Plan Amendments and the Duty to Monitor

Date: May 15, 2020
Hello, everybody. This is Allison Wilkerson from McDermott Will & Emery. I’m a partner in our Dallas office and have the pleasure of moderating what is going to be part of our, of our four-part series regarding some of ESOP focused challenges that we have been facing in the first quarter of 2020. To those who have joined all four, we greatly appreciate your attendance. To those who have joined either only this one or others, we also greatly appreciate your attendance and welcome back. We have two speakers here, Rick Pearl and Jeff Holdvogt from, both from our Chicago office, actually, who are going to be taking us through plan amendments and the duty to monitor. We’re going to start a little bit with the discussion regarding, kind of, a high level as to the requirements, but are largely going to focus on these issues as they impact plans, again, in our current environment. We’ve got kind of a three-part agenda series here. We’re going to focus, really on plan sponsors, boards of directors and executives. We’re going to focus a lot on how these groups might interact, the importance of who has what responsibility, and making sure that that group really takes ownership of that responsibility. We’re going to discuss plan amendments, including the decision to amend, procedures for amending, any limitations that we might have. But then, ultimately, any thoughts, processes that should go into, kind of, implementing that amendment and leading into any way that we can couch against potential liability. And then finally, we’re going to talk about, sort of, fiduciary duties of the board. And that will be covered a little bit throughout this as we talk about who amends and how that’s done, but also with respect to the duty to monitor and how that helps the board oversee, generally, the requirements for other for fiduciaries from the plan. And while we may refer to the board here, obviously really important to keep your own corporate governance in spite. Sometimes boards delegate authority and there will be, obviously, that trickle-down effect. But again, the duty to monitor is really going to play, kind of throughout, throughout that process. To make sure that we’re all a little bit awake after lunch on the central and east coast and those on the west coast who are joining us, we thought we maybe start off with an introductory quiz. We are really focusing on fiduciary versus non fiduciary conduct, kind of as a theme throughout this entire presentation. And so, if we might have everybody take just a moment and answer those questions. Give us a little bit of a framework of kind of where we need to take this discussion.

Mine popped up, it says hosts and panelists cannot vote. That’s too bad. I think I know the answers.

I just don’t want to find out you don’t, Rick. Okay, Administrator, I think that probably gives us enough time for voting. We got any thoughts of our attendees here? Okay, so kind of taking a look at this, I think this lets us kick out sort of who this is. And I believe that that this will allow us, Jeff, to lead into, kind of, the process for amending a plan, and again, kind of focusing on when this is a fiduciary versus a non-fiduciary function, and how to, how to keep those things in mind?

Great. Thank you, Alison. Yes, that’s interesting results from the, from the quiz there. And I think we can answer one of those questions right away. So we’re first going to focus on all things related to amending a plan. The when, the how, and the why that a plan sponsor is going to amend a plan. And, as Allison already talked about, sort of the big, the big primary question we’re focused on here to start with is, is that a fiduciary decision? Or is that a non-fiduciary AKA settlor decision? And contrary to, I think, the results of our quiz there, the plan amendment process is a non-fiduciary action. So, to be clear, the, what that means is that when a board or other amending authority, if the board has delegated that authority down to a committee or an individual who may have certain amendment authority, when that, when the board is acting to make a plan design change by amending a plan, by establishing the plan, by terminating the plan, that’s a non-fiduciary decision. And that’s crucial because that means the board or other amending authority can act in the best interest of the plan sponsor of the company. In contrast with an ERISA fiduciary decision, when someone’s acting as an ERISA fiduciary, they need to be acting with the best interests of plan participants and the plan in mind. And again, that will apply, whether it’s the board amending or whether, like I said, if the board has delegated that down to a committee or an administrator who, in other capacities, may be acting as a fiduciary, when they’re amending a plan, they have their non fiduciary hat on and they can act with the best interests of the plan sponsor in mind. That said, though, so while we have that established, there are still some ERISA fiduciary and other issues that can come into play with respect to amending a plan. So number one is, as it notes here, it is pretty crucial to make sure that we’re following procedures for adopting an amendment. This isn’t, this is not an ERISA issue per se, but this is sort of a corporate governance issue where you have a, where you have an ESOP, you have a plan document that sets for the terms of the ESOP, all the details of how the plan is supposed to work and is going to work. And one of the provisions within that document will be a section that describes how the plan can be amended. Board by necessity or if the more delegates it down, maybe the plan specifies who was amending within the actual document. But the board or someone will have the authority, by necessity, to amend the plan in the future, make design changes to terminate etcetera. And, if you’re going to make, if you’re going to, adopt a plan amendment, particularly in this environment, if you’re going to be adopting an amendment that has the potential to have negative consequences for some participants, it’s crucial that you are following the appropriate procedures. So that, if there’s any challenge to that amendment, you can point to the corporate governance procedures that show yes, the plan document says that the board can amend. Or the plan delegated down to a committee and here are those, here are those resolutions that delegate that down, that shows why that committee has that authority to make this amendment. Again, in case you’re ever challenged, making sure that we’re following that proper procedure is crucial to be able to counteract that challenge. Secondly, I’ll just note the, while again we, you know, the board necessarily reserves the right to amend the plan at any time, there are still some ERISA and internal revenue code restrictions that can apply. Most significantly, there is the, what’s known as the anti-cutback rule, which at a high-level means that an amendment that’s adopted cannot, it cannot restrict or takeaway the vested rights that a participant accrues or that a participant has towards a vested account, towards certain distribution rights. And there are very specific regulations that apply, regarding, you know, how those principles interact. But you always need to keep in mind, that, that an amendment, in general, on a high level, can’t take away some vested right that’s been accrued. And then, lastly, just, I’ll just note regarding legal restrictions on amendments. It’s, once you actually have done the amendment, once the board has approved it or committee, whoever’s approved of that amendment, the act of implementing that amendment then becomes a fiduciary act. And that’s, that’s where we get into the fiduciary duties. So if your board amends the plan to allow for an interim valuation, the administrator that then is in charge for deciding when and how the interim valuation is going to occur, is doing so in a fiduciary capacity. And I’m going to turn over to Rick to talk a little bit about some of those issues on the following slides.

