LaRue – More Analysis and ESOP Implications

Corey Rosen's commentary on LaRue v. DeWolff, Boberg & Assoc. Inc., No. 06-856 (Feb. 20, 2008) can be found at Implications of the LaRue Decision for ESOPs. He explains the ruling and the history of the case. He also asks what this means for ESOPs:

So what does this mean for ESOPs? The decision specifically includes all form of defined contribution plans, so ESOPs are covered. Generally, ESOP experts believe it will have much more impact on 401(k) plans than on ESOPs, particularly for fiduciary errors and omissions and for excessive plan charges. How much the decision will allow employees to sue over choices or performance of investments in plans is hard to say given the facts of this case and that the Court did not specifically comment on this matter. Still, the large majority of ESOPs are funded by the company with no individual choices or directions, so losses to one participant's account are likely to be mirrored in accounts of other participants. ESOP lawsuits, in other words, could already usually proceed under Section 502(a)(2). Of course, that does not mean some aggressive attorneys will not try this tack anyway or that there could not be situations where there are specific individual issues, particularly regarding errors and omissions for individual accounts (failing to offer a diversification election, for instance). A very broad reading of the case, however, could include a decline in stock value after an employee leaves but before payout.

On the other hand, some attorneys have concluded (but others disagree) that LaRue may make it more difficult for participants to file class-action lawsuits against any kind of plan if courts conclude they could instead have sued as individuals. In that case, it is likely that only individuals with large account balances and a tolerance for legal wrangling will proceed.

Here are some other LaRue-related posts:

• More LaRue Action Items
• LaRue – An ESOP Perspective
• LaRue Impact on Fiduciaries and Sponsors

You can also find other LaRue-related links in the LaRue v. DeWolff, Boberg & Assoc. Inc., No. 06-856 (Feb. 20, 2008) post.

In the News: Using an ESOP to Avoid Consolidation, Retaining the Management Team, Outside Board of Directors

Litecontrol (Hanson, MA)

Litecontrol announces full employee ownership discusses how Litecontrol, a Hansen, MA light manufacturer, purchased the remaining shares seven years ahead of schedule and is now 100% ESOP-owned.

This event, originally scheduled for 2014, completed a change in ownership that began in December of 1999. Litecontrol experienced fantastic growth from 2004 through 2007, which enabled the company to accelerate the purchase by nearly 7 years.

A press release discusses how they avoided the consolidation approach that their competitors have followed:

"In a time when many niche lighting manufacturers are being purchased by larger competitors, Litecontrol has chosen a different route," notes Clark. "Our ability to provide top notch service to our customers will be enhanced by ensuring we remain independent and that every one of our employees has a stake in the customer experience. Employee ownership is very consistent with our management philosophy at Litecontrol. We are known in the industry for the strength of our people. This is just another way we want to invest in this important asset," said Clark.

The release also notes that the management structure and team will remain the same and that they have an external Board of directors, consisting of the company chairman and four outside members.

More LaRue Action Items

We have devoted a few posts to LaRue v. DeWolff, Boberg & Assoc. Inc., No. 06-856 (Feb. 20, 2008), including a look at LaRue from an ESOP Perspective. We have also discussed immediate concerns and recommendations and LaRue's Impact on Fiduciaries and Sponsors. Here are links to two additional articles that discuss some action items:

Employee Benefits Law: Recent Supreme Court Case Should Prompt Review Of Fiduciary Practices discusses some steps that plan sponsors and fiduciaries should consider:

• reviewing fiduciary and administration practices to ensure compliance with all ERISA Section 404(c) requirements (see summary below), including timely implementation of participant investment directions;
  
• adopting and following a plan investment policy statement that describes the process to be followed in selecting plan investment alternatives and that provides for regular monitoring of the performance of investment alternatives (and, if applicable, investment managers);
  
• educating plan fiduciaries about the increased fiduciary liability exposure arising out of this case, and the steps they should take to minimize that exposure;
  
• ensuring appropriate due diligence and detailed documentation of fiduciary decisions, which always must be made in the best interest of plan participants;
  
• retaining investment professionals to assist in the selection and monitoring of investment alternatives;
  
• reviewing all plan administration practices to ensure that the plan is administered in accordance with its terms; and
  
• reviewing insurance policies to ensure adequate insurance coverage for all plan fiduciaries (coverage generally should be "non-wasting" to ensure that litigation expenses are not charged against the coverage amount).

