FIDUCIARY LIABILITY—PUBLIC SECTOR Hard Choices, Real Protection October 10, 2009 Robert D. Klausner Klausner & Kaufman, P.A. Esquire Daniel Aronowitz Ullico Casualty President Christine A. Dart Chubb & Son Vice President Brian L. Smith The Segal Company Senior Vice President
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FIDUCIARY LIABILITY—PUBLIC SECTOR Hard Choices, Real Protection October 10, 2009 Robert D. Klausner Klausner & Kaufman, P.A. Esquire Daniel Aronowitz Ullico.
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FIDUCIARY LIABILITY—PUBLIC SECTOR
Hard Choices, Real Protection
October 10, 2009
Robert D. KlausnerKlausner & Kaufman, P.A.Esquire
Daniel AronowitzUllico CasualtyPresident
Christine A. DartChubb & SonVice President
Brian L. SmithThe Segal CompanySenior Vice President
Agenda
Indemnity protection Common misconceptions v. reality
Fiduciary “Standard of Care”
Fiduciary liability exposures Operational Statutory Other
Claim Examples
Fiduciary liability insurance Is it permitted? What does it cover?
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Common Misconceptions
Trustees are not bound to fiduciary rules Plans are exempt from ERISA
Trustees are exempt from liability Sovereign immunity Statutory indemnification Governmental policy
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The Reality
Trustees are subject to significant fiduciary obligations
Existing protections may be Very limited Non-existent
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Possible “Gaps” in Your Liability Protection
“Good faith” standard Who determines?
– The attorney general, the board of trustees, or the courts
Indemnity contingent upon an evaluation of the underlying conduct
Liable for bad faith, willful, wanton or grossly negligent conduct
“Ultra virus” standard Indemnity not available for actions taken outside “the scope of employment” Conduct must be consistent with “statutory duties” or “applicable standard of care”
– “Breaches of fiduciary duty” may not be covered
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Potential “Gaps” continued
No uniformity
Statues vary by state for indemnification of defense costs, judgments, penalties, and other expenses
“Triggers” also vary
No indemnity
At least eleven appear to limit indemnification to trustees No indemnity is available to other officers, agents or employees
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Immunity
State “agent” immunity may be qualified Acts involving skill or judgment (Discretionary Acts) may not be eligible for
immunity Non-qualifying acts may include:
– Acts “inconsistent” with statutory duty– “Ultra Virus” acts– “Willful and wanton” negligence
The “independence” of Public Sector plans may void sovereign immunity protection
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Indemnity/ImmunityOther Observations
State statutory law may mirror ERISA’s section 412 [or 410?]
Any indemnity agreement for a breach of fiduciary duty is void
State statutory law may specifically grant immunity
BE AWARE OF THE CAVEAT “That do not involve malicious or wanton misconduct…”
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Critical Questions
Do you know your state’s statutory and other applicable laws that define your responsibilities and liabilities?
Do you have written opinions from legal counsel identifying the scope of any indemnification or immunity protections?
Do you understand the caveat language that may exist within these protections? For example, is indemnity available for: “Gross negligence” or “willful or wanton failure?” Any alleged criminal activity?
Are you protected if the Plan or a regulatory agency (e.g., the state attorney general) sues you for an alleged wrongdoing?
Will the indemnity or immunity be provided if the alleged wrongdoing has become a political “hot potato” or “public scandal”?
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Fiduciary Standard of Care
The fiduciary standard adopted in most states is the ERISA standard applicable to most private sector plans.
