result in the employer's liability for breach of fiduciary duty. Such was the case in Kujanek v. Houston Poly Bag I Ltd., 658 F.3d 483 (5th Cir. Sept. 27, 2011).

Mr. Kujanek left his employer and communicated his intent to take a distribution from the plan. The employer would not distribute the funds, because a distribution required completing a request for distribution form, but the employer would not give Kujanek the form. He contacted the plan's third party administrator to request the form. The administrator contacted the employer, but the employer still would not provide the form. In the meantime, the securities in which Mr. Kujanek's account was invested significantly dropped in value.

The United States Court of Appeals for the Fifth Circuit held that the employer breached its fiduciary duty, and was liable to Kujanek for the difference between the account balance when Kujanek tried to request a distribution, and the time when the distribution finally took place. The employer had a fiduciary duty to provide Kujanek with the forms and tools necessary to properly make his request for distribution, especially when it knew he was trying to make such a request.

If you have experienced problems obtaining a distribution from your plan, speak with an experienced ERISA lawyer today.

Failure to Remove Employer Stock from 401(k) Held Not a Breach of Fiduciary Duty

Mon, 24 Oct 2011 12:34:15 -0600

Employees of Chicago companies who participate in a 401(k) holding employer stock or an Employee Stock Ownership Plan are often attracted to owning stock in their employer because of the significant upside for the staff doing a good job for the employer. You are there at work every day, and you see how the business operates. So you can see how your (and your colleagues') efforts will pay off. But holding employer stock in your retirement plan does not come without its risks. For example, one might say you have all your eggs in one basket. If your employer goes bankrupt, you not only are out of a job, but your retirement savings could be decimated. Fiduciaries of an ERISA retirement plan owe a duty of prudence with respect to the investments in the plan, and failing to take employer stock out of the retirement plan can be a breach of your employer's, or some individuals who make such decisions, fiduciary duties.

Many employer plans "hard wire" the holding of employer stock into the terms of the plan. This means the plan document states one of the purposes of the plan is to hold employer stock. In such cases, the fiduciaries are given a broader deference in their decision over when they should make the decision to stop including employer stock in the plan, a so called presumption in favor of the retention of employer stock being reasonable. The seminal case on that point is Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995). Recently, the Second Circuit Court of Appeals (a significant court that sits in New York City) adopted that rule in Gearren v. McGraw-Hill Cos., 660 F.3d 605 (2d Cir. Oct. 19, 2011). Plaintiffs in that case alleged it was a breach of fiduciary duty for fiduciaries of the McGraw-Hill 401(k) plan to not remove employer stock from the plan when the stock dropped 64% in value following the subprime mortgage crisis. The Second Circuit held that this presumption applies at the pleading stage, meaning it can cause a case to be dismissed if the proper facts are not pled.

Where the plan is subject to the Moench presumption, a plaintiff will generally have to allege that the employer stock faced a dire situation that was foreseeable to the fiduciaries. This is, of course, pretty vague language, and what it means can only be discovered through the case-by-case examples. If you have questions about your retirement plan including your employer's stock, consult an ERISA lawyer.

Seventh Circuit Reissues Opinion on Self Reported Symptoms Limitation in Disability Policy

Mon, 17 Oct 2011 22:19:17 -0600

More and more frequently, employees in Chicago on long term disability through an employer-sponsored disability plan are facing benefit terminations for conditions such as Fibromyalgia and Chronic Fatigue Syndrome because of a so called "self reported symptoms" limitation in the long term disability policy. Insurers more frequently place these limiting clauses in disability policies, assuming they would dispose of all the Fibromyalgia and Chronic Fatigue Syndrome cases within 24 months. But not so fast. After withdrawing its opinion in Weitzenkamp v. Unum Life Insurance Co. of America, the Seventh Circuit Court of Appeals reissued an opinion, again ruling in favor of the claimant, but on different grounds. 2011 U.S. App. LEXIS 19283, 2011 WL 4375637 (7th Cir. Sept. 20, 2011).

I previously covered this opinion, and he suspicion for why the court may have withdrawn its opinion. This time, the Seventh Circuit held that although the limitation on self reported symptoms was a part of the plan, it did not apply in Weitzenkamp's case. The limitation in this policy could be construed one of two ways. Either a limitation that limit applicable to all disabilities where the disabling conditions are self-reported symptoms, as UNUM proposed, or as a limit on disabilities where the diagnosis of the condition is based primarily on self reporting of symptoms. The Seventh Circuit held that the latter construction was more reasonable. With every condition, it is not the condition itself that disables the person, but the pain, weakness, etc. associated therewith that renders the person disabled. To construe the limitation as UNUM suggested would literally cause every disabled person to have his or her benefits limited to 24 months pursuant to one of these clauses. Because in Weitzenkamp's case, the physicians had considered plenty of other data along with the self reported symptoms, the court held the limitation did not apply.