Supreme Court Addresses the Remedies Available for Fiduciary Breach Under ERISA discusses the action that plan sponsors should take to protect themselves:

First, the allocation of responsibility between the plan sponsor and the administrative service providers should be clearly stated in the administrative services agreement. Then, to the extent the employer has a role in the receipt and execution of participant investment directions, safeguards should be put in place to assure that participants' investment directions are promptly and accurately carried out. However, there probably is no way for a 401(k) sponsor to completely insulate itself from LaRue actions, since the very act of choosing an outside service provider is arguably a fiduciary act that might be alleged at some point to have been a contributing cause of a loss to a participant's account, and because mistakes in handling participant investment directions probably are inevitable given the large volume of such directives handled every day.

Employers may also wish to review the administrative services agreement, which will often include a provision stating that the provider will be liable only for intentional errors or gross negligence. While this language will not protect the service provider from participant lawsuits, it may prevent the plan sponsor from bringing the service provider into litigation as a third-party defendant. In addition, the administrative services agreement should address the degree to which the service provider is willing to indemnify or defend the plan sponsor in any litigation brought by a participant where the failure to implement an investment directive was the fault (in whole or in part) of the service provider rather than the plan sponsor.

60-day Rollover Period

Is the 60 days for IRA rollovers calculated from the date of the check or the post mark of the check received by the owner? discusses the 60-day rollover period. Guidance for the 60-day rollover period can be found in IRC Section 402(c)(3) - Taxability of beneficiary of employees' trust - Rules applicable to rollovers from exempt trusts - Transfer must be made within 60 days of receipt and guidance defining a rollover contribution can be found in IRC Section 408(d)(3) -Individual retirement accounts - Tax treatment of distributions - Rollover contribution. The article states that the 60-day period begins the day after the IRA has receives the assets and that the IRA owner is responsible for determining the date. The article also discusses the 60-day waiver rules provided under IRS Revenue Procedure 2003-16.

America Saves Week 2008

America Saves published Americans Report Their Savings Habits and Progress, a press release announcing the results of a survey commissioned by America Saves and the American Savings Education Council (ASEC). The survey found that "only 53 percent say that they save at least 5% of their income, while only 57 percent of those not retired say they are saving enough for a retirement with a "desirable standard of living." The press release highlighted the following:

• Americans Report Mixed Savings Progress
• Income Differences Provide Best Explanation for Savings Differences
• During America Saves Week, Diverse Organizations Plan Activities to Encourage and Assist
• Good Savings Habits

Groups Kick off America Saves Week provides a summary of the press release and the survey results.

The America Saves Week website discusses the purpose of America Saves Week:

The personal savings rate is near zero, most Americans are not saving adequately for retirement, and most lower-income households do not have adequate emergency savings for unexpected expenditures like a car repair. But with more societal encouragement and support, more Americans will be persuaded to build wealth, not debt.

During America Saves Week, individuals will be encouraged and assisted to assess their savings progress and take action to advance this progress. This encouragement and assistance will be provided by organizations and professionals with an interest in improving the financial security of individuals and families.

For example:

• Employers encourage and make it easier for employees to participate in savings and retirement programs.
  
• Banks and credit unions promote automatic transfers from checking to savings and investments.
  
• Mortgage lenders help consumers attain homeownership by saving the down payment on a first mortgage loan.
  
• Nonprofits promote savings programs such as individual development accounts.
  
• Financial educators discuss savings opportunities such as automatic deposits and the "miracle" of interest compounding.
  
• The media report and editorialize about personal savings activities and the activities of the Week.
  
• Individuals take action to save more effectively and encourage family and friends to do the same.

Here are a couple of financial education-related posts:

• Taking The Mystery Out Of Retirement Planning
• Free Basic Financial Education

LaRue – An ESOP Perspective

ESOPs Impacted by Landmark U.S. Supreme Court Case discusses LaRue v. DeWolff, Boberg & Assoc. Inc., No. 06-856 (Feb. 20, 2008) from an ESOP perspective. Most claims related to the company stock would apply to the plan as a whole and are not affected by this ruling. This post discusses three examples where a claim only affects one participant or a subset of participants:

1. Statutory Diversification – The post discusses what would happen if the diversification eligible participants thought the stock was undervalued and sued. Prior to LaRue, the case would have likely been dismissed. Now, it appears the participants would have a right to make a fiduciary claim under ERISA Section 502(a)(2), 29 U.S.C. Section 1132(a)(2) – Civil enforcement - Persons empowered to bring a civil action or a denial of benefit claim under ERISA Section 502(a)(1)(B), 29 U.S.C. Section 1132(a)(1)(B) – Civil enforcement - Persons empowered to bring a civil action.
   
