Employee Benefits & Executive Compensation Blog

The View from Proskauer on Developments in the World of Employee Benefits, Executive Compensation & ERISA Litigation

ERISA Plan Participants Cannot Proceed As A Class In Challenging EpiPen Prices

Four ERISA plan participants, who participated in four different ERISA plans, commenced an ERISA class action against four of the nation’s largest pharmacy benefit managers (PBMs), alleging that the PBMs breached their fiduciary duties by failing to ensure that the plaintiffs and other plan participants received the benefit of discounts that the PBMs had negotiated with Mylan Pharmaceuticals, a company that markets and sells EpiPens.  As a result of the alleged breaches, the plan participants argued that they were forced to pay excessive prices for EpiPens through their respective plans.

In a blow to the plaintiffs’ case, a federal judge in Minnesota recently denied their motion for class certification of four nationwide classes—one class for each PBM.  In so ruling, the court concluded that class certification was not appropriate because plaintiffs could not satisfy Rule 23’s commonality requirement.  The court determined that it would need to examine the terms of each plan to determine (i) whether each PBM was a fiduciary, (ii) if a PBM was a fiduciary, whether the PBM breached its fiduciary duty, and (iii) how to measure any losses.  The court explained that many plans required the PBMs to pass along 100% of any discount to the plan and it was therefore each plan’s decision to pass on such discounts to the plan participants.  The court also explained that each PBM’s contract with Mylan Pharmaceuticals differed markedly, both in terms of the services provided and whether a PBM passed through a percentage or the entire amount of the Mylan discounts, which would in turn determine the amount of profits that would be subject to forfeiture.

The case is In re: EpiPen ERISA Litig., No. 17-1884 (PAM/HB) (D. Minn. Aug. 5, 2020).

Terminating a CEO for Cause

Terminating a CEO “for cause” requires that the board of directors (“Board”) of the employer focus on two questions – What is the applicable standard for cause? Do the facts and circumstances satisfy this applicable standard?

The consequences of a “for cause” termination can be severe, with the former executive forfeiting equity awards, having to repay previously paid incentive compensation (the “claw-back”), losing severance benefits and having vested stock repurchased at a punitive price. Reported circumstances of cause terminations are infrequent. Often this is because the battle takes place in confidential arbitration proceedings or disputes are settled confidentially, after the “cause” card has been played.

In recent years though there has been increasing shareholder activity focusing on high level executive compensation matters. This has included shareholder challenges to decisions by the Board to terminate an executive without cause, and pay large severance amounts rather than dismiss the CEO for cause. The issue arose back in the 1990’s when Michael Ovitz and Disney parted ways, and again more recently when the board of lululemon athletica inc. decided to pay severance rather battle with its former CEO over a cause termination.[1]

CEO “for cause” terminations, however, do exist. That was the case when American Apparel terminated its CEO in December 2014.  Just recently, a public company (Akazoo S.A.) terminated its CEO for cause and affirmatively stated so in its public filings with the Securities and Exchange Commission (“SEC”).[2] Modern Media Acquisition Corp. S.A., a special purpose acquisition company (“SPAC”), acquired Akazoo (an on-demand streaming subscription company) (the “Company”) in late 2019. After the acquisition, in early 2020 a hedge fund released a report questioning the Company’s accounting practices.

On May 1, 2020, Akazoo filed a Form 6-K with the SEC stating that it had fired its CEO “for cause.” [3] In its May 1, 2020 press release (an exhibit to the Form 6-K) announcing the firing, the Company stated that its Board took such action based on the recommendations of a Special Committee, “which  found  evidence of conduct [by the CEO] that the Special Committee believed was inconsistent with the Company’s policies, including lack of cooperation with the investigation.” There was no mention in the May 1, 2020 filing of the CEO engaging in fraud, only that there was a continuing investigation of “the circumstances relating to the Company’s revenue sources and contractual arrangements….”

By May 21, 2020, the Company filed another Form 6-K. By this time the internal investigation had proceeded to the point where the Company stated that its Special Committee had determined that “former members of Akazoo’s management team and associates defrauded [its] investors…. by materially misrepresenting [the Company’s] business, operation and financial results as a part of a multi-year fraud (emphasis added).”

