Union Fiduciary; Union Fiduciary; PBGC Underfunding; PBGC Underfunding; Multi-Employer Plans… Multi-Employer Plans… Thomas R. Herendeen Thomas R. Herendeen , , Philadelphia Insurance Cos. Philadelphia Insurance Cos. Daniel Aronowitz, Daniel Aronowitz, Ulico Insurance Group Ulico Insurance Group Christine A. Christine A. Dart Dart , , Chubb & Son Chubb & Son Michael Jacobster, Michael Jacobster, Jackson Lewis Jackson Lewis
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Union Fiduciary; PBGC Underfunding; Multi-Employer Plans… Thomas R. Herendeen, Philadelphia Insurance Cos. Daniel Aronowitz, Ulico Insurance Group Christine.
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Union Fiduciary; Union Fiduciary; PBGC Underfunding; PBGC Underfunding;
Multi-Employer Plans…Multi-Employer Plans…
Thomas R. HerendeenThomas R. Herendeen, , Philadelphia Insurance Cos.Philadelphia Insurance Cos.
Daniel Aronowitz,Daniel Aronowitz, Ulico Insurance GroupUlico Insurance Group
Christine A. DartChristine A. Dart, , Chubb & SonChubb & Son
Michael Jacobster,Michael Jacobster, Jackson LewisJackson Lewis
Session ObjectivesSession Objectives
• Explain the unique underwriting issues associated with providing fiduciary liability insurance to multi-employer plans
• Identify key legal issues that take on greater significance for multi-employer plan trustees
• Review significant claims and highlight trends
““Multi-Employers” Who Are Multi-Employers” Who Are They?They?
Documentation and Oversight Trustee meetings Delegation of fiduciary duties Written acknowledgement of fiduciary status Investment objectives documented Strategies are established on an annual basis Active and comprehensive monitoring program to
evaluate the performance Investment management and advisory agreements
• Trustees of Pension Plan invested $750,000 for 825 units in the Aspen By Pulp Mill Project to be built in Upper Peninsula of Michigan.
• DOL filed suit alleging that the Trustees breached their fiduciary duties (failure to act solely in the interest of beneficiaries and for the exclusive purpose of providing benefits and ignoring Fund Counsel’s advice).
• Plumbers and Pipefitters (UA) – Diplomat Hotel (invested $800 million – 27% below $587 mil project value).
2. Real Estate Investments2. Real Estate Investments
• Coffee Creek – DOL and participants allege that the Northwest Indiana District Council of Carpenters breached fiduciary duties for investing $10 million of pension fund assets in a 640-acre residential and commercial land development on Lake Erie.
• Somerset Ridge – DOL lawsuit alleging investment advisor imprudently invested without appraisal and proper investigation $10 mil of Laborer pension fund assets in 120-acre tract of raw land in N. Las Vegas.
• Mason Tenders District Council of NY – trustees of pension fund found to have breached fiduciary duties in purchasing NY office building without appraisal for $24 mil ($16.5 mil higher than sale 10 months earlier) and without QPAM.
3. Withdrawal Liability3. Withdrawal Liability
• Withdrawal Liability – when benefit fund asks the employer to pay unfunded liability
• Typical claim alleges that (a) employer(s) told the plan is financially ok; (b) a recent increase in unfunded benefits; and (c) significant investment losses
• Brach’s Confections Inc./Central States Southeast and Southwest Pension Fund – Brach’s assessed $31 mil in withdrawal liability after it closed facility covered by CBA.
4. Benefit Claims4. Benefit Claims
• Pension Fund (a) miscalculated pension benefits, or (b) improperly suspended benefits.
• Health and Welfare Fund wrongfully denied medical treatment or expenses
• Pension Fund: (a) Trustees failed to collect employer contributions; or (b) trustees increased Plan benefits without increasing employer contributions.
• Health and Welfare Fund: (a) financial condition deteriorated to crisis position; (b) major “incurred” and “incurred but not reported” liabilities outstanding.
5. Funding/Reserve Claim5. Funding/Reserve Claim
• Financial distress due to rising health care costs and greater utilization
• Trustees only partially implemented repeated consultant’s recommended rate increases
• Exhaustion of Plan reserves• Forced withholding of claim payments.• Trustees' actions suggested a willingness to allow the
Plan reserves to shrink in order to maintain low rates for contributing employers instead of maintaining reserves for their intended purpose
• Failure to provide adequate funding and maintain sufficient reserves for the Plan violated ERISA’s prudent man standard of care (section 404(a)(1)(B)).
• Alleged breaches of fiduciary duty for improper payment of collection services, improper allocation of payroll audit fees, improper expenses for office workers shared with the union and legal fees.
Fiduciary breaches that are eligible for correction under the VFC program:
● Late Payment of participant contributions to benefit plans;● Loans to or from parties-in-interest, either at or below market interest
rates;● Purchase or sale of assets between a plan and a party in interest; ● Sale and leaseback of property to a sponsoring employer;● Purchase or sale of assets between a plan and an unrelated party, at
below-market value;● Under- or over-payment of benefits due to inaccurate valuation of
plan assets;● Payment of duplicative, excessive or unnecessary compensation to a
party in interest; and● Payment of dual compensation to a fiduciary.
8. Settlor Claims8. Settlor Claims
• Settlor Functions – lie outside the fiduciary requirements of ERISA
• Involve plan design – creation, modification or termination
• But are they covered under a fiduciary liability policy? LaFata v. Cement Workers example of plan amendments.
• Most common is the failure to collect contributions• Using plan assets to advance union interests• Payment of compensation to trustees for “services”
allegedly rendered• Transfers of assets between related plans (to prop
up financially troubled plans)• Use of plan assets to benefit friends and families of
union officers and companies owned by Trustees• Kickbacks and other improper payments to pay
trustees – ex., Capital Consultants hunting and fishing trips
• Teamsters Union 25 Health Services & Insurance Plan – two trustees of the Plan were indicted and pled guilty to theft and embezzlement from the pension plan; false statements made in ERISA plan documents; mail fraud.
• U.S. v. International Longshoremen’s Assoc., et al. (E.D.N.Y.) – DOJ alleges that the ILA Fund Trustees “rigged” the awarding of its pharmacy benefit manager and mental health benefits contracts (choosing a less desirable vendor because of ties to the contractor and organized crime).
• Pension Fund: (a) Trustees failed to collect employer contributions; or (b) trustees increased Plan benefits without increasing employer contributions.
• Health and Welfare Fund: (a) financial condition deteriorated to crisis position; (b) major “incurred” and “incurred but not reported” liabilities outstanding
• Are employer contributions a fiduciary exposure?• Do benefit improvements without increased
employer contributions increase risk?• What is the risk of deteriorating financial condition
• Financial distress due to rising health care costs and greater utilization
• Trustees only partially implemented repeated consultant’s recommended rate increases
• Exhaustion of Plan reserves• Forced withholding of claim payments.• Trustees' actions suggested a willingness to allow the
Plan reserves to shrink in order to maintain low rates for contributing employers instead of maintaining reserves for their intended purpose
• Failure to provide adequate funding and maintain sufficient reserves for the Plan violated ERISA’s prudent man standard of care (section 404(a)(1)(B)).
• Payment of benefits without properly valuing plan assets on which payment is based.
• DOL Description of Transaction: “A defined contribution pension plan pays benefits based on the value of the plan’s assets. If one or more of the plan’s assets are not valued at the current value, the benefit payments are not correct. If the plan’s assets are overvalued, the current benefit payments will be too high. If the plan’s assets are undervalued, the current benefit payments will be too low.”