2. Distributions – The same concept as #1 for the participants who received distributions in a given time period.
   
3. KSOPs – The same concept as #1 for the participants who invested in company stock.

The post also discusses publicly traded ESOPs:

"Much of the ERISA-related stock drop litigation since Enron has involved participants' claims that the company stock fund in the 401(k) plan was an imprudent investment choice and that the fiduciaries are liable to any participants who invested in the fund. Prior to LaRue, some of these cases were dismissed by courts because only some of the KSOP's participants chose to invest in the company stock fund. Since others elected not to invest in company stock, some courts said there was no loss to the "entire plan" but rather individual losses to affected participants. After LaRue, this sort of defense will no longer be available. The affected participants should be able to maintain their claims. Under Justice Roberts' concurrence, it is possible that participants will need to bring these claims under Section 502(a)(1)(B) as a benefit claim rather than as a 502(a)(2) fiduciary breach case….For ESOPs in publicly traded companies, the LaRue decision will allow many more plaintiffs to avoid an early stage dismissal of their case and increase the likelihood of getting to a trial on the merits of the underlying fiduciary claim."

LaRue Impact on Fiduciaries and Sponsors

I continue to add related links to the LaRue v. DeWolff, Boberg & Assoc. Inc., No. 06-856 (Feb. 20, 2008) post. One of the related links, Supreme Court Expands Remedies Available for ERISA Fiduciary Breach Claims, discusses the impact on fiduciaries and sponsors:

"Plan fiduciaries and administrators can take several precautionary steps in an attempt to ward off new lawsuits based on LaRue and to provide potential defenses if new litigation is filed. Fiduciaries should first review their current plan administration and account investment processes to ensure that all steps are being taken to avoid administrative errors affecting plan participants' accounts. Proper and diligent administration is generally the best defense against potential litigation.

However, even with the best procedures in place, administrative mistakes do occur. If fiduciaries learn of investment errors or other administrative claims involving individual benefit decisions, administrators may attempt to rely on Chief Justice Roberts' concurring opinion and treat any challenges to administrative or investment errors as claims for benefits under the plan. By treating these issues as garden-variety benefit claims, the plan administrator can require the participant to first exhaust administrative remedies, giving the plan the opportunity to determine whether any errors have occurred before litigation is filed. If the claims are denied, the plan administrator can argue in litigation that the decision and any interpretations of plan terms should be reviewed under a deferential standard of review. If a claim is viable, the plan administrator may grant the benefit claim during the administrative review, which can save litigation defense costs and avoid payment of attorneys' fees to the participant's lawyer if litigation is commenced.

Finally, employers should review their existing fiduciary insurance coverage to determine whether it is sufficient if the amount of ERISA fiduciary breach litigation increases, or consider purchasing fiduciary coverage if none is in place. Any increase in fiduciary litigation could become very costly for employers, and fiduciary insurance policies may have limits that could be quickly reached if the number of lawsuits against any plan increases greatly."

The LaRue v. DeWolff, Boberg & Assoc. Inc., No. 06-856 (Feb. 20, 2008) post contains additional information about immediate concerns and recommendations.

ESOP Statistics, ESOP Coverage in the WSJ, Steady Decline Percentage of Assets Invested in Company Stock

The February 14, 2008 Employee Ownership Update is online and discusses the following:

• ESOPs Grow Significantly in 2007
• Wall Street Journal Features ESOPs
• New Data on Employee Ownership in 401(k) Plans
• Entries Open for Annual Principal 10 Best Small and Medium Sized Companies for Financial Security Awards

2007 ESOP Statistics Available

As discussed in 2007 ESOP Statistics, Estimating Techniques, 1993 Peak, and Aggressive Acquirers, the NCEO has updated their ESOP Statistical Profile. The Update explains that the increase in value of plan assets is due to a combination of market gains, additional performance gains attributable to being an ESOP company, and acquisitions made by ESOP companies. The acquisitions also explain why the value of plan assets and number of participants are increasing at a significantly faster rate than the number of plans (even considering the 3% ESOP termination rate).

As discussed in yesterday’s post, the Update explains in more detail how they derived the numbers:

The numbers are necessarily estimates. First, we looked at all the Department of Labor Form 5500 filings for the most recent years available (2006 for some plans and 2005 for others). These data provided a baseline number for plan assets, plan participants, and number of plans. The data are subject to reporting errors, so we cannot call our projections anything other than reasonable estimates. Then we used IRS data on the number of letters of determination for new plans and plan terminations. These numbers, unfortunately, appear subject to serious reporting errors and inconsistencies, but the relationship between terminations and new plans seem fairly consistent. Using that data, and input from plan providers on trends on new plan formation, we made a conservative estimate of how many net plans were added in 2006 and 2007 that would not have been picked up in the Department of Labor data.