The lesson to be learned from Weitzenkamp is to make sure a doctor treating you for Fibromyalgia or Chronic Fatigue Syndrome runs appropriate tests to rule out other possibilities before diagnosing your condition. If the doctor does so, and your plan has a clause like the one in Weitzenkamp, you may be able to avoid application of such a limitation. If you have questions about a self-reported symptoms limitation, speak with a knowledgeable ERISA attorney.

What to Do if Your Employer Clearly Says It Will Not Pay Your Pension Benefit

Mon, 10 Oct 2011 20:00:32 -0600

Employees in the Chicago area, and elsewhere, come to expect that when their employer sponsors a pension plan, or other type of benefit plan, and promises a benefit, that the employer will honor that promise. That is, unfortunately, not always the case. The first question, though, is what to do about it when the employer, which is usually acting as the plan's administrator, clearly says it will not pay the benefit? The natural inclination is to want to file a lawsuit, and many people have done that immediately, only to be disappointed by having wasted so much time by failing to exhaust administrative remedies. But why should a claimant have to make an administrative claim to the plan when the employer unequivocally states it will not pay a benefit? The Eight Circuit Court of Appeals analyzed this very issue in Angevine v. Anheuser-Busch Companies Pension Plan, 646 F.3d 1034 (8th Cir. 2011).

In Angevine, Anheuser-Busch was the pension plan sponsor and administrator. The plan provided that if the company were sold or there was otherwise a change in control, participants would get an enhanced pension benefit, a 5+5 benefit (i.e., five years of age and service added to the employee's current count). When InBev bought out Anheuser-Busch, the company sent an email out to many employees, including Mr. Angevine, unequivocally stating the enhanced 5+5 benefit would not be paid. Mr. Angevine wished to take early retirement, but rather than making a claim to the plan for the enhanced benefit, he immediately sued in court, arguing he did not need to exhaust any administrative remedies because the plan repudiated its obligation to pay the enhanced benefit.

The Court of Appeals held that Mr. Angevine prematurely filed a lawsuit and was obligated to pursue administrative remedies--filing a claim with the plan, and exhausting any appeals with the plan. There are only two exceptions to the requirement to exhaust administrative remedies: when doing so would be futile, and when there is no administrative remedy to pursue. The plan stated that the way to pursue an administrative remedy is to file a claim for benefits with the plan. Also, the Court held the administrative remedy would not necessarily be futile because although the email provided the participants with an indication of what the plan administrator would do, it was not certain the plan administrator would deny the claims. The repudiation, while causing the claim to accrue and triggering any statutes of limitations, therefore did not provide a third exception to the requirement to exhaust administrative remedies.

If your retirement plan has indicated to you that it will not pay a benefit to which you think you are entitled under the terms of the plan, consult an experienced ERISA lawyer to determine the proper method to handle the claim.

Who Do You Sue Under ERISA When Your Health Insurance Claim is Denied?

Mon, 03 Oct 2011 10:38:37 -0600

Employees of Chicago area employers that participate in an employer sponsored group health insurance plan often assume if and when their claim is denied, they must sue the insurance company. But that is not always the case in litigation under the Employee Retirement Income Security Act of 1974 ("ERISA"). The insurance company is undoubtedly the party with whom the employee or other covered participant has had communications, and received a denial letter from. But the inquiry does not stop there.

In the case of a health insurance plan that is fully insured, meaning the insurance company bears the financial risk, then the insurer will undoubtedly be a fiduciary under the plan. But in the case of large employers, the plan is often self-funded, and the insurance company merely acts as a claims administrator. The question then is whether the insurance company exercised any discretionary authority or control over approving or denying the claim. See ERISA § 3(21)(A).

In Wesson v. Jane Phillips Medical Center & Affiliates Employee Group Healthcare Plan, No. 09-561 (N.D. Okla. Sept. 30, 2011), this issue arose. The plaintiff named BMI-Healthplans, the insurance company acting as a claims administrator, as a defendant. According to the plan document, BMI was merely a "plan supervisor" and would process claims and apply the rules of the plan to claims, but would not have any discretion. If this were true, BMI would be a non-fiduciary third party administrator not subject to liability in a claim for benefits due under the terms of the plan. However, the plaintiff alleged that BMI, despite not being contractually obligated to do so, actually did exercise discretionary authority or control, thereby making BMI a "functional" or "de facto" fiduciary. This just means that if a party does the acts the ERISA statute says makes one a fiduciary, that party is a fiduciary regardless of what any contract says to the contrary.

Despite the allegation, nothing in the administrative record revealed that BMI in fact did anything to make it a functional fiduciary, so the court dismissed all claims against BMI (but not the plan). If you have questions about an ERISA lawsuit, speak to an ERISA lawyer today.

