Employee Benefits Committee Summer 2013 Newsletter | ABA Section of Labor & Employment Law

ABA Section of Labor and Employment Law



Employee Benefits Committee Newsletter

Issue: Summer 2013

American College of Employee Benefits Counsel Members Discuss

DOL Fiduciary Duty Review of Substantive Investment Decision Making

One of the truly special characteristics of the EBC is that although we are capable of passionate exchanges on topics that would cause most ABA Labor Section members eyes to roll back in their heads, the core principles of collegiality and camaraderie among those with decidedly different perspectives carry the day far more often than not. Those principles are core values for those admitted to the American College of Employee Benefits Counsel (you will see this abbreviated in the listserv address ACEBC). From time to time over on the College's List Serve, an issue will surface that engenders high level spontaneous exchanges of views.

The editors of the EBC Newsletter concluded that it would be a shame if some of those exchanges were not disseminated to a larger audience of practitioners and the original authors of the various posts agreed to republication with the usual caveats that views expressed are individual opinions and not offered on behalf of any organization, client or constituency. Some of the entries have been edited to fit the format, all of them have been scrubbed of their original IRS Circular 230 Notifications and signature blocks have been truncated after the first post. Communications have been reassembled in reverse email thread order to facilitate reading from the top down.

----- Original Message -----
From: Oringer, Andrew [mailto:Andrew.Oringer@dechert.com]
To: 'acebc@listserve.com' <acebc@listserve.com>
Subject: [ACEBC] A.I. Case Against Morgan Stanley and Weyerhaeuser

Further to our discussion the other day of the DOL's willingness to second-guess substantive decision-making, in particular regarding the allocation of investments to more aggressive choices, there now comes the case of Palmason v. Weyerhaeuser Co., No. 2:11-cv-00695-RSL (W.D. Wash. April 26, 2013), in which the court seems willing to second-guess substantive fiduciary decision-making, even to the point of holding an alternatives manager responsible for the plan's overall strategy. The arguable trend (cf. the AFTRA case, Tibble, ABB, etc.) towards second-guessing substance is troubling to me, but it appears to be getting more palpable by the day. I pass the cite along because I was one of the emailers advocating the view that substantive second-guessing should be viewed as inappropriate, and this case may be a sobering counterpoint.

From: David Cook
To: Oringer, Andrew; 'acebc@listserve.com'
Subject: Re: [ACEBC] A.I. Case Against Morgan Stanley and Weyerhaeuser

Well, since the ACEBC includes Plaintiffs' lawyers, as well as plan counsel, the defense bar, and an overwhelming contingent of executive compensation counsel, here's my 2 cents worth as a Plaintiffs' lawyer and Union/Taft-Hartley Funds counsel:

The decision cited is a ruling on a FRCP 12b6 motion to dismiss. It goes purely to the adequacy of the pleadings, and makes no determination on the merits of the fiduciary breach claims. Even after Iqbal and Twombly, courts are going to allow plainly plead complaints to proceed.

According to Keller Rohrback's (lead Plaintiffs' counsel) web-site, the Complaint seeks relief for:

"The Complaint alleges that Defendants breached their fiduciary duties owed to Plan participants by causing or permitting the Plans' Master Trust to invest more than 80% of its assets in alternative investments (including in hedge funds and in private equity), an inherently risky, illiquid and unusual asset allocation. Compounding this misguided allocation of assets, as alleged in the Complaint, Defendants magnified the portfolio's risk with the purchase of derivatives, substantially overshooting their own target for the portfolio's risk. The Complaint further alleges that Defendants knew or should have known that their unique strategy exposed the portfolio to undue risk while conferring no benefit on plan participants in these overfunded pension plans. Additionally, the Complaint alleges that Defendants breached their fiduciary duties by investing in a stunningly large number of alternative investments (approximately 330 different hedge funds, private equity investments, and real estate funds) making it nearly impossible to manage the portfolio's risk and further breached their fiduciary duties by failing to perform adequate due diligence to ensure that the portfolio presented no more risk than the targeted benchmark.

The Complaint concludes that the Plans' inappropriately risky and poorly executed investment strategy caused Weyerhaeuser's pension plan assets (including the Plans' Master Trust) to fall from being overfunded by $2.1 billion at the end of 2007 to being underfunded by $450 million just one year later, thereby jeopardizing the retirement benefits of the Plans' participants and beneficiaries." (emphasis added)

I don't know about you, but in my world (and I represent Union plans, and Taft-Hartley's as well), if these allegations prove to be true, someone's head is going to roll. 80% in hedge funds and alternative investments? Derivatives? Really? When the IPS doesn't permit them? Someone would have to work really hard, or be really bad at investment strategy to lose $2.5 Billion in pension assets in just one year--even in the face of the Great Recession and the stock market crash!

