Employee Benefits & Executive Compensation Blog

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

A Conjunction is Worth Thousands of Dollars: Recent Case Highlights Significance of “And” vs. “Or”

You do not need a Lexis or Westlaw subscription to know that major cases and significant judgments have sometimes hinged on the meaning of a single word, or the placement of a single Oxford comma. We have a recent case to add to the list: Weinberg v. Waystar, Inc., et al., which was an executive contract dispute case in Delaware that hinged on a single word: “and.”

The plaintiff, an executive at Waystar, received three option grants.  The “call right” provision in the option award documentation allowed the defendants to repurchase the plaintiff’s equity acquired upon exercise of the options upon specified events, including termination without cause and/or a restrictive covenant breach. The plaintiff’s employment was terminated without cause, and she exercised her vested options. The defendants then exercised their call right, repurchasing the plaintiff’s newly acquired equity, pursuant to their interpretation of the call right provision.

As a matter of background, many private companies’ equity incentive arrangements include call rights to allow the company to repurchase equity under a variety of circumstances.  The call right serves both strategic and logistical ends.  Strategically, many companies do not want ex-employees to participate in the upside of the company’s growth post-termination because these ex-employees are no longer contributing to the company’s success. Logistically, having too many minority holders on the capitalization table can create administrative challenges in the future (e.g. with respect to information rights or payments in connection with an exit event) and could also raise securities law issues.  To these ends, call rights are typically triggered upon the termination of an executive’s employment.

Back to the case at hand.  The call right provision read:

“The Converted Units shall be subject to the right of repurchase (the ‘Call Right’) . . . during the six (6) month period following (x) the … Termination of such Participant’s employment . . . and (y) a Restrictive Covenant Breach.” 

(Emphasis added.)  The dispute hinged entirely on the meaning of the word “and” before clause (y).

The plaintiff asserted that the word “and” between “(x)” and “(y)” meant that both conditions had to be satisfied before the defendants could exercise their call right (i.e. the conjunctive interpretation).  Under this interpretation, the call right would not be triggered unless the plaintiff’s employment were terminated and the plaintiff were to breach a restrictive covenant. The parties agreed that the plaintiff did not breach a restrictive covenant; so under the plaintiff’s interpretation, the defendant would not have had a right to buy back the equity.

In contrast, the defendants interpreted the word “and” to mean that they could exercise the call right if the plaintiff’s employment were terminated or if she were to breach a restrictive covenant (i.e. the disjunctive interpretation).  Under this interpretation, the defendants were within their rights to repurchase the plaintiff’s equity grant on the basis of the plaintiff’s termination alone.

The judge sided with the defendants, concluding based on the language and the surrounding context, that the parties must have intended the disjunctive interpretation: “I find that the plain language of the Call Right provision supports the Defendant’s interpretation because it is consistent with the ‘several’ use of ‘and’ that is used in permissive sentences.”  The judge concluded that the provision was analogous to saying “at our resort, you can swim, golf and play tennis”—which would not require participating in all three activities.

The judge also noted that the purchase price for the call right varied depending on whether the plaintiff’s termination was with cause or without cause (another common feature of call right provisions).  The judge said that distinction would be rendered “meaningless” if the conjunctive interpretation of the provision were correct.  It would not make sense to have a “no cause” purchase price if the call right required both termination and breach of a restrictive covenant.

*          *          *

At the end of the day, the word choice did not change the outcome, but that would ignore the cost of defense.  This case is a good reminder that, in drafting, every word matters.

PBGC Issues Final Rule on Special Financial Assistance Program for Troubled Multiemployer Pension Plans

On July 8, 2022, the Pension Benefit Guaranty Corporation (“PBGC”) published its much anticipated final rule on the special financial assistance (“SFA”) available to certain troubled multiemployer plans under the American Rescue Plan Act of 2021 (“ARPA”).

As we previously described in our client alert, ARPA provided for cash payments from the PBGC to eligible plans that were supposed to be in the amount necessary for the plans to pay benefits and administrative expenses through the plan year ending in 2051. In July 2021, the PBGC released an interim final rule (the “IFR”), which provided various details on the SFA program, including how the SFA amount would be calculated for an eligible plan, as we previously explained in detail. But the devil is always in the details, and there were a number of questions raised by the IFR, including whether the assumptions and conditions established by the IFR would provide enough SFA for all eligible plans to remain solvent through 2051.

