Compliance June 15, 2017

Stock Drop Challenge Filed Against Chicago Bridge and Iron

The proposed class action suit includes many of the classic claims typically leveled in ERISA stock-drop litigation. 
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A new class action challenge filed in the U.S. District Court for the Southern District of New York, Giantonio vs. Chicago Bridge & Iron, accuses plan fiduciaries of improperly continuing to offer employer stock as an investment option in the company’s retirement plan while the company faced serious financial challenges.   

Similar to other stock-drop challenges, this Employee Retirement Income Security Act (ERISA) lawsuit alleges the employer knew its stock price was artificially inflated during the class period—October 29, 2013, through the present—making it an imprudent retirement investment for the plans. 

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As the text of the lawsuit spells out, “Defendants knew or should have known that material facts about CB&I’s business had not been disclosed to the market, causing CB&I Stock to trade at prices above which it would have traded had such facts been disclosed.”

As a rule these claims are hard to prove in court, it should be stated, because even though the famous Supreme Court decision in Fifth-Third vs. Dudenhoeffer established that plan sponsors offering employer stock cannot rely on a blanket presumption of prudence, nevertheless the assertion that plan fiduciaries should have determined that the public stock price of their company was inflated (or indeed undervalued) is generally implausible—absent special circumstances such as massive willful fraud.

Knowing this, the plaintiffs attempt in their complaint to establish that fraud was at least potentially occurring, and that this should have been enough to prevent plan fiduciaries from continuing to offer employer stock to participants. As the complaint states: “During the class period, the company failed to disclose that it was responsible for hundreds of millions of dollars in liability and had improperly accounted for its goodwill during 2013 to cover losses associated with construction delays and cost overruns on contracts to complete construction of new nuclear power plants in Waynesboro, Georgia and Jenkinsville, South Carolina (the “Nuclear Projects”). Furthermore, the company faces potential fraud claims valued at over $2 billion, which exceeds its market capitalization as of the filing of this complaint.”

Given the totality of circumstances prevailing during the class period, plaintiffs assert that “no prudent fiduciary could have made the same decision as made by defendants here to retain and/or continue purchasing the clearly imprudent CB&I Stock as investment in the plans.”

NEXT: Details from the text of the suit 

Attempting to establish that plan fiduciaries should have known their employer’s stock price was inflated, and to established alternative actions the fiduciaries should have known to take, the text of the lawsuit offers extensive background on the recent development of the Chicago Bridge & Iron company, particularly the acquisition of Shaw Group Inc. and the company’s effort to serve contracts related to the nuclear power industry. The background info shows that eventually Chicago Bridge & Iron entered into a merger agreement with Westinghouse, which plaintiffs say partially contributed to that company’s own eventual bankruptcy.

As of June 5, 2017, CB&I’s stock was down 40.8% over the prior three months and 40.2% over the prior six months. The stock has returned -49.7% over the last year, plaintiffs claim, and the company’s market capitalization is less than its potential liabilities as of the filing of the complaint.

The complaint continues: “Disclosure might not have prevented the plans from taking an inevitable loss on company stock it already held, but it would have prevented the plans from acquiring (through participants’ uninformed investment decisions and continued investment of matching contributions) additional shares of artificially inflated company stock. The longer the concealment continued, the more of the plans’ good money went into a bad investment; full disclosure would have cut short the period in which the plans bought company stock at inflated prices.”

A number of alternative actions are proposed: “Defendants should have closed the company stock fund to further contributions and directed that contributions be diverted from company stock into prudent investment options based upon the participants’ instructions or, if there were no such instructions, the plans’ default investment option … Neither of these actions would have implicated, let alone been in violation of, federal securities laws or any other laws. Nor would the plans ceasing to purchase additional company stock likely send a negative signal to the market.”

Alternatively, plaintiffs allege, “defendants could have disclosed (or caused others to disclose) CB&I’s construction delays and cost overruns on contracts to complete construction of the nuclear projects so that CB&I Stock would trade at a fair value … Given the relatively small number of shares of CB&I stock purchased by the plans when compared to the market float of CB&I Stock, it is extremely unlikely that this decrease in the number of shares that would have been purchased, considered alone, would have had an appreciable impact on the price of CB&I Stock.”

Compliance June 15, 2017

Fiduciary Reforms Will Impact Expanding HSA Market

The DOL fiduciary rule expansion establishes ERISA fair dealing requirements in the sale and service of health savings accounts; employers have a lot of questions about what this means. 
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Chad Wilkins, president of HSA Bank, and Kevin Robertson, senior vice president, recently sat down with PLANADVISER to talk about their expectations for health care reform and other hot-button items on the policy agenda in Washington.