And here I thought ERISA required proper, prudent and appropriate diversification!

David M. Cook
Cook & Logothetis, LLC
22 West 9th Street
Cincinnati, Ohio 45202
513.287.6980 - direct dial
513.721.0444 - office
513.721.1178 - fax

From: Bob Stevenson <bob@skalaw.com>
To: David Cook <dcook@econjustice.com>, "Oringer, Andrew" <Andrew.Oringer@dechert.com>, "'acebc@listserve.com'" <acebc@listserve.com>
Subject: RE: [ACEBC] A.I. Case Against Morgan Stanley and Weyerhaeuser
(Statutory material redacted by EBC Newsletter Editor)

We continue to preach to the choir, I think.

The governing law is above in this email.

Questions of fact seem to involve whether a prudent "man" who is knowledgeable in this kind of investment "enterprise" would have made these investments "under the circumstances then prevailing" (not in hindsight), and whether the investments failed to provide sufficient diversification so as to minimize the risk of large losses. And of course, even if such risk of large losses were presented, was it "clearly prudent" to proceed with the investments nonetheless.

As other writers have previously observed in a predecessor string of emails on a similar issue (in which I believe DOL was second guessing an asset allocation), an analysis of the diversification of the holdings of the complained-about investments would be in order. (On that score, 330 different hedge funds sounds potentially diversified, as far as that goes.) Other investment analysis would also be called for.

I can see where a well-pleaded complaint involving such matters should be allowed to proceed. But that's a long way from finding a fiduciary breach. As this plays out, it will be interesting to see the defense and the attack of the investment strategy here. I have a feeling that the strategy was not some hare-brained scheme concocted over drinks by Morgan Stanley and Weyerhaeuser, but who knows?

I am glad that in today's world, I am not called upon to make investment decisions for a DB plan. Let's face it, it's becoming the rule that plan sponsors dump cash into DB plans yet fall behind in funded percentage, largely due to low interest rates and increasing longevity. (Some day, the interest rate part will turn in a hurry, and we'll be looking at how reversions work again!)

That all said, prudently investing a DB plan is a challenge, and there seem no dearth of ready second-guessers. Which is fine, so long as the second-guessing is based on a sound analysis of ERISA Section 404 and underlying investment modalities, and not on emotion, gut-reactions, and Monday-morning quarterbacking.

P.S. Aren't the years in question also a bit interesting? From 2007 to 2008, the Dow lost 4488.43 points or 33.84% of its value. I'm sure the second guessers here personally knew in advance that such a drop was coming, and had THEY been the plan fiduciaries, things would have been very different. I wish they would have promulgated that knowledge in advance; I admit that I would have benefitted personally.

Bob Stevenson
Stevenson Keppelman Associates
444 S. Main Street
Ann Arbor, MI 48104
Ph: (734) 747-7050 ext. 114
Fax: (734) 747-8010

From: David Cook [mailto:DCook@econjustice.com]
To: Bob Stevenson; Oringer, Andrew;'acebc@listserve.com'
Subject: Re: [ACEBC] A.I. Case Against Morgan Stanley and Weyerhaeuser

Hmmmm . . . I wonder if investing in 330 forms of the same asset class counts as "diversification"?

David M. Cook
Cook & Logothetis, LLC

From: Bob Stevenson <bob@skalaw.com>
Date: Wednesday, May 1, 2013 5:05 PM
To: David Cook <dcook@econjustice.com>, "Oringer, Andrew" <Andrew.Oringer@dechert.com>, "'acebc@listserve.com'" <acebc@listserve.com>
Subject: RE: [ACEBC] A.I. Case Against Morgan Stanley and Weyerhaeuser

In my experience, all hedge funds do not invest identically, in the same assets and with the same hedging strategies.

I would think that there are differences among the 330 funds in this case. But that's why folks do advance investment analysis, and presumably take into account the 404 rules.

I'll bet someone did such analysis in this case, on an advance basis.

Now, it seems, someone is doing it after the fact also.

Too bad we can't invest in advance, but with the benefit of hindsight. Good thing ERISA does not require that advance diligence be as good as hindsight.

Bob Stevenson
Stevenson Keppelman Associates

From: David Cook [mailto:DCook@econjustice.com]
To: Bob Stevenson; Oringer, Andrew;'acebc@listserve.com'
Subject: Re: [ACEBC] A.I. Case Against Morgan Stanley and Weyerhaeuser

Perhaps. But the rules in Section 404 are written for hindsight review . . .

David M. Cook
Cook & Logothetis, LLC

From: Oringer, Andrew[mailto:Andrew.Oringer@dechert.com]
To: David Cook; Bob Stevenson;'acebc@listserve.com'
Subject: RE: [ACEBC] A.I. Case Against Morgan Stanley and Weyerhaeuser

I guess I respectfully disagree that 404 is there for the purpose of hindsight review by the courts of substantive decision-making by fiduciaries.