Really quickly before we make that transition, did have a question come in. And I think maybe level setting some of our terminology might make sense here. So we’ve talked about kind of fiduciary, non-fiduciary/settlor corporate responsibilities. So, somebody had basically asked, kind of, you know, that’s all well and good, but what are we talking about with respect to, kind of, what governs? And just Rick, this will probably tee up you moving in pretty well, when we talk non-fiduciary board corporate functions, this really falls under state law corporate requirements. So, state law, fiduciary duty, business judgment rule, etcetera. When we’re discussing fiduciary through the concept of this, I’m thinking about that as ERISA fiduciary versus corporate fiduciary. I think, generally, non-fiduciary here is going to be a corporate action. Feel free to correct me on that. But I think that’s, kind of, the terminology we’re looking for.

Yeah, that’s a great point, Alison. I’ll just jump here real quick because yes, so in this presentation, when we’re talking about fiduciary conduct, we’re talking about ERISA fiduciary conduct, with the understanding as well that, of course, a board has other fiduciary responsibilities with respect to the corporation and with respect to other actions. Rick?

Okay. Thank you, Jeff. So, amending a plan for interim valuation dates. So, here are some considerations that we want to talk through, explain what some of the risks are, and how this should be done. The first question is always, is an amendment even required? What does the plan already allow with respect to interim valuation days? If there is a provision in your plan that permits some discretion in, usually the administrator, sometimes the trustee, in ordering an interim valuation that they, that, then, is not really a plan amendment issue. It can be, but it’s more of a discretionary decision at that point to order the interim valuation. The interim valuation, of course, will always be set, determined by the trustee in coordination with its expert advisers. But ordering that, that one be done, would then be the responsibility of whoever is identified in the plan with the power to do that. If there is no provision in the plan that permits interim valuation dates, so if we take a step back, you have a company that has been affected by the events, Coronavirus economic events, and is concerned with liquidity, is concerned with maybe some other issues and thinks that if it makes distributions or takes any other action using a prior valuation, year-end valuation, it’s going to be problematic, and it might not be reflective of where the value is today. Then, you may want to consider an interim valuation. If the plan doesn’t allow that, then the only way to do it would really be through an amendment. There’s maybe an argument that there’s a fiduciary obligation, possibly, but really, the way to do it is through an amendment. You have to very carefully consider what is your goal going to be of this amendment? And what I mean by that is, are you seeking to have one interim valuation, one time, in view of a particular situation that the company is facing? Do you want to perhaps allow some broader discretion for somebody, whether it’s the administrator or someone else, to order one? And, you know, what is the ultimate goal there? Is it because of financial considerations? Is it because employees are going to be leaving, terminated, either voluntarily or not? And that is going to inform how your amendment is drafted. The other thing is, once you have an amendment, you, if it’s too broadly drafted, or if it’s drafted in a way that has unintended consequences, the only way you’re going to deal with that is by reamending later. And, and the problem with that is if you catch that, sort of, too late, one of the problems, and you have language in there that’s sort of binding at one point in time and you’re in a rush to get that language out, it may be too late. And we’ll talk about some instances where plan amendments cannot apply to certain categories of participants who might be affected by the amendment, as Jeff said, in a matter that’s prohibited by ERISAs anti-cutback, anti-discrimination or some other provisions. Some of the things you can consider. Do you want a discretionary interim valuation date? Do you want to make the one mandatory now? Some, some of the things to think about, you know, we’ve been talking about the effects of the Coronavirus now, and as time goes on, we’ve been doing these webinars and talking about them, you know, for weeks now, the situation has changed in a sense that we’re getting a better view of what the rest of this year might look like. And unfortunately, my opinion is that things aren’t correcting fast enough. And the announcements you’re hearing about the return of the virus, which is picking up in some places and it was already predicted to do that in the fall. That is probably a consideration. You know, what do you want to account for if later in the year companies end up in the same situation or a different situation, but may also require interim valuations? The considerations, as Jeff already explained, plan amendments do not have to be in the best interests of participants. The corporate obligation is protected by the business judgment rule, so, amending a plan is, is really, like almost like a state law business judgment determination as to what’s best for the company. There are Supreme Court cases that have clearly explained an amendment so long as it’s authorized by ERISA, procedurally proper, doesn’t violate any of the expressed limitations in ERISA can be for purposes that are directly averse to participants. That’s fine. Congress made the decision to exclude that from the fiduciary requirements. 204(g). So, this gets us into the case law that addresses interim valuations and anti-cutbacks invested benefits. So, you can have categories of participants for whom an amendment is perfectly fine and enforceable, and other categories for whom it is not. If you have participants who have benefits that are already calculated or a provision in the plan that says benefits shall be calculated pursuant to a particular valuation date, and that is approved for those participants. They have already separated. They’re waiting for the distribution, perhaps. The law generally says you cannot change the valuation date for, for those participants. Valuation dates in many other circumstances, however, are viewed by courts as merely advisory. Sort of a counting mechanism that they don’t really confer rights until there is an event specified in the plan or under ERISA that entitles a participant to actually use a particular valuation date for purposes of benefits. So you have to go through, and you have to think about, well, if we change now, or we change on such and such a date, who are the particular participants that are going to be affected? What are their balances? And factor that into how you’re going to amend and how you’re going to implement the amendment. Then, proper procedure that Jeff talked about. You know, we’ve, we’ve had litigation cases where there has been a hiccup in an amendment, and it can be difficult. And it can involve the IRS, it can involve the DOL, it can involve private lawsuits. You want to make sure you get it right and that you get it right 100%. In the instance I’m thinking of, it was about ¾ of the way right. There was an additional step that wasn’t taken. Jeff or Allison, do you want to talk about notice? That, that’s not a particular thing that I deal with on a day to day basis, but the plan amendments always require, sometimes, what kind of notice has to be given to participants?

