by allaboutgeorge (flickr)

Last week, I posted a summary of a LERA presentation on the benefits of private equity firms using labor pension funds to invest in struggling businesses. 

One of the upshots discussed at the lunch was that the pension funds had greater control over the use of their investments. 

Instead of just being a faceless, unimportant investor, the fund’s money would be used to direct an individual business’s trajectory, making it a win-win for the union.  The pension money grows, and the investment advances the agenda of the union.

At least one union is stretching the limits of that theory. 

Earlier this month, the Beverly-Hills-based private equity group Platinum Equity bought the struggling San Diego Union-Tribune for an undisclosed amount.  Usually, what happens after that is that the private firm just reorganizes or breaks up the company, and then sells it for a profit, which satisfies its investors. 

In this case, though, the Los Angeles Police and Fire Pension System has upwards of $30 million invested in Platinum, and one of the unions contributing to that pension fund, the Los Angeles Police Protective League, wants a little more for its money than double-digit ROI .  From the San Diego News Network:

[T]he union that represents Los Angeles police officers is demanding the ouster of the newspaper’s editorial page staff….

In a letter to Platinum Equity Chief Executive Tom Gores, Los Angeles Police Protective League President Paul M. Weber said the Los Angeles Police and Fire Pension system is now a Union-Tribune part-owner because of its $30 million investment in Platinum.

The union is complaining about editorials in the Union-Tribune that have repeatedly criticized the amount of money going into San Diego’s public employee pension plans.  The union says that it’s investment makes it part owner of the paper, and therefore the editorials are out of line, and the staff should be replaced.

How exactly one contributor of one investor of the company that eventually bought the newspaper becomes part owner is sort of lost on me.  And, apparently, on Platinum:

In a recent interview with the Union-Tribune, a Platinum executive indicated that the union was wasting its time because Platinum has no editorial agenda.

But the union does make one interesting point.  This idea of “control” is a selling point for the private equity funds.  The news story has the following quote from the union’s letter to Platinum:

“When you went to pension funds seeking their investment dollars, you promised to invest that money for the benefit of those funds and their members…  One way you can fulfil that promise is to dismiss the Editorial Staff of the San Diego Union-Tribune.”

In this case, of course, the argument is meaningless because the union isn’t the investor, the pension fund is.  But if a pension fund decided to get militant, who would be the final decisionmaker?  The private equity fund, for sure.  That’s why we separate funds from their beneficiaries – so fiduciaries can focus on the greater financial good, without getting bogged down in principle and moral directives. 

But that makes the private equity funds’ “control” selling point a fallacy from the start, right?

The Equal Employment Opportunity Commission recently opined that “an employer violated the Americans with Disabilities Act when it required employees to undertake a health risk assessment (“HRA”) as a condition of participating in the employer’s group health plan.” The case the EEOC based its informal opinion letter on involved a county that had implemented an HRA which included answering a short health-related questionnaire, taking a blood pressure test, and providing blood for use in a blood panel screen. Employees declining to participate in the program (and members of their families) were ineligible for coverage under the employer’s self-funded health plan.

The EEOC, in forming their opinion, distinguished between disability-related inquiries and medical examinations that are job-related and consistent with business necessity and voluntary wellness programs:

[O]nce employment begins, an employer may make disability-related inquiries and require medical examinations only if they are job-related and consistent with business necessity. The EEOC determined that requiring all employees to take this HRA that includes disability-related inquiries and medical examinations as a prerequisite for obtaining group health coverage does not appear to be job-related and consistent with business necessity, and therefore it would violate the ADA. …

 

A wellness program is considered voluntary only if employees are not required to participate and are not penalized for non-participation. With regard to the HRA, an employee’s decision not to participate resulted in the loss of the opportunity to obtain health coverage through the employer’s plan. Thus, even if the HRA could be considered part of such a wellness program, the program would not be voluntary because individuals who do not participate in the assessment are denied a benefit (i.e., they are penalized for non-participation).

 

I love David Greising.   The Chicago Tribune and NPR business contributor seems to understand everything business, especially the stuff I don’t.  This morning, he took on AIG’s bailout apologist CEO, Edward Liddy, for going soft on derivatives execs after canning 6000 Allstate employees a few years ago, employment contracts be damned.  

Why, Greising asks, after pushing Allstate into a handful of class action lawsuits (two by the EEOC, even – that takes work) because he ignored the axed employees’ contracts, has the man brought in by the Bush Administration to clean up AIG dropped the broom?

