The Department of Labor (DOL) has made it no secret that it actively engages in enforcement activities against employee stock ownership plans (ESOPs) with a particular focus on the valuation of the stock of privately held companies that is held or bought by the ESOP.[1] The valuation of the company stock is important to the DOL because the Employee Retirement Income Security Act of 1974 (ERISA) includes provisions to allow an ESOP to purchase employer stock as a retirement investment for employees participating in the ESOP, provided the stock purchase was for “adequate consideration.”[2] When the purchase price of the company stock held or purchased by an ESOP on behalf of participants is more or less than adequate consideration, there may be a violation of ERISA in terms of a breach of fiduciary duty.

While any size company can implement and sponsor an ESOP, many small business owners have found ESOPs to be an attractive business succession plan as the owner, often a baby-boomer, approaches retirement and wishes the company to be owned by its employees through an ESOP rather than finding a buyer or selling its ownership to a competitor. Because of this, many of these DOL enforcement actions regarding valuation issues end up targeting small businesses.

Dearth of Guidance

In these transactions, there is very little official guidance from the DOL regarding how to value the stock that is bought or owned by the ESOP. Valuators still rely on Revenue Ruling 59-60 to value privately owned stock for purposes of an ESOP transaction, even though that guidance is 60 years old and was originally issued for estate and gift tax purposes.[3] Additionally, old proposed regulations from the DOL in 1988 set forth a two-part test to determine fair market value. The DOL never finalized these proposed regulations, which are now 31 years old. The lack of official guidance leaves many ESOP fiduciaries wondering if a valuation is proper and will ultimately survive an investigation by the DOL.

On October 1, 2018, twenty-seven members of Congress wrote a letter to President Trump, with a copy to the DOL Secretary, stating that the “Department [of Labor] has released very little guidance on substantive issues including, for example, valuation…we believe the Department [of Labor] could immediately eliminate some of the regulatory uncertainty by collaborating with the ESOP community to develop clear guidance with respect to valuation and other important issues.” That letter goes on to accuse the DOL of regulating ESOPs by litigation instead of through officially issued guidance.

Indeed, despite very minimal official guidance from the DOL regarding the valuation of the stock that is owned or bought by the ESOP, there is a high level of enforcement and investigation activity from the DOL for valuation issues. Unfortunately, with such a void in official guidance from the DOL, trustees and fiduciaries are left to glean guidance from enforcement actions and settlement agreements with the DOL regarding valuation issues. Rather than issue official guidance regarding these issues, the DOL has even promoted recent settlement agreements with trustees and ESOP fiduciaries as “best practices” to satisfy a fiduciary duty under ERISA with respect to the appraisal guidelines, process requirements, and fiduciary engagements.[4]

The procedures and due diligence process set out in a 2014 settlement agreement with the DOL for appraisal guidelines serve as the industry’s standard for fulfilling a fiduciary duty when determining the fair market value of privately held stock purchased by the ESOP. Since then, the DOL has updated its procedures and migrated on a few details in later settlement agreements with other trustees after 2014 regarding valuation issues. Generally, despite some differences, all of the settlement agreements with the DOL focus on how the valuation advisor is selected, the oversight and monitoring of the valuation advisor during the process, and how the ESOP terms affect a repurchase obligation as well as the ability to repay the loan obtained to purchase the stock by the ESOP if the projections used to determine the fair market value of the stock do not later come to fruition.

Bottom Line

The bottom line is that trustees and ERISA fiduciaries often have a challenging task when ascertaining whether the valuation of privately held stock bought or held by an ESOP is a reasonable fair market value that will pass DOL muster in an investigation, and this is an arena in which the DOL often referees without an official rulebook. Until official guidance is issued by the DOL regarding ERISA duties in a valuation of privately held company stock held or bought by an ESOP, these trustees and ESOP fiduciaries must find value in old IRS Revenue Rulings, old proposed DOL regulations, and recent DOL settlement agreements that were not decided in a courtroom and often differ regarding valuation issues.


[1] See “National Enforcement Projects” tab at where ESOPs are listed as the first of several enforcement projects.

[2] Section 3(18)(B) of ERISA states that “adequate consideration for a closely held business interest is the fair market value of the asset as determined in good faith by the trustee or named fiduciary pursuant to the terms of the plan.”