These two filings show how the Company navigated the “cause” issue during a fluid internal investigation into accounting fraud. We were not involved in the case and our analysis is based on our careful review of the public disclosure as it unfolded in May, 2020.  As of May 1, 2020, the Company felt compelled to terminate its CEO for cause, but relied on activity “inconsistent” with Company policies, including a lack of cooperation, as the basis for its publicly announced determination.  Note that the Company’s employment agreement with its CEO contained a cause definition that included “willful acts that materially injure (whether financially or otherwise) the business or reputation of the company.” That prong of the cause definition would appear to apply to a “multi-year” financial fraud- the problem was that there may not have been enough evidence of the CEO’s involvement in the fraud as of May 1, 2020 to trigger a cause termination for that reason. But fortunately for the Company there was also another prong in the cause definition, “willful failure, disregard, or refusal to follow directions from the board of directors.” One surmises that this is the contractual “prong” relied upon to terminate the CEO, with the disclosure on May 1, 2020 carefully constructed not to directly state that the CEO was being terminated for his involvement in the multi-year financial fraud.[4]  By May 21, 2020, after the investigation proceeded, the Company affirmatively stated in its disclosure that it had discovered multi-year fraud but at that point, the Company had already terminated the executive for inconsistent activity and lack of cooperation stated above.

The recent Akazoo public filing is an interesting example of a relatively rare public disclosure of a CEO “cause” termination, and it evidences the value of having a cause definition that includes additional “prongs” (such as a willful refusal to follow Board directives) that can be used as an internal investigation of fraud unfolds. Continuing shareholder litigation focusing on executive compensation will pressure Boards to consider “cause” terminations if circumstances warrant, but as the Akazoo disclosure evidences, the exact “cause” trigger and its related public disclosure will also require attention and care.

One final note-a recent case involving Exide Technologies (“Exide”) serves as a cautionary counter-point to the careful approach taken in the Akazoo case. In late 2018, Exide terminated its CEO and at the time he was told he was being terminated “obviously without cause” and presented with a term sheet that referenced his severance payments. In February, 2019, as the separation documentation was being finalized, the now former CEO was advised that his termination had been “reclassified” to a cause termination. The asserted grounds for cause was that the former CEO had failed to apprise the Board about the interest of a Chinese buyer in acquiring an idle factory and had failed to pursue the sale (allegedly he had “dropped the ball”), when Exide was in a liquidity crisis and could have benefited from the sale proceeds. As a result, Exide viewed his conduct as constituting “gross negligence” (and cause) under Delaware law.

The former CEO took Exide to arbitration and prevailed in an award rendered in January 2020, with the arbitrator finding that the conduct in question did not meet the Delaware cause standard for “gross negligence,’ in that it did not show “reckless indifference to or deliberate disregard of the whole body of stockholders, or actions which are without the bounds of reason.” Instead, the arbitrator reviewed the circumstances and identified numerous factors that mitigated against finding for Exide (the Chinese buyer was equivocal and sent mixed messages about purchasing the factory, the Board had expressed reluctance to sell the factory to a competitor, the Board had establish other priorities for the CEO and the “reclassification” appeared contrived and pressured by creditors of Exide).

Not everything works out in the end. In May 2020 Exide filed for bankruptcy under Chapter 11, which turned the victorious former CEO into an unsecured creditor, with an arbitration award that may be worth very little in bankruptcy.

*Special thanks to summer associate, Morgan Peterson, for her assistance on this blog*


[1] Shabbouei v. Potdevin, 2020 WL 1609177 (Del. Ch. Apr. 2, 2020) (court rejected the plaintiff’s claim and held that the directors acted reasonably in their decisions to separate the executive other than for cause).

[2] Akazoo was a foreign private issuer, with its stock traded on NASDQ. However, in June, 2020, NASDAQ announced the delisting of the Company from the exchange.

[3] Because Akazoo was a foreign private issuer, it used a Form 6-K, rather than a Form 8-K.

[4] There have been other examples of senior executives being terminated for cause related to their failure to cooperate with reasonable investigative demands in connection with a company’s investigation of wrongdoing.


American Airlines 401(k) Plan Not Required To Offer Stable Value Fund

Among the many claims brought by plaintiffs challenging investment offerings in defined contribution plans is the claim that plans should offer stable value funds in lieu of more conservative capital preservation funds, such as money market funds and deposit accounts that are insured by the U.S. government.  Plaintiffs have argued that stable value funds are inherently better than more conservative options because they typically provide a higher rate of return.