We defined ESOPs to include plans that filed as ESOPs, stock bonus plans, and profit sharing plans primarily invested in company stock. There were 530 profit sharing plans so invested with about $50 billion in assets and 630,000 participants. While these profit sharing and stock bonus plans are not technically ESOPs, functionally there are few differences, especially for participants.

ESOP Coverage in the Wall Street Journal

We have profiled most of the ESOP Coverage in the Wall Street Journal. The Update discusses how this is the result of a suggestion to the Journal reporters from the NCEO. The NCEO is encouraging its members to send a link to their contacts and provided some suggested language for an email:

"I wanted to call your attention to what I think is a great set of stories you might not have seen.

The Wall Street Journal on February 7 ran a full-page of articles on employee stock ownership plans. There is a link to all this material and more at online.wsj.com/small-business/small-business-link.

I think this is one of the best explorations of employee ownership in a major publication ever produced, and anyone with any interest in the topic should take a look.

The article was the product of a suggestion to the paper from Corey Rosen of the National Center for Employee Ownership. The center is a great resource on employee ownership. They have books, webinars, and an upcoming annual meeting that covers all aspects of the topic. Their site is well worth visiting as well. Their site is www.nceo.org."

Steady Decline of Percentage of Assets Invested in Company Stock

Last week we discussed the percentage of assets invested in Company Stock in Too Concentrated in Employer Stock? The same report discussed in the post (the 2006 EBRI/ICI Participant-Directed Retirement Plan Data Collection Project) notes that 11% of plan assets were invested in company stock in 2006, compared to 19% in 1999.

2007 ESOP Statistics, Estimating Techniques, 1993 Peak, and Aggressive Acquirers

The Statistical Profile of Employee Ownership was updated in February 2008. Here are some of the latest ESOP statistics:

• The number of "ESOPs, stock bonus plans, & profit sharing plans primarily invested in employer stock" increased to 9,774 in 2007 (from 9,650 in 2006)
  
• The number of participants of "ESOPs, stock bonus plans, & profit sharing plans primarily invested in employer stock" increased to 11.2 million in 2007 (from 10.5 million in 2006)
  
• The value of plan assets of "ESOPs, stock bonus plans, & profit sharing plans primarily invested in employer stock" increased to $928 billion (from $675 billion)
  
• 30% of the private company ESOPs owned 51-100% of the company stock, 30% owned 31-50%, 20% owned 11-30%, and 20% owned 0-10%
  
• 40% of majority-owned private ESOP companies pass through full voting rights, compared to 20% of all private ESOP companies
  
• The mean allocation to a private ESOP is 8-10% of compensation. The mean number of employees is 1,460, and the median is 125

Plans Considered and Statistics Used

The Profile provides an analysis of the plans considered and statistics used:

ESOPs (employee stock ownership plans) are stock bonus plans qualified to borrow money; otherwise, the two types of plans are very similar. Estimates for ESOPs in this category are based on data from the Department of Labor and the Internal Revenue Service. Because these data have many imperfections, we have used an estimating technique that we believe is fairly accurate. The estimates were revised in 2007, providing a somewhat lower number of plans than we had reported a few years ago, a somewhat higher number of participants, and a stronger year-to-year growth than previously thought. Details on this estimating technique are in the February 14, 2008, Employee Ownership Update. The data on 401(k) plans is based on surveys from the Employee Benefit Research Institute and the Investment Company Institute for 2006. The stock bonus plans and profit sharing plans included here are similar to nonleveraged ESOPs (they are primarily invested in employer stock and offer distributions in employer stock). Most companies with ESOPs are closely held.

The dramatic growth in plan assets in participants in the last few years appears to result from the better performance of ESOPs companies and a huge increase in the number of ESOPs doing acquisitions.

The estimating technique is important to understanding how the number of plans is calculated. Last December we discussed the DOL's Summary of the 2005 IRS Form 5500. You may have wondered about the difference between the number of ESOPs according to the DOL's Summary and the NCEO's Profile. I asked Corey Rosen, the executive director of the NCEO, about the difference:

"The 2006 data show about 8,700 ESOPs in the Form 5500 reports we have. You need to search for both ESOPs and separately for leveraged ESOPs. The 5500
data have some lag because smaller companies only file every three years, so,
for instance, in 2005, you would miss companies with ESOPs set up in 2005 or 2004 that have fewer than 100 participants (another four to five hundred probably, maybe a little more). On the other hand, some companies have more than one plan or their plan is inactive.

