Compliance November 3, 2014

Plan Fiduciaries Liable for Mispriced ESOP Stock Purchase

The owner of Bruister and Associates and trustees of its employee stock ownership plans (ESOPs) were found responsible for causing the plan to pay too much for employer stock.
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A U.S. District Court judge has issued a judgment and order requiring fiduciaries to pay more than $6.48 million to the two employee stock ownership plans sponsored by Bruister and Associates Inc. (BAI).

BAI was a home-service provider that installed and serviced satellite-television equipment for its sole client DirecTV. According to a lawsuit filed by the U.S. Department of Labor in U.S. District Court for the Southern District of Mississippi, during a three-year period, from December 2002 to December 2005, Herbert Bruister, the sole owner of BAI, sold 100% of BAI’s shares to the plans for $24 million. In each instance, Bruister and Amy Smith served as trustees to the plans and members of the BAI Board of Directors. Jonda Henry served as trustee for the three purchases tried by the Court.

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According to court documents, Bruister, Smith and Henry, as plan fiduciaries, engaged in prohibited transactions by causing the plans to pay excessive prices for BAI stock purchased from Bruister. For each purchase, the fiduciaries used flawed valuations prepared by Matthew Donnelly and his firm, Business Appraisal Institute.

The court also found that the three fiduciaries breached their duty of loyalty from start to finish. Additionally, Bruister and his attorney David Johanson went so far as to fire the initial attorney representing the plans because that attorney was too thorough. Moreover, the court found that Bruister and Johanson exercised undue influence over Donnelly’s valuations, and that as a result, Donnelly was not sufficiently independent to provide valuations for the plans.

The court concluded that Bruister, Henry and Smith, in their role as plan fiduciaries, failed to properly represent plan participants’ interests, and that they unreasonably relied on an appraiser who so obviously lacked independence. The court reasoned, “An informed trustee would not have remained idle while the seller communicated directly with the employee stock ownership trust’s independent appraiser and financial advisor in an effort to elevate the price at the participants’ expense.”

Although Johanson was not a fiduciary, the court found his conduct worthy of comment because he was both the attorney for the seller and structured each sale. The court noted that Johanson attempted to influence the valuations in Bruister’s favor, and the testimony Johanson gave at trial did not support his denials. The court even noted that Johanson coached Donnelly during a break in his deposition to retract his testimony that Johanson represented Bruister individually. “History rebuts Johanson’s suggestion that he did not interfere with Donnelly’s valuations and raises doubts as to each of the subject transactions,” the court said.

The court’s order requires Bruister, Smith and Henry to jointly pay $4.5 million in restitution to the plans and requires Bruister to pay an additional $1.98 million in prejudgment interest. The order also held Bruister Family LLC liable with all defendants for $885,065 and jointly liable with Bruister for $390,604.

Data & Research October 31, 2014

Amount Needed for Retirement Health Care Dips

Less could be needed to meet health care costs in retirement, according to new modeling by the nonpartisan Employee Benefit Research Institute (EBRI).
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Projected savings targets needed so that the American elderly can cover their health care costs in retirement continue to decline, in part because of enhanced prescription drug coverage provided by the Patient Protection and Affordable Care Act (ACA), EBRI finds in a new report.

Savings targets declined between 2% and 10% between 2013 and 2014, according to the EBRI report, an update of previous computer modeling of retiree health savings needs. For a married couple both with drug expenses at the 90th percentile throughout retirement who wanted a 90% chance of having enough money saved for health care expenses in retirement by age 65, targeted savings fell, from $360,000 in 2013, to $326,000 in 2014.

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In 2014, a man would need $64,000 in savings and a woman would need $83,000 if each had a goal of having a 50% chance of having enough money saved to cover health care expenses in retirement. If either instead wanted a 90% chance of having enough savings, $116,000 would be needed for a man and $131,000 would be needed for a woman.

As the report notes, Medicare beneficiaries can expect to pay a share of their costs out of pocket because of program deductibles and other cost sharing. In 2011, Medicare covered 62% of the cost of health care services for Medicare beneficiaries ages 65 and older, while out-of-pocket spending accounted for 13%, and private insurance covered 15%.

Medicare was never designed to cover health care expenses in full. Individuals over age 65 have to pay for their own deductibles for inpatient and outpatient services, as well as for uninsured costs of outpatient prescription drugs, says Paul Fronstin, director of EBRI’s Health Research and Education Program, and lead author of the report.

As the EBRI report notes, when outpatient prescription drugs were added as an optional benefit under Medicare, the program included a then-controversial coverage gap known as the so-called donut hole. ACA included provisions to reduce the size of this coverage gap. By 2020, enrollees will pay 25% of the cost of prescription drugs when they are in the coverage gap for both generic and brand-name drugs.

Share of Costs Could Rise

However, Fronstin notes, regardless of the effects of the ACA, individuals may pay a greater share of their overall costs in the future because of the combination of the financial condition of the Medicare program and cutbacks to employment-based retiree health programs.

Projections of savings needed to cover out-of-pocket expenses for prescription drugs are highly dependent on the assumptions used for drug utilization, EBRI points out, which is why the analysis provides three sets of estimates: prescription drug use is at the median (midpoint, half above and half below) throughout retirement; prescription drug use at the 75th percentile throughout retirement; and in prescription drug use is at the 90th percentile throughout retirement.

Many individuals will need more than the amounts cited in this report, Fronstin says, because it does not factor in the savings needed to meet long-term care expenses or take into account that many individuals retire before becoming eligible for Medicare. However, some workers will need to save less than what is reported if they choose to work past age 65, thereby postponing enrollment in Medicare Parts B and D if they receive health benefits as active workers.

The report, “Amount of Savings Needed for Health Expenses for People Eligible for Medicare: Good News Not So Rare Anymore,” is published in the October EBRI Notes, online at www.ebri.org.

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