Responding to a number of comments on the IFR, the PBGC’s final rule made several changes to the IFR. Most notably, the final rule attempted to address the concerns that some plans would not receive sufficient SFA to remain solvent through 2051. It also addressed concerns that plans that previously implemented benefit suspensions under the Multiemployer Pension Reform Act of 2014 (“MPRA”) would be disadvantaged if they sought ARPA relief and, as required, revoked their MPRA suspensions.

These and other key changes made by the PBGC in the final rule are summarized below.

  1. Methodology and Assumptions to Calculate Special Financial Assistance

Separate Investment Return Assumptions for SFA and Non-SFA Assets. In order to calculate the amount of SFA to which an eligible plan is entitled, the IFR prescribed a single investment return assumption equal to the lesser of the interest rate used for funding standard account projections in the most recent zone status certification completed before 2021 or 200 basis points plus the third segment rate in the last four months prior to the filing of the application. At the same time, the IFR required a plan to invest its SFA in investment grade-bonds, which were yielding far less than that rate.

For many plans, this meant that the PBGC would provide SFA necessary to maintain solvency through the plan year ending in 2051 assuming the SFA it provided would earn more than it actually could in light of the investment restriction. The result was that some of these plans would become insolvent before 2051 even with the SFA.

The final rule addressed this issue by calculating SFA using separate investment return assumptions for SFA and non-SFA assets. For SFA assets, the assumption is 67 basis points plus the average of the three segment rates for the month in which the average is the lowest among the four months prior to the filing of the application. For non-SFA assets, the assumption is the one that previously applied, except that the third segment rate for the “cap” is the lowest in the last four months prior to the filing of the plan’s application.

Proskauer observation: The assumptions provided in the final rule are more likely to match a plan’s actual experience, making eligible plans more likely to maintain their solvency through 2051.

SFA Amount for MPRA Plans. The final rule increases (potentially significantly) the amount of SFA available to plans that implemented suspensions under MPRA as of March 11, 2021 in response to concerns that trustees of such plans had to grapple with whether to avoid insolvency indefinitely (the standard required to implement suspensions under MPRA) and forego SFA or accept SFA and reinstate benefits (as required by ARPA to receive SFA) and jeopardize the plan’s long-term viability.

The final rule allows a MRPA plan to apply for the greatest of: (1) the SFA amount for non-MPRA plans; (2) the amount sufficient to ensure that the plan will project increasing assets at the end of the 2051 plan year; or (3) the present value of reinstated benefits, including both make-up payments for previously suspended benefits, as well as payments of the reinstated portion of the benefits expected to be paid through 2051.

Proskauer observation: By providing for sufficient SFA to ensure that a plan will project increasing assets at the end of the 2051 plan year, the PBGC is using a standard that approximates the position the plan would be in if it maintained its MPRA suspension. Thus, trustees of plans with MPRA suspensions are no longer in the unenviable position of having to decide whether to sacrifice long-term solvency to obtain ARPA relief.

SFA Amount for Non-MPRA Plans. Under the final rule, the amount of SFA to a non-MPRA plan is calculated as the lowest dollar amount for which, as of the last day of each plan year during the SFA coverage period (which ends in 2051), the plan’s projected SFA assets and projected non-SFA assets are both greater than or equal to zero. This methodology was changed from the present value methodology in the IFR because of concerns raised about how the present value calculation was affected by the timing of cash flows.

Proskauer observation: Although many commenters hoped that the PBGC would provide all plans with SFA in amounts similar to those available to MPRA Plans, the PBGC stated that it believed that doing so would be inconsistent with the Congressional intent behind APRA.

Contribution Rate Increases after July 9, 2021. In projecting a plan’s resources to calculate its SFA amount, the final rule disregards contribution rate increases that are agreed to on or after July 9, 2021. The PBGC noted that this rule eliminated the incentive for bargaining parties to wait until after the plan receives its SFA to negotiate contribution increases.

Proskauer observation: This appears to exclude increases that are required by a rehabilitation plan that were not incorporated into an employer’s collective bargaining agreements as of that date.