Great question. I think that notice can be really important in situations like this. Technically, changes to a plan that will change participants benefits, rights to benefits etcetera, would generally be included in a summary of material modifications. Interestingly enough, the, the timing for an SMM tends to be fairly elongated from when the change is made. Generally advising clients here that really, even despite that kind of ERISA requirement that eventually you must tell participants, this is something that we’re encouraging a more active communication with. Participants who are seeing valuations change or are seeing distributions as we’re going to talk about the next slide, policy change. Participants need to know that before they’re making elections to avoid, just, quite honestly, consternation or challenges and different claims coming in. So, this is, I think, more of a, keeping employees informed during this somewhat scary time is the best way to keep some of the chaos that might eventually come to you. The other point I want to make, kind of going to Rick’s point of view as he walked through this, is we have focused a lot on interim valuation dates, and I know there have been a ton of people talking about that in the ESOP community. I think it is really important to reiterate what Rick and Jeff touched on, that knowing what is in your plan document can be really important here because a lot of plans do provide for interim valuations, but plans, quite honestly, are all over the board as a huge responsibility, that is. And while it may be more challenging to input an interim valuation process that isn’t already in the plan, I think, and Rick, I’d be curious as to your thoughts on this, you certainly could amend your plan to say, well, right now, it’s left to the trustee to make that decision. While, the trustee, given that this so dovetails with corporate impact, may not be the only one wanting to have that conversation, let’s amend this to make it a joint decision so that we have everybody focused on, kind of, what is in their valley. I don’t see that amendment as problematic if the interim valuation was already in there and identifying that maybe your procedure for that process wasn’t perfect and could be changed, I think is a little bit less challenging for already matured benefits.

Yeah. Here’s the real concern, I think, in a lot of these instances is between figuring out what’s the fiduciary aspect of this? What’s the non-fiduciary aspect? And how is a court going to view questions, whether they’re fiduciary or non-fiduciary? Generally in, in ERISA litigation and ESOP litigation, you have, as defendants, a harder time getting claims dismissed, a harder time convincing judges of the propriety of an act, if you have interested parties making the decisions. Now ERISA does allow, Congress made the decision to do this, allow people who are interested, in fact, they have to be the people to amend the plan, are representatives of the company. The people who appoint the trustee are company representatives. There is always a dual hat going on there. But the more you can provide comfort to a third party reviewing an act, fiduciary or otherwise, that you obtained objective input. You involved people who have different perspectives. That is always going to be helpful. Later rent. We’re going to talk about an actual principle of law that shields fiduciaries from liability in certain situations if they have objective, independent expert parties involved. But the real thing that that I like to see if, if we have a case that we’re defending and there are questions about anything under ERISA, whether it’s amendment or, or fiduciary, you do want to see that anybody who may have been interested really documented why there wasn’t a conflict that colored the decision. Why the person obtained or thought about different options, obtained different viewpoints. So, whether it’s the trustee, whether it’s internal. I mean, in this particular situation, if we think about what’s really, what’s going on here, separate and apart from the legal issues or maybe tied to the legal issues, how important these decisions are to the, to the going concern of companies, to the welfare, the jobs of individuals, to the health and well-being. Involve everybody. I mean, that’s just a decision, that’s just the advice I think that everybody should generally follow is, is you don’t have to put it in your plan that it’s mandated, but when you make these decisions, try and, try and involve everybody who may have a viewpoint on this and may be affected by it. Yeah.