Federal Standard
=Expert
Prudent Man
State Standard
= or ~Expert
Prudent Man
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Fiduciary Standard of Care continued
The fiduciary…may owe affirmative duties…beyond those found in an ordinary case of fraud. See Jersey City v. Hague, 18 N.J. 584, 589-90 (1995)
A fiduciary agent is presumed to be acting with “absolute devotion”… See Jaclyn, Inc. v. Edison Bros. Stores, Inc., 1970 N.J. Super. 334, 369 (1979)
The public official may be considered a “constructive trustee” of assets gained through misconduct…or impose an “equitable lien”… The public employer may demand not only what was lost, but also gains…
– See Dobbs, Law of Remedies
RICO provisions and remedies may also be available
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Public versus Private Sector Plans
ERISA preempts state law and creates a uniform statutory standard
Public sector plans are not so protected Numerous statutory and common
law standards may apply
ERISA=
Uniform Statutory Standard
Public Sector=
No Uniform Statutory Standard
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Delegation of Fiduciary Duty
ERISA permits the avoidance of fiduciary liability by delegation Trustees’ exposure is
essentially limited to monitoring
Government plan fiduciaries do not transfer their liability by delegation of their duties to service providers Trustees’ exposure
includes investment decision, performance, and monitoring
ERISA Delegation Permitted
Liability Transferred
Public SectorDelegation Permitted
Liability Not Transferred
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Trustee and Administrative (Operational) Exposures
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Trustee and Administrative (Operational) Exposures
Labor Department Sues to Appoint Independent Fiduciary for 401k Plan Abandoned by Employer DOL Sues Health Care Provider to Recover 401k Assets Company Agrees to Restore 401k Funds Following DOL Investigation DOL Sues Defunct Company for Abandoning 401k Plan DOL Sues to Restore Losses to Tampa 401k Plan DOL Sues Company President to Recover 401k Assets DOL Sues Company to Protect 401k Plan Participants DOL Sues Company and Owners Over Delinquent 401k Contributions DOL Sues Fiduciary to Recover 401k Assets Owner Pleads Guilty to Embezzlement of 401k Assets Labor Sues to Recover 401k Assets from California Company Labor Appoints Independent Fiduciary for Abandoned Georgia 401k Labor Department Recovers $8.6 Million Involving Agway 401k Plan Labor Department Obtains Judgment Over Misuse of 401k Assets Company and Officers Ordered to Restore Misused 401k Funds DOL Takes Legal Action Against 401k Plan Trustee Labor Department Sues Fiduciary to Recover 401k Assets Labor Department Obtains Settlement with Business Owner to Restore 401k Funds DOL Sues Defunct Company Over Abandoned Retirement Plan Labor Department Sues to Appoint Independent Fiduciary for Abandoned 401k Labor Department Seeks to Recover Employee Contributions to 401k Plan Labor Sues to Protect Retirement Assets of Reno, Nevada, Workers
401Khelpcenter.com
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Asset allocation choices
Funding Issues NJ—Considers bill deferring ½ of municipalities annual pension funding requirements. PA—Employer contributions may increase from 4% of payroll to 28% in 2012. MI—Employer contributions for Detroit’s police and fire pension plans may increase to 50% of payroll in 2011.
Source: Pension Bills to Surge Nationwide (WSJ, March 16, 2009)
Specific Examples
~1950’s ~1970’s – 1990’s Today
Mostly debt
Statutory limitations
Debt to Equity Shift
Statutory limitationseliminated
Heavy equity and Alternative
investments
PossiblyALM
Future
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Specific Examples continued
Favorable benefit provisions For example, in at least one municipal plan
– The minimum retirement age = 50– 100% benefits after 25 years of service
Performance disclosure 13 states have secrecy laws
Real estate investments—risk adjusted performance In 2007, one large fund held $213 billion in commercial real estate equity,
leveraged 70% on average.– Rarely do internal rates of return account for leverage.– In a down market, leverage turns average performance into a disaster.
Source: The Next Meltdown, Forbes, July 21, 2008
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Other Statutory Exposures
Federal
ERISA’s “exclusive benefit” rule Tax exempt status is subject to plan assets not being used for or diverted to non-
participants– Does this indirectly impose ERISA’s “fiduciary standards”?
» See H.R. Conf. Rep. No. 93-1280
ADEA, PPA’06, and WRERA Crediting interest in cash balance plans
– What is a market rate? Non-spousal rollovers Temporary waiver of required minimum distributions Self-funded plans eligible for special tax exclusion