Andrew S. Williams
We have an award winner for 2018: Florida eye doctor Samuel Poppell.
In McLain v. Poppell, it was alleged that Dr. Poppell, owner of the Emerald Coast Eye Clinic and trustee of its 401(k) plan with total investment discretion, invested plan assets primarily in VirnetX, a publicly traded company whose principal business was acting as a “patent troll” (a company that acquires patents and uses them primarily to sue other businesses for alleged patent infringement).
Dr. Poppell’s investment decisions were based on his personal review of internet message boards. His investment acumen resulted in a loss of more than one-half of the plan’s asset value in a single year as the VirnetX stock cratered.
In response to participant complaints about these investment losses, Dr. Poppell allegedly threatened to terminate the plan as its VirnetX investment continued to lose money. Dr. Poppell’s next response, as participants continued to complain, was to terminate their employment!
Dr. Poppell was able to settle the suit filed by participants against him for about 25 percent of the plan’s total investment losses. However, the Department of Labor subsequently intervened and required Dr. Poppell to compensate participants for the balance of their aggregate losses.
So, for his complete disregard for his fiduciary duties to his employees and his related retaliation against participants who had the temerity to complain, Dr. Poppell is our 2018 ERISA Hall of Shame “honoree.”
Fiduciaries of 401(k) plans need to engage and rely on their professional advisors – you can’t just wing it when it comes to plan investment decisions.
Andrew S. Williams
Whether you are an accountant, lawyer, banker, business consultant or investment advisor, many of your business clients will have a 401(k) or other qualified retirement plan. You may not specialize in retirement plans, but consider the following as the kinds of things you might do to assist your clients and prospects with their retirement plans:
- Introduce your client to responsible third party administrators (TPAs), investment advisors, record keepers and, if necessary, ERISA counsel
- Make sure your client has an investment policy statement and uses it as a basis for investment decisions
- Your client should meet at least twice a year with an investment advisor to discuss the plan’s investment funds – and document those discussions
- Encourage your client to maintain fiduciary liability insurance (not to be confused with the plan’s required ERISA fidelity bond!)
- See that your client has participants sign a release when they receive benefit distributions (see Howell v. Motorola, Inc.)
- Suggest that your client include low cost index funds as 401(k) investment selections to provide a defense to claims of excessive costs or poor performance on other fund selections (see Divane v. Northwestern University)
- Encourage your client to use independent ERISA counsel to assure confidentiality of sensitive information (the company’s lawyer has a confidential attorney-client relationship only with the company, not the plan or its fiduciaries)
Andrew S. Williams
There are judicial decisions holding that a business owner can be personally responsible when the owner has control over company finances and exercises such authority by paying company creditors instead of making required payments to a welfare benefit plan. But a recent decision of the U.S. Court of Appeals for the Ninth Circuit holds that an employer does not become an ERISA fiduciary merely because it breaks its contractual obligations to make welfare plan contributions (see Glazing Health & Welfare Fund v. Lamek).
In the Lamek decision, the Court considered whether or not unpaid contributions could be considered “plan assets” so that parties in control of those assets would be deemed fiduciaries to the plan. The Court found that:
…even an ERISA plan that treats unpaid contributions as plan assets does not make an employer a fiduciary with respect to those owed funds.
This is good news to plan sponsors, especially those who contribute to union sponsored health and welfare funds. Under Lamek, parties to an ERISA plan cannot by contract designate unpaid contributions as “plan assets” in order to make employers plan fiduciaries. However, not all circuit courts agree with the Ninth Circuit and employers in the Second Circuit (New York, Connecticut and Vermont) and the Eleventh Circuit (Alabama, Georgia and Florida) should be wary of collective bargaining agreements that define unpaid employer contributions as plan assets. Other circuit courts such as the Court of Appeals for the Seventh Circuit in Chicago have not yet ruled on this issue. It may eventually take a Supreme Court decision to resolve the conflict among the circuit courts. Until then, there will be no nationwide judicial resolution of this matter.
The Ninth Circuit decision is a favorable development for employers in California and the other West Coast states included in the Ninth Circuit. For the rest of the country, it’s wait-and-see what happens in the circuit courts – or the U.S. Supreme Court.
Andrew S. Williams
Many of us have believed that every ERISA plan must have both a plan document and a summary plan description (“SPD”). An SPD is required for all ERISA plans in order to explain them in plain English. ERISA also requires subject plans to have a “written instrument” and it is the usual practice, for retirement plans in particular, to have both a plan document and an SPD.
In the absence of a separate plan document, can a plan’s SPD itself also satisfy the ERISA “written instrument” requirement? A recent decision of the Firth Circuit Court of Appeals (Rhea v. Alan Ritchey, Inc. Welfare Benefit Plan) says yes.
Because many insured group health plans have no documentation other than an SPD, this decision may provide a defense to employers who are sued because their group health and other welfare plans are documented only by an SPD and, therefore, are alleged to fail to meet ERISA’s so-called “plan document” requirement.
In reaching its decision in Rhea, the Fifth Circuit rejected arguments that the defendant’s SPD was deficient because it referenced a separate, non-existent “plan document.” The Court also found that the SPD’s short hand description of procedures for amending the plan and its funding arrangement satisfied applicable ERISA requirements.
Although the decision in Rhea recognizes the reality that most sponsors of insured group health plans do not have a separate plan document, note that many of those plans do not even have an SPD. This is because their insurance company has provided only an insurance company “certificate of coverage.” That type of documentation as well as SPDs that lack all the required provisions are not covered by the decision of the Court in Rhea.
Sponsors of insured group health plans with only an SPD and not a separate plan document can relax – but only if their SPD’s satisfy the applicable ERISA “written instrument” requirements. Also bear in mind that there are other reasons to have a separate plan document. SPDs are prepared by insurance companies and may not include optional provisions that plan sponsors frequently include in separate plan documents. Also, more employers are adopting “wrap plan” documents that consolidate all of their welfare benefits such as group health, group life and group disability plans into a single plan to allow ERISA annual reporting on just one Form 5500.