There are also plans that are functionally ESOPs (and even call themselves that) but are not technically (stock bonus or profit sharing plans invested primarily in employer stock). And there are many, many errors in both directions."

He provided a more thorough explanation in the February 14, 2008, Employee Ownership Update, which I will be blogging about later today.

Why the Number of ESOPs Peaked in 1993 and ESOPs as Aggressive Acquirers of Other Companies

The Profile also discusses the peak of 1993 and how ESOPs have become aggressive acquirers of other companies:

"1993 was one of two peak years for the number of ESOPs, ironically with the same number as 2005.

In the late 1980s, many public companies set up ESOPs. In 1992, accounting rules changed in a way that was less favorable for ESOPs, and public companies moved their contributions of stock from their ESOPs to 401(k) plans and began terminating their ESOPs. Formal plan designation changed, but not substance. Meanwhile, ESOPs in closely held companies were growing, both in numbers and size. ESOP companies tend to grow faster in terms of employment than comparable firms and, in recent years, have become aggressive acquirers of other companies. The numbers for 2007 in this table are for the end of the year and also apply as of early 2008."

Collection of Delinquent Contributions

In the shadow of LaRue, Department of Labor issues a directive on fiduciary responsibility for collection of delinquent contributions mentions LaRue v. DeWolff, Boberg & Assoc. Inc., No. 06-856 (Feb. 20, 2008) and discusses Field Assistance Bulletin No. 2008-01 – Fiduciary Responsibility for Collection of Delinquent Contributions:

• For Banks serving in the trustee role (directed or discretionary), are they not now responsible for forcing the employer to forward contributions due to the plan, not just participant deferrals; unless some other party is made responsible for that function.
  
• For TPA/Recordkeepers the answer would appear to be it is dependent on their actual role. If the TPA/recordkeeper is purely in the role of recordkeeper with no responsibility for asset investment, apparently nothing has changed.
  
• For TPAs/recordkeepers who are now acting in the investment advisory role, unless responsibility is specifically allocated elsewhere, it is their job to make sure contributions are made, especially for self-trusteed employer plans.
  
• A positive note about this change is that for an employer who is not timely depositing the employees' deferrals, there is now guidance that can be used to let the employer know that he or she may have to be reported to the DOL or sued if the contributions are not made.
  
• As to discretionary contributions, it appears that the rules will apply once the employer has declared that a discretionary contribution is being made. At that point, the contribution becomes due and owing to the plan.

The above commentary, along with a discussion on the required time period to deposit employee deferrals, is originally from Responsibility for Collecting Contributions DOL FAB 2008-1:

"The DOL time for the employer to deliver employee deferrals is five business days. This has been learned from audit findings and verbal guidance. There is no written guidance from the DOL to inform employers of this DOL position."

ESOP Coverage in the Wall Street Journal

The February 7 edition of the Wall Street Journal published a series of ESOP-related articles in its Small Business section (page B6). Here are links to my posts discussing each of the articles:

• In the News: Educating Workers about Employee Ownership
• In the News: Diversification of ESOP Assets
• In the News: Using Analogies to Teach Business Literacy
• Charting ESOP Trends
• In the News: ESOP Companies Acquiring Companies, Cost to Establish an ESOP
• In the News: Using Business Books to Get Employees Involved
• Too Concentrated in Employer Stock?

Here are some additional Wall Street Journal items about ESOPs and employee ownership:

• Blog: What flavor is the Kool-Aid at your company?
• Podcast: Creating an ownership culture to drive results
• Independent Street Blog: How one employee-centered company went wrong

LaRue v. DeWolff, Boberg & Assoc. Inc., No. 06-856 (Feb. 20, 2008)

In December we wrote about how the Supreme Court started hearing arguments in the LaRue Case. The Supreme Court finally issued their ruling in LaRue v. DeWolff, Boberg & Assoc. Inc., No. 06-856 (Feb. 20, 2008) (PDF file).

