Compliance October 30, 2019

Plaintiffs Left With Only One Claim in CenturyLink ERISA Case

CenturyLink seems to be off the hook regarding a specific fund offered in its 401(k), but its investment management company still faces litigation.

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On the third try in a lawsuit against CenturyLink and its investment management company, a judge has recommended all but one claim by participants in the firm’s Dollars & Sense 401(k) Plan be dismissed.

U.S. Magistrate Judge Nina Y. Wang of the U.S. District Court for the District of Colorado discussed the procedural background to this case in her prior recommendation to dismiss, so she only focused on subsequent amendments made in the plaintiffs’ third amended complaint.

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Case documents show CenturyLink appointed CenturyLink Investment Management Company (CIM) as an investment fiduciary for its 401(k) plan. One of the investment options offered by CIM was the Active Large Cap U.S. Stock Fund, which was also included in the plan’s 12 target-date funds. As noted in the latest recommendation, the fund underperformed its benchmark nearly every quarter over the life of the fund.

In May 2015, CIM reevaluated the fund’s seven managers using a five-year, rather than a three-year, basis. By the end of 2015, three of the managers had significantly underperformed their benchmarks, but CIM took no action. The following year, CIM again reviewed its investment strategy, concluding that “the Large Cap Fund underperformed by 2.6% while the average manager has detracted 1.8%.” It also concluded that active management had been the largest detractor for the fund. So, CIM shifted 8% of assets managed by Cornerstone to the other managers and terminated Artisan, which managed 4% of the fund. In April 2017, after more underperformance, CIM again evaluated its strategy but declined to make material adjustments.

According to Wang’s recommendation, the third amended complaint contains three counts: (1) breach of fiduciary duty against CIM for the deficient design of the fund, including but not limited to opting for a self-designed fund and the failure to sufficiently monitor and replace or modify the fund despite “dramatic underperformance”; (2) breach of fiduciary duty against CenturyLink for failure to properly monitor CIM as the plan investment fiduciary in its design and implementation of the fund; and (3) co-fiduciary liability against CenturyLink under the Employee Retirement Income Security Act (ERISA).

Wang began her discussion by noting that “the fact that a fiduciary has undergone a robust investigation of an investment does not in and of itself relieve the fiduciary of liability if the circumstances reflect a breach of duty despite the rigorous investigation—and the reverse is true as well.”

Wang found that the third amended complaint is left with allegations, even taken as true, that are insufficient to establish that a reasonably prudent fiduciary would not have made the decision to structure the fund across multiple active managers within the context of the entire portfolio and the overall investment strategy. First, she noted that the defendants have a statutory duty under ERISA to diversify investments. According to the plaintiffs, CIM claimed to have designed the fund to hedge against various market factors. They allege that a back test showed CIM that “the performance of multiple uncorrelated large cap managers over a 10-year period will be very similar to the performance of the index.”

The defendants pointed out that the allegations in the third amended complaint suggest that CIM engaged in a robust investigation in designing the fund. The plaintiffs did not claim that the defendants knew from the outset that structuring the fund with seven managers could not exceed the benchmark. Nor are there factual allegations that demonstrate that CIM’s determination that the level of risk was unacceptable, particularly given the back test that demonstrated that the performance would be “very similar” to the performance of the index. According to Wang, other courts have observed in the context of a motion to dismiss that “a plan is not per se imprudent merely because it incorporates risky investments.”

She concluded that the plaintiffs failed to state a claim under its theory that CIM imprudently structured the fund with seven active managers.

Turning to the plaintiffs’ allegations that CIM’s truncated search for managers constitutes a breach of fiduciary duty, Wang noted that they argued that CIM sought to lessen its oversight burden rather than find the best possible managers for the fund and therefore imprudently limited its search for managers to those with whom it was already familiar. Wang also found those allegations failed to state a claim. She said, as an initial matter, the applicable standard is not “the best available managers for the Large Cap Fund.” Rather, she focused on the process CIM engaged in to select the fund managers, and whether CIM’s decision to select from known fund managers was objectively imprudent.