A federal district court in Texas recently dismissed this type of claim in a case brought against American Airlines.  Ortiz v. Am. Airlines, Inc., No. 16-cv-151, 2020 WL 4504385 (N.D. Tex. Aug. 5, 2020).  In this particular case, the American Airlines 401(k) plan offered a credit union fund, which was sponsored and managed by American Airlines Credit Union (“AA Credit Union”), and was fully guaranteed by the U.S. government up to $250,000.  Two plan participants argued, among other things, that American Airlines and the plan’s investment committee breached their fiduciary duties of loyalty and prudence, and violated ERISA’s prohibited transaction rules, by selecting and retaining this fund instead of a stable value fund.  Their claims were based on the higher rate of interest available from stable value funds, without regard to the investment risk presented by stable value funds relative to the credit union fund or the fact that stable value funds would not have had the government guarantee.  The plan participants also brought claims against AA Credit Union, arguing that it breached its fiduciary duties by improperly benefitting from the allegedly unreasonable rate of return for the credit union fund.

Although the Court denied an initial motion to dismiss these claims, it subsequently granted defendants’ motion for summary judgment following discovery.  Specifically the court held that:

  1. Since stable value funds carry more risk than a guaranteed deposit fund, the two products “are not simply interchangeable.” Accordingly, a difference in expected return is not sufficient to establish that choosing the more conservative fund was imprudent.
  2. To establish a breach of fiduciary duty, plaintiffs were required to show that no reasonable fiduciary would have included the credit union fund in the plan. In light of the differences between stable value and a guaranteed deposit fund—particularly the risk profile—the plaintiffs failed to meet this burden.
  3. To establish a breach of fiduciary duty, plaintiffs needed to provide a more meaningful benchmark fund, g., other demand deposit account funds, from which the court could evaluate the decision to retain the Credit Union Fund despite interest rates that plaintiffs claimed were “abysmally low.”

The court also dismissed the claims against the AA Credit Union.  First, it rejected the argument that AA Credit Union became a functional fiduciary simply by accepting and holding deposits into the credit union fund.  Second, the court held that plaintiffs’ failed to show that AA Credit Union dealt with plan assets for its own interest by reinvesting some of the credit union fund’s deposits through loans to AA Credit Union customers as this is standard practice for financial institutions and at all times the amounts deposited in the credit union fund were available for withdrawal.

Although the court addressed the merits of all of the claims, it had initially concluded that plaintiffs did not have constitutional standing to pursue their claim that defendants breached their fiduciary duties by failing to include a stable value fund in lieu of the credit union fund.  In so holding, the court explained that the harm derived from the failure to offer a stable value fund would be speculative at best because:  (i) plaintiffs offered no evidence that they would have chosen a stable value fund had one been provided; and (ii) when a stable value fund option did become available in the plan neither participant took steps to invest in the fund.

Proskauer’s Perspective

The court’s decision in Ortiz v. American Airlines is notable for the court’s willingness to look past allegations that focused solely on interest rates and to dig deeper into fund characteristics that can make it prudent to select and hold a fund with a lower expected return.  Particularly where the fund’s purpose is to preserve capital—and not to achieve long-term returns—a prudent fiduciary might favor the protection of conservative underlying investments and/or a government guarantee over a higher interest rate.  The decision also reinforces a trend in the courts requiring plaintiffs to provide meaningful benchmarks in support of claims of imprudence.

SEC Cracks Down on Retirement Fund Advisers’ Undisclosed Compensation and Conflicts

In August 2020, the SEC issued two orders against VALIC Financial Advisors Inc. (VFA) related to VFA’s management of 403(b) and 457(b) plans. These matters arise out of two of the SEC’s enforcement initiatives, the Teachers and Military Service Members’ Initiative and the Share Class Selection Disclosure Initiative. VFA is a registered investment adviser and broker-dealer with approximately $21.1 billion in assets under management and services defined contribution retirement plans for Florida public school teachers, among other plans. These two orders follow a sweep of letters sent by the SEC in fall of 2019 to several third-party administrators and affiliates, including broker-dealers and registered investment advisers that work with 403(b) and 457(b) plans. While these actions are the first to come out of the SEC’s Teachers’ Initiative, they are unlikely to be the last.

Read the full post on our private equity litigation blog, The Capital Commitment.