  1. Permissible Investments

The IFR only allowed plans that receive SFA to invest the SFA assets in high-quality, investment-grade bonds and certain other permissible investments that would be expected to yield similar returns. Many commenters expressed concern that this would make it harder (if not impossible) for many eligible plans to stay solvent until 2051, particularly in light of the investment return assumption described above.

The final rule pivoted from the IFR and altered the requirements for permissible investments of SFA assets. The final rule allows plans to invest up to 33% of its SFA assets in “return-seeking assets” (e.g., publicly traded, U.S. dollar denominated common stock; equity funds that invest primarily in public shares; and certain debt instruments of domestic issuers that are not investment-grade bonds). The remaining 67% of SFA must still be invested in investment-grade fixed income instruments.

Proskauer observation: The PBGC acknowledged that it took a conservative position in the IFR because ARPA expressly authorized PBGC to approve investments in asset classes other than investment grade bonds. However, PBGC stated that it wished to go through the notice and comment period under the IFR before expanding to other asset classes. By allowing a limited amount of additional diversification in the investment of SFA, the final rule attempts to balance the security of the taxpayer-funded SFA and the need to achieve investment returns to maintain solvency.

  1. Special Withdrawal Liability Rules

Phased Recognition of SFA. Under the IFR, all of the SFA received by a plan was immediately treated as plan assets for withdrawal liability calculations. The final rule modifies this approach by phasing-in the treatment of SFA of a plan asset over time. The phase-in period begins from the first year the plan receives SFA through the end of the plan year that the plan is projected to exhaust SFA assets. The PBGC is seeking public comments on this aspect of the final rule.

Use of Mass Withdrawal Assumptions: The IFR required plans that receive SFA to calculate withdrawal liability for all withdrawing employers using the conservative mass withdrawal interest rate assumptions established by the PBGC. The final rule continues to require plans to use these rates until the later of: (1) 10 years after the end of the plan year in which the plan receives payment of SFA; or (2) the last day of the plan year in which the plan no longer holds SFA or any earnings in a segregated account. However, it refined the second date to prevent plans from holding a small amount of SFA just to extend the period during which this rule applies by providing that it is the last day of the plan year by which the plan projects it will exhaust its SFA assets, extended by the number of years, if any, that the first plan year of payment is after the plan year that includes the SFA measurement date.

  1. Conditions on a Plan that Merges with a Plan that Receives SFA

In response to comments and uncertainty as to the restrictions and conditions that apply when a plan that receives SFA merges with another plan, the PBGC clarified the conditions that apply to those merged plans, as detailed in the following chart:

Application of Restrictions and Conditions After a Merger

Applies to merged plan

Does not apply to merged plan

Other

·Restrictions on uses of SFA

·Transfer or merger approval

·Withdrawal liability settlement approval

·Must file annual compliance statement

·Comply with periodic audit from PBGC

·Restrictions on prospective benefit increases

·Restrictions on allocation of plan assets

·Restrictions on allocating expenses

·Retroactive benefit increase: plan may apply for a waiver, but, absent a waiver, continues to apply to participants in the SFA plan

·Contribution decreases: plan may apply for a waiver, but, absent a waiver, continues to apply to employers who had obligation to contribute to SFA plan

·Allocating contributions and other income: plan may apply for a waiver, but, absent a waiver, continues to apply to contributions or income relative to the SFA plan before the date of the merger

·Withdrawal liability calculation: no waiver; conditions required to be applied to determine unfunded vested benefits (UVBs) that arose under the SFA plan before the date of the merger for purposes of allocating UVBs under ERISA § 4211(d) and determining withdrawal liability

 

  1. Other Conditions for SFA

PBGC generally maintained the other conditions it imposed on plans that receive SFA. However, the final rule made a few changes to the conditions. For example, with respect to the prohibition on benefit increases, it added a process pursuant to which a plan may request approval from PBGC to increase benefits if 10 years have passed since the end of the plan year in which SFA was paid and the plan will avoid insolvency notwithstanding the benefit increase.

  1. Application Process

The final rule maintained the IFR’s priority and metering process. However, it also added a new process that allowed plans that file after March 11, 2023 and before the end of 2025 (as well as plans in priority groups 5 and 6) to file a “lock-in application” if the PBGC closes the application process temporarily due to metering. This pro forma e-mail application would allow the plan to lock in its base data (i.e., SFA measurement date, census data and interest rates) even though it cannot yet formally apply due to the temporary closure.