Given his own history, Liddy’s explanation that his “hands are tied” because of the derivative department’s executive agreements is sad.  Can you imagine the media tsunami that would follow a class-action lawsuit on behalf of AIG derivatives executives for their bonuses?  It’s not even their salaries, it’s their #%*$@* bonuses!  …  [cough] sorry. 

Honestly, it’s like Wall Street and K Street are having a “who can sound more hollow” contest. 

Greising also points out that other ailing corporations, including Motorola and Continental Airlines, have worked out deals with their executives for pay cuts, bonus paybacks and the like.

And then there’s the big wrench in Liddy’s explanation – the United Auto Workers.  They, too, had a contract.  A few, actually.  But nobody – not the government, the union or the automakers asking for tax money ever questioned whether it could be renegotiated.

And that’s as it should be.

So what’s different about AIG?  How is it that, in the face of a furious public, following one of the biggest collective renegotiations in history, and with a proven executioner at the helm, this company can’t get out of paying millions in bonuses?

Is there a double standard among contracts for workers and contracts for executives?  Probably.  But Greising’s article proves that that can’t answer the whole question.  Honestly, I think the real problem here is a denial of workplace realities. 

When the auto industry was getting bailed out, one of the biggest arguments against giving them the money was that it would create a false sense of stability.  The employees and executives of the Big 3 needed to understand the dire straits they were in, and government infusions would keep that from happening. 

The same is clearly true at AIG.  Employees and executives alike simply don’t understand how close to the edge they are.  They want to pay bonuses to “retain talent”?  Talent? 

The department created confusing securitized investments that didn’t work.  Now it’s months away from being wound down, and they’re still paying to retain talent?  This is a group of people who need to feel their livelihoods are in jeopardy.  That’s why the UAW renegotiated their deals.  That’s why Motorola execs adjusted theirs, too. 

Employment contracts are only as good as the companies that agree to them.  Perhaps if AIG were suddenly small enough to fail (potentially, at least), its employees would find it in their hearts to discuss their compensation structures.

A former professor of mine once commented that the Ninth Circuit gets overturned twice in a good week.  And, it is very possible the Supreme Court will disagree with the distinction the Ninth Circuit draws between the Maryland pay-or-play statute, which only impacted Wal-mart in the state, and the San Francisco ordinance at issue, and reverse the Ninth’s decision.

However, both arguments in this case carry water, and my opinion seems to change based on whose argument I am reading. Either way, if the Supreme Court takes the case, regardless of the holding, it will play a prominent role in the future of state mandated health care statutes.

In its October term, the Supreme Court shall review the decision in Jones v. Harris Associates, L.P., 527 F.3d 627 (7th 2008) . In Jones v. Harris Associates the 7th Circuit reasoned that because the advisors fee was approved by the directors of the fund, it could not be deemed excessive, unless it could be shown that the advisor materially misled the directors to gain such approval.  The court determined that there is enough competition among mutual fund advisors to keep the fees they charge in check. In other words, it was not up to the court to determine a limit, or or put a cap on such fees.

Obviously, this case is of great importance to mutual fund advisors everywhere, and will be closely followed.   Currently, millions of individuals have vast amounts of wealth tied up and invested in mutual funds for retirement and other investment initiatives, so the outcome in this case could loom large.

Employers can, and generally do, charge former employees and/or their dependents up to 102% of the premium that the employer would have paid for the coverage had the individual and/or his dependents continued to be covered by the plan. In addition to multiple other notices employers are required to provide with respect to COBRA, employers must provide notice of the availability of COBRA to each covered employee at the time of termination of employment.

The American Recovery and Reinvestment Act of 2009 (ARRA), which the President signed into law this afternoon, provides for a 9 month, 65% subsidy for COBRA premiums for coverage periods beginning on or after March 1, 2009, for those individuals who lost/lose their jobs between September 1, 2008 and December 31, 2009.

Employers must provide notice to all former employees and their dependents to whom this subsidy is available.  In other words, employers must provide additional notice to those former-employees who were already laid off and already provided the “regular” COBRA Notice.

Consistent with current COBRA requirements, the subsidy will no longer be available to individuals who become eligible under another health plan, and the subsidy is not available to individuals with annual income exceeding $145,000 and couples with income exceeding $290,000.