Side by Side Comparison: Electronic Disclosure Rules for Pension & Welfare Plans

The DOL recently provided retirement plans with a new method to comply electronically with certain participant disclosure and notice requirements. See our blog post outlining the new DOL rule. This new method adds to the previously issued DOL safe harbor and the IRS rules.  Below is a side-by-side general comparison to help plan administrators keep track of when each method may be used, and what requirements must be met. Plan administrators should consult with counsel on the details of any electronic disclosure procedures to verify compliance with all applicable rules.

A few caveats to this framework:

  • This chart could evolve in the future. The preamble to the new DOL pension rule noted the agency’s ongoing study of the future application of these rules to welfare plans. It also gave a nod to the IRS’s stated intent to issue more guidance regarding electronic delivery.
  • There is additional flexibility during the COVID-19 national emergency. DOL guidance provides some leniencies in applying various ERISA deadlines and requirements during the national emergency if a plan administrator takes good faith action to furnish notices, disclosures or documents as soon as administratively practicable under the circumstances. Electronic communications (e.g., websites, e-mails and text messages) with people who have effective access can be considered good faith acts. For more information, see our blog post outlining EBSA Disaster Relief Notice 2020-01.

Electronic Disclosure Rules for Pension & Welfare Plans Side by Side Comparison Chart

10 Keys to Executive Compensation Excise Tax for Tax-Exempt Employers and Their Affiliates

Employers that are tax-exempt or have tax-exempt affiliates (for example, a foundation) should pay close attention to a 21% excise tax under Section 4960 of the Internal Revenue Code on certain executive compensation.  Proposed Regulations under Section 4960 are described here.  The discussion includes traps for the unwary.  Please reach out to your Proskauer contact to discuss how these rules affect your organization.

New DOL Fiduciary Rule Package: What You Really Need to Know

The U.S. Department of Labor’s (the “DOL”) new “fiduciary rule” package, issued on June 29, 2020, and published in the Federal Register on July 7, 2020, has three important components:

  1. The DOL has formally reinstated its “five-part test” initially set forth in its 1975 regulation for determining whether a person is a “fiduciary” by reason of providing “investment advice” for a fee. This reinstatement is effective immediately, and generally reflects the status quo after the Obama administration’s 2016 fiduciary rule was vacated by the Fifth Circuit in 2018.
  2. The DOL has provided commentary on its interpretation of the “five-part test”. Most notably, the DOL states that advice on whether to take a distribution from a retirement plan and roll it over to an IRA could be considered fiduciary “investment advice” after considering the facts and circumstances surrounding the advice.  In describing this interpretation, the DOL stated that it will no longer follow its “incorrect” contrary analysis set forth in Advisory Opinion 2005-23A (the “Deseret Letter”).
  3. The DOL has proposed a new prohibited transaction exemption (the “Proposed Exemption”) that would give “investment advice” fiduciaries more flexibility to provide advice (including with respect to IRA rollovers) that affects their compensation. The Proposed Exemption would also permit “investment advice” fiduciaries to enter into and receive compensation from “riskless” and certain other “principal transactions” where the fiduciary is purchasing a security for its own account or selling a security from its own inventory.  Comments on this proposal are due by August 6, 2020.  If granted, the Proposed Exemption would become effective 60 days after the final exemption is published in the Federal Register.

Below we describe in more detail the rules for determining whether a person is a “fiduciary”  (including by way of providing “investment advice” under the “five-part test”), the DOL’s views on the “five-part test” and rollover advice, the consequences of being a “fiduciary”, and the Proposed Exemption.

Who is a Fiduciary?  The “Five-Part Test”

Under each of Section 3(21) of the U.S. Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and Section 4975(e)(3) of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), there are three ways for a person to be considered a “fiduciary” with respect to a retirement plan or IRA:

  1. The person exercises any discretionary authority or control respecting management of the plan or IRA or with respect to the management or disposition of its assets;
  2. The person renders “investment advice” for a fee or other compensation, direct or indirect, or has any authority or responsibility to do so; or
  3. The person has any discretionary authority or responsibility in the administration of the plan or IRA.

The “fiduciary rule” package (like the Obama administration’s vacated rule) relates only to the second prong – rendering “investment advice” for a fee.  The guidance has no bearing on becoming a fiduciary by reason of having discretionary authority or responsibility over the management, administration, or investment of the assets of a plan or IRA.

