Monday, February 25, 2013

Plaintiff's Bar -- The Good, The Bad, and The Ugly

Collectively, they are known as plaintiff's bar. These are the attorneys who gear their practices toward representing plaintiffs in civil litigation. As I see it, they fall into three categories:

  • The group who represent plaintiffs in litigation where the plaintiffs in question have clearly been wronged. While it's not where I am going to focus here, consider, for example, the made-up case where plaintiff goes to a restaurant (think Japanese steak house) where the chefs put on a show for their diners. They toss food. They flip spatulas. I have never seen a diner get hurt in one of these situations. But, in this fictional situation, one chef decides to fling diners' food to them on razor sharp knives. One diner gets up to leave because he is frightened and just as he does, a knife flies astray and hits him blade first in the back, seriously injuring him. The restaurant's insurer says that the diner assumed a risk when he sat down at the hibachi grill. I don't have legal training, but the lay person in me thinks he needed an attorney to right this wrong.
  • The group who represent plaintiffs who have probably not been wronged, but where there might be a court that will find for plaintiffs and award massive damages. As an example, consider the spate of cash balance plan lawsuits that were filed. Typically, the issue was age discrimination. Whether or not there actually was age discrimination in designs was a matter of opinion. As a group, actuaries are well-trained to opine on this issue. Being one of these actuaries and being one who knows many others, I've not personally found one yet who thinks that cash balance plans are inherently age discriminatory. But, the attorneys filing the suits know that all they need is one big win and the payoff for them will be huge. I disagree with these attorneys, but it is possible that they are right and I am wrong.
  • Finally, there is the group who seek out plaintiffs to file lawsuits where there is never any thought of wrongdoing. All they are doing is hoping that defendants will think it is less expensive to settle the lawsuits than to defend them. Since the attorneys in such situations don't, in my opinion, even care if there is any wrongdoing, I view this as the worst of all situations.
Yes, I have an example for you. As regular readers of this blog know, Dodd-Frank and its older brother Sarbanes-Oxley have imposed significant requirements on issuers of proxies to disclose executive compensation. Most companies have worked hard to ensure that their disclosures are, at a minimum, adequate. A meaningful percentage of them have gone above and beyond in their disclosures providing information to shareholders beyond that which is required and providing excellent supporting rationale for their compensation decisions.

So, what's the litigation here?

A group of attorneys made the startling (well not really) discovery that if you could find a way to stop a company from holding its annual shareholder's meeting that all proverbial hell would break loose. I wrote about this here. What they claim is that disclosure of executive compensation in the proxy is inadequate for the shareholder to make an informed decision regarding say-on-pay or some other vote on which their client could weigh in.

We apologize for this brief commercial interruption before returning you to your regular program. In my profession, I work with a lot of people who do understand compensation. Many of them are also shareholders in companies so that they get to cast their votes on these matters. As part of the small group who could actually make sense of these disclosures, how many of them actually take the time to review the executive compensation disclosures in proxies? A very unscientific review of data that I did on this group (this means that I observed, asked a few people and took a guess) suggests that fewer than 10% of this group actually reviews the executive compensation disclosures carefully enough to opine on its reasonableness. Most institutional shareholders outsource the review and even the firms to whom they outsource such review are working far more from checklists than they are from hard analysis of the data.

So, there's no case, right?

That's not the point. A well-timed lawsuit can cause a company problems. Put yourself in the position of a company and decide how you would react when you learn that plaintiffs have gone to court seeking an injunction to prevent you from holding your annual shareholder's meeting (for those even less legally informed than me, this means that a court would prohibit that meeting from taking place). You are probably left with just a few options, all costly and none foolproof:
  • Fight the injunction and hope you win
  • Settle to make plaintiffs and their attorneys go away, so to speak
  • File significantly enhanced disclosures with the SEC and provide them to shareholders on a timely enough basis
The attorneys for plaintiffs are betting that most companies will choose what's behind door number two. That is, they are betting that companies will opt to settle for an amount of money whereby those attorneys will recover their expenses plus perhaps 35%-40% of the remaining settlement. That makes it profitable litigation for those attorneys.