The case asked whether a 401(k) participant can bring an ERISA Section 502(a)(2), 29 U.S.C. Section 1132(a)(2) – Civil enforcement - Persons empowered to bring a civil action fiduciary breach claim. Justices' ERISA Ruling Puts Firms on Spot summarizes the case:

"In this case, James LaRue had sued his former employer — management consultancy DeWolff, Boberg & Associates — after he lost $150,000 in his 401(k) plan. He claimed that DeWolff failed to respond to his two requests to make investment changes to his account. As a result, his interest in the plan "depleted" by thousands of dollars. He subsequently accused the firm of breaching its fiduciary duty, but his case was denied by two lower courts."

Ruling Allows Workers to Sue On 401(k) Losses discusses how the Supreme Court upheld the right to sue because pension law "does authorize recovery for fiduciary breaches that impair the value of plan assets in a participant's individual account." The ruling sends the case back to the lower courts.

502(a)(1)(B) Denial of Benefit Claim Instead of a 502(a)(2) Fiduciary Breach Claim?

Ruling Allows Workers to Sue On 401(k) Losses also discusses how a minority opinion might help combat similar cases in the future:

"But employers may find solace in a minority opinion by Chief Justice John Roberts, which, while concurring with the majority, appeared to offer companies a roadmap for combating similar cases in the future…. In that opinion, Chief Justice Roberts, joined by Justice Anthony Kennedy, discussed a defense that Mr. LaRue's employer hadn't raised: that the case should have been brought under a different provision of federal pension law. Under that provision, pension-law experts say, cases can be harder to win, in part because participants must exhaust administrative remedies before suing, and because plan trustees are generally given broader discretionary leeway to make decisions on the plan's behalf"

UPDATE: This article discusses how Court precedent "bars claims that are essentially benefits claims from being recast as fiduciary breach claims."

Reflections on the LaRue Decision provides ten reflections, including thoughts on the above-mentioned opinion of considering the claim under ERISA Section 502(a)(1)(B), 29 U.S.C. Section 1132(a)(1)(B) – Civil enforcement - Persons empowered to bring a civil action instead of ERISA Section 502(a)(2), 29 U.S.C. Section 1132(a)(2) – Civil enforcement - Persons empowered to bring a civil action:

"I could not agree less with the concurrence written by Chief Justice Roberts, and joined by everybody's favorite swing vote, Justice Kennedy, that this case is really not a fiduciary breach case under 502(a)(2), but rather a denial of benefit case under 502(a)(1)(B), subject to exhaustion and Firestone discretion. I think it is interesting that Justice Scalia did not join Roberts opinion since he asked most of the questions in the oral argument about (a)(1)(B) alternative, but it seems clear that he and Thomas believed this was a fiduciary case and not a benefits case being mischievously recast."

Is LaRue a Plan Participant?

U.S. Supreme Delivers Decision in LaRue on Recovery for Fiduciary Breaches discusses the reference to the Russell case, the above-mentioned minority opinion, and who is considered a plan participant (including a reference to Harzewski v. Guidant Corp):

"6 After our grant of certiorari respondents filed a motion to dismiss the writ, contending that the case is moot because petitioner is no longer a participant in the Plan. While his withdrawal of funds from the Plan may have relevance to the proceedings on remand, we denied their motion because the case is not moot. A plan "participant," as defined by §3(7) of ERISA, 29 U. S. C. §1002(7), may include a former employee with a colorable claim for benefits. See, e.g., Harzewski v. Guidant Corp., 489 F. 3d 799 (CA7 2007)."

Immediate Concerns and Recommendations

U.S. Supreme Delivers Decision in LaRue on Recovery for Fiduciary Breaches also mentions the immediate concerns raised by LaRue:

"More immediate concerns raised by LaRue are what type of plan language changes will be needed to accommodate the decision, including changes to Summary Plan Descriptions (SPDs) and administrative forms."

ERISA Litigation - LaRue discusses the case and recommends that plans and their fiduciaries check with their counsel and consultants to get assistance with:

1. reviewing the plans' ERISA § 404(c) compliance (particularly because some plans may be only partially compliant);
   
2. reviewing the plans' procedures for discharging participant directions and ensuring that proper controls are in place to reduce the potential for error;
   
3. reviewing the adequacy of fiduciary liability insurance coverage;
   
4. reviewing the plans' investment policies and procedures designed to ensure that the plans' investments options are prudent;
   
5. reviewing service provider agreements to ensure an appropriate allocation of liability and indemnification rights;
   
6. considering provision of access for plan participants to investment advisers who can advise participants on investment in company stock; and,
   
7. analyzing (and documenting the analysis of) fees charged by service providers, including consultants and counsel, to the plans.