Proskauer observation: The new “lock-in application” process avoids a situation in which a plan that has already performed all of the work necessary to complete its application has to redo all of its calculations because the application process is temporarily shut down due to metering.

To further address timing concerns raised by commenters, the PBGC also changed the definition of the SFA measurement date from the last day of the calendar quarter immediately preceding the initial filing date to the last day of the third calendar month immediately preceding the initial filing date.

Plans that previously applied for SFA are permitted to supplement their applications to take advantage of the final rule, and plans that have already received their SFA may receive a second SFA payment based on the supplemental application.

*          *          *

The final rule is effective August 8, 2022, and will generally apply to both new SFA applications and previously submitted SFA applications if the plan submits a supplemental application. The final rule contains several other changes and nuances that we have not described here. Plans, employers, and other interested parties should consult with counsel regarding these details. The PBGC’s website also provides a host of additional resources regarding the SFA program. The authors thank summer associate Mallory Knudsen for her contribution to this blog post.

Defendants Secure Motion to Dismiss Victories in Three Post-Hughes Decisions

In April, we wrote here about the discouraging trend of opinions allowing commonly asserted breach of fiduciary duty claims in 401(k) and 403(b) plan investment litigation to survive motions to dismiss.  While it may be too soon to declare a reversal of that trend, three recent decisions dismissing these types of claims present some hope for plan sponsors and fiduciaries that in appropriate cases they may be able to avoid the costs and burdens of class action discovery.  In particular, the Sixth Circuit became the first Court of Appeals to affirm the dismissal of a 401(k) fee litigation since the Supreme Court’s decision in Hughes v. Northwestern University, 142 S. Ct. 737 (2022), and two district courts dismissed similar claims.

The Sixth Circuit’s Decision

In Smith v. CommonSpirit Health, a 401(k) plan participant claimed that defendants breached their fiduciary duty of prudence by offering actively managed investments despite the availability of lower-cost and better-performing index funds.  Smith v. CommonSpirit Health, No. 21-5964, 2022 WL 2207557 (6th Cir. June 21, 2022).  The participant alleged that not only were actively managed funds more costly in general, but that specific funds in the plan underperformed relative to similar index funds over three- and five-year periods.  She also alleged that the plan’s recordkeeping and management fees were excessive as compared to industry average costs published in surveys by NEPC and Brightscope/ICI.

We previously blogged here on the Eastern District of Kentucky’s September 2021 opinion dismissing the complaint.  The district court rejected plaintiff’s investment-specific allegations insofar as they relied on comparisons to passively managed funds—which the court held were not “ideal comparators”—over a “relatively short” five-year period.  Plaintiff’s challenge to the plan’s recordkeeping fees similarly was rejected for failure to identify other providers that would have provided the same services at a lower cost.

In its recent decision, the Sixth Circuit affirmed the dismissal of the case.  First, the Court held that the participant’s allegation that defendants acted imprudently by offering actively managed funds in the plan’s investment lineup did not give rise to an inference of a breach.  In so ruling, the Court emphasized the important role that actively managed funds can play in a plan’s investment lineup despite their comparatively higher fees, particularly for employees hoping to realize above-average returns in the long-term through a mix of high-growth and defensive investment strategies.  The Court went so far as to suggest that the failure to offer any actively managed options might be imprudent.

Second, while the Court acknowledged that the selection of specific actively managed funds could be found imprudent under ERISA, it rejected the participant’s claim here because, as other circuit courts have held, a plaintiff cannot challenge a fund’s prudence based on alleged underperformance by merely “pointing to a fund with better performance.”  Here, the participant’s claims centered on the plan’s default investment option—the actively managed suite of Fidelity Freedom Funds—and compared its performance to that of a Fidelity-managed index fund over a five-year period.  While the Fidelity Freedom Funds’ returns trailed those of the index fund in each of the five years, the Court found that this did not, without more, violate the duty of prudence.  The Court reasoned that a “five-year snapshot” of performance was insufficient to show a violation of the process-based duty of prudence because “[a] side-by-side comparison of how two funds performed in a narrow window of time, with no consideration of their distinct objectives, will not tell a fiduciary which is the more prudent long-term investment option.”  Moreover, according to the Court, allowing short periods of underperformance to dictate an investment’s prudence would “lead to the disappearance” of actively managed funds—which may well-serve the objectives of some investors—from 401(k) plans entirely.  As the Court put it, “[a] retirement plan acts wisely, not imprudently, when it offers distinct funds to deal with different objectives for different investors.”