Pension Fund Cannot Terminate Participant's Benefits Because the Employer Stopped Contributing

Fri, 30 Sep 2011 14:50:05 -0600

Employees of Chicago companies that are subject to a collective bargaining agreement ("CBA") frequently wonder what will happen to their pension benefits if the employer goes belly up, or otherwise does not contribute to the pension fund. Sometimes the owners of these small employers are also employees themselves who perform work for the employer, the scope of which is covered b the CBA. The problem is that multiemployer plans depend on contributions from the employers that sign the CBA to fund the benefits the plan promises, so will the plan pay benefits to an employee or owner-employee from a non-contributing employer? The answer is almost always yes, unless the fund must impose benefit restrictions due to its funding level.

Multiemployer plans are permitted to sue noncontributing employers for delinquent contributions under ERISA § 515. But the plan may not withhold benefits from employees, or even owner employees, in order to enforce the plan's right to those delinquent contributions. A court recently reviewed this same principle, where the owner of the business claimed his pension, and the plan would not pay the benefits because his company was delinquent with its contributions. See Rust v. Electrical Workers Local 26 Pension Trust Fund, No. 10-29 (W.D. Va. Sept. 29, 2011). The fund refused to pay Rust's pension claim because his company experienced financial troubles and stopped contributing to the fund on behalf of the employees.

The court held that the fund could not enforce its claim to delinquent contributions in this manner. The proper way to enforce was through ERISA § 515, rather than withholding benefits. This situation is not to be confused, though, with health insurance plan claims to reimbursement and subrogation for expenditures for injuries caused by a third party.

If your pension plan is attempting to set off any benefits payable to you, speak with an experienced ERISA lawyer.

ERISA Breach of Fiduciary Duty for Failing to Notify Profit Sharing Plan Participant of How to Request Distribution

Tue, 27 Sep 2011 13:00:29 -0600

Executives and employees with retirement plans in Chicago, and nearly everywhere else, now change employers with greater frequency than they did 50 years ago. Long gone are the days where you would typically work for the same company your whole career. This is part of the reason for the rise in popularity of the defined contribution plan over the more traditional defined benefit plan: because you can take your account balance with you. But how exactly do you take your account balance with you when you leave your employer?

Employees typically depend on the employer to provide them with information about how to take the distribution or roll the funds over into an IRA, or another employer plan. So what happens when the employer does not tell you how to make the request? This happened recently, and the United States Court of Appeals for the Fifth Circuit held the sponsor breached its fiduciary duty by failing to notify the employee about how to request a distribution of his benefits following the employee's resignation. Kujanek v. Houston Poly Bag I Ltd., No. 10-20664 (5th Cir. Sept. 27, 2011). In that case, after the employee resigned, the profit sharing plan account balance dropped in value, and the decline could have been avoided if the employee knew how to request the distribution earlier. The court thus held the employer was required to make up for the "loss" to the plan (i.e., the drop in that account's balance) because of the breach of fiduciary duty under ERISA § 502(a)(2). Recall, losses to the plan remedies under that subsection can be obtained for a single participant after Larue v. Dewolff, Boberg, & Associates, Inc., 128 S. Ct. 1020 (2008).

Though this case's facts were limited to failure to notify a participant of how to request a distribution following resignation, the same principle could apply to a surviving spouse who is not notified of how to request a withdrawal following the death of the participant spouse. If your employer, or your spouse's employer, has failed to notify you of how to request a distribution, call a skilled ERISA lawyer.

The Only Question in ERISA Fees Litigation Should Be Whether the Fees Are Reasonable

Tue, 20 Sep 2011 14:26:12 -0600

Nearly every employee of any Chicago-based employer is a participant in some sort of retirement plan offered by the employer: pension plan, cash balance plan, or a 401(k) plan. Participants in 401(k) plans rarely know how much in fees the plan (and therefore, the participants) pay to the service providers. New regulations on disclosure of fees to participants will soon take effect requiring plan administrators to disclose fees charged by service providers to the participants in 401(k) plans.

There has been a wave of lawsuits alleging that certain large 401(k) plans pay excessive fees for mutual funds to service providers. The most recent of which is Renfro v. Unisys Corp., No. 10-2447 (3d Cir. Aug. 19, 2011). In that case, there was lengthy battle over whether Fidelity was a fiduciary with respect to selection of plan investments. The court held it was not, and thus a breach of fiduciary claim could not proceed against Fidelity, following the authority of Mertens v. Hewitt Associates, 508 U.S. 248 (1993). However, the Supreme Court also held non-fiduciaries can be held liable under ERISA § 502(a)(3) in order to unwind a prohibited transaction under ERISA. Harris Trust and Savings Bank v. Solomon Smith Barney, Inc., 530 U.S. 238 (2001). Under ERISA, the service provider will invariably be a "party in interest", such that the provision of services must be for a reasonable fee, otherwise it is a prohibited transaction. ERISA § 406(a).