From: ACEBC On Behalf Of Bob Stevenson
To: 'Oringer, Andrew'; David Cook
Subject: Re: [ACEBC] A.I. Case Against Morgan Stanley and Weyerhaeuser

Well, 404 does set standards, and by definition, if one alleges a breach of those standards, there's going to be an after-the-fact review.

And I guess that part of "substantive decision making" by fiduciaries would involve such things as adequate diversification and general prudence, which amount to ERISA requirements. But all of that is tested "under the circumstances then prevailing" and not "based on what we know happened after the fiduciaries made their decision."

I'm just not ready to substitute some kind of knee-jerk indictment of the decisions here, because, for example:

  • There were 330 different investments
  • They were (OMG!) HEDGE FUNDS!!
  • The plan suffered losses in the otherwise propitious period of 2007-2008 (JK, of course; it may be that this plan lost less than the average similarly situated DB plan.)

In this case, it would seem that plaintiffs must succeed at showing that the investments were imprudent or insufficiently diversified, relative to the decisions that would otherwise have been made by prudent fiduciaries of a similar DB plan, tested based on prevailing circumstantial information as of the date the investment decisions were made. There is room for opinion here. There is also danger of Monday morning quarterbacking. One hopes a court will recognize the difference.

Bob Stevenson
Stevenson Keppelman Associates

From: Hoffman, Susan K.
To: Bob Stevenson; 'Oringer, Andrew'; David Cook;'acebc@listserve.com'
Subject: Re: [ACEBC] A.I. Case Against Morgan Stanley and Weyerhaeuser

And nobody has sued the Central States Trustees for losing the 6 billion that UPS paid just before the crash--probably because only the employers are suffering as a result.

Susan Hoffman, Shareholder
Three Parkway, 1601 Cherry Street, Suite 1400
Philadelphia, PA19102-1321

From: Jeffrey Lewis <JLewis@lewisfeinberg.com>
To: "Hoffman, Susan K." <SHoffman@littler.com>, Bob Stevenson <bob@skalaw.com>, "'Oringer, Andrew'" <Andrew.Oringer@dechert.com>, David Cook <dcook@econjustice.com>, "'acebc@listserve.com'" <acebc@listserve.com>
Subject: RE: [ACEBC] A.I. Case Against Morgan Stanley and Weyerhaeuser


First, I'm not aware that Central States lost the money because of poor decision-making.

Second, if it did and any participant or attorney knew that, you can thank the idiotic decisions by two circuit courts holding that participants in d.b. plans have no standing until after it is too late to do anything about it; i.e., until after their benefits have been cut or stopped.

From: David Cook
To: Jeffrey Lewis; Hoffman, Susan K.; Bob Stevenson; 'Oringer, Andrew';'acebc@listserve.com'
Subject: Re: [ACEBC] A.I. Case Against Morgan Stanley and Weyerhaeuser

Precisely--no damages until the plan is terminated, or goes into Red Zone? The time to remedy the fiduciary breach is before you get to that point . . .

David M. Cook
Cook & Logothetis, LLC

From: Baker, James
To: David Cook; Jeffrey Lewis; Hoffman, Susan K.; Bob Stevenson; 'Oringer, Andrew';acebc@listserve.com
Subject: Re: [ACEBC] A.I. Case Against Morgan Stanley and Weyerhaeuser

Blame Congress.

DB plan members have a right to a certain level of benefits, known as "accrued benefits." 29 USC section 1002(23)(A). Because DB plan members generally have a nonforfeitable right only to their "accrued benefit," the plan's actual investment experience does not affect their statutory entitlement. A decline in the value of a plan's assets does not alter accrued benefits. Hughes Aircraft v Jacobson, 525 US 432, 440 (1999).


James Baker
Attorney at Law
Baker & McKenzie LLP
Two Embarcadero Center, 11th Floor
San Francisco, California 94111-3802, USA
Tel: +1 415 591 3232
Fax: +1 415 576 3099


From: Lee T. Polk
To: Baker, James; David Cook; Jeffrey Lewis; Hoffman, Susan K.; Bob Stevenson; 'Oringer, Andrew';acebc@listserve.com
Subject: Re: [ACEBC] A.I. Case Against Morgan Stanley and Weyerhaeuser

However, the following counterpoint can be made:

It may not affect their "accrued benefit" strictly speaking, but the notions of equity come into play in the fiduciary context, if lousy DB investments place participants at (greater) risk. And the counter-counterpoint would likely emerge: The "appropriate equitable relief" could be very difficult to pin down.