So as we move to the next slide, really quickly going to address a quick question here. Client doesn’t enter valuation every year for a releverage transaction and not, not teaching releverage here, but essentially a releverage transaction is after you’ve made, start distribution for, for distribution purposes that are bought by the company, the ESOP buys those shares back to put those under an ESOP loan, so they continue to have a pool, pool of stock for participants. They, because that’s a transaction, you have to do a valuation, can that no stock price be used for distribution purposes? Quite honestly, first of all, it’s going to largely depend on your plan. If you’re plan says you can do an interim valuation, but that’s not used for distribution or benefit purposes, then the answer for 2019 is, is likely that that’s going to be challenging because your plan doesn’t already allow that. So your 2019 value for this may be mature. The bigger problem is, is typically that valuation is done for the ESOPs purchase. And the ESOPs can’t purchase until after the distributions occurred. So if we have the distribution and then that valuation process, we simply have a problem with ordering. So, while we may be … to let’s do an interim valuation, it may be that look, we wanted to the interim valuation before the transaction to figure out what distribution should be etcetera. And it might be a nice check to figure out if you’re anywhere in the realm of, kind of, where you were historically. But, do you need to be very, very careful that your plan both allows for an interim valuation and allows that benefits be distributed on that, and I’ve seen plans go both ways. Without beating valuation to, to death, Rick, I think, probably we’re talking the flip side of the very same coin is well, yes, we may do an interim evaluation, but it may be that we have to do with interim valuation plus a juster distribution policy. Or, it becomes an either-or policy, ie. we can manage some of the challenges that we’ve had simply by adjusting our distribution changes. So, you know, how do you typically view the, the other side of what we’re seeing with the questions here?

Sure. So, the distribution changes, so the way, the considerations are basically the same if you look at this slide and remember what was on the previous. They lineup generally. Again, you want to check your plan, well, two things, actually. You want to check what the plan already allows. And, in addition to that, with respect to distribution, you have some provisions in ERISA that permit certain changes, modifications to distributions, without having to amend. Allison, you’re an expert on those. Can you, sort of, explain what are some of the ERISA already approved modifications to distributions that wouldn’t require any change to the plan?

So, ESOPs can be incredibly unique in this situation. So, many of the plans that we’ve drafted and that we maintain for clients, the language and the plan document itself quotes the law. And therefore, my plan in and of itself doesn’t provide a lot of detail regarding how a distribution is paid. And what I mean by that is, my plan basically says that for non-death or disability, distributions will be paid no later than the fifth plan-year, etcetera. Well, if you think about that, that doesn’t actually tell me when distributions will begin. It doesn’t tell me if I’m using the ESOP installment purpose, etcetera. And so, I have a snap on a write along distribution policy. So I have taken those true distribution instructions out of my plan and put them in a policy. However, that policy kind of becomes part in parcel and must be amended. Typically, the viewpoint that I have is, is those policies have a little bit more flexibility in amendment, and ESOPs have some exception with respect to company stock as to what constitutes a change, an appropriate change in distribution. And so, generally going from a lump sum to installments is not problematic. My preference would be to pull that lever before I start delaying people. And largely, that’s more because participants who are counting on funds now, especially during this time, to tell them that we’re delaying distributions becomes a more challenging communication than, well, we’ll give you 1/5 or whatever that installment is, and pay them out later. That’s less of a legal requirement, more just considerations of people’s expectations. But I’ve seen a number of clients that have gone to installments versus lump sum for a couple reasons. One, to manage cash flow. But also because as Rick noted, we keep thinking we’re going to get clarity on what this has done to the valuation process, and I think that continues to get hard, so by paying installments now based on 2019, it allows for an idea that as we see where this is going, later installments will either reflect this or reflect that we’ve recovered and allowing everybody a sort of share in, kind of, what this has done with respect to the company.

And ERISAs provisions on cutbacks have, first of all, they apply only to amendments. So, to the extent there’s a, some discretion under the plan or under ERISA itself to make a change to a distribution policy, that wouldn’t run afoul of the anti-cutback provision because the anti-cutback provision applies to amendments that cut back benefits, that particular provision. The anti-cutback provision also has, what’s known as the ESOP exception that applies specifically to distribution. So what the provision basically says is that changes to distribution rules, which include changing or getting rid of an optional form of benefit, constitutes a cutback. And the ESOP exception says, unless it’s done in a non-discriminatory matter, and discriminatory in the sense of it can’t discriminate in favor of highly compensated employees as opposed to other employees. We actually just had a case like this that we obtained dismissal on because of the ESOP exception. And a change to the distribution rules apply to all ESOP participants that didn’t say highly compensated employees are going to benefit over other employees is generally permissible, assuming that it complies with other ERISA provisions. So, the other thing is that when you were talking about these potential changes to distributions that are permitted by an ERISA or permitted by the plan, that is an implementation issue that becomes a fiduciary function. So, the fiduciary standard that, we’re going to talk, maybe a little bit more about that. One thing that we often hear people mischaracterize and, and I hear this actually from the Department of Labor, often, is that the fiduciary obligation requires fiduciaries to act in the best interests of, like, two or three particular participants who are leaving or categories of participants. That’s not what the obligation is. The obligation is actually owed to the plan and to all participants overall. So, when making any fiduciary decisions, the effect on one or two particular people, of course, that’s relevant. But the consideration is what is in the best interests of the participants as a whole. So, the distribution changes, you know, you have to think about every person, every aspect of the plan that might be affected by it. And the ultimate question is, if you were objective, you didn’t have any other considerations, which is how you need to think about these things, what is a prudent decision? And if you evaluate the options effectively and you involve third parties to advise you, you should be fairly well shielded from claims or potential liability for breaching a fiduciary duty when it’s a discretionary function.