Updates:

• LaRue’s Impact on Fiduciary Risk: Number of Lawsuits, Stock Drop Litigation, and Plan Design Litigation
• More LaRue Background and Anaylsis
• LaRue – More Analysis and ESOP Implications
• More LaRue Action Items
• LaRue – An ESOP Perspective
• LaRue Impact on Fiduciaries and Sponsors

Related Links:

• What LaRue Wrought
• 7th Circuit Applies Supreme Court’s Decision in LaRue to Defined Contribution Overvalued Stock Lawsuit
• The Interaction of LaRue, Bruch, and MetLife v. Glenn
• Should We Rue LaRue?
• There's no such thing as a bullet-proof 401(k) plan
• Liability of Plan Fiduciaries under ERISA: LaRue v. DeWolff, Boberg & Associates
• Implications of the LaRue Decision for ESOPs
• Employee Benefits Law: Recent Supreme Court Case Should Prompt Review Of Fiduciary Practices
• Supreme Court Addresses the Remedies Available for Fiduciary Breach Under ERISA
• Supreme Court Holds that 401(k) Participants May Sue for Breach of Fiduciary Duty to Recover Losses in Individual Accounts
• Supreme Court Gives "Green Light" to ERISA Breach of Fiduciary Duty Claims Related to Individual 401(k) Participant Accounts
• Supreme Court Permits Employees to Sue Retirement Plan Fiduciaries for Losses to Individual Account Balances
• ESOPs Impacted by Landmark U.S. Supreme Court Case
• Supreme Court Expands Remedies Available for ERISA Fiduciary Breach Claims
• Supreme Court Ruling Enables §401(k) Plan Participants to Sue for Losses in Their Accounts Caused by Administrative Errors
• Supreme Court Expands Liability Exposure of Fiduciaries of Individual Account Plans
• Supreme Court Decision Authorizing Suits by Individual 401(k) Plan Participants Based on “Impaired Value” of Plan Accounts Confirms Yet Another Risk for Plan Fiduciaries
• Supreme Court Allows Individual 401(k) Plan Participants to Sue
• U.S. Supreme Court Allows 401(k) Plan Participant to Sue Plan Employer over Loss to Participant's Account
• Court Expands Liability for 401(k) Plan Fiduciaries
• ERISA Lawyers: Don't Expect Lawsuit Tsunami After LaRue Ruling
• Pressure to be fiduciaries intensifies - High-Court Ruling on 401(k) May Open Floodgates of Litigation
• 401(k) Plans Put on Notice As Investor's Suit Advances Supreme Court Opens New Front In 401(k) Suits
• IMHO: All for One - Looks Like James Larue Will Get His Day in Court, After All
• Individuals Had Standing to Sue Fiduciary for Breach of Duty to Recover 401(k) Losses
• Supreme Court Upholds Right To Sue 401(k) Administrators
• Supreme Court Rules Individual Retirement Plan Participants Can Sue Employers Over 401(k) Losses
• Supreme Court Rules Employees Can Sue Over 401(k) Plan Management Misconduct
• Court Rules 401(k) Participants Can Sue
• Supreme Court Vacates Fourth Circuit's Decision in LaRue
• Top Court Allows Suit Over 401(k)
• LaRue Wins! 502(a)(2) Again Viable for ERISA Participants
• Pension Rights Center's Statement on the Supreme Courts Decision in LaRue v. DeWolff
• Dark Victory for 401(k)
• Court Says 401(k) Participants Can Sue
• Legal Alert: Supreme Court Allows ERISA Relief for Individual Plan Accounts
• U.S. Supreme Court Says 401(k) Plan Participants Can Sue
• A victory for participants. A warning shot for plan sponsors
• Interpreting LaRue

Taking The Mystery Out Of Retirement Planning

U.S. Labor Department announced a new online resource to help Americans chart their retirement finances and prepare for retirement:

"Washington – The U.S. Department of Labor today released a new online resource that makes it easier for Americans to prepare for a financially secure retirement. A series of interactive worksheets were developed as a companion to a 2006 publication entitled "Taking the Mystery Out of Retirement Planning." Using the worksheets, individuals who are 10 to 15 years from retirement can calculate their income and savings as well as their projected expenses in retirement.

"Americans are living longer, healthier lives and need to plan for their retirement," said U.S. Secretary of Labor Elaine L. Chao. "These interactive worksheets will give workers and their families a better perspective on how much they need to save to ensure that they can realize their retirement dreams."

Although targeted to individuals approaching retirement, the worksheets and booklet are also useful for recent retirees."