The courts should thus stop inquiring into whether there was a breach of fiduciary duty, and just focus on whether the fees charged were reasonable for the service, and if not the service provider should be liable to the plan for the amount of the fee charged that was unreasonable under ERISA § 502(a)(3). If you have a question about fees your 401(k) plan pays, speak with a competent ERISA attorney.

Spousal Waiver of Survivor Benefit Upheld by Seventh Circuit

Fri, 16 Sep 2011 15:30:00 -0600

Beneficiaries of employer-sponsored retirement plan accounts often find themselves in disputes with each other as to whom is really entitled to the 401(k) or profit sharing plan account balance when the participant dies. Most often, a surviving spouse finds him or herself battling with children from a prior marriage of the deceased spouse. The question both want answered is: what does it take for a surviving spouse to consent to waiving any interest in the benefits? Just such a question came up recently in Chicago before the Court of Appeals for the Seventh Circuit. See Burns v. Orthotek, Inc., Employees' Pension Plan and Trust, No. 10-1521 (7th Cir. Sept. 15, 2001).

In Burns, Dr. Burns was the owner of an orthodontics practice, and the practice sponsored a pension plan, of which Dr. Burns was the plan administrator, named fiduciary, and main plan participant. He died in 2004, but his second wife, Cheryl, survived him. Before his death, Dr. and Cheryl Burns signed three plan documents: Dr. Burns' waiver of a joint and survivor annuity with spousal consent, designation as beneficiaries Dr. Burns' two sons, and Cheryl Burns' consent to the beneficiary designations. After Dr. Burns died, however, Cheryl claimed survivor benefits under the plan. She argued that while she did sign a consent form to the waiver of the joint and survivor annuity and signed the consent to the sons being beneficiaries, the forms did not comply with ERISA's requirement that her signature be witnessed by a plan representative in accordance with ERISA § 205.

That section of ERISA requires that any pension benefit payable in the form of a life annuity must provide for a joint and survivor benefit, and if the participant is married, that form of payment can only be waived if (1) the spouse consents in writing, (2) the election designates a beneficiary, and (3) the spousal consent acknowledges the election and is witnessed by a plan representative. In the Burns case, Cheryl contended that though she signed the consent, it was not witnessed by a plan representative because Dr. Burns did not sign the form as a witness.

The Court of Appeals appeared to weigh the equities of the case here, and held that the "witnessed" requirement did not require that the plan representative actually sign the documents as a witness. Dr. Burns was a plan representative, and signed the forms himself, and admittedly he provided the forms to Cheryl.

If you are a surviving spouse or a beneficiary and have questions about the validity of a spousal consent to designate an alternative beneficiary, talk to an ERISA lawyer.

Seventh Circuit Rejects Argument Again that a 401(k) Plan Paid Excessive Fees for Retail Class Rather than Wholesale Class Mutual Funds

Wed, 07 Sep 2011 10:31:03 -0600

Few employees that participate in an employer-sponsored 401(k) plan question whether the plan is paying excessive fees to the funds it offers as investment options. We often just assume the plan, and the employer, are leveraging the buying power of the large amount of assets held in the plan to secure the lowest possible fees for the participants. But this may or may not be true. One theory advanced in several cases so far is that when the 401(k) plan offers "retail" class mutual funds, rather than "institutional" class funds available at a lower cost, the plan fiduciaries are not meeting their fiduciary obligations. See, e.g., Loomis v. Exelon Corp., No. 10-1755 (7th Cir. Sept. 6, 2011).

The crux of the participants' argument is that where a plan can use its size to negotiate lower fees, or where the same fund is available in both a lower-fee "institutional" class and a higher-fee "retail" class, the fund should opt for the lower cost alternative. The Court of Appeals for the Seventh Circuit, though, has disagreed with this rationale several times now. See, e.g., Hecker v. Deere & Co., 556 F.3d 575 (7th Cir. 2009). The court, however, reasoned that the employer, Exelon in this case, met its obligation because it provided an array of investment options to participants, some with lower fees.

The flaw I see in both the court's reasoning, and the manner in which the participants presented the argument, is that it does not address the overall shift in attitude about plan expenses as the predominant plan type shifted from traditional pension plans to the modern 401(k) plans. In a defined benefit pension plan, participants were promised a certain benefit, and any plan expenses necessarily drove up the employer's cost. The employers therefore were very savvy about paying plan expenses, using the plan's size to leverage the best deals possible. But as we have shifted to the 401(k) being the predominant type of retirement plan, the participants and not the employer bear many of those expenses, such as fund and management fees. Are the employers really using the same level of diligence to defray expenses as they did when the expenses came from their own pockets?

If you have questions about 401(k) plan fees, call an ERISA lawyer today.