Okay. I think, Jeff, we are going to turn this over to you about fiduciary functions.

Yeah. Thanks, Rick. So, we’ve been talking obviously about board’s amendment authority and sort of, you know, the non-settlor, or the non-ERISA fiduciary amendment authorities. So we’re going to turn now towards the board’s fiduciary functions. And specifically on this slide, we’re going to talk about the fiduciary functions with respect to interim valuations. So, we already, sort of, talked about the, the plan, the plan document may confer, well, the plan document may allow for an interim valuation. If it doesn’t, the plan could be amended to allow for an interim valuation. And, in most, in most instances, what it will provide for is discretion for an administrator to order an interim valuation. And that’s particularly relevant in these circumstances because there, there is very possibly, a material change in circumstances due to the COVID 19 pandemic. And so, it would be very appropriate, potentially for an administrator to consider an interim valuation. When that plan administrator is considering the interim valuation, that is an ERISA fiduciary decision, so, subject to the ERISA fiduciary requirements. And as it notes here on the slide, subject to potential personal liability under ERISA section 502 for breaches of an arrest of fiduciary duty. So what does it mean for an administrator, in this instance, to be acting appropriately as an ERISA fiduciary? Sort of the golden rule, the cardinal rule of an ERISA fiduciary is that, as Rick sort of just talked about, ERISA fiduciary needs to act in the best interest of all participants and the plan as a whole. In contrast with the non-ERISA fiduciary situation where the individual, the board member, can be, can act in the interest, and in many cases required to act, in the best interests of the company. In this instance, the board member or plan administrator is required to act in the best interests of plan participants. And, that necessarily involves potential conflicts of interest that need to be thought through and, and worked through as these decisions are being made. So if you’re, as an administrator, if you’re considering an interim valuation, there’s obviously, there is coordination involved with the trustee and service providers and third parties. And all those things need to be worked through in terms of considering how, sort of, the material change of circumstances. Is an interim valuation appropriate? If so, when should that be done? How should be done? All of that is part of the ERISA, subject to the ERISA fiduciary duty.

Jeff and Allison, can I, can I ask a question?

The typical year, if you have a plan that authorizes interim valuations, but a company has never ordered, administrators never ordered them before, in what situation do you think the circumstances give rise to that administrator to actually, then, actively consider an interim valuation? Meaning, is there, is there, is there a risk if an administrator who has the discretion just says, this year I’m not going to think about it, I don’t have to. I’m just not going to address it. So what, what would give rise to that administrator saying, you know what, it’d be prudent for me, even if I decide against it in this situation, I have to at least consider it?

A couple of things to kind of, kind of, address there, Rick. And maybe level setting really quickly. And, because I would suggest that 99% of the time, I don’t know that an interim valuation is raised. The general concept of an ESOP is for private company stock that is valued once a year. Keeping in mind that that valued once a year, is really a defined contribution plan rule, ie. you must value and provide information as to benefits to participants at least once a year. The reality is, is the reason that we’re looking at 12-31-19 as for calendar year plans, is we’re simply out of time. We’ve ran the 12 months we have to provide a value. And, for most of the time, the general thought is we can live with that value. And I don’t know that every year we have to create an interim valuation. Where we have something that looks different, smells different, etcetera., that’s really when the discussion needs to come up. And importantly, I care about the answer because we’re always seeking a process that leads to the right answer. With ERISA being a process statute, where I find fiduciaries, settlors having challenges, is where, quite honestly, I call it an act of omission. They kept with the status quo because they didn’t really want to address it. And so what I’ve been guiding some of my clients through, and Rick, I’m going to flip this around on you when we get to, sort of, our litigation shield, is, I can’t give them the right answer. What I can give them is a list of questions that they should address and depending on how they answer those questions that will guide, sort of, what makes sense. One of those questions, quite frankly are, well, we’ve had ups and downs before. After 08, we had the Great Recession. Or, our business is very, very tied to hurricanes, and in Katrina we had an incredible explosion on our valuation. We never revalued there. Why? Well, I can distinguish and can provide some tools to distinguish why this is different. It may be that it’s not different enough that it makes sense to do so, or, we certainly need to identify why it’s different, so, what we don’t get caught in is now severely doing updates every 3 to 6 months, simply so that we are trying to, kind of, keep up with the trends of fluctuating values. The important thing for all of that, though, is that those questions are being discussed, and that documentation is really put into why this year felt different, if we decided to it, and how we’re, sort of, going to it. The other consideration that I’m seeing, quite honestly, people do, and Rick, this really goes to your point, is when we first started having these conversations in March, I think the thought was well, by March 31st, by April 30th we’ll have some insight and can provide it. Well, a lot of the comments I’m getting, or if I was asked to do projections now, my response is somewhat of a tongue in cheek, shrugging my shoulders. If I can’t put input into that valuation, redoing the valuation with the guests may become also more challenging because, obviously, we know how much scrutiny projections get. So, documenting all of that and what really guided your rule, I think, is going to border directors, did you act appropriate and look at it? And kind of, actually we have, we have a question here that I think, sort of, feeds into what they can consider. So the question is, is, can cash flows and financial projections adversely affected by a sudden change in the company’s industry, and this one’s really focused on, for example, oil, be a consideration when looking at participants as a whole? Interestingly enough, obviously the interim valuation conversation has come up in response to COVID. What got overlooked is some of the crisis that hit our oil industry at the beginning of the year. And I think that interim valuation analysis, from here going forward, quite honestly, important to really know, look, it may be that this is a tool we should be using more often. I’m not going to suggest it’s universal for every ESOP. That 12-month rule is still, I think, what the rule should be. But I do think that where we’re getting to is, if we’re having things that make this year look so different from any typical year, should we take action? And quite honestly, again, I can’t tell you what that is, but your participants as a whole are those receiving distributions, those are in the plan and, quite honestly, those who are coming into the plan. So, what a participant as a whole is a much bigger party. Rick, did that kind of answer question? Jeff, do you have anything to add?