Taking The Mystery Out Of Retirement Planning consists of seven chapters and a resources section:

• Chapter 1 - Tracking Down Today's Money
  
• Chapter 2 - Tracking Down Future Money At Retirement & After
  
• Chapter 3 - Tracking Down Future Expenses
  
• Chapter 4 - Comparing Income And Expenses
  
• Chapter 5 - Five Ways To Close The Gap
  
• Chapter 6 - Making Your Money Last
  
• Chapter 7 - Tracking Down Help For Retirement
  
• Resources
  

Too Concentrated in Employer Stock?

Continuing my review of the series of ESOP articles in the Wall Street Journal, Overdosing on Your Company's Stock is a post on the Wall Street Journal's Independent Street Blog that discusses the problem of being too concentrated in employer stock. The post follows up an article discussing how an ESOP company diversified a portion of its ESOP Assets.

EBRI Study

The post cites the 2006 EBRI/ICI Participant-Directed Retirement Plan Data Collection Project, which is also discussed in Decreasing Share of Company Stock in 401(k) Plans, and states "that among participants in 401(k)s where employer stock was offered, 9% held more than 80% of their balances in the stock." For a more complete picture, here is the exact language from page 26 of the report:

Distribution of Participants' Company Stock Allocations by Age

Participants' allocations to company stock remained in line with previous years. Forty-seven percent (or 9.3 million) of the 401(k) participants in the 2006 EBRI/ICI database are in plans that offer company stock as an investment option (Figure 22). Among these participants, 67 percent hold 20 percent or less of their account balances in company stock, including almost 45 percent who hold none (Figure 32). On the other hand, nearly 9 percent have more than 80 percent of their account balances invested in company stock.

Enron

The post also cites Enron as a reason to be concerned about diversification:

At Enron Corp., nearly two-thirds of employees' 401(k)s were held in Enron stock in late 2000. The stock, selling then for $83 a share, plummeted while the financial scandal at the company unraveled. It was worth just pennies by late 2001, wiping out many employees' retirement savings.

An informative Q&A on Enron is available at Questions and Answers About Enron, 401(k)s, and ESOPs (Keep in mind that the article was written in January 2002 and, while relevant to the Enron discussion, will most likely contain references to dated legistlation, statistics, and other information)

Additional Things to Consider

Here are some additional items to consider that were not discussed in the post.

• Employees who work for an ESOP company generally receive more retirement benefits than employees of non-ESOP companies and usually have access to another retirement plan, usually a 401(k) plan, giving them an opportunity to diversify their retirement holdings.
  
• Since most ESOPs generally allows all full-time employees to share in the plan and are entirely funded with employer contributions, more employees are given a greater opportunity to benefit from the ESOP (than a 401(k) plan) without having to invest any of their own money. See Benefits of Participating in an ESOP, which highlights a NCEO discussion of a different EBRI study, for further analysis.
  
• Participants that are age 55 with 10 years of participation have a right to diversify a portion of their account balance, assisting them in achieving their diversification objectives.
  

Comments

The post contains some excellent comments worth reading. Here is a sample:

• "The 2006 Pension Protection Act did require that public companies with 401(k) plans or combined ESOP/401(k) plans requires that employers allow employees to diversify out of employer stock every quarter. Employees should take advantage of that. 401(k) plans should be diversified. Remember, though, that applies to all investments, not just employer stock.
  
  In a private company, if you have an ESOP, you can diversify when you have 10 years of participation in the plan and are 55 or older. More important, almost all ESOPs also have 401(k) plans that have no company stock in them, so make sure you put as much as possible in that plan to provide a buffer if company stock in the ESOP declines. Overall, however, ESOP participants have about three times the retirement assets, and about as much in diversified assets, as comparable employee sin non-ESOP companies." - Comment by Corey Rosen, National Center for Employee Ownership
  
  
  
• "What Kelly Spors fails to explain (perhaps she just does not understand) is that ESOP benefits at closely held companies are typically provided by the employer at no financial cost to the employee, as an added fringe benefit. The ESOP is fully invested in company stock and operates alongside a 401k plan, which usually does not permit any investment in company stock whatsoever. So let me give you this example: Joe Jones can go to work for Acme,Inc. and earn a good salary as a welder, say $75,000, save $20,500 a year (he is over 50) in the Acme 401k plan in a diversified portfolio with no company stock, AND participate in the Acme ESOP where he gets another $25,000 worth of Acme stock credited to his account each year for the 10 years of the ESOP loan. Is this a bad deal for Joe? Should he turn down the job at Acme becuase he does not want to be so heavily invested in company stock? I guess Joe, if he felt so strongly about it, could