Under the “five-part test”, a person is considered to be providing “investment advice” only if the person: (i) renders advice as to the value of securities or other property, or makes recommendations as to investing in, purchasing or selling securities or other property, (ii) on a regular basis, (iii) pursuant to a mutual agreement, arrangement, or understanding with the plan, the plan fiduciary or IRA owner that, (iv) the advice will serve as a primary basis for investment decisions with respect to plan or IRA assets, and (v) the advice will be individualized based on the particular needs of the plan or IRA.  A person who meets all five prongs of the test and receives direct or indirect compensation will be considered an “investment advice” fiduciary with respect to the applicable plan or IRA.

On April 8, 2016, the DOL replaced the “five-part test” with a new fiduciary regulation that significantly expanded the scope of  “investment advice.”  However, that rule was vacated by the U.S. Court of Appeals for the Fifth Circuit on March 15, 2018.  Following that decision, on May 7, 2018, the DOL issued Field Assistance Bulletin 2018-02 (“FAB 2018-02”), which provided (among other things) that the DOL would not enforce the 2016 fiduciary rule and instead would go back to the “five-part test.”  The latest regulation implements that decision.

DOL’s Commentary on the Five-Part Test

Historically, service providers have often taken the position that advice on whether to leave money in a plan or to roll over to an IRA was not provided on a “regular basis” and/or was not provided pursuant to a “mutual” agreement, arrangement or understanding that the advice would serve as a “primary basis” for the decision.  Further, in the Deseret Letter, the DOL suggested that advice to roll assets out of a plan to an IRA did not constitute “investment advice,” because it was not advice with respect to moneys or property of a plan.

In the commentary to the Proposed Exemption, the DOL disclaimed its guidance in the Deseret Letter  as an “incorrect analysis.”  The DOL now says that the “better view” is that IRA rollover advice is a recommendation to liquidate or transfer the plan’s property to effectuate the rollover.  This means that advice on whether to take a distribution from a retirement plan and roll it over to an IRA (or to roll over from one plan to another plan, or one IRA to another IRA) may be covered by the “five-part test,” if the advice is either part of an ongoing relationship or the start of an ongoing relationship.

In this regard, the DOL notably stated the following:

  • The full “five-part test” applies for determining whether a service provider is an “investment advice” fiduciary. Whether or not the prongs of the test are satisfied “will be informed by all the surrounding facts and circumstances”;
  • IRA rollover advice may be an isolated and independent transaction that would fail to meet the “regular basis” prong, but the analysis will depend on the surrounding facts and circumstances:
    • In circumstances where an advice provider has been giving financial advice to an individual about investing in, purchasing, or selling securities or other financial instruments, any rollover advice provided to the individual would be considered part of an ongoing advice relationship that would satisfy the “regular basis” requirement;
    • Similarly, where a rollover advice provider will be regularly giving financial advice with respect to the IRA following the rollover (even if it has not otherwise provided any advice before the rollover), the rollover advice would be the start of an advice relationship that could satisfy the “regular basis” requirement;
  • The determination of whether there is a “mutual” agreement, arrangement, or understanding that the investment advice will serve as a “primary basis” for investment decisions will be based on the reasonable understanding of each of the parties:
    • Written statements disclaiming a mutual understanding are not determinative, but may be considered as part of the analysis;
    • The advice does not need to serve as “the” primary basis of investment decisions, but rather it only need to serve as “a” primary basis; and
    • When a financial service professional makes recommendations that are based on the individualized needs of the recipient or made in accordance with a best interest standard such as the Securities and Exchange Commission’s (“SEC”) best interest standard, the parties “typically should reasonably understand that the advice will serve as at least a primary basis for the investment decision.”

Consequences of Being a “Fiduciary”

If a person is considered to be a “fiduciary” of a plan or IRA under ERISA and/or the Code, it will be subject to the prohibited transaction rules under Section 406 of ERISA and/or Section 4975 of the Code.  These rules generally prohibit a fiduciary from causing the plan or IRA to engage in many different types of transactions with a potentially broad universe of counterparties unless the transaction qualifies for an exemption.  The prohibited transaction rules also prohibit a fiduciary from engaging in certain “self-dealing” transactions whereby it deals with the assets of the plan or IRA for its own account or receives a “kick-back” in connection with a transaction involving the assets of the plan or IRA.  In particular, a fiduciary would be prohibited from providing investment advice to the applicable plan or IRA that results in the fiduciary or its affiliate receiving additional compensation; and the fiduciary also would not be able to engage in principal transactions with the plan or IRA, unless an exemption is available.