Lee T. Polk | Bio
(312) 499-1432 (direct) | (312) 277-3481 (fax)

150 North Michigan Avenue, 35th Floor | Chicago, IL 60601
(312) 499-1400 (main) |www.ebglaw.com

From: Brustad, Orin D [mailto:brustad@millercanfield.com]
To: 'Lee T. Polk'; Baker, James; David Cook; Jeffrey Lewis; Hoffman, Susan K.; Bob Stevenson; 'Oringer, Andrew';acebc@listserve.com
Subject: RE: [ACEBC] A.I. Case Against Morgan Stanley and Weyerhaeuser

Does anyone think--or know--if a shareholder of the sponsor could file a derivative action for diminution of share value resulting from a fiduciary breach that reduced DB asset value and increased the sponsor's funding obligations? In the context of a solvent corporation, where participant benefits are not jeopardized, it's the shareholders who are the harmed parties. I have looked at Bogert and Scott and found authority to the effect that a settlor has standing in some circumstances to sue for breach of trust. Where the settlor is a public corporation, a derivative suit would be an appropriate method of enforcing the corporation's "settlor rights." This would raise some interesting pre-emption questions. (I have not yet read all the posts on this topic, so if someone else has made a similar point, forgive my redundancy.)

Orin Brustad

From: Bob Stevenson <bob@skalaw.com>
To: "'Brustad, Orin D'" <brustad@millercanfield.com>, "'Lee T. Polk'" <LPolk@ebglaw.com>, "Baker, James" <james.baker@bakermckenzie.com>, David Cook <DCook@econjustice.com>, Jeffrey Lewis <JLewis@lewisfeinberg.com>, "Hoffman, Susan K." <SHoffman@littler.com>, "'Oringer, Andrew'" <Andrew.Oringer@dechert.com>, "acebc@listserve.com" <acebc@listserve.com>
Subject: RE: [ACEBC] A.I. Case Against Morgan Stanley and Weyerhaeuser

Preemption does come to mind. I would think that Congress intentionally limited ERISA causes of action to certain parties-plaintiff, and those don't seem to include shareholders, except insofar as they may be suing in another capacity (participant or fiduciary). And those other capacities would not be the correct plaintiff for a derivative suit. (The only other ERISA plaintiffs are the plan fiduciaries [sue yourself?] or the Secretary of Labor, correct?)

Bob Stevenson
Stevenson Keppelman Associates

From: David Cook [mailto:DCook@econjustice.com]
To: Bob Stevenson; Brustad, Orin D; 'Lee T. Polk'; Baker, James; Jeffrey Lewis; Hoffman, Susan K.; 'Oringer, Andrew';acebc@listserve.com
Subject: Re: [ACEBC] A.I. Case Against Morgan Stanley and Weyerhaeuser

As well as plan participants and beneficiaries

David M. Cook
Cook & Logothetis, LLC

From: Brustad, Orin D [mailto:brustad@millercanfield.com]
To: 'David Cook'; Bob Stevenson; 'Lee T. Polk'; Baker, James; Jeffrey Lewis; Hoffman, Susan K.; 'Oringer, Andrew';acebc@listserve.com
Subject: RE: [ACEBC] A.I. Case Against Morgan Stanley and Weyerhaeuser

Fiduciary actions generally result in recovery by the plan. The derivative action suggestion is not that shareholders would recover for themselves or for the corporation but that the shareholders would seek to enforce an ERISAclaim by the plan against the fiduciaries. So who has standing to bring an action on behalf of the plan? If the sponsor itself does not have standing, I suppose the sponsor could fire the breaching fiduciary and theninvite the successor fiduciary to file on the plan's behalf. Or if the sponsor is plan administrator, could the sponsor in its administrator capacity filea fiduciary claim on the plan's behalf? If a recoverywere made on behalf of the plan, then the sponsor's future contribution liability would be diminished and the shareholders would indirectly benefit. The point is that ifpensions are not put in jeopardy neither participants nor the DoL have much incentive to pursue the fiduciary--particularly in view of the relatively short statute of limitations.

Compiled by James M. Nelson, Greenberg Traurig, LLP

CONTENTS: Opening Page | The Supreme Court Demonstrates Its Predictable Unpredictability in Comcast v. Behrend | Comcast Corporation v. Behrend: Another Obstacle to Obtaining Relief for ERISA Participants? | What The Supreme Court's Decision in Comcast v. Behrend Means for ERISA Class Certification | State-Sponsored Individual Retirement Plans: An Emerging Solution to the Retirement Crisis: Interview with Teresa Ghilarducci | Open Issues Remain for Same-Sex Couples' Employee Benefits Post-Windsor | As We Go To E- Press--A Few Items from the Editors of the EBC Newsletter

American Bar Association Section of Labor and Employment Law
321 N Clark | Chicago, IL 60654 | (312) 988-5813 | Fax: (312) 988-5814