Compliance May 29, 2015

Fiduciaries Removed for Misusing Retirement Plan Funds

The Department of Labor filed suit against fiduciaries of a medical corporation’s pension plan for using plan assets for personal expenses, citing multiple violation of the Employee Retirement Income Security Act. 
Reported by

An investigation by the U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) found that Alfred and Judy Chan, the fiduciaries of a pension plan for the employees of their Lakewood, Washington, medical corporation, violated their fiduciary duties to administer the plan prudently and solely on behalf of its participants.

The Chans relocated to Taiwan in February 2011 shortly before an impending indictment for Medicare fraud. Once in Taiwan, Alfred and Judy Chan did not appoint an administrator of the pension plan in their absence, did not file mandatory reports about the plan, and did not give their former employees the pension benefits owed to them.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

Instead, EBSA alleges in a lawsuit, the Chans used the pension plan’s assets to pay for personal debts, personal legal fees and other personal, non-plan expenses and investments. Specifically, the complaint says Judy Chan invested $200,000 of the pension assets in Facebook Stock LLC under a different name to repay a debt. She also took more than $100,000 of the plan assets to pay for personal legal fees, and failed to deposit $31,137 of plan assets into the pension plan’s accounts.

On May 21, the U.S. District Court for the Western District of Washington approved a consent judgment permanently enjoining the defendants from causing any assets to be removed from any account or limited liability company held in the plan’s name. The court has ordered that upon the appointment of an independent fiduciary selected by EBSA, the defendants shall be removed as fiduciaries to the plan and the Chans permanently enjoined from serving as fiduciary or service provider to any employee benefit plan subject to ERISA.

The court also orders that Alfred and Judy Chan shall not recover any amount from the plan unless and until the rest of the participants receive the distributions owed to them in full, which is more than $400,000.

The court’s consent judgment and order is here.

Compliance May 29, 2015

Documentation and Deliberation Remain Critical Post-Tibble

“The main impact of Tibble vs. Edison in my view is that it’s a good reminder that plan sponsors need to sharpen their pencils and look once again at the processes they’re using, both for selection and monitoring of investments,” explains Nancy Ross, partner in Mayer Brown’s litigation and dispute resolution practice.
Reported by

She is talking, of course, about the Supreme Court’s decision in Tibble vs. Edison, a closely followed example of 401(k) fee litigation playing out between a large plan sponsor and a large class of similarly situated participants. Like others interpreting the outcome of the case, Ross feels the recent decision took a modest step to solidify the “ongoing duty to monitor” investments as a fiduciary duty under the Employee Retirement Income Security Act (ERISA) that is separate and distinct from the duty to exercise prudence in selecting investments for use on a defined contribution plan investment menu.

“But what does this mean practically for plan sponsors?” Ross asked during a recent webinar. “First of all, the opinion does little more than state the obvious. We have all known that there is a duty to prudently monitor investments under ERISA, and any plan sponsor serious about the fiduciary duty is already doing this monitoring. The Supreme Court dodged the meat of the question of what the duty to monitor is.”

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

As explained by Ross and another Mayer Brown colleague, Brian Netter, partner in the firm’s Supreme Court and appellate practice, plan sponsors “must have a monitoring practice in place for investments, and they must be able to show they have a well-established monitoring practice.” Beyond this, sponsors need to follow such processes, Ross adds, not just have them written down.

“From this and other cases we have learned that fiduciaries are wise to be able to show there was both deliberation and a decision made for any investment on the menu,” Ross says. “If you don’t have robust deliberation, the court will be suspect as to whether you followed your fiduciary obligations. In the same way, if you have robust deliberation but no clear explanation of why the decision was made, this will also be problematic.”

While Ross and Netter feel the Tibble decision won’t lead to a new string of successful challenges from participants—that doesn’t mean plaintiffs lawyers won’t try to shape the decision into a new wave of litigation.

“The ruling is very narrowly focused on investments and specific duties under ERISA, but it’s very likely the plaintiffs’ bar will use this opinion outside the investment menu and seek to apply it to any number of other issues,” Netter suggests. “The duty to monitor will start popping up as a separate claim … that you failed to monitor a service provider, for example. Or you could be accused of failing to monitor revenue sharing or conflicts of interest. When the Supreme Court speaks, people listen, so there is always an increase in litigation whether the Supreme Court rules to favor plaintiffs or not.”

Despite this attention from plaintiffs attorneys, Netter feels the courts are not particularly interested in drawing a clear line in the sand about what the duty to monitor should look like—a line of commentary that played out directly during argumentation of Tibble before the Supreme Court. During the arguments, Justices Sotomayor and Scalia, for example, expressed similar skepticism about whether the court was in an appropriate position to define something like the duty to monitor, especially whether such matters are still being discussed in other cases before the trial and appellate courts.

Ross warns that plan sponsors must take ownership of all documentation and deliberation processes related to investment selection and monitoring to appease the courts.

“You can’t rely exclusively on advisers or consultants for all of this, and then later claim that you offloaded this fiduciary liability,” she explains. “If you are familiar with the context of Tibble, you’ll know Edison International contracted with a Hewitt Financial Services company for investment consulting advice. That was a good thing to do, but the concern the trial and circuit courts had was that Edison did not do thorough job in reviewing what their consultant was advising.”

Netter says sponsors should fully understand any advisers’ processes, “so that you can know how they reach their conclusions. Are they using the right benchmarks for your plans on performance and fees, for example? Are you comfortable with how they are reaching and documenting their decisions? With the Tibble outcome in mind, the important thing is to show that you debated the pros and cons of an investment selection, even if you have an adviser leading the process.

“The courts know plan fiduciaries are becoming more attentive in this area, and they’ll expect to see strong deliberation and documentation of procedural prudence when it comes to things like investment selection and monitoring,” Netter explains. “The courts want to see evidence that show that fiduciaries were asking the right questions. If you have this evidence, there’s not too much to worry about coming out of Tibble.”

«