So, I was just going to jump in just to put a finer point on that. To, sort of, I think, help clarify what you’re saying Allison. If you have an example, if you have, if you have a plan sponsor that you, like you said in your example, has never done an interim valuation in the past, it’s just never come up, but the plan document provides for it, it is an option. Given the circumstances of this year, if the business has been you know, significantly material affected by COVID, even if the answer ultimately ends up being, you know, we’re not going to do an interim valuation. Would you say it seems perfectly appropriate that they would be doing, that they would be, they would be considering it? Even if the answer is not going to end up doing an interim valuation under the circumstances, doesn’t it seem particularly appropriate they would be considering it?

That’s a great fine point to put on this Jeff. I believe that most of the companies with which I’m working are considering whether or not it’s appropriate. I would say the split is all over the show as to whether or not they’re actually doing it. But I think, given the chaos on a macroeconomic level and some of the changes we’re seeing in companies and industries, I believe it is incredibly worthwhile. And I’m recommending to almost all of my boards that they really need to, at least, ask and answer this question as appropriate is for them. I’ve gotten a couple of questions here. I know I mentioned those magical lists of questions that I’m having my company ask, and it’s been asked if I could share those. I will tell you that’s incredibly fact specific. But some of the things I’m having my company look at is, you know, is the 19 value so incorrect now, in light of what’s been happening, in where we think the company is going as to almost be a waste and corporate asset to pay on that? Can I manage my cash flow in other ways? And Rick we’re about to flip. Or, Rick and Jeff we’re about to flip to this on distributions by modifying the distribution policy. Is paying out 2019 really putting the company at risk for, truly, it can’t meet its obligations? You know, so, that risk changes and those questions change depending on the company. But I look at it for both, what is appropriate for the plan of the participants? Again, keeping in mind that there are future participants who may be losing value if you’re overpaying today. As well as, quite honestly, if the company can simply modify it or if the company has been able to shift its operations. I have a company that’s moved to making hand sanitizer and so is really bridging the gap from some of what they’re doing. And so, are there other ways to mitigate the impact of really what we’re going to? If the answer is no, then I’m getting more and more toward yes, in that situation of interim valuations is necessary. ‘

Yeah, just one point that I’d like to make from the litigation perspective. And it’s, I’ve been getting more involved, and not as much as I’d like, but more involved in the front end of these issues in helping with the process and drafting the documents documenting the process. Because I’ve had so much experience sitting in the depositions with the company representatives where they are asked questions about minutes, about notes, about emails, and I’ve seen the struggle at times 3, 5, 6 years after an event for people to remember what exactly was going on. And sometimes you get conflicting memories, and it’s not a fault. There’s nothing nefarious about it. It’s just the nature of try and sit down six years after an email and explain exactly what was going on. I’ve also, you know, seem some very smart and very crafty people on the other side take things, I think, out of context and characterize them in a way because, maybe, some ambiguity in the documents. The documentation of the process is actually much more than saying we met, we discussed such and such. It should be much more than that. It should be a check to ensure, first of all, that you have explained precisely what was done overall, who was involved, considerations that were assessed. You don’t have to go chapter and verse on everything, but you do want to document in a way that avoids, think of it from the perspective of a judge. That’s how I like to think of anything. Any documents created in a fiduciary capacity for any plan, valuation, transactional, this fiduciary decision. I like to put myself in the position of a judge who may not have many ESOP cases, maybe none, who understands that there are fiduciary issues, the high standard known in the law, and that accounts of individual workers are usually at stake when you address these questions, and the level of scrutiny a judge might give to that. And think, you know, what would a judge think if there’s a, this monumental decision being made that affects the company and the accounts of so many people, if there is a one paragraph minute from one meeting that explains everything that was done. From the litigation perspective, you, the Allison, you hit on exactly the type of analysis that I think should actually be in the documentation itself. Explain why this situation is different. Why you are addressing the possibility of interim valuations or distribution changes. Explain what’s so special about this so you don’t wind up in a situation where two years down the road, you don’t do an interim valuation and to get sued for not doing it, even though that’s just, sort of, a regular kind of year. And you don’t have the fulsome explanation of the documents as to why it was so different this time. And just, and document, explain it almost like a brief, in a way. Make the argument. Why did we do this? What, what did we consider and why was this approved?

