November 8-9, 2007 Washington, D.C.

Transcription

1 297 ALI-ABA Course of Study Conference on Life Insurance Company Products Current SEC, FINRA, Insurance, Tax, and ERISA Regulatory and Compliance Issues November 8-9, 2007 Washington, D.C. ERISA Disclosure and Fiduciary Issues for Financial Service Providers: Recent Developments Concerning Fees and Revenue Sharing in Bundled Services Products By Hartford Life Insurance Company Simsbury, Connecticut

2 298 ERISA Disclosure and Fiduciary Issues for Financial Service Providers Recent Developments Concerning Fees and Revenue Sharing in Bundled Services Products INDEX I. INTRODUCTION The Hartford II. III. IV. THE CURRENT ENVIRONMENT DISCLOSURE UNDER ERISA: LEGAL REQUIREMENTS AND EVOLVING REGULATION SUMMARY OF ERISA FIDUCIARY RESPONSIBILITY PROVISIONS FOR INSURERS AND OTHER FINANCIAL SERVICE PROVIDERS V. FIDUCIARY DUITIES VI. VII. PROHIBITED TRANSACTION RESTRICTIONS SUMMARY OF SOME NOTABLE STATUTORY EXEMPTIONS VIII. SUMMARY OF SOME IMPORTANT ADMINISTRATIVE EXEMPTIONS IX OVERVIEW OF PROHIBITED TRANSACTION ISSUES PRESENTED BY REVENUE SHARING ARRANGEMENTS IN BUNDLED SERVICES PRODUCTS X. FIDUCIARY LIABILITY 1

3 299 ERISA Disclosure and Fiduciary Issues for Financial Service Providers Recent Developments Concerning Fees and Revenue Sharing in Bundled Services Products The Hartford I. INTRODUCTION This outline summarizes a number of recent developments concerning fees paid by retirement plans and compensation arrangements of plan service providers. It also contains a survey of important disclosure and fiduciary responsibility provisions under Title I of the Employee Retirement Income Security Act of 1974, as amended ( ERISA ), which have particular relevance to financial service providers offering bundled services products to participant-directed defined contribution plans. A bundled services product is an arrangement under which an employer establishing or maintaining a retirement plan ( plan sponsor ) may purchase all of the administrative, custodial and investment related services necessary for the establishment and operation of the plan in one package offered by a single service provider or an alliance of service providers. II. THE CURRENT ENVIRONMENT Today s market-place for defined contribution plan investment products and services reflects considerable pressure due to the heightened scrutiny of retirement plan fees and compensation arrangements among plan service providers by the trial bar, Congress and regulatory authorities. On the one hand, plan sponsors are challenged to perform greater due diligence to understand fees and potential conflicts of interest from service provider compensation arrangements in bundled service products. On the other hand, plan service providers continue to strive to find the most useful ways to disclose fees and potential conflicts of interest. A. Recent Defined Contribution Plan Revenue Sharing Litigation Some of this pressure is a by-product of numerous pending lawsuits filed primarily under ERISA that name plan sponsors, plan service providers or both as defendants. These lawsuits allege various breaches of fiduciary duty and prohibited transactions based on allegedly excessive service provider compensation and/or investment related fees paid by the plan. 2