Wang found the plaintiffs’ argument that CIM limited this search to “ease its own oversight burden” is both conclusory and does not itself indicate any defective process. She said they also have not pled facts that, taken as true, establish or support a plausible inference that CIM’s purported objective to reduce the oversight costs associated with the plan was improper. Wang also noted that the third amended complaint asserts not that this decision was made without analysis, but rather only after “a period of re-underwriting, when the Team refreshed its due diligence through calls, meetings, site visits, and quantitative analysis.” She said there are also no factual allegations that support the contention that CIM’s existing managers were known to be inadequate or managers with such a poor track record that a reasonably prudent fiduciary should have necessarily broadened the search.

According to Wang, to plausibly establish a claim for breach of the duty to monitor based on procedural prudence, a plaintiff must allege facts plausibly establishing that, upon proper review, no reasonable fiduciary would maintain the investment. The plaintiffs must allege facts to support the conclusion that CIM would have acted differently had they engaged in proper monitoring—and that an alternative course of action could have prevented the plan’s losses. It is not sufficient to simply allege that an investment did poorly, and therefore a plaintiff was harmed.

So, given additional factual allegations the plaintiffs provided in their new complaint, Wang found dismissal at this juncture to be inappropriate. While recognizing that the plaintiffs have not addressed the specific alternative course of action that could have prevented the plan’s losses in each instance where review was not adequately conducted, drawing all inferences in favor of the plaintiffs, as she said she must at this juncture, she found that the third amended complaint at least presents a question of the proper interpretation of certain admitted facts, which is not amenable to the motion to dismiss, and may be influenced by expert testimony. She denied the defendants motion to dismiss the claim that CIM failed to monitor the funds.

Regarding the failure to monitor claim against CenturyLink, Wang first turned to the question of whether CenturyLink was a functional fiduciary in this matter. She previously found that the plaintiffs’ allegations were sufficient to establish that CenturyLink was a functional fiduciary, relying on the fact that the plaintiffs pleaded that CenturyLink had the authority to appoint and remove CIM as plan fiduciary. Wang previously declined to recommend dismissal of CenturyLink, given that the especially fact-sensitive inquiry into functional fiduciary status was more appropriate for the summary judgment stage or trial. She found no reason to depart from this recommendation on plaintiffs’ third try.

So, assuming CenturyLink constitutes a functional fiduciary, Wang turned to considering whether the plaintiffs stated a plausible claim that CenturyLink breached its duty to monitor CIM. She found that this claim against CenturyLink suffers from a lack of factual support. Although the plaintiffs offered a more detailed record of when CIM monitored the fund’s performance, and its alleged lack of appropriate action, there are no such facts supporting CenturyLink’s monitoring of CIM. The third amended complaint offers only the conclusory statement that CenturyLink failed to monitor CIM. Wang noted there are no times, dates, locations, or any such specific identification of any review process, nor did the plaintiffs point to any schedule by which CenturyLink was required to monitor CIM but failed to do so.

“Particularly given the fact that Plaintiffs are on their Third Amended Complaint, and they have had discovery available to them, this single allegation is still not sufficient,” said Wang, and she recommended the defendants’ motion to dismiss be granted.

Benefits October 30, 2019

Employers Recognize Need to Reduce Health Benefit Costs for Employees

Many are turning to innovative tech-enabled programs that cut costs for them while not shifting costs to employees, Mercer found.

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The average total health benefit cost per employee grew 3% to reach $13,046 this year, according to the annual Mercer National Survey of Employer-Sponsored Health Plans 2019.

Diverse workforce needs are increasingly shaping health program design. When asked about their priorities for the next five years, 42% of large and midsize employers (500 or more employees) identified “addressing health care affordability for low-paid employees” as an important or very important strategy. In 2019, most large and midsize employers backed off on requiring employees to pay more out-of-pocket for health services as a way to hold down premium costs: The average individual deductible in a Preferred Provider Organization (PPO), the most common type of medical plan, rose just $10 in 2019, to $992.

