Kansas City Employment Lawyer Blog

Businesses woo customers. But when the "customer" is a fiduciary acting on behalf of the "beneficiaries" of that fiduciary duty, the wooing better be solely for the benefit of the beneficiaries.

Despite this clear, well-established legal paradigm of fiduciary duty, corporate officers acting as fiduciaries of employee benefit plans don't seem to get it. It is commonplace for corporate officers to accept gifts or gratuities from a service provider, or from a prospective service provider, of an employee benefit plan of the corporation. In response, the Department of Labor (DOL) began taking an active interest on the subject in March of 2007. At that time, the Director of Enforcement of the DOL's Employee Benefits Security Administration warned that plan fiduciaries "need to be very, very careful under ERISA about accepting any gifts or gratuities from a service provider, even items of modest value." The Director further stated that "every one of [the DOL's regional enforcement offices] will be looking at this issue." Later, in November of 2007, the DOL published new annual reporting forms for employee benefit plans that included the following statement concerning plan service providers: "gifts or gratuities of any amount paid to or received by plan fiduciaries may violate ERISA and give rise to civil liabilities and criminal penalties." The DOL later clarified in its enforcement manual that any such gifts or gratuities with an annual aggregate value of $250 would be considered "substantial" for purposes of the fiduciary's breach of his or her duty to act for the exclusive benefit of the employee participants of the benefit plan.

In publishing these statements, the DOL was grappling with a widespread problem. With the repeal of the Glass-Steagal Act in 1999, depository/lending banking, investment banking and insurance could all be part of one corporate affiliate. Glass-Steagal had previously prohibited such businesses from having any connection to each other. Now, a single company offering depository, investment or insurance services to an ERISA benefit plan has a much wider variety of improper inducements to offer corporate officers deciding which company will be awarded the business of providing services to the corporation's employee benefit plans. Such improper inducements can be for the benefit of the fiduciary or the corporation. For example, a company seeking to provide investment management services to a retirement plan could offer the fiduciary a sweetheart deal on his personal life insurance. Or a company could offer the corporation favorable terms on a business loan in exchange for the company's affiliated mutual funds being placed in the lineup of investment options for the corporations' 401(k) plan. The problem in such cases is the fiduciary's conflict of interests regarding his or her duty under ERISA to act for the "sole and exclusive benefit" of the plan's employee participants in selecting a service provider for the plan.

Continue reading ""Business as Usual" Is a Recipe for Liability for an ERISA Fiduciary " »

We have grown accustomed to corporate executives lining their own pockets when making virtually any business decision, whether it benefits the corporation or not. When it comes to managing a employee benefit plan, however, acting under such self-interest can be a very costly violation of the decision maker's legal duties to the employees.

In many contexts, "management" and "labor" have conflicting interests. Management wants to maximize profits, and will sometimes attempt to do so by minimizing labor costs. Labor, by contrast, will want to maximize wages and benefits. Recognizing this conflict of interests, the law generally does not require an employer to act in the interest of its employees. The law generally allows employer discretion in setting levels of employee compensation, as long as applicable minimum wage, overtime and collective bargaining obligations are met. Thus, the same corporate decision makers who slash wages and benefits then sometimes get an immediate seven or eight figure bonus, based on projected profits stemming from the lower labor costs, and without regard to the eventual actual profits, after decreased commitment, skill and morale of employees set in. It's not illegal; it's just bad, short-sighted business.

The law also doesn't require an employer to establish an employee benefit plan. But once a private-sector employer establishes an employee benefit plan, in exchange for the tax benefits of doing so, the law imposes stringent "fiduciary" requirements regarding plan administration. The assets of the plan are held "in trust" and the employees who participate in the plan are "beneficiaries" of the trust. The law requires that decisions regarding hiring, firing and monitoring service providers of an employee benefit plan must be made for the "exclusive benefit" of the employees participating in the plan.

Continue reading "Selecting Financial and other Service Providers for an Employee Benefits Plan " »

An Employee Stock Ownership Plan is an employee benefit plan recognized under federal law. An ESOP provides employees with "beneficial" title to stock in the corporation where they are employed. Such stock is held in trust, with the "legal" title held by one or more trustees, who are typically executives of the corporate employer.

In reality an ESOP is usually a way for a "privately held" corporation to raise capital while shifting risks of such financing from corporate executives to employees. The stock of a "privately held" corporation is not traded on a public exchange--typically only a handful of current and former corporate executives own any shares. If the company needs or wants a sizable influx of capital, the company may need to pledge its stock as collateral for a loan. Corporate executives can decide to spread the risk of encumbered corporate stock from themselves to their employees by creating an ESOP. They obtain the loan with corporate stock as collateral, and the employees become the proud owners, wholly or in part, of the company where they work. But their newly acquired stock is mortgaged. Whether it will ever be worth its assessed value will depend on the success of the business plan and circumstances that prompted the loan.