I think that’s a great point, Rick. Really quickly Rick and Jeff. We’re looking at about 15 minutes. We’re doing well on slides. I want to make sure we do get to the monitoring and delegation part of this. And, yes, you sort of cheated on me, Rick, on the litigation, what we have next. I think the distribution changes follow a lot of the interim. So let’s touch on that and really move to, kind of, the final duty to monitor piece of our presentation.

Yeah, the only thing I will just say quickly about the distribution changes is, again, where we have a situation where, where the plan confers discretion on the plan, plan administrator to allow for distribution changes, that that’s subject to the ERISA fiduciary duties. So it needs to be taken in the best interest to plan participants and beneficiaries. Again, as Rick sort of mentioned earlier, that doesn’t necessarily mean that it can’t be, you can’t have a negative impact on any individual participants. But on the whole, it has to be beneficial for the participants and beneficiaries. Or that’s the way that the, that’s the way that the plan administrator should be thinking about it when, when thinking through those changes. And again, document, document, document. When, you know, when analyzing the process, you know, why are we adding a lump sum? Why are we eliminating a lump sum? Why are we adding installments? Documentation is crucial for showing that procedural prudence that we want under ERISA so we can, we can show that we’re meeting that ERISA standard.

Thanks, Jeff.

This is not ripped from a secret stolen draft of the next Marvel movie. This is a shield that is a litigation shield, an extremely, extremely important one. So when, when we represent fiduciaries in litigation over the breach of fiduciary duty, one of the issues that comes up extensively is, is the fact that the fiduciary involved independent expert advisers. That’s usually an issue in the valuation cases. It’s an issue in distribution cases and interim value, value cases as well. And the principles in ERISA are generally, if a fiduciary makes a decision concerning a matter that requires specialized knowledge, the fiduciary is held to the standard of an expert. So, if a trustee is going to set the value and the trustee’s going to do that itself, him or herself, the court is going to hold that trustee to the standard of an expert in valuation. Same with a legal decision. If a trustee for some reason we’re to decide, I’m going to analyze this legal issue and make a decision, it’s no defense, the good heart empty head defense has been rejected, you know, since ERISA was enacted 40, 50 years, however long it’s been now. The assessment is different when there is an expert advisor in the room. And the analysis then becomes focused on the reliance on the adviser. Was the trustee’s reliance, the fiduciaries reliance, on the adviser reasonable under the circumstances? That is a more superficial inquiry, in a way, because it basically asks, would a prudent fiduciary in the position of the defendant have made the same decision, even if there was an error in the underlying advice? So, there are cases where courts have said, you know, I don’t necessarily agree that valuation adviser got that right, but I’m not going to hold the trustee responsible for that. A fiduciary is not a guarantor of the infallibility. There’s no strict liability if an advisor gets something wrong or a court says, you know, I don’t think that was quite the right way to go. What this means is, this is an incredibly important risk mitigation, liability mitigation, tool and shield, in addition to just being reasonable improvement. That if you hire expert counsel, if you hire expert valuation advisers and you are a fiduciary, and they do their work and you ask, questions have become familiar, you read it, you understand what they’re advising, and you document that, you will largely be protected even if there is an underlying error by the advisor. So, the reliance on the experts, if there’s a question whether or not there’s a situation where you might need an expert advisor, side on get the expert advisor because it is, it is protection.

So, we’ll move then to the board’s duty to delegate and monitor, which is really just a duty to monitor. The board doesn’t have to delegate, but, but, often times, and we obviously recommend that the board delegate, to, so, the board will be delegating to a named fiduciary, usually. A plan administrator who is exercising discretion in appointing the trustee, in appointing an ESOP committee. The, what’s crucial understand, though, is that the ERISA fiduciary duty is, there’s a trailing duty on the part of the board to monitor the delegates, to monitor the entities to which the board has delegated. So that fiducicary duty can never be fully extinguished. There’s a duty to monitor to make sure that the delegate has, is performing the duties as, as they’re required to do. And to make sure that the appointment continues to be appropriate. And it’s important to note, though, that what this duty to monitor is, though, it’s sort of a high-level inquiry. The board in this instance, if we think about, what should, practically speaking, what a board should be doing, doing when it’s delegated, it’s delegated administrative responsibilities. What a board should be doing is getting periodic reports or, or analyses about what the what the administrator is doing. Reviewing and making sure, you know, is the administrator, is the trustee handling situations appropriately? Are they themselves hiring advisors, asking the right questions? And the board itself should be, you know, not involved in decision making, but should be asking questions and scrutinizing the, the administrator to make sure they really are doing their job. While at the same time keeping their hands off in terms of the day to day decision making and activities of the administrator or the trustee. So, again, it’s, it’s sort of a trailing duty, but it’s crucial. The board, unfortunately, can’t just wash its hands entire, of ERISA entirely, and just say, you know, we’ve delegated this. We have nothing to do with it. It’s crucial to remember that this duty to monitor, monitor exists. And, like any ERISA fiduciary, make sure that we’re documenting what we’re doing in terms of monitoring. Whether that’s getting a report in keeping that report with the board’s minutes, or getting a report and committee are at a board meeting itself and documenting that in and of itself. That documentation, documentation, documentation, crucial for that ERISA procedural prudence.