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However, Mercer notes that the average deductible rose by more than $250 among small employers (10 to 499 employees), which typically have less ability to absorb high cost increases and fewer resources to devote to plan management.

Some larger employers that had offered a high-deductible health plan (HDHP) with a health savings account (HSA) as the only medical plan added a traditional PPO or Health Maintenance Organization (HMO) as an option. This trend was especially notable among employers with 20,000 or more employees. Those offering only a high-deductible account-based plan fell from 22% to 16%.

“This doesn’t mean HSA plans are going away, but to meet the various needs and budgets of today’s five-generation workforce, employers are increasingly offering an array of health benefit plans,” says Tracy Watts, Mercer’s national leader for U.S. Health Policy.

Cost-cutting solutions with no employee cost-share

As employers look for cost-management strategies that do not shift cost to employees, the survey found many are turning to innovative tech-enabled programs that help employees manage chronic conditions or other health needs.

In 2019, 58% of all large and midsize employers, and 78% of those with 20,000 or more employees, offer one or more of such targeted health solutions.

“Typically the goals of these programs are empowerment, convenience and lower costs,” says Watts. “For example, a physical therapy app that reminds patients when to do prescribed exercises, provides instructions, and even counts reps could mean fewer trips to a clinic, less out-of-pocket cost for the employee, and a better outcome.”

The survey also revealed another surge in telemedicine, with nearly nine out of 10 employers now offering a program to employees. Telemedicine expands access to care and is designed to reduce out-of-pocket spending. Telemedicine visits are typically less than half the cost of an office visit. In addition, teletherapy is now offered by 42% of employers with 5,000 or more employees.

But, utilization of telemedicine by employees is growing only slowly. Last year, among employers offering telemedicine, on average 9% of eligible employees used telemedicine, up from 8% the prior year, and about one in seven employers reported utilization of 20% or higher.

To improve utilization of health benefit offerings, 41% of large and midsize employers say all or most of their benefit offerings are accessible to employees on a single, fully integrated digital platform (most often through a smartphone app), up from 34% in 2018.

High-cost claims

Whether the private- or public-sector is paying, one common finding is that health care costs are concentrated among a relatively small percentage of high need individuals, those who cost $50,000 or more in one year, the American Health Policy Institute notes.

These “high-cost claimants,” as they are called, are at the top of a long list of the most expensive sources of health care costs, surpassing medical inflation, pharmaceuticals, and any specific disease or condition. The Institute says in its report, “High Cost Claimants: Private vs. Public Sector Approaches,” that according to the National Business Group on Health, high-cost claimants are the No. 1 cost driver for 43% of large employers.

According to Mercer’s survey, employers are using innovative patient-centered programs to address high-cost claims. Managing these high-cost claims is the top priority for employers over the next five years.

The largest employers are taking the lead in offering enhanced health advocacy and intensive case management services, as well as programs that make it easy for members to seek an expert medical opinion on a diagnosis or their treatment plan. “Health advocates help patients and their families navigate a complex health care system to get to the right provider at the right time. When care is better coordinated, we often see less wasteful healthcare spending,” says Watts. 

High-cost specialty drugs, such as those used in cancer treatment, are often a factor in high-cost claims. While spending on all prescription drugs rose 5.5% in 2019 among large and midsize employers, spending on specialty drugs rose 10.5%, according to Mercer. More than half of all large and midsize employers (52%) and more than three-fourths of those with 20,000 or more employees (78%) now steer employees to a specialty pharmacy, which typically provides enhanced care management. For example, some drug therapies can be administered at home at less cost and greater convenience for the patient and family.

The Mercer National Survey of Employer-Sponsored Health Plans is conducted using a national probability sample of public and private employers with at least 10 employees; 2,558 employers completed the survey in 2019. The survey was conducted during the summer, and results represent about 700,000 employers and about 124 million full- and part-time employees.

The survey report is available here.

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