Further, even if the requirements for an exemption are satisfied, fiduciaries of ERISA-covered plans are also subject to ERISA’s fiduciary duties, including prudence and loyalty, which are among the highest known to the law.  ERISA gives plan participants and beneficiaries a private right of action to challenge the prudence and loyalty of advice, even if the requirements of an exemption have been satisfied.

The Proposed Exemption

The Proposed Exemption would provide relief for certain “investment advice” fiduciaries (but not for parties with discretion) that is broader and more flexible than existing exemptions, provided that the fiduciary is willing and able to comply with the “impartial conduct” standards. The “impartial conduct” standards are intended to be aligned with the standards of conduct for investment advice professionals established and considered by other U.S. Federal and State regulators – in particular, the SEC and its Regulation Best Interest.

More specifically, the Proposed Exemption would permit “investment advice” fiduciaries to receive compensation as a result of providing what would otherwise be considered “conflicted” fiduciary investment advice (including IRA rollover advice) to a Retirement Investor (i.e., an ERISA plan participant or beneficiary, IRA owner, and a fiduciary of an ERISA plan or IRA) if the “investment advice” fiduciary is a registered investment adviser, broker-dealer, bank, or insurance company (or an employee, agent, or representative of an eligible entity).  The compensation could include, for example, including 12b-1 fees, trailing commissions, sales loads, mark-ups and mark-downs, and revenue sharing payments from investment providers or third parties.

The Proposed Exemption would also permit qualifying “investment advice” fiduciaries to enter into and receive compensation with respect to “riskless” and certain other “principal transactions” with a Retirement Investor where the fiduciary either purchases certain investments from a Retirement Investor for its own account or sells certain investments out of its own inventory to the Retirement Investor.

The critical protective condition set forth in the Proposed Exemption is that the investment advice must be provided in accordance with “impartial conduct” standards – namely, a best interest standard (which includes duties of prudence and loyalty specifically requiring the “investment advice” fiduciary not to place its financial or other interests ahead of the interests of the Retirement Investor or to subordinate the Retirement Investor’s interests to interests of the financial institution or the investment professional; duties that would not otherwise apply to advice provided to an IRA not subject to ERISA); a reasonable compensation standard; and a requirement to make no materially misleading statements.  The Proposed Exemption also requires that the “investment advice” fiduciary:

  • Disclose both the financial institution’s and the investment professional’s status as an “investment advice” fiduciary and material conflicts of interest;
  • Establish, maintain and enforce policies and procedures designed to ensure compliance with the “impartial conduct standards”; and
  • Conduct an annual review to ensure compliance with the conditions of the Proposed Exemption.

In contrast to the DOL’s vacated class exemptions, the Proposed Exemption would not provide a separate right of action to Retirement Investors, nor would it require a separate written contract or otherwise create any new legal claims beyond what is already provided under ERISA.

An “investment advice” fiduciary could lose the ability to rely on the Proposed Exemption for a period of 10 years for certain criminal convictions, providing misleading statements to the DOL in connection with relying on the exemption, or engaging in an intentional violation or systematic pattern of violating the conditions of the exemption.

The Proposed Exemption would not cover advice arrangements that rely solely on “robo-advice” without interaction with an investment professional.  Those advice arrangements are covered by the statutory exemption in Sections 408(b)(14) and 408(g) of ERISA and Sections 4975(d)(17) and 4975(f)(8) of the Code and the regulations thereunder.

As part of the 2016 fiduciary rule package, the DOL granted two new prohibited transaction class exemptions (i.e., the Best Interest Contract Exemption and a Class Exemption for Principal Transactions) and amended several pre-existing exemptions.  FAB 2018-02 (described above) allowed “investment advice” fiduciaries to continue to rely on the new Best Interest Contract Exemption and Class Exemption for Principal Transactions if they worked diligently and in good faith to comply with the impartial conduct standards required by those exemptions.

The Proposed Exemption is consistent with the DOL’s temporary enforcement policy under FAB 2018-02, in that investment advice professionals that established processes and procedures to comply with the “impartial conduct” standards under the vacated exemptions would be able to use the same processes and procedures under the Proposed Exemption.  For the time being, the DOL’s temporary enforcement policy in FAB 2018-02 remains in place.

In connection with the issuance of the Proposed Exemption, the DOL removed from its website the vacated exemptions (i.e., the Best Interest Contract Exemption and the Class Exemption for Principal Transactions), and the DOL has confirmed that the pre-existing class exemptions that were amended in 2016 (i.e., PTEs 75-1, 77-4, 80-83, 83-1, 84-24 and 86-128) have reverted to their pre-amendment form.

