Compliance January 14, 2020

Court Ends Dispute of Proper Remedy in Amara v. Cigna

A federal district court has refused to reconsider its ruling that Cigna is carrying out its orders correctly in the cash balance conversion case.

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Plaintiffs in the case Amara v. CIGNA, concerning CIGNA’s switch from a traditional defined benefit (DB) plan to a cash balance plan last April alleged that CIGNA is not following new calculations ordered by a federal court to remedy its breach of providing inadequate disclosures to participants about its conversion from a traditional defined benefit plan to a cash balance plan.

On August 16, 2019, the U.S. District Court for the District of Connecticut issued a ruling that denied aspects of the plaintiffs’ Motion to Enforce Court Rulings and for Sanctions. Specifically, the court ruled that CIGNA was in compliance with an earlier ruling that set forth the method for converting already-paid lump sum retirement benefits into annuities. In reaching that conclusion, the court clarified and reiterated its prior ruling that CIGNA was to utilize the mortality tables and interest rates in effect at the time the lump sum was received.

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The plaintiffs in the suit argued that CIGNA violated the court’s rulings by, among other things, using “outdated” mortality tables from the date of the Part B lump sum distributions rather than the “successor” mortality tables applicable under the plan provisions on the “Applicable Mortality Table” to annuitize the offsets that the court allowed CIGNA to take.

The plaintiffs also argued that CIGNA violated the court’s rulings by eliminating early retirement benefits until the “later of” the Part A early retirement age or the date the Part B cash balance account is distributed.

In its decision last August, the court declined to entertain a methodological dispute regarding the payment of early retirement benefits because the plaintiffs had not pursued that issue in their motions related to methodology.

On August 23, 2019, the plaintiffs moved for reconsideration of these aspects of the court’s enforcement ruling, but the court has now denied their motion. The court agreed with CIGNA that the plaintiffs are essentially attempting to relitigate issues already decided. “Plaintiffs’ Reconsideration Motion does not present any previously overlooked decisions or facts, but instead restates the arguments presented in their Enforcement Motion and subsequent reply,” the court said in its order.

Compliance January 14, 2020

Supreme Court Will Not Weigh In on Burden of Proof and Index Fund Comparison

The denial will let a 1st U.S. Circuit Court of Appeals decision stand, which the Investment Company Institute previously said will increase ERISA litigation, distort retirement plan fiduciary decisionmaking and ultimately harm plan participants.

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The U.S. Supreme Court has denied review of a case in which Putnam Investments was accused of engaging in self-dealing by including high-expense, underperforming proprietary funds in its own 401(k) plan.

Putnam had asked the high court to weigh in on whether the plaintiff or the defendant bears the burden of proof on loss causation under Employee Retirement Income Security Act (ERISA) Section 409(a). Putnam also asked the court to determine “whether, as the First Circuit concluded, showing that particular investment options did not perform as well as a set of index funds selected by the plaintiffs with the benefit of hindsight, suffices as a matter of law to establish ‘losses to the plan.’”

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The U.S. District Court for the District of Massachusetts, in 2018, ruled for Putnam. Among other things, U.S. District Judge William Young of the U.S. District Court for the District of Massachusetts found the comparison of the Putnam mutual funds’ average fees to Vanguard passively managed index funds’ average fees flawed. Vanguard is a low-cost mutual fund provider operating index funds “at-cost.” Putnam mutual funds operate for profit and include both index and actively managed investments. Young said the expert’s analysis “thus compares apples and oranges.”

However, “finding several errors of law in the district court’s rulings,” the 1st U.S. Circuit Court of Appeals vacated the District Court’s judgment in part and remanded the case for further proceedings. In its opinion, the Appellate Court said “we align ourselves with the Fourth, Fifth, and Eighth Circuits and hold that once an ERISA plaintiff has shown a breach of fiduciary duty and loss to the plan, the burden shifts to the fiduciary to prove that such loss was not caused by its breach, that is, to prove that the resulting investment decision was objectively prudent.”

The Supreme Court’s denial of Putnam’s petition for writ of certiorari will leave these questions unanswered, and Putnam will now have to defend itself in the lower courts.

Previously, in an amicus curiae brief, the Investment Company Institute argued that shifting the burden of proving causation, or the lack thereof, from the plaintiff to the fiduciary ignores the ordinary default rule and the plain language of ERISA specifying that fiduciaries are liable for “losses to the plan resulting from” a fiduciary breach. “The ruling will inevitably adversely skew fiduciaries’ selection decisions. Congress directed fiduciaries to make investment option selections in the best interests of participants. Participants’ best interests vary based on many factors, including individual needs (e.g., age, marital and family status, other financial resources, risk appetite, and other factors) and the marketplace, so fiduciaries typically make available to plan participants a wide range of options. The ruling gives fiduciaries greater—and potentially overwhelming—incentives to make choices driven by the threat of litigation based on a single point of reference (i.e., index funds), rather than simply by what plan participants’ best interests dictate,” the brief says.

It also argued that allowing plaintiffs in ERISA fiduciary-breach cases to meet the loss causation element of a fiduciary breach claim solely by comparison to an index-fund-only hypothetical ignores the differences between actively managed investments and index funds as well as their differing benefits for participants while assuming that, as a per se matter, a prudent fiduciary would necessarily substitute passively managed funds for active ones no matter the circumstances.

ICI said letting the Appellate Court decision in the case stand will increase ERISA litigation, distort retirement plan fiduciary decisionmaking and ultimately harm plan participants.

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