I would note that one of the interesting aspects of many ESOPs is it’s not uncommon for trustees to be internal. And I think it’s really important to note that some of this back and forth, some of, is the trustee acting appropriately, or, quite honestly, trustee of your monitoring your board that you voted for, are you confirming that you’re board is having necessary discussions surrounding these issues, etcetera? Those rules, as Rick said, apply as an expert. So the fact that that is an internal trustee doesn’t negate these conversations, this documentation, the trustee participating these conversations, which obviously can always be a little bit challenging, depending on where they fall in the corporate food chain. But, you know, we talk a lot about fiduciaries as professional fiduciaries. I just want to be very clear that when we have a board monitoring a trustee or even a trustee asking questions of its board, the standards for an internal trustee are, quite honestly, identical to those of a professional trustee. And I think that’s very important as we move through, kind of, these challenges.


So, seeing if our group is awake here really quickly. How often does your company’s appointing fiduciary, and we’re typically talking about the Board of Directors here, but obviously, depending on that chain, we can certainly go to, meet? Would love to sort of get an idea of what people are doing with respect to how often they’re addressing issues? And given some of the shortness on time, why don’t we see where we’re at? We can we can take the conversation from here. So, the thing I really like here is that, is that a good deal of our, of our participants are making sure that they have those meetings, those touchpoints, at least once, or on a more regular basis.

Okay. A couple more points I think I would like to make about the duty to monitor. particularly, because there have been many more lawsuits that have been filed recently expanding the scope of defendants in ESOP fiduciary breach cases to include board members who appointed a trustee. Principal accusations will be against the trustee, and then we’ll sue the board for not monitoring the trustee. So in, in my opinion, I think the theories that I’ve seen pleaded are off base. And I think that some courts are, sort of, working their way through ERISAs provisions to understand what exactly the duty to monitor is. So, the way I like to think about it, is you begin with the, with the provisions in ERISA that permit allegations. So in the plan document, you’re going to have a named fiduciary, a principal fiduciary that has principal responsibility, except for some trustee obligations, for all of the fiduciary decisions. ERISA then allows a delegation of fiduciary responsibilities. And what your ERISA says is, if there is a delegation, then the delegate is responsible for the fiduciary duties that were delegated. That means if the board delegates a fiduciary obligation, the board is absolutely no longer responsible for that fiduciary obligation. What the board’s obligation then is, is with respect to the delegation itself. And what that means is they chose who the fiduciary trustee was going to be. The fiduciary obligation of the board is then to assess, do I continue this delegation? Do I have to replace that person? It is never to make the underlying fiduciary decisions that were delegated. And I think there are a lot of theories that I’ve seen pleaded that sort of blur that line or process. So the reasonable, I think, conduct of a board of directors, if you have, let’s say you have an ESOP committee, and you had three people on it and they all left three years ago, and nobody on the board realized. That is probably, you know, a tough situation to defend because that is directly related to the delegation itself. It is something the board could have fixed through the delegation. You just find new people. Or, if there’s a way to do it, reassess the structure of the fiduciary obligations. But people are getting sued. Boards are getting sued. And what you do need to do is ensure that the delegates, the trustee ESOP committee, are qualified. They are doing the job. They look like they’re doing the job. They’re showing up. You ask those types of questions. As one court put it, the duty to monitor is monitoring, it’s not meddling. It’s just kind of monitoring, making sure. So, that’s something I wanted to talk about because I know there’s a lot of discussion and there’s a lot of fear, understandably, because boards are getting sued more and more. There are actions that involve these gray areas between fiduciary conduct and corporate conduct. Let’s take an interim valuation. Valuations and valuation advisors inherently rely on company provided information. Many times that information is provided by the same board members or directors who had the obligation to appoint the trustee. And there have been lawsuits, there are lawsuits, against boards, not for a breach of that delegation, but for a different provision in ERISA that says if one fiduciary knows of another’s breach, they have a duty to act reasonably to correct it. So when you’re, if you’re on a board of directors and you get a request from the trustee, trustee valuation advisor for documents and you’re responding to that, is that a fiduciary decision under ERISA? Is that a corporate decision? I think it’s a, it’s, fairly clearly, to me, it’s a business decision because the request is being made to the company and they’re responding on behalf of the company. But if, if, however, something comes to mind that creates in the in the board’s mind, even in their corporate capacity, that there is something amiss about the fiduciary functioning, trustee or otherwise, you can’t sort of, you know, half your brain and put it in that executive half and, and ignore it. There, so there’s kind of this gray area. There are acts that are corporate acts, but the effect, the knowledge, that that can impute to the trustee fiduciary head. It does happen. And there have been courts that have addressed that have struggled with it at times, but it does happen.

So with that, I apologize, I am going to have to cut in. We, we’ve hit the top of the hour and I know people are incredibly busy. Thank you very much, Rick and Jeff for leading us through this. McDermott has a fairly robust resource center regarding, kind of, this, this recent pandemic. I encourage you to check it out. I believe we will be providing slides and additional information on this. For those of you who have seen us through, kind of, the last month of presentations, really appreciate. And to all of our participants, thank you so much for joining us.


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