Third, the Court rejected the participant’s claim that the plan paid excessive recordkeeping fees because she failed to provide the necessary context for her allegations.  While the participant compared the plan’s fees to industry averages, she did not allege that the services provided to the plan were equivalent to those provided to the plans comprising those averages, nor that the surveyed plans were sufficiently similar to this one.

Lastly, the participant’s similar allegations regarding the plan’s average investment management fees, without more, failed because they were devoid of context and merely reflected the fact that the plan offered several actively managed funds.

District Court Decisions

Federal district courts in Missouri and Utah reached conclusions similar to the ones reached by the Sixth Circuit.  Riley v. Olin Corp., No. 21-cv-1328, 2022 WL 2208953 (E.D. Mo. June 21, 2022); Matney v. Barrick Gold of N. Am. Inc., No. 20-cv-275, ECF No. 68 (D. Utah June 21, 2022).

Like Smith, both cases involved claims by plan participants that defendants breached their fiduciary duties by allowing the plans to incur excessive investment management and recordkeeping fees.

In Riley, the court rejected both of the participants’ fee-related claims.  The court rejected the participants’ excessive recordkeeping fee claim, which was based primarily on metrics from an NEPC survey of over 100 other plans, and materials, such as expert opinions, submitted in other cases regarding the average amount plans should pay in recordkeeping fees.  The court explained that the NEPC survey was not an appropriate comparator because it did not detail the specific services provided to the surveyed plans, and the materials submitted in other cases were not “meaningful benchmark[s]” because the fees charged by “different and entirely unrelated plans sa[id] nothing about the reasonableness of the [p]lan’s recordkeeping fees here.”

The court also rejected the participants’ reliance on the Brightscope/ICI survey (mentioned above) to compare mutual fund fees to those charged by cheaper collective trust versions because the ICI survey was not a “meaningful benchmark” insofar as it only considered plan size and high-level investment style and provided no information about fund holdings, investment style, or strategy.  As for fees charged by individual funds, the court noted that courts “routinely” find collective trusts not to be meaningful comparators for mutual funds, and that the participants alleged only that the mutual funds were more expensive, with no comparisons of their underlying asset allocations.

In Matney, the court denied the participants’ motion for reconsideration of a prior ruling dismissing their complaint.  In its previous dismissal, the court rejected the plan participants’ use of cherry-picked funds as a basis for challenging the plan’s investment management fees, and held that averages from a “401(k) Average Book” were not “meaningful benchmark[s]” against which to evaluate the plan’s recordkeeping fees.  The plaintiffs moved for reconsideration based in part on their view that the Supreme Court’s decision in Hughes constituted an intervening change in controlling law.  The court declined to revisit its original order, agreeing with defendants that Hughes (which was decided prior to the court’s previous dismissal) did not justify reconsideration here.

Proskauer’s Perspective

The decisions in Smith, Riley, and Matney are a breath of fresh air for plan sponsors and fiduciaries, particularly given that most courts have denied motions to dismiss very similar claims since the Supreme Court’s ruling in Hughes.  While we continue to believe that the overall track record of motions to dismiss warrants consideration of an early motion for summary judgment as an alternative, these decisions reinforce the fact that a motion to dismiss may still be a proper strategy in appropriate cases.

After Dobbs v. Jackson Women’s Health Organization: Impact on Employee Benefits

Employers and other group health plan sponsors are left with much to consider following the U.S. Supreme Court’s decision in Dobbs v. Jackson Women’s Health Organization, which  overruled the Supreme Court’s prior landmark decisions in Roe v. Wade and Planned Parenthood v. Casey.  Those cases solidified a federal constitutional right to obtain an abortion and prohibited state regulation placing an “undue burden” on that right.

Without Roe and Casey, approximately half of all U.S. states now (or likely will soon) ban or significantly limit reproductive health services, including abortion, and some state laws threaten to impose liability on those who assist an individual in obtaining an abortion. As a result, employers and other benefit plan sponsors are left wondering about the future of health plan coverage for reproductive healthcare, the permissibility of travel reimbursements to assist employees in traveling to jurisdictions where abortion remains legal, and other related issues.