 Kennedy v. Plan Administrator for DuPont Savings and Investment Plan has a fact pattern that is quite common in the HR realm, and a decision that should be heeded by all plan administrators.  Mr. Kennedy was a participant in the DuPont Savings and Investment Plan. Under the plan, Liv Kennedy, his wife at the time, was named beneficiary. The two were later divorced and under the divorce decree Liv waived her rights as beneficiary under the plan. Mr. Kennedy, however, never changed his beneficiary designation under the plan prior to his death. Following his death, Mr. Kennedy’s daughter, as executrix of his estate, requested that the assets of his account under the plan be distributed to the estate. The plan administrator, however, relying on the plan documents and the beneficiary designation thereunder, paid the benefits to Liv. 

The Court held that because a plan administrator has a duty, in accordance with Section 404(a)(1)(D) of ERISA (29 U.S.C. 1104 for you labor people), to administer a benefits plan in accordance with the plan documents, and the plan documents, or Mr. Kennedy’s beneficiary designation, named Liv as his beneficiary, the plan administrator was acting in accordance with the plan documents when it distributed Mr. Kennedy’s assets to Liv, even though they had divorced.  

Although the outcome seems unfair, it is a necessary one to ensure consistent plan interpretation and operation. Mr. Kennedy had every opportunity to change that beneficiary designation. Although the divorce decree may have led him to believe that the beneficiary designation would be voided, the onus of determining proper beneficiaries cannot be put on the plan administrator. To do so would require every plan administrator to shoulder the additional burden of determining a deceased participant’s intent irrespective of his beneficiary designation.

J. Mark Iwry, Of Counsel at Sullivan & Cromwell’s Washington, D.C. office,  led the discussion. Mr. Iwry was clearly qualified to guide us as his impressive resume includes having been, among numerous other highly acclaimed positions, former Benefits Tax Counsel at Treasury and recently a policy adviser to Rahm Emmanuel. I’m going to focus on just two pieces of the presentation.

Executive Compensation

First, Mr. Iwry discussed the near future of executive compensation legislation. After providing the great truism, “it is easier to afflict the comfortable than to comfort the afflicted,” Mr. Iwry explained how it is likely that Congress has yet to finish punishing executives for earning money. While providing no opinion as to whether limiting executive compensation is a laudable goal, Mr. Iwry was simply making the point that it is easier for Congress to hinder the rich through policy changes than it is to make life better for those who struggle. Certainly, it is easier to garner support from their constituents for such work. Therefore, despite the recent effectiveness of the Draconian 409A requirements, more is still to come.

Ironically, around the time Mr. Iwry was talking , Barney Frank was introducing legislation to further limit executive compensation under the Emergency Economic Stabilization Act.

Automatic IRAs

Another possible upcoming change to employee benefits law under the new administration that was touched upon was the introduction of the automatic individual retirement account, or “Automatic IRA”.  This idea has received much attention and commentary as of late. The theory that this arrangement can mend the disaster that is the American retirement system stems from the success of auto-enrollment provisions under 401(k)s. Studies (not cited here) show that the participation in company-provided 401(k) retirement accounts skyrockets when individuals are automatically enrolled at the time they are hired. Clearly, this is a result of our society’s tendency to be complacent.

While auto-enrollment under 401(k) accounts has been working, only around 50% of employers provide retirement savings accounts of any kind, and just a small portion of those provide for auto-enrollment. This is because many employers don’t want to deal with the inherent costs and headaches that accompany a qualified retirement plan.

The Automatic IRA would essentially be just a payroll practice. The idea is that the federal government would implore employers to simply forward on the amounts deferred from individuals’ compensation to the specified IRA, but it does not seem that the plan is to make this practice mandatory. Call me a cynic, but I don’t believe employers who aren’t already sponsoring retirement plans would want to deal with even the miniscule burden of forwarding deferred compensation to an IRA, unless the practice is made mandatory, or there is an incentive to employers for doing so.

The recently passed Worker, Retiree and Employer Recovery Act of 2008 contains a provision that waives the RMD requirements for certain qualified, 403(b) or 457 plans for the 2009 calendar year, but specifically does not waive the requirements for 2008. Treasury has simply reiterated that provision. In other words, individuals who reach age 70 1/2 during 2009 will not be required to take distributions from their retirement accounts, but individuals who do so in 2008 are still subject to the requirement.