The pair had some important commentary to share regarding the implementation of the Department of Labor (DOL) fiduciary rule and related exemptions. It is surely common industry knowledge by now that the DOL rulemaking has greatly expanded the number of advisers and investment/recordkeeping service providers deemed fiduciaries under the Employee Retirement Income Security Act (ERISA). But the pair warned the rules apply not only to traditional retirement products such as 401(k)s, but also to health savings accounts (HSAs).

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“This fact has generated no small about of confusion and concern among employers who make HSAs available to their employees,” Wilkins suggests. “While HSAs aren’t normally thought of as a retirement vehicle, the DOL broadened the scope of the rules to include these plans due to their long term savings and investment aspects.”

Wilkins and Robertson feel the jury is actually still out regarding the question of whether the employers will become fiduciaries to their HSA-using employees. Advisers making investment recommendations for individuals using HSAs will likely take on some new level of fiduciary responsibility, they expect, but as it pertains to an employer’s own fiduciary exposure, the general consensus within the industry is that the new regulations “probably do not automatically require employers offering HSA plans to be considered fiduciaries.”

As is commonly the case in examining ERISA standards, any given employer’s fiduciary exposure will depend on the particulars of their HSA programming and to what degree they offer advice versus education.

“This is one of the first questions an employer will need to answer for their HSA plan as the DOL rules come into play,” Robertson says. “There may be no technical or legal responsibility of an employer to act as a fiduciary for their HSA plan, but we strongly recommend that employers implement certain features of ERISA best practices, to mitigate risk for themselves and their employees.”

NEXT: Fiduciary management of HSAs 

“While ultimately the steps taken to ensure compliance with the rules will be unique to each employer group, there are some foundational components of the rules that hold true in many cases,” Wilkins says. “Additionally, there are some requirements that apply to all employers, regardless of whether they are a fiduciary or not.”

At a high level, the themes of fiduciary compliance within HSA programs will be very similar to those applying to defined contribution (DC) plans and individual retirement accounts (IRAs):

  • Know and understand the structures of fees within the plan, and specifically the flow of money with regard to what and how providers get paid within the program;
  • Take appropriate measures to ensure that the fees charged to participants within their program are reasonable and fully disclosed;
  • Review their education and communication materials and practices to ensure that they are appropriate and do not constitute investment advice or direct recommendations;
  • Potentially make changes to the investment (or vendor) options within their plans, as prudence requires; and
  • Potentially initiate new contracts or addendums with vendors as a result of the above impacts.

“The four main areas of concern are account structures, appropriate fees and disclosures, investments, and communication and educational materials,” Wilkins explains. “Again, even if an employer is not a fiduciary, we encourage all groups to understand these same concerns and take them under advisement in the evaluation and delivery of their own plans.”

Wilkins and Robertson further recommend employers learn the answers to these questions: “Where are the funds located, and how are they being protected? Are they FDIC insured? What criteria is the vendor using to vet the banks or insurance companies that hold cash, and how often are they being evaluated? What safeguards are in place to ensure the recordkeeping and the assets balance for each participant? What notice is provided when funds are moved among banks or annuity contracts?”

“At first glance, this list of questions may appear to be too detailed, but even if an employer is not a fiduciary under the rule, most will want to perform due diligence on their vendors, and arrive at a determination that their vendors are acting in the best interest of their employees,” Wilkins concludes.

NEXT: New responsibilities are manageable 

“At first glance, this may sound a bit daunting for employers,” Robertson admits. “However, it really isn’t a far stretch from the current processes that most employers undertake in the planning, selection, and delivery of their retirement and benefit programs. The fiduciary rule will require new disclosures. Employers should take full advantage of that information in the vendor selection process.”

Another piece of practical advice is that HSA custodians, “or any vendor for that matter,” should be happily providing the necessary information to the employer so that they can effectively manage their vendor selections and program delivery. Robertson encourages employers to be aggressive in their demands for clarity, transparency and consistency from vendors.

“We also highly recommend that employers engage their own counsel to help with the overview and compliance of their entire retirement and benefit plans, but there should be plenty of support made available from reputable vendors,” he concludes. “Vendors should have systems to provide the necessary information, including full disclosure of account structure, fees, investments, and all elements of their product offering. From there, the employer should be able to quickly and accurately make determinations on the compliance of their plans.”

Additionally, employers may want to review their formal agreements with their vendors. The changes and requirements associated with the expanded fiduciary rule may necessitate either new contracts or addendums in contractual language.

“With all of this in mind, employer oversight of HSA plans should be an easily accomplished task.” 

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