In this complex legal environment, different questions arise depending on whether a group health plan is insured or self-insured, the jurisdictions in which the plan operates, and a variety of other factors.  Our guidebook answers common questions facing employers and other plan sponsors working through the impact of Dobbs and can be downloaded here.

Proskauer’s Task Force on Reproductive Healthcare Benefits is assisting employers and multiemployer health plans as they begin to navigate the legal and practical environment in the post-Dobbs world.  Future updates will be posted on our blog, www.erisapracticecenter.com, to which you can subscribe here.

No Presence? No Problem: Temporary Relief for Witnessing Spousal Consent Further Extended Through Year-End

Perhaps channeling the old adage of “if it ain’t broke, don’t fix it,” the IRS recently released Notice 2022-27 extending through December 31, 2022 its temporary relief from the requirement that spousal consent for plan distributions or loans be witnessed in person.

As discussed in greater detail in our earlier posts (here and here), in response to the COVID-19 National Emergency, the IRS issued guidance temporarily allowing a notary or plan representative to witness spousal consent electronically via live video, provided certain conditions are met.  This relief was originally issued in June 2020 and due to expire on December 31, 2020, but then was extended twice under the same conditions.

Following those two extensions, the relief was scheduled to expire at the end of this month.  Notice 2022-27 now further extends the relief through the end of 2022.  The conditions for obtaining relief (described in our first post) remain unchanged.

Although the IRS stated that it does not expect a further temporary extension (due to easing public health precautions in connection with the pandemic), the IRS is currently reviewing comments it previously received from stakeholders regarding whether to make the relief permanent.  The Notice reiterates that the IRS will use the formal regulatory process (including an additional notice and comment period) if it proposes permanent changes to the physical presence requirement.

Plan administrators should be aware of this guidance and should continue to ensure that electronic witnessing meets all of the conditions set forth in the temporary relief.

CEO Self-Evaluation: To Thine Own Self (Assessment) Be True

“Report cards” may bring to mind evaluating middle school students, not CEOs of multi-billion dollar companies. But over the last decade, some companies have adopted a CEO “self-assessment” for evaluating the performance of CEOs. This approach can take a myriad of forms, ranging from an informal discussion with the CEO to having the CEO prepare a formal report addressing performance issues.

Consider the following:  An Intelligize search completed in May 2022 for publicly filed proxy statements that contain “self-assessment” or “self-evaluation” within three words of “CEO” returns 623 results. While admittedly imprecise and anecdotal, this survey of proxy disclosures suggests that some public companies now incorporate CEO self-assessment as part of their review of CEO performance.

The proxy disclosure of the CEO self-assessment process varies, depending on the issuer. For example, consider the following disclosures from the 2022 proxy statements for International Business Machines Corporation (“IBM”), McKesson Corporation (“McKesson”) and Akamai Technologies, Inc. (“Akamai”):

  • IBM: “The Chair of the Compensation Committee works directly with the Committee’s compensation consultant to provide a decision-making framework for use by the Committee in determining annual incentive payouts [to the] Chairman and CEO. This framework considers the Chairman and CEO’s self-assessment of performance against commitments in the year, both qualitative and quantitative, and also considers progress against strategic objectives, an analysis of IBM’s total performance over the year and the overall Company incentive score. The Committee considers all of this information in developing its recommendations, which are then presented to the independent members of the IBM Board of Directors for further review, discussion, and final approval.”
  • McKesson: As part of the assessment of year-end results, the “CEO presents an assessment of his individual performance results to the Board and discusses his goals for the new fiscal year.”
  • Akamai: “With respect to his own compensation, the CEO conducts a self-assessment of prior year performance. The Board (without the participation of the CEO) then discusses and evaluates the Chief Executive Officer’s performance. The TL&C [Talent, Leadership & Compensation] Committee is the ultimate decision-maker with respect to the compensation of our Chief Executive Officer and other NEOs.”

The actual components of the CEO self-assessment vary from company to company.

