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INSIGHT: Guidance for Retirement Committees Trying to Satisfy Duty to Monitor

Feb. 11, 2020, 9:01 AM

To the ultimate relief of ERISA retirement committee members across the United States, a federal judge in Pittsburgh halted the Department of Labor from dramatically expanding their duties to monitor the activities of investment managers they hire to manage pension benefit funds.

U.S. District Court Judge Nora Barry Fischer ruled in favor of a retirement committee and its members on the issue of whether the committee members had to do more than simply monitor the actions of the investment manager they had hired. (See Scalia v. WPN Corp., W.D. Pa.)

The court rejected the DOL’s argument that, notwithstanding delegating all duties for making investment decisions to an investment manager, the committee still retained responsibility for the manager’s investment decisions, transforming and extending the duties to monitor into a duty to invest. The DOL filed a notice of appeal Dec. 16 with the U.S. Court of Appeals for the Third Circuit.

Realities Going Forward

The DOL’s aggressive and unyielding pursuit of its claims against the committee and its members individually highlights at last three current business realities retirement committees face:

  1. the DOL has adopted a strategy to target retirement committees, and more importantly, the liability insurers behind them, as the “deep pockets” that will bail out pension funds when investment managers breach their investment duties;
  2. retirement committees, accordingly, need to redouble their vigilance to ensure they have adequate insurance to protect them against an investment manager’s misconduct given the current DOL litigation strategy; and
  3. retirement committees seeking to delegate investment duties to an investment manager must do so in clear and precise language to combat any later attempts by the DOL to transfer that duty and liability improperly from the investment manager to the committee.

Other prophylactic measures include:

  • regular communication by the committee with the investment manager;
  • retention and regular input from outside ERISA legal counsel regarding committee oversight practices relating to the investment manager:
  • appointment of one or more committee members with investment, or investment oversight, expertise; and
  • committee training on best practices for investment manager oversight.

Case Origins in the Great Recession

In 2008, the retirement committee at issue, the Severstal Retirement Committee, had its retirement funds resting in a joint trust that included assets for Wheeling Pittsburgh Steel Corp. and Severstal Steel. The trust had been managed to historically superb results by its investment manager, Ronald LaBow, and his investment company WPN. LaBow ranked among the top 2% of all investment managers before the financial crisis, according to one national source.

In late 2008, the joint trust was separated, creating a stand-alone Severstal Retirement Fund. The Severstal committee retained LaBow and reached an agreement with him that the Severstal fund would reflect the same diversified investment mix as held in the joint fund. Roughly $32 million in assets were to be conveyed to the Severstal Trust.

LaBow on Nov. 1, 2008, contrary to the investment agreement, did not transfer the historic and diversified investment mix of stocks, but rather transferred assets heavily weighted in large cap energy stocks, which made up roughly 97% of the new Severstal fund.

Mercer Investment Consulting Inc. of Chicago, a consultant to the Severstal committee, produced quarterly reports analyzing the portfolio and notified the retirement committee on Dec. 29 of LaBow’s improper, undiversified transfer. Ultimately, the Severstal fund suffered a loss in excess of $17 million.

The DOL contended that the retirement committee breached its duty to monitor by not checking on LaBow’s investment choices on the day of the original transfer of assets. It further argued that the committee should not have waited for two quarters before firing LaBow in May 2009, providing him during that six-month period an opportunity to create a diversified investment portfolio consistent with ERISA norms.

No Duty of Prescience

The DOL said that LaBow’s historic investment practices, while highly successful, were risky and therefore the committee should have anticipated LaBow may invest in an undiversified portfolio, placing on the committee not just a duty to monitor investments once made, but a duty of prescience to prevent an investment manager’s misconduct beforehand.

The district court rejected the DOL’s effort to place on the committee not only a duty of prudence, which is the current legal duty, but one of prescience.

The court provided guidance on what elements a retirement committee must meet to satisfy its duty to monitor, which include:

  1. a retirement committee must have in place procedures for reviewing an investment manager’s decisions;
  2. adhere to these procedures; and
  3. take corrective action when appropriate.

The court found that the committee satisfied this duty. Mercer’s quarterly review of the investment portfolio put the committee on notice of LaBow’s misconduct, the committee took corrective action by demanding that LaBow diversify the portfolio, and then ultimately fired him when he did not.

The court also made clear that the DOL’s generalized criticism that the Severstal committee should have been more vigilant in monitoring or fired LaBow sooner must fail because it did not provide a specific, alternative course of conduct the committee should have pursued to change the outcome.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Charles Kelly is a partner in the Pittsburgh office of Saul Ewing Arnstein & Lehr LLP. He is a highly regarded litigator with extensive experience handling media, healthcare, and complex commercial litigation, including ERISA disputes.

Michael J. Joyce, a partner in the Pittsburgh office of Saul Ewing Arnstein & Lehr LLP, assists clients with litigation, including a wide variety of commercial disputes and insurance matters. His work includes defending fiduciaries against claims under ERISA and defending against ERISA benefit claims. Joyce also represents media industry clients on matters ranging from defamation to privacy issues to government open records disputes.

Kelly and Joyce represented the committee and its members in the matter.

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