4 Summary of the Litigation against Plan Sponsors Over a dozen lawsuits have been filed by plan participants against plan sponsors as putative class actions on behalf of a class of the plan s participants and beneficiaries. Eight of these cases were filed against various plan sponsor defendants on the same day (September 11, 2006) by one law firm, Schlichter, Bogard & Denton of St. Louis Missouri. 1 In other cases, the complaints name both the plan sponsor and a service provider as defendants. 2 Common allegations in these cases are that the defendant plan sponsor breached its fiduciary duty under ERISA to the plan s participants and beneficiaries, and engaged in prohibited transactions under ERISA, by causing or allowing the plan to enter into agreements with service providers under which the plan paid directly or indirectly fees and expenses that were unreasonable and/or not incurred solely for the benefit of participants and beneficiaries. Most cases identify two categories of fees: Direct hard dollar payments from the plan to service providers, and Indirect revenue sharing payments to service providers from third parties. A number of the complaints contain substantially identical definitions of the term revenue sharing, broadly defining the term as:... the transfer of asset-based compensation from brokers or investment management providers (such as mutual funds, common or collective trusts, insurance companies offering GIC s, and similar pooled investment vehicles) to administrative service providers (recordkeepers, administrators, trustees) in connection with 401(k) and other types of defined contribution plans. 3 The claims and allegations related to revenue sharing have received the most attention. These claims appear to advance a theory that the fees paid by the plans are unreasonable 1 See Abbott v. Lockheed Martin Corp., No. 3:06-cv MJR-DGW (S.D. Ill.); Beesley v. International Paper Co., No. 3:06-cv DRH-CJP (S.D.Ill); Kanawi v. Bechtel Corp., No. 3:06-cv CRB (N.D.Cal.); Loomis v. Exelon Corp., No. 1:06-cv (N.D.Ill.); Martin v. Caterpillar, Inc., No. 2:06-cv SOW (W.D. Mo.) (transferred to C.D. Ill as No. 1:07-cv JBM); Taylor v. United Technologies Corp., No. 1:06-cv (N.D. Ill.) (refiled as No. 3:06-cv WWE (D.Conn. Sept. 22, 2006); Waldbuesser v. Northrop Grumman Corp., No. 1:06-cv (N.D. Ill) (refiled as No. 2:06-cv RJC (C.D. Cal. Sept. 28, 2006); and Will v. General Dynamics Corp., No. 3:06-cv WDS-CJP (S.D. Ill.). 2 See for example, Hecker v. Deere & Company et al, No. 06-C-0719-S (W.D. Wis. Filed Dec. 8, 2006), (All defendants motion to dismiss granted June 20, 2007); Kennedy v. ABB, Inc. et al, No.,2:06-cv NKL (W.D. Mo. Filed Dec. 29, 2006); Renfro v. Unisys Corp. et al, No (E.D. Pa. May 23, 2007). 3 See for example, Abbott v. Lockheed Martin Corp. No. 3:06-cv MJR-DGW (S.D. Ill.) at 71. 3

5 301 and excessive because they are allegedly inflated by revenue sharing payments to the plan s service providers. The complaints contain a number of additional allegations related to fees and payments, including revenue sharing. Based on these allegations, the cases typically claim that the plan sponsor breached its fiduciary duties under ERISA by failing to: Monitor the fees and expenses paid by the plans; Establish, implement and follow procedures to determine whether the fees and expenses were reasonable and incurred solely for the benefit of the plans; and Discover, disclose and stop the charging of allegedly hidden and allegedly excessive fees to the plan. Overall, the litigation has contributed to an environment of concern and confusion among plan sponsors as to how best to perform a diligent review of the fees and compensation arrangements in the bundled services products that they purchase and maintain for their plans. Activity in these cases so far has been largely procedural. However, in one case, Hecker v. Deere & Company, the court granted the defendants motion to dismiss. In its decision regarding the plaintiffs claim of failure to disclose revenue sharing payments, the court observed that nothing in ERISA requires that a plan sponsor or other plan fiduciary disclose revenue sharing to plan participants: A review of the [the ERISA Advisory Counsel Report of the Working Group on Plan Fees and Reporting on Form 5500] confirms that the revenue sharing issue raised by plaintiffs complaint is a matter of policy concern within the Department of Labor. It also unequivocally confirms that present regulations do not require disclosure of the information. See particularly the report s Recommendations for Regulatory Change at p. 8. Whether, as a policy matter, additional reporting of revenue sharing arrangements should be required, it is not presently required and failure to include such information does not violate existing ERISA standards for disclosure. Accordingly, defendants failure to so disclose is not a violation of the present statute [or] regulations and does not state a claim for breach of the duty of disclosure. 4 Additionally, in dismissing the plaintiffs claim for breach of fiduciary duty for allegedly providing investment options with excessive fees, the court in Hecker found that the defendants could rely on the defense from liability for investment losses under ERISA Section 404(c), which is available to plan fiduciaries in plans where participants exercise control over the assets in their accounts. Responding to the plaintiffs argument that the Section 404(c) defense should not be available to the defendants because the defendants 4 Hecker v. Deere & Co., No. 06-C-719-S (W.D.Wis. June 21, 2007) at page 10. 4