  • Some companies may follow a “free form” approach, which allows the CEO to set forth the key metrics or goals he or she views as relevant and the extent of his or her achievement. Others provide a set of financial and non-financial goals (such as leadership milestones) that need to be addressed.
  • As to time frame, some focus on the most recently completed fiscal year; others focus on goals that stretch over a longer period (such as a three- or five-year budget period), and may include progress on succession matters if the CEO is approaching retirement.
  • In line with the current focus on ESG goals, the CEO may be expected to address progress on environmental and social issues.
  • There may be a “catch-all” category, where the CEO is expected to address “misses” or areas for improvement.

How is the self-assessment used? Frequently for compensation purposes, often in connection with assessing CEO achievement of non-financial metrics underlying the annual incentive plan (“AIP”) and related payouts under the AIP (such as strategic and operational goals separate from earnings per share (“EPS”) growth, total shareholder return (“TSR”) and other financial metrics). Second, at a more general level, as a “reality check”—the fact is that the tone, candor and “feel” of a self-evaluation, in many cases reading “between the lines,” can provide the Board with a helpful overview of the CEO’s view of his or her performance and whether there is any “disconnect” between that view and the current operations and future prospects of the company. The audience for the CEO self-assessment is generally the Compensation Committee (but could include other Directors serving on committees that touch on CEO performance, a committee of independent Directors, or even the full Board). Issues relating to privilege also have to be considered when using CEO self-assessments, so counsel should be consulted as part of the implementation of a self-assessment protocol.

We close with some observations from Mark Nadler, a friend of the Firm and the founder of Nadler Advisory Services; Mark (along with his late brother David Nadler) has been a pioneer in advising CEOs and Boards. Mark warns against focusing only on the CEO’s achievement of financial metrics, particularly when the company has had a good year. In Mark’s view, financial metrics are “lagging indicators,” so regardless of how well the company has performed in any given year, it is important to focus on the future, and see how the CEO is contributing to the next year’s performance and the overall future of the company. As part of that non-financial “future oriented” emphasis, Mark recommends that the self-assessment take into account strategy, talent development, company culture and leadership—all factors that remain important for the long game.

IRS Unveils New Pre-Examination Compliance Pilot Program for Retirement Plans

Ever wished you could predict the future? Or at the very least, predict the timing of a retirement plan audit? Well, you may be in luck on your second wish.

Last Friday, the IRS Employee Plans division announced a new pilot program whereby it will notify retirement plan sponsors 90 days in advance that their plan has been selected for upcoming examination.  The pilot program has three key features:

  • Advance Notice of an Upcoming Audit: Ninety days in advance of starting examinations, the IRS will notify plan sponsors by letter that their retirement plans have been selected for an upcoming audit. It is unclear from the announcement whether this 90-day review period will apply to all retirement plan audits (including those occasioned by a referral from another agency, like the Department of Labor), or only to retirement plans randomly selected for audit.
  • 90-Day Review Period to Self-Correct Errors: Plan sponsors are encouraged to use the 90-day period to review their plan document and operations to confirm compliance with current tax-qualification rules. Plan document and operational errors identified during this 90-day period, if eligible, may be self-corrected by the plan sponsor using the principles of the IRS’s voluntary compliance program set forth in Employee Plans Compliance Resolution System (EPCRS).  The IRS will review any proposed self-correction and documentation to confirm that it agrees with the resolution.  The IRS will then issue a closing letter or conduct a limited or full scope examination.
  • Reduced Fees for Errors Not Eligible for Self-Correction: If, within the 90-day period, a plan sponsor identifies errors that are not eligible for self-correction, it can request a closing agreement from the IRS.  In that process, the IRS will apply the VCP fee structure to determine the sanction amount, rather than the normal Audit CAP fees that would otherwise apply to errors identified in an IRS examination.  Because Audit CAP fees are far more unpredictable and can be significantly higher than the VCP fees, this pilot program provides a valuable opportunity for plan sponsors to get in front of costly errors not eligible for self-correction.

Although it is only a pilot and not (yet) part of the IRS’s compliance program, for as long as it lasts, this pre-examination pilot program marks a potentially helpful new tool for plan sponsors to ensure tax-qualification compliance for retirement plans.

So, what should plan sponsors do next?  The ability to predict the future is valuable only to those who use the information to change their proverbial destiny.  Sponsors and administrators who receive a 90-day pre-examination notice should immediately work with their attorneys and other advisors to conduct a self-audit to identify any compliance issues and address them within the 90-day window.