[3] Revenue Rulings 650192 and 65-193 later broadened the application of Revenue Ruling 59-60 for income tax and other purposes. Proposed DOL regulations issued in 1988 also relied on Revenue Ruling 59-60.

[4] See “National Enforcement Projects” tab at five recent settlement agreement are provided with titles such as “Appraisal Guidelines,” “Process Requirements,” and “Fiduciary Engagements.”

“Wilderness therapy? What’s that?”

That’s the common response I receive when I mention that wilderness therapy is a hot topic in mental health parity litigation. Wilderness therapy is a form of residential treatment that uses nature and the outdoors as a therapeutic tool.   Often used with operationally-defiant or drug-addicted teens, wilderness therapy combines traditional therapy with outdoor activities.

A number of lawsuits have been brought over the last year, alleging that group health plans have been impermissibly denying coverage for wilderness therapy. This series of cases is interesting because it gives us insight into how a court might apply the mental health parity rules based on varying plan language.

Quick Reminder

Regulations issued under the Mental Health Parity and Addiction Equity Act contain a complicated and wordy requirement that applies whenever a plan includes a non-quantitative limitation on mental health treatment (i.e., a limitation that is not expressed numerically). This requirement would apply, for example, when certain mental health services are subject to prior authorization or excluded altogether.

The non-quantitative limit rules generally prohibit a group health plan from imposing a treatment limitation on mental health or substance use disorder benefits unless, under the terms of the plan as written and in operation, any processes, strategies, evidentiary standards, or other factors used in applying the treatment limitation to mental health or substance use disorder benefits are comparable to, and are applied no more stringently than, the processes, strategies, evidentiary standards, or other factors used in applying the limitation with respect to analogous medical/surgical benefits. (See – I told you it was wordy.)

A limitation that applies only to mental health benefits and does not apply to an analogous medical or surgical benefit will very likely violate the rules.

Lessons Learned

  1. Identify the reason why the service is excluded.

Whenever an employer-provided health plan places a limit on treatment of mental health services, the employer should be prepared to defend that limit under the mental health parity rules described above. The employer will need to be able to identify the factors used in determining that the benefits should be limited and to justify how those factors apply comparably to limit an analogous medical/surgical benefit.

In a recent wilderness therapy case, a plan denied coverage for wilderness therapy because the therapy was not provided in a “Residential Treatment Center.” The definition of that term included the following language:

It does not include half-way houses, supervised living, group homes, wilderness programs, boarding houses or other facilities that provide primarily a supportive environment and address long term social needs, even if counseling is provided in such facilities . . .

Here, the particular standard used to justify the exclusion was included within the document – the employer did not want to cover services that were primarily supportive in nature as opposed to necessary to treat a medical or mental health issue.

Similar language was included in the definition of “Skilled Nursing Facility,” which was viewed as the analogous medical/surgical benefit. Accordingly, it was easy for the court to see that the standard applied comparably to the mental health and medical/surgical benefits, and the court determined that the plan document was in compliance with the mental health parity rules.

  1. Ensure that the reason for excluding the service actually justifies the exclusion.

Even if the plan document identifies the reason for the exclusion, and even if the reason for the exclusion applies comparably across the board, the plan could be violating the mental health parity rules if the given reason does not justify the actual exclusion.

In a recent wilderness therapy case, a court noted that the following exclusion was facially neutral:

Services for counseling in the absence of illness, not expressly described in this plan as a Covered Service, will not be covered. Examples of non-covered services: educational, social, image, behavioral or recreational therapy; sensory movement groups; marathon group therapy; sensitivity training; Employee Assistance Program (EAP) services; [and] wilderness programs…

However, the plaintiff alleged that the plan administrator excluded coverage for all wilderness programs, even if they provided counseling to treat an illness. The court denied the plan’s motion to dismiss because denying coverage for wilderness therapy that was provided to treat an illness (which was not justified under the factors used to develop the exclusion) could violate the mental health parity rules in operation.

If an employer does not wish to cover a service at all, the employer will need to carefully consider whether the given reason for the exclusion justifies a total exclusion. For example, the plan might provide that it excludes “any service or supply for education, training, or retraining services or testing, including special education, remedial education, wilderness treatment programs, job training and job hardening programs.” However, that exclusion likely would not justify denying coverage for wilderness therapy that is provided to treat substance abuse.