Despite their new status as beneficial shareholders, the employees won't get to exercise any authority over corporate business directly; their shares will be voted for such purposes by the individuals, typically a corporate committee, designated for such decisions of the ESOP. Here's where it gets tricky: While voting those shares of stock on corporate decisions, or while otherwise monitoring corporate decisions on behalf of the ESOP, the ESOP committee is acting as a "fiduciary" of the shareholder employees. That is, they have a legal duty to look out for the best interests of the shareholder employees. So, what if those ESOP decision-makers are corporate insiders, deciding the amount of their own executive compensation to be paid by the corporation? From a legal standpoint, they have created a situation where they are fiduciaries with a "conflict of interest" between themselves and the shareholder employees--their unbridled discretion as to how much they themselves will be compensated directly affects the corporate balance sheet, which in turn affects the value of the ESOP assets, the corporate stock. The more they pay themselves, the worse the corporate balance sheet. Any lawyer with any experience in advising fiduciaries would tell them that's a really bad idea. Nonetheless, as long as the company appears to be doing reasonably well and the conflicted fiduciaries resist the temptation of grossly hogging the corporate trough, the conflict of interest will probably go unnoticed.

Continue reading "ESOP's Fable: A Tale of Conflicted Fiduciaries " »

True "pensions" are becoming a thing of the past for private sector employees. There was a time when most employees received a guaranteed monthly pension benefit for as long as they lived. Their retirement was secure. Now, by contrast, most employees just get a pot of 401(k) money. As we have seen recently, that pot of money can lose a huge chunk of its value in the stock market, or for any host of other reasons, it can become depleted within a few years after retirement. So much for retirement security.

If you are fortunate enough that you still participate in an employer-sponsored pension plan with guaranteed monthly benefits for life, the benefit plan probably provides a "lump sum" benefit option. That is, your "normal form" of benefit is an annuity, a monthly payment for the rest of your life or for the joint lives of you and your spouse; the plan, however, also provides the option to take your benefit in one lump sum. To pay lump sum benefits from a traditional "defined benefit" pension plan, the plan administrator must perform an "actuarial conversion" of your monthly benefit you would otherwise receive for the rest of your life to determine the "actuarial present value" of your immediate lump sum benefit. That actuarial conversion is essentially a mathematical formula that takes into account your age, your expected "normal form" benefits over your lifetime based on "mortality tables", and the "present value" of receiving a lump sum of money immediately rather than having to wait to receive benefits each month. Federal regulations place restrictions on the most crucial aspects of the formula, including the mortality tables and the annual interest rate used in the present value calculation. The plan itself can provide for a formula that is more favorable than the requirements of federal regulations. If so, the plan administrator must follow the requirements of the plan in determining lump sum benefits.

Continue reading "A "Lump Sum" Retirement Benefit Shouldn't Mean "Taking Your Lumps" in Your Benefit Calculation" »

State Street Bank and New York Mellon Bank have recently been sued for overcharging several public sector pension funds for foreign currency exchanges.

The scheme alleged in the suits goes like this: the pension fund contracts with the bank as the custodian of its assets; the pension fund also contracts with an investment manager to invest pension fund assets in foreign securities; the investment manager needs to convert dollars to foreign currency, or vice versa, each time it trades in foreign securities for the pension fund; under "standing instructions" between the bank and the investment manager, the bank agrees to execute the foreign currency exchanges to facilitate the investment manager's foreign securities trades; the bank has a twenty-four hour window to execute each foreign currency exchanges, during which time the exchange rates between the dollar and the other relevant currency fluctuate; the bank executes the foreign currency exchanges from the pension fund's account at the exchange rate as of a specific time of day, but the bank charges the pension fund account at the most expensive exchange rate of the entire day, and the bank essentially pockets the difference; the bank misleads the pension fund and/or the investment manager regarding the bank's foreign currency exchange practices on the bank's pension fund account.

The recent lawsuits allege violations of state law to recover losses suffered by public sector pension funds. A federal law, commonly referred to as ERISA, however, governs most investment-related activity for private sector pension funds. If State Street and Mellon have been applying the same scheme as described above to their private sector pension fund accounts, some very complex ERISA issues would be implicated.

As to the bank, the scheme implicates two fundamental prohibitions under ERISA: fiduciary self-dealing, and fiduciary dishonesty. By exercising discretion over the foreign exchange rates to apply and assess against a pension fund account, the bank would be a "functional fiduciary" of the pension fund under ERISA. By utilizing such discretion to feather its own bed, the bank would be engaged in "fiduciary self-dealing" with pension fund assets. By misleading the pension fund or the investment manager about its foreign currency exchange practices, the bank would be engaged in fiduciary dishonesty.

Continue reading "Banks Pocket Spread from Pension Funds On Foreign Currency Exchanges" »