Proskauer Perspective

Although the ERISA world has been operating under the “five-part test,” we now have confirmation from the DOL that it applies.  The DOL’s commentary that IRA rollover advice could be fiduciary “investment advice” is a formal departure from the Deseret Letter, but it is consistent with prior comments from DOL officials.  The Proposed Exemption would formally implement the temporary guidance from FAB 2018-02, but will not go into effect unless and until it is finalized.  The latest guidance undoubtedly will not be the last word on this topic.

Fifth Circuit: Plaintiff Not Entitled to Attorneys’ Fees For Obtaining Remand on Appeal

The Fifth Circuit concluded that an individual plaintiff was not entitled to attorneys’ fees, even though she persuaded the Fifth Circuit to vacate and remand a summary judgment decision in favor of the Humana Health Plan, because her victory was “purely procedural.”  While ERISA section 502(g)(1) provides that a court “in its discretion may allow a reasonable attorney’s fee and costs of action to either party,” the Supreme Court has made it clear that an ERISA fee claimant must show “some degree of success on the merits.”  Hardt v. Reliance Standard Life Ins. Co., 560 U.S. 242, 255 (2010).  The Supreme Court also ruled many years ago, in a non-ERISA case, that a claimant whose only “victory” is an interlocutory ruling by a court of appeals has not received any relief on the merits.  Hewitt v. Helms, 482 U.S. 755, 760 (1987).

In the case before the Fifth Circuit, the plaintiff had spent time in an eating disorder treatment center and sought reimbursement of fees incurred from the plan.  The plan declined to provide her with coverage because it determined that her hospitalization was not “medically necessary.”  On appeal, the Fifth Circuit concluded that there were disputed issues of fact about whether the treatments were medically necessary and remanded to the district court for additional proceedings.  While the Fifth Circuit’s decision allowed the plaintiff to proceed with her claim, it did not alter the parties’ legal relationship or require that the defendant do something. Accordingly, she had not achieved some degree of success on the merits and was not entitled to a fee award.

The case is Katherine P. v. Humana Health Plan, Inc., No. 19-50276 (5th Cir. June 29, 2020).

“Divane Intervention”: ERISA 401(k) Plan Investment Claims Dead On Arrival

A federal district court in Illinois recently dismissed “excessive fee” and “imprudent investment” claims against the plan fiduciaries of the CareerBuilder 401(k) plan fiduciaries, relying largely on the Seventh Circuit’s decision in Divane v. Northwestern University, 953 F.3d 980 (7th Cir. 2020).  (Our blog on the Divane decision is available here.)  In the case against the Careerbuilder plan fiduciaries, the plaintiff alleged that defendants breached their duties of prudence and loyalty under ERISA by:

  • Paying excessive recordkeeping fees;
  • Failing to invest in cheaper institutional shares as opposed to retail shares; and
  • Failing to include more passively managed as opposed to actively managed funds.

The court first addressed the recordkeeping fee claim.  The court observed that the fund at issue in Divane charged recordkeeping fees that averaged between $153 and $213 per person and the fees here similarly averaged between $131 and $222 per person.  Because Divane had held that a similar range of fees did not give rise to an inference of imprudence, plaintiff’s allegations here also could not either.  The court further explained that an inference of imprudence was even less plausible here than in Divane because CareerBuilder’s plan had fewer participants and thus less leverage to negotiate lower fees.

The court next quickly disposed of plaintiff’s claim that the plan should have invested in institutional share classes rather than more expensive retail share classes because Divane had held that a fund’s failure to invest in institutional as opposed to retail funds does not give rise to an inference of imprudence.

Turning to plaintiff’s claim that the plans should have included more passively managed funds, the court concluded that defendants’ failure to offer “every index fund under the sun” was not, in and of itself, imprudent as long as the plan offered a mix of investments and there are no other indicia of a flawed process.  The court found that the plan offered an acceptable mix of options with expense ratios ranging from .04% to 1.06%—within the range found to be reasonable as a matter of law by other courts.  The court also found that plaintiff’s allegations that defendants removed or modified a majority of the funds in the plan over a five-year period actually supported an inference that defendants had a prudent process in place for monitoring the plan’s funds.