  1. A blanket exclusion may not be the best approach.

Given the discussion above, an employer might be tempted to remain silent on the reason for the exclusion and simply include a blanket exclusion for the service. Under a blanket exclusion, the plan document expressly provides that the plan does not cover the service. For example, a plan may include “wilderness therapy” in its list of exclusions.

A blanket exclusion may seem like a good idea because it clearly communicates the plan’s intent not to cover the service and does not leave open the possibility that the service would be covered in certain cases. However, if the blanket exclusion applies to mental health treatments, a mental health parity inquiry will not end with a review of the plan documents.

The wilderness therapy cases have demonstrated that, when plaintiffs plead mental health violations in the right way, cases challenging blanket exclusions tend to survive a motion to dismiss. When addressing a blanket exclusion for wilderness camps, one court  expressly indicated that the defendant would not be able to demonstrate compliance with the mental health parity rules unless it provided a detailed explanation of why wilderness camps were not covered.

In other words, a blanket exclusion is an invitation to litigation.


In addition to providing the lessons described above, the recent slew of wilderness therapy cases have illustrated that courts do not yet approach mental health parity analyses in the same manner. For example, despite my earlier generalization that blanket exclusions lead to litigation, one court granted a defendant’s motion to dismiss because “the Court cannot find that the Plan’s blanket exclusion of services at “wilderness camps” is a treatment limitation in violation of the Parity Act.” However, another court  expressed concern “that a blanket exclusion for all wilderness camps, which in practice has only been applied to mental health treatment, may constitute a violation.”

All of this uncertainty is causing me anxiety. I think I need some wilderness therapy.


The University of Pennsylvania suffered a setback in the first ERISA fee case against a university to be decided by a U.S. Court of Appeals. In Sweda v. the University of Pennsylvania, a divided panel of the Third Circuit ruled 2-1 that the district court had erred in granting the university’s motion to dismiss.  A copy of the opinion is attached here.

The plaintiffs alleged that, among other things, the fiduciaries of the university’s 403(b) plan failed to use prudent and loyal decision making processes regarding investments and administration, overpaid certain fees by up to 600%, and failed to remove underperforming investment offerings. At times the plan offered as many as 118 investment offerings, including mutual funds, fixed and variable annuities, and an insurance company separate account, as well as a self-directed brokerage window. As in several other university fee cases (e.g., Georgetown University and Northwestern University), the district court had found that dismissal was appropriate. But unlike those cases, the appellate court in Sweda reversed on appeal.

The majority opinion in Sweda is a textbook example of giving ERISA plaintiffs the benefit of the doubt at early stages of a case. In reversing the dismissal, the panel cited many of the plaintiff-friendly soundbites from ERISA case law: “pure heart, empty head” and “highest duty known to law,” etc. The majority panel held that “[t]o the extent that the District Court required Sweda to rule out lawful explanations for [the fiduciaries’] conduct, it erred.”

Pleading Standard in ERISA Cases

The real focus of the majority’s decision was on the proper pleading standard in ERISA cases. In most ERISA prudence cases, the plaintiffs are relatively information-poor at the outset of the case, as they are not usually privy to the inner-workings of the process employed by the plan fiduciaries.   Therefore, they face challenges when trying to plead specific and compelling facts in their complaints, before taking any discovery. Thus, in their fee complaints, plaintiffs usually resort to discussing results (e.g., performance against known benchmarks) more than process (e.g., what the fiduciaries did and relied on).

The Sweda case is more about the pleading standard in court, than the standard of conduct a prudent fiduciary must employ under ERISA. Of course, the two are related because ERISA litigation is very costly and disruptive, and most prudent fiduciaries want to conduct themselves in a way that maximizes the chances that they can file a successful motion to dismiss.

Thus, this case doesn’t say whether the Univ. of Pennsylvania fiduciaries actually breached their fiduciary duties –only that discovery must go forward before that decision can be made. Other fiduciaries have been in this position, and ultimately prevailed. For example, NYU and American Century did not win motions to dismiss in their ERISA fee cases, but they did later prevail at trial.