Of course, given what is involved in conducting a detailed review, identifying errors, coordinating internally and then fully correcting the errors, the 90-day period may feel shorter than it is.  That being the case, it is a good idea for plan sponsors and administrators to consider working with their professionals to conduct self-audits on a periodic basis even in the absence of an impending audit.

[Podcast]: Cross-Border Asset Deals

proskauer benefits brief podcast

In this episode of The Proskauer Benefits Brief, partner David Teigman, senior counsel Nick LaSpina, and special international labor & employment counsel Nicola Bartholomew, discuss differences between asset sales in the US and the UK, with respect to transfers of employees.  In short, there are significant differences that are not necessarily intuitive to US practitioners.  In the US, parties will have commercial freedom to make offers of employment and negotiate terms, whereas in the UK employees will transfer automatically as a result of TUPE and a number of significant protections and obligations apply that will need to be factored into the deal. So be sure to tune into this informative discussion about employment and benefits issues in asset sales in the US and the UK.


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Sixth Circuit Rejects Arbitration for Proposed Fiduciary Breach Class Action

The Sixth Circuit, in a matter of first impression for that Circuit, held an arbitration clause contained in an individual employment agreement did not apply to ERISA fiduciary breach claims brought on behalf of a defined contribution plan.  The case is Hawkins et al. v. Cintas Corp., No. 21-2156, __ F.4th __, 2022 WL 1236954 (6th Cir. 2022).

Plaintiffs, former Cintas Corp. employees, sued the company and its investment committee under Section 502(a)(2) of ERISA on behalf of its 401(k) plan, alleging that defendants breached their fiduciary duties of prudence and loyalty with respect to the management of the plan.  Cintas moved to compel arbitration, arguing that an arbitration clause in plaintiffs’ employment agreements covered the claims they now sought to bring.

Last year, a judge in the Southern District of Ohio denied defendants’ motion to compel arbitration, reasoning that individual arbitration agreements could not cover claims under Section 502(a)(2) because such claims are brought on behalf of the plan.

The Sixth Circuit affirmed.  While the court stopped short of deciding whether Section 502(a)(2) claims could ever fall within the scope of an arbitration clause in an individual employment agreement, it held that plaintiffs’ claims did not fall within the arbitration clauses here.  The court reasoned that because such claims “belong” to the Plan, they cannot be forced into arbitration based on agreements that bind only individual participants.  Moreover, the court found that, in this case, the agreements established only plaintiffs’ consent to arbitration, but not the plan’s.

Proskauer’s Perspective

The Sixth Circuit’s decision is notable in several ways.  For one, it joins the Second, Seventh, and Ninth Circuits in rejecting arbitration of Section 502(a)(2) claims based on a clause in an individual employment agreement, though these courts reached the same result based on varied reasons, including that the clause did not reach ERISA claims (as opposed to typical employment-related claims) and that the clause violated the “effective vindication” exception to the Federal Arbitration Act where it would limit the relief authorized under Section 502(a)(2) (see our previous blog posts discussing the Second and Seventh Circuit decisions).

Additionally, the Sixth Circuit explicitly limited its decision to the arbitration clause contained in the employment agreements but left open the question of whether an arbitration clause in a plan document would lead to a different result, as it did in the Ninth Circuit in 2019 (see our previous post).  Given the increased use of arbitration clauses and frequency with which plaintiffs bring ERISA fiduciary breach claims, courts outside the Ninth Circuit may very well face this question in the near future.

Ninth Circuit Revives Second Excessive Fee 401(k) Plan Litigation

On Friday, for the second week in a row, the Ninth Circuit reversed dismissal of a 401(k) plan excessive fee litigation challenging the offering of retail share classes of mutual funds instead of cheaper institutional share classes.  As with its decision reviving the other 401(k) plan litigation (discussed in detail here), the Ninth Circuit declined to consider at the pleading stage defendants’ explanation that it offered the more expensive retail share classes because they paid revenue sharing to the plan’s recordkeeper, which helped offset plan recordkeeping and administrative fees. The case is Kong v. Trader Joe’s Co., No. 20-56415 (9th Cir. Apr. 15, 2022).

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