Compliance March 5, 2010

Court Dismisses Claims against Amgen in Stock Drop Case

March 5, 2010 (PLANSPONSOR.com) – A federal court has found no evidence that Amgen, Inc. breached its fiduciary duties by continuing to offer company stock in its retirement plans.
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Two former participants of the Amgen Retirement and Savings Plan and the Retirement and Savings Plan for Amgen Manufacturing, Ltd. alleged that Amgen defendants violated their fiduciary obligations under the Employee Retirement Income Security Act (ERISA) to avoid conflicts-of-interest by failing to appoint independent fiduciaries and failing to notify federal agencies that Amgen stock was no longer a suitable investment for the plans. The participants said the plan fiduciaries had a conflict because some of their compensation was in company stock and removing the stock from the plan would have caused the price to go down, decreasing their salaries.

However, the U.S. District Court for the Central District of California said such allegations are insufficient to state a claim for beach of the fiduciary duty of loyalty under ERISA, and ERISA explicitly permits a corporate officer, employee, or agent to serve as a plan fiduciary. The court dismissed the claim for breach of the fiduciary duty of loyalty.

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In dismissing a claim for breach of fiduciary duty of care, the court noted that under the standard set by the 3rd U.S. Circuit Court of Appeals’ decision in Moench v. Robertson, fiduciaries of an Eligible Individual Account Plan are entitled to a presumption of prudence, unless “the ERISA fiduciary could not have believed reasonably that continued adherence to the [plan’s terms] was in keeping with the settlor’s expectations of how a prudent trustee would operate.”

Moench said the presumption of prudence may be rebutted by allegations that the fiduciaries were aware that the “company’s financial condition is seriously deteriorating and [that] there is a genuine risk of insider self-dealing,” or that “the company is on the brink of collapse or undergoing serious mismanagement,” according to the opinion. But, the district court found that the plaintiffs do not allege that Amgen was in a seriously deteriorating financial condition or was on the brink of collapse. In contrast, the court said, “Defendants have provided evidence that Amgen was in a relatively stable financial condition.”

The court also cited the case of Kirschbaum v. Reliant Energy, Inc. (see Reliant Wins 2nd Stock Drop Case Ruling) in which the 5th U.S. Circuit Court of Appeals found that a “fiduciary cannot be placed in the untenable position of having to predict the future of the company stock’s performance. In such a case, he could be sued for not selling if he adhered to the plan, but also sued for deviating from the plan if the stock rebounded.” Furthermore, the district court said. eliminating the Amgen investment option may have violated federal securities laws because the decision would have been based on inside information.

Finally, the opinion noted that the cases cited by the plaintiffs to suggest that federal securities laws did not relieve defendants of their duty to eliminate the Amgen investment option involved allegations of criminal conduct, but they offered no evidence that the Amgen defendants engaged in “an illegal scheme.” On the contrary, defendants noted that “there have been no lawsuits filed against Amgen by the SEC, or any other federal agencies.”

The former participants alleged that the value of the company stock dropped, and caused losses to the plan, it was revealed that the defendants concealed the negative results of clinical studies of the Amgen drug Aranesp and also allegedly marketed Aranesp and another Amgen drug, Epogen, for “off-label” uses that they knew were risky while at the same time they purported to market the drugs for uses consistent with the FDA label.

In 2008, the district court dismissed claims by one of the former participants for lack of standing since he had already taken a distribution of his account, and also dismissed the rest of the claims for failure to name the proper plan fiduciaries. However, the 9th U.S. Circuit Court of Appeals reversed, holding that subsequent case law conferred standing on individuals who have received the full distribution from a plan, and allowed for the filing of an amended complaint (see Case Sensitive:Second Chances).

The case is Harris v. Amgen Inc., C.D. Cal., No. CV 07-5442 PSG (PLAx), 3/2/10.

Benefits March 5, 2010

Health Care Costs Driving Dismal Picture for Governments

March 5, 2010 (PLANSPONSOR.com) – A new report from the Government Accountability Office says state and local governments face persistent and long-term fiscal pressures.
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According to the report, increases in federal grants-in-aid – largely from the Recovery Act – alleviated some near-term pressure on state and local government budgets. The GAO found that the March 2010 operating balance measure (including 2009 Recovery Act funds) shows an improvement compared to the January 2009 simulation.

However, the GAO projects that the sector’s long-term fiscal position will steadily decline through 2060 absent any policy changes.The agency said the decline in is primarily driven by rising health care costs.

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Specifically, the report said state and local expenditures on Medicaid and the cost of health insurance for state and local retirees and employees are projected to grow more than the GDP. The GAO’s model also projects that the sector’s health-related costs will be about 3.5% of GDP in 2010 and 3.8% of GDP in 2011.

In contrast, the agency said it found that other types of state and local government expenditures -including wages and salaries of state and local workers and investments in capital goods – are expected to grow slightly less than GDP. It also found that revenue growth, excluding Medicaid grants from the federal government, is projected to be relatively flat as a percentage of GDP.

The report also noted that recent declines in pension asset values stemming from the current recession could also affect state and local governments’ long-term fiscal position. According to the report, the sector experienced a decline in pension asset values of 27.6%, from $3.2 trillion at the end of 2007 to $2.3 trillion at the end of 2008. The GAO’s March 2009 estimate of the sector’s required contribution rate rose to 9.9% of the sector’s wages, which is higher than the sector’s actual 8.3% of wages contributed in 2008.

However, in addition to declines in pension asset values and the challenge of fully funding pension benefits, state and local governments also face challenges funding their liabilities for other public employee benefits – which, the GAO noted, are primarily retiree health benefits.

The report lends credibility to the reaction some groups had to a recent Pew Center report on the states. Pew’s report, “The Trillion Dollar Gap,” indicated there was a $1 trillion gap at the end of fiscal year 2008 between what states had set aside to pay for employees’ retirement benefits and what they owed (see IMHO: Promises Premises). Following the report’s release, The National Association of State Retirement Administrators and the National Council on Teacher Retirement issued a statement saying that the vast majority of the financing gap is not attributable to pensions, but rather to health care programs that until recently were funded primarily on a pay-as-you-go basis (see Groups Dissect Pew Report on State Retiree Benefit Funding).

The GAO said it calculated that closing the fiscal gap would require action to be taken today and maintained for each and every year going forward equivalent to a 12.3% reduction in state and local government current expenditures. The report said closing the fiscal gap through revenue increases would require action of a similar magnitude through increased state and local tax receipts.

The GAO’s report is here.

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