The majority in Sweda distinguished Hecker v. Deere, an early defense victory in the ERISA fee litigation, by noting that in Hecker the defendants could rely on their § 404(c) defense in a motion to dismiss because the plaintiffs’ complaint “thoroughly anticipated” the safe harbor defense. In Sweda, by contrast, the plaintiff did not put the safe harbor defense for self-directed investing activity in play at the pleading stage. Therefore, the Penn fiduciaries must wait until a later stage of the case to raise their 404(c) defense.

The precedential impact of Sweda is somewhat lessened by the fact that it is a 2-1 decision. The dissent makes a good case that the majority departs from earlier precedents.

In my view, the real rub is that standards like “prudent” and “reasonable” – bedrock ERISA principles – are broad and inherently devoid of specific, bright-line rules. The opinion says such bright line rules would “hinder” courts’ evaluation of fiduciaries, but of course, the absence of a bright line rule makes it difficult for fiduciaries to know in advance what conduct will insulate them from liability.

Meaningful Mix of Investments Options

As a factual matter, the University of Pennsylvania’s 403(b) plan featured a large mix of options, including between 78-118 mutual funds, various fixed and variable annuities, and a brokerage window. But the Third Circuit held that a fiduciary cannot win a motion to dismiss merely by arguing that the plan has a meaningful mix of investment options. Such a rule, the Court reasoned, would encourage fiduciaries to stuff plans with hundreds of options, even if they are overpriced or underperforming. So when Sweda alleged that the fiduciaries’ process of selecting and managing options must have been flawed if the plan retained expensive underperformers over better performing, cheaper alternatives, the Court held: “At this stage, her factual allegations must be taken as true, and every reasonable inference from them must be drawn in her favor.”

Bottom Line

The results are mixed in ERISA fee cases, both in university 403(b) plans and business 401(k) plans. Sometimes fiduciaries win motions to dismiss, and sometimes they win at trial. But other times they make multimillion dollar settlement payments to avoid trial.

A similar state of affairs existed in the employer stock cases under ERISA before the Supreme Court brought some semblance of order to the chaos by setting forth a specific pleading standard. Thanks to the Dudenhoeffer decision in 2014, in employer stock cases under ERISA, unlike fee cases, successful motions to dismiss have become the norm (subject to one exception now pending before the Supreme Court, as described here). The defense-side’s path toward arriving at a Dudenhoeffer-like standard that would make successful motions to dismiss the norm in fee cases continues to hit potholes. Maybe one of these “pleading standard” fee cases will get to the Supreme Court someday soon.

Stay tuned to for updates on ERISA fee cases.

The Supreme Court decisions in Dudenhoeffer (2014) and Amgen (2016) made it more difficult, as a practical matter, for plaintiffs to bring ERISA duty of prudence claims involving employer stock. In the ensuing years, every stock drop complaint filed by ERISA plan participants around the country was dismissed for failure to allege facts satisfying Dudenhoeffer – until defendants’ winning streak was broken in December 2018.

In Jander v. Retirement Plans Committee of IBM, 910 F. 3d 620 (2d Cir., Dec. 10, 2018) (cert granted), the Second Circuit held that a complaint against the fiduciaries of an ESOP sponsored by IBM sufficiently pled a claim for violation of ERISA’s duty of prudence in connection with alleged overinflated employer stock, and that it was improper for the lower court to have dismissed the complaint.

This ruling caught many observers by surprise, given that all complaints of this type filed in the past 4-5 years have been dismissed.

Aberration or start of a plaintiff-friendly trend in employer stock cases?

General allegations of stock volatility or downward declines in stock price (even those resulting in bankruptcy) have been found insufficient to support a duty of prudence claim since Dudenhoeffer. But the more specific factual allegations in IBM highlight a potential roadmap for plaintiffs:

  1. Allege that plan defendants knew that the company stock was overvalued due to a failure to disclose some adverse information.

In IBM’s case, the defendants allegedly failed to disclose that the value of a business unit, and therefore the overall stock price, was artificially inflated through accounting violations.

  1. Allege that the plan fiduciaries had the power to disclose the truth and correct the artificial inflation, but did not.

In IBM’s case, the plan fiduciaries were also the CAO, CFO and GC.

  1. Allege that the company stock traded on an efficient market such that correcting the accounting fraud would reduce the stock price only by the amount by which it was artificially inflated and that earlier disclosure of the accounting fraud (as opposed to later disclosure) would have reduced the risk of over-correction.