Finally, the court dismissed plaintiff’s duty of loyalty claims because plaintiff failed to raise an inference of self-dealing and relied largely on facts supporting his duty of prudence claims.

The case is Martin v. CareerBuilder, LLC, No. 19-cv-6463, 2020 WL 3578022 (N.D. Ill. July 1, 2020).

Internal Revenue Service Provides Temporary Relief and Other Guidance on Mid-Year Reductions of Safe Harbor Contributions to 401(k) Plans due to COVID-19

On June 29, 2020, the Internal Revenue Service (the “IRS”) issued Notice 2020-52 that provides temporarily relief to plan sponsors that amend their safe harbor Section 401(k) or 401(m) plans (“Safe Harbor Plans”) mid-year to reduce or suspend employer safe harbor matching or nonelective contributions due to the COVID-19 pandemic.  To qualify for the relief, a Safe Harbor Plan would need to be amended between March 13, 2020 and August 31, 2020.


Under current IRS regulations and related guidance, a Safe Harbor Plan may be amended mid-year to reduce or suspend the employer’s safe harbor matching or nonelective contributions only if all of the following requirements are met:

  • The employer either (i) is operating under an economic loss for the year (which is generally a facts and circumstances test), or (ii) included a statement in the original safe harbor notice given to participants before the start of the plan year (“Original Notice”) that the employer may reduce or suspend contributions mid-year and that the reduction or suspension will not apply until at least 30 days after participants are provided notice of the reduction or suspension (“Required Reservation”).
  • All eligible participants are provided with a supplemental notice that explains (i) the consequences of the amendment that reduces or suspends the future safe harbor contributions, (ii) the procedures for participants to change their cash or deferred elections, and (iii) the effective date of the amendment (“Supplemental Notice”);
  • The reduction or suspension of safe harbor contributions is effective no earlier than the later of the date the amendment is adopted or 30 days after eligible employees are provided the Supplemental Notice;
  • Participants must be given a reasonable opportunity (including a reasonable period after receipt of the Supplemental Notice) prior to the reduction or suspension of safe harbor contributions to change their 401(k) elections;
  • The plan must be amended to provide that the ADP test and the ACP test (if applicable) will be satisfied for the entire plan year using the “current year testing method” (i.e., the plan can no longer use the safe harbor to satisfy such testing for the year); and
  • The plan must make the pre-amendment safe harbor contributions through the effective date of the amendment.

Temporary Relief and Other Guidance Provided Under Notice 2020-52

Due to unprecedented circumstances resulting from the COVID-19 pandemic, Notice 2020-52 provides the following additional temporary relief from the general prohibition on mid-year reductions or suspensions of safe harbor contributions:

  • For a plan amendment adopted between March 13, 2020 and August 31, 2020, a plan will not be treated as failing to satisfy the requirement that the employer either is operating under an economic loss for the year or included the Required Reservation in the Original Notice given to participants.
  • For a plan amendment that reduces or suspends safe harbor nonelective contributions adopted between March 13, 2020 and August 31, 2020, the plan will not be treated as failing to satisfy the requirement that participants be provided the Supplemental Notice at least 30 days prior to the effective date of the reduction or suspension, so long as (i) the Supplemental Notice is provided to participants no later than August 31, 2020, and (ii) the plan amendment is adopted no later than the effective date of the reduction or suspension of safe harbor nonelective contributions. This relief does not apply to mid-year reductions or suspensions of safe harbor matching contributions.
  • The temporary relief described above also will apply on similar terms to Section 403(b) plans that apply the Section 401(m) safe harbor rules to satisfy the nondiscrimination rules applicable to such plans.

Separately, Notice 2020-52 clarifies that, because contributions made on behalf of highly compensated employees (“HCEs”) are not included in the definition of safe harbor contributions, a mid-year change that reduces only the contributions of HCEs is not considered a suspension or reduction of safe harbor contributions that requires an employer to satisfy the rules described above.  However, such a mid-year change would be a change to the content of plan’s Original Notice, and pursuant to prior guidance issued in IRS Notice 2016-16 an updated safe harbor notice and an election opportunity must be provided to HCEs to whom the mid-year change applies.

Many employers have implemented or are considering changes to their 401(k) plan matching and nonelective contributions in light of the economic situation related to the COVID-19 pandemic. There are a number of considerations with any of these changes and employers should consider them carefully with counsel. IRS Notice 2020-52 provides welcome guidance in this regard for employers considering changes to Safe Harbor Plans.