Employee Benefits In-Depth Series (Part 2): A New Burden Falls on Employers
BY JOEL BERG, a freelance journalist and college professor
American workers are shouldering more and more of the burden of saving for their retirement and healthcare. But that doesn't mean their employers are off the hook if those company savings accounts should suffer losses.
In fact, recent trends expose employers to liabilities they didn't face when pension checks were guaranteed and health insurance covered every cough: employees who become upset over an unexpected blow to their retirement or health savings, embodied in benefits such as 401(k) plans and health savings accounts might decide to seek reparation if they feel their trust has been abused by their employer.
"When that happens, if they feel they were treated wrongly or they think that the financial hit could have been avoided had the employer done something differently, then they're going to come back after the employer," said Stephen Rosenberg, a partner at The McCormack Firm in Boston.
And come back they have. Over the last few years, class-action lawsuits on behalf of employees have targeted 401(k) plans over allegedly excessive fees. Other suits have focused on plans that offered the employer's stock as an investment option.
The stock-market collapse of 2008 exacerbated the complaints, observers said. "Folks are probably looking more closely at results and returns in their programs," said Christine Dart, vice president and worldwide fiduciary product manager for the Chubb Group of Insurance Cos. in Warren, N.J.
Health savings accounts, a relatively new entrant in the world of employee benefits, have drawn less litigation. But the accounts are not free from pitfalls, according to attorneys, insurers?and the Metcalfes, a couple that lives in Marion, N.Y., about 20 miles east of Rochester.
David and Robin Metcalfe said they lost about $6,000 when the company overseeing their health savings account, or HSA, went bankrupt in late 2009 amid charges of fraud. Two executives at the company, Canopy Financial Inc., were accused of misappropriating about $18 million earmarked for health savings, according to a December 2010 press release from the U.S. Department of Justice.
"It could have been a lot worse," said David Metcalfe, noting that he and his wife were planning to deposit about $6,000 when they learned their account had been frozen.
HSAs opened at banks and credit unions are generally covered by the Federal Deposit Insurance Corp., which protects depositors at failed financial institutions. But Canopy Financial was a technology company and not FDIC-insured.
"That was one of the most surprising things to me," said Metcalfe, an early adopter of HSAs. He opened the account in 2005 with a company called Wellfund and recalled verbiage online that said the account was FDIC-insured. Canopy began administering the accounts in the late 2000s, he added.
Metcalfe remains a fan of the HSA and now has an account at an FDIC-insured bank recommended by his employer, Xerox Corp. He doesn't blame Xerox for his earlier losses. "This was totally my money," he said. A Xerox spokesman said company officials were unavailable to discuss the company's HSA program.
EMPLOYEES TAKE ACTION
Employees have been less forgiving when the money at stake is sucked out of their 401(k) plans. In recent lawsuits, plaintiffs have argued that employers shirked their fiduciary duty by not ensuring that investment fees and expenses were reasonable. Verdicts, mostly involving large employers, have gone both ways, according to attorneys.
In a 2009 case brought against farm-equipment manufacturer Deere & Company, a court ruled in favor of the employer, noting that participants in the company's 401(k) plan had a wide variety of investment choices, reflecting a wide range of fees.
Another court, in a 2010 case involving electric utility Edison International, sided with plan participants. The court faulted Edison for failing to question whether participants buying retail-class shares in a mutual fund could have gotten less-expensive institutional shares instead.
No matter which direction courts go, employers have a looming incentive to look more closely at the expenses associated with their 401(k) plans: A series of regulations issued by the U.S. Department of Labor is requiring greater fee disclosure to both plan sponsors and plan participants over the next year.
Fiduciaries should act on the new information, especially if it shows fees are higher than they could be, attorneys and insurers said.
Time won't make the potential problems go away, said Drew McCorkle, a senior vice president in the investment consulting group of Aon Hewitt, a Chicago-based employee benefits consulting firm. "Get after it and get it done," McCorkle said.
What employers do with what they know is at the center of another trend in 401(k) litigation: cases involving plans that offer employer stock. In these cases, employees sue after company stock purchased through a 401(k) drops in value. Employees allege the companies knew of issues that led to the stock drop and should have issued a warning.
COURTS WEIGH IN
Courts have sided with employers over the broad question of whether employer stock is a prudent investment, said Randy Gegelman, a partner at Faegre & Benson, a law firm in Minneapolis, Minn. But other issues remain unsettled, such as the conflict between employee benefits law and securities laws that govern what companies can say to investors?even if those investors happen to be employees.
"From a securities standpoint, you can't be engaged in selective disclosure to some shareholders," Gegelman said. "You can't say, 'I will talk to plan participants and not anyone else.'"
When it comes to health savings accounts though, the more talking employers do, the better.
"They're just very difficult to understand and difficult to communicate to an employee, so that's probably the main challenge that an employer has," said Ed Fensholt, compliance services director for Lockton Benefit Group, a unit of insurance broker Lockton Companies Inc., in Kansas City, Mo.
More companies are embracing the challenge, however. The number of people covered by the combination of an HSA and a high-deductible insurance policy is growing by double digits, according to surveys by America's Health Insurance Plans, a trade group in Washington, D.C. As of January 2010, slightly more than 10 million people were covered by the combination, up from about 8 million a year earlier, according to the surveys.
And the plans are no longer the province of freelancers and independent contractors looking for affordable, individual coverage. The group market accounts for about 80 percent of the people covered, according to AHIP.
Growth alone is likely to amplify the legal hazards, Fensholt said. "The more programs out there, the increased risks there are that someone's going to make a mistake.
But so far, HSAs have yet to exert much power as a magnet for litigation. The law is one reason. HSAs are generally not covered by the Employee Retirement Income Security Act of 1974, or ERISA, which is the basis for many suits over employee benefits.
State law is more likely to apply to HSAs, said Bill Sweetnam, a principal with Groom Law Group in Washington, D.C. Employees typically set up and manage their own accounts, and they don't have to use the depositary institutions recommended by employers.
ERISA comes into play only when employers begin exerting control over employee choices, said Sweetnam, a former U.S. Treasury Department official. Some employers, for example, have worried employees might misuse the accounts. But, he said, "If you're that concerned about it as an employer, you're probably not going to establish an HSA anyway."
Another factor is the amount of assets. HSAs typically contain less money than 401(k)s, making for smaller targets.
"I think that's why there's a lot of speculation about risks but you haven't actually seen anything yet that's too scary," said Maureen Maly, another Faegre & Benson partner.
Companies that want to be prepared should ensure their fiduciary liability insurance covers HSAs, said Rhonda Prussack, an executive vice president and fiduciary liability product manager for New York City-based insurer Chartis. Policies typically cover employee welfare plans, she said, but HSAs may not fall under the definition.
The law offers safe harbor provisions for employers offering HSAs, Prussack added. "If they meet these safe harbor provisions, then theoretically they're exempt from liability," Prussack said. "Of course, there are safe harbor provisions for 401(k) plans?and that hasn't stopped employers from being sued."
March 1, 2011
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