IBM stock is traded on a national exchange.

  1. Allege that the plan fiduciaries knew that disclosure of the truth was “inevitable.”

In IBM’s case, the court found disclosure was inevitable because IBM was looking to sell this particular business unit and would be unable to hide the overvaluation from the public once a third party buyer vetted the business and a purchase price was disclosed – in the end, IBM actually paid $1.5 billion to a buyer to take the business unit off IBM’s hands, and IBM’s stock dropped by $12 per share.

IBM Distinguished

In the first post-IBM employer stock drop decision, a court made a strong effort to limit IBM to its facts. In Fentress v. Exxon Mobil Corp., No. 4:16-cv-3484 (S.D. Tex., Feb. 4, 2019), the District Court granted Exxon Mobil’s motion to dismiss an employer stock drop case, IBM notwithstanding.

The Exxon court addressed plaintiff’s allegations that defendants violated their duty of prudence because they knew that Exxon’s stock prices were artificially inflated and yet continued to invest in Exxon stock. Plaintiff alleged that defendants should have sought out those responsible for Exxon’s disclosures under federal securities laws and tried to persuade them to refrain from making affirmative misrepresentations regarding the value of Exxon’s oil reserves. The parties submitted briefing on the impact of IBM on the pending motion to dismiss.

The Exxon court held that the two arguments the IBM court appeared to find most persuasive – “that the fraud became more damaging over time and that the eventual disclosure was inevitable” – do not apply to Exxon.

As to reputational damage, the Exxon court held that the Fifth Circuit recently rejected the identical argument in the Whole Foods stock drop case.

As to inevitability, the Exxon court held that there was no major triggering event that made Exxon’s eventual disclosure of its oil reserve troubles inevitable. Though Exxon was being investigated by authorities regarding statements about its oil reserves, investigations are often long and may not result in any charges against a company. Thus, while Exxon’s eventual disclosure was probably foreseeable, the Court could not say it was inevitable.

Supreme Court Agrees to Hear IBM’s Appeal

On June 3, 2019, the Supreme Court granted IBM’s cert petition, adding this employer stock drop case to its docket. The high court will hear at least one other ERISA matter next term (a statute of limitations issue under ERISA’s “actual knowledge” standard). As IBM phrased the issue to be decided on appeal: Whether Dudenhoeffer’s “more harm than good” pleading standard can be satisfied by generalized allegations that the harm of an inevitable disclosure of an alleged fraud generally increases over time?

Next Bite at the Apple

Plaintiffs recently sued Boeing in an ERISA stock drop case, explicitly raising IBM as a benchmark in the complaint. Plaintiffs allege that Boeing knew about problems with its 737 MAX aircraft before two high-profile crashes brought worldwide attention to this particular aircraft’s issues.

The complaint cites the IBM case, and argues that, as in IBM, here “disclosure [of the allegedly non-disclosed negative information] was inevitable” because Boeing is in a highly-regulated industry. Burke v. The Boeing Company, No. 1:19-cv-02203, N.D. Ill (complaint filed on 3/31/19). Soon the court in Boeing will have a chance to weigh in on whether IBM is a crack in the Dudenhoeffer dam, or simply an aberration.

Stay tuned to for updates on these cases.

Plaintiffs’ lawyers have filed a series of cases challenging the lawfulness of the actuarial assumptions used in certain defined benefit retirement plans.  The seventh such case was filed on May 20, 2019 in the Eastern District of Virginia.

All seven complaints are based on the same general theories and the same specific claims for relief under ERISA.  In general, plaintiffs allege the plan fiduciaries of a defined benefit plan fail to pay alternative forms of benefits in amounts that are actuarially equivalent to the plan’s default benefit, a single life annuity.

In particular, plaintiffs challenge the use of outdated mortality tables, unreasonable interest rates, and/or other unreasonable custom conversion factors used to calculate alternative benefits, such as joint and survivor annuities or life-certain annuities, saying they are not actuarially equivalent to single life annuities.

Plaintiffs contend the fiduciaries have caused retirees to lose part of their vested retirement benefits in violation of ERISA § 203(a) (nonforfeitability requirements).  They style their claims for relief as “reformation of the plan”; benefits due; and breach of fiduciary duty.

In their complaints, plaintiffs focus on the use of allegedly “outdated” mortality tables and other allegedly inappropriate “conversion factors” as the centerpiece of their claims:

Court Mortality Table or Other Assumption Used Interest Rate Used
Case 1 (S.D.N.Y.) 1971 Group Annuity Mortality Table for Males (“1971 GAM”), set back one year for participants and set back five years for beneficiaries 6%
“         ” 1983 Group Annuity Mortality Table for Males (“1983 GAM”), set back one year 5%
Case 2 (N.D. Texas) 1984 Unisex Pension Mortality Table (“UP 1984”) 5%
Case 3 (S.D.N.Y.) Custom “conversion factors”
Case 4 (D. Minnesota) Custom “early commencement factors”
Case 5 (E.D. Wisconsin) 1971 GAM 7%
“        ” UP 1984 6%
Case 6 (E.D. Missouri) 1984 UP, adjusted for likely increases in life expectancy 7%
“        ” 1984 UP, adjusted for likely increases in life expectancy 6.5%
Case 7 (E.D. Virginia) 1971 GAM 6%

In the first four cases, the defendants have filed motions to dismiss.  The briefing shows the following three primary categories of arguments raised in support of dismissal:

  1. General ERISA defenses
  • It’s a matter of plan design: benefits were calculated using assumptions mandated by the plan.
  • Plaintiffs are suggesting that the sponsor must change the mortality tables in a collectively bargained plan without union input – a perceived non-starter.
  • Plaintiffs ignore the interplay of mortality assumptions and interest rates: a high interest rate can offset outdated mortality rates.
  • Statute of limitations (more than six years since plaintiff received retirement paperwork).
  • Failure to exhaust administrative remedies (claim depends on administrative interpretation).
  • Standing issues (if no harm suffered by plaintiff).
  1. Regulations
  • The ERISA regulations cited by plaintiffs do not require the use of any particular assumptions in this context, and in other contexts (ERISA’s non-discrimination rules) the regulations specifically authorize the use of the same mortality tables used here.
  • Nothing in ERISA’s statutory provisions requires that actuarial assumptions used in calculating early conversion factors be “reasonable” or imposes liability when those factors are not reasonable (addressing 29 U.S.C. §§1053 and 1054).
  • Congress could have required that plans only use “reasonable” actuarial factors for calculating benefits at early commencement, but it did not. (Contrasting plan-funding provisions of 29 U.S.C. §1085a, withdrawal liability provisions of 29 U.S.C. §1393(a)(1), and lump sum benefit provisions of 29 U.S.C. §1055(g)(3)(B)).
  • There is no private right of action under ERISA to enforce the Code regulation upon which plaintiffs rely (26 C.F.R. §1.401(a)-11). ERISA’s relevant enforcement mechanism allows redress of any violation of “any provision of this subchapter” – not the Code or regulations.
  • Other regulations expressly say the mortality table used in a certain plan is a “standard mortality table” that is “reasonable” for plan administrators to use. (citing 26 C.F.R. § 1.401(a)(4)-12 and (a)(4)-3f(7)).
  • When Congress intends mortality tables to be updated, it specifies that timing expressly.
  1. Reasonableness
  • Complaint does not identify what conversion factor would be reasonable or why the ones used were unreasonable.
  • Plaintiffs allege a less than 3% difference between the benefits calculated using the actuarial factors in the plan and the actuarial factors they argue are acceptable (for lump sum calculations). Treasury regulations make clear that a benefit difference of 5% or less is not only reasonable, but is deemed “approximately equal in value” as a matter of law. (citing 26 C.F.R. § 1.417(a)(3)-1(c)(2)(iii)(C)).
  • Life expectancy has been falling for years, contrary to plaintiffs’ underlying premise.

Geographic Diversity

Given the dispersion of cases filed so far, one cannot be faulted for concluding that plaintiffs’ strategy includes filing these early test cases in as many different federal circuits as possible.  To date, the seven cases have been filed in five different circuits.

U.S. Circuit Courts - Actuarial Cases Filed

Rulings Expected this Summer or Fall

In four of the earliest filed cases, briefing on the defendants’ motion to dismiss is complete,  meaning that courts could start issuing rulings as soon as this summer. Stay tuned to for the latest updates.