What should companies do?

There is no great answer, but it seems a good tact to prepare for this sort of litigation.
  • Enhance your disclosures proactively. That is, make yourself a less vulnerable target. 
  • Have a team internally that understands the issues and that can be mobilized to combat the opposition. This should probably be composed of internal people and have outside counsel in the loop.
  • Make your disclosures convincing. Describe how you developed your practices and why they are appropriate for your company in your industry and your geography.
And, yes, there is a fourth thing that you can do that some may think is as useful as the first three: hope you don't get sued.

Wednesday, February 13, 2013

Communicating Rewards

I haven't had a really good rant on here for a while. Today, I think I am going to change that. The topic is communication of rewards programs. That means benefits of all kinds, compensation, learning and development, work/life programs -- the whole kit and kaboodle. It's all part of rewards, and as a society, our communication of rewards is just plain miserable.

There, I said it. I'll say it again. In the United States today, communication of rewards programs to employees just plain sucks. I didn't say that companies don't try. I didn't say that supervisors don't try. Things have gotten really complicated. Most components of rewards programs today are offered because there is an underlying incentive. Perhaps the incentive is in the Internal Revenue Code. That means that either or both the employer and the employees get a tax break because of this particular rewards element. And, who understands that?

Consider either the communications that you receive or the ones that you send (if you represent the employer side) related to rewards. How do you get the communications of most of these elements? I'm guessing it's one of two way:

  • e-mail
  • a large packet of material filled mostly with required disclosures
Do you read every e-mail that you get including attachments? I don't. When you receive a large packet of materials describing the new health care plan, do you read the whole thing? I don't.

Once upon a time, but during my working lifetime, changes, especially improvements, to rewards programs were communicated differently. How is that? Someone spoke to us. Yes, a real live person with a real live voice spoke to us. Sometimes it was done in groups, sometimes individually. Often, the person who spoke to us could and would answer questions. Yes, the required disclosures were covered, but their was emphasis placed on what was really important and you knew it.

Let me give you an example. When your employer changes its 401(k) plan, there are pages of required disclosures. Most of those disclosures don't mean anything to you or to me. Everyone is worried about getting sued now, so often, most of everyone doesn't want to tell you anything that isn't prescribed by law. You get all the required information, but little relevant information. Therefore, you don't make optimal use of the new program. Why would you? You don't know the full benefit of the change. You don't know who to ask. And, even if you did, that person might be afraid to tell you.

My plea for the near future: let's go back to real communication.

Thursday, February 7, 2013

New Trends in the 401(k) World

Shortly after the passage of the American Taxpayer Relief Act of 2012 (ATRA), Aon Hewitt did a pulse survey of more than 300 large employers (presumably from their client base, but the press release doesn't seem to specify) on 401(k) plans. Here were some of their key findings:

  • 49% of respondents currently do not offer Roth provisions
  • Of those, 29% are very likely or somewhat likely to add Roth provisions in the next 12 months (this would bring the percentage who do not offer Roth provision down to about 35% of the total)
  • Of the new adopters, about 76% will add in-plan conversion (from traditional to Roth) features
  • Approximately 53% of companies that currently allow Roth contributions but do not currently offer in-plan conversions will begin to allow them
Personally, I am pleased to see this trend. For the life of me, though, the only good reasons I can see to not offer both of these features are these:
  • HR has too many other things on their plate and implementation of these is not a high enough priority to implement in 2013
  • The company is particularly paternalistic and worries that because Roth accounts have earlier distributable events than traditional 401(k) accounts that participants will not use them for retirement
  • Employees have not asked for them (I think this is not a good excuse because many employees will not have heard of the opportunity)
  • Employers have not heard of these changes (shame on them, they should be reading this blog, of course)
The employer-sponsored retirement plan world has changed from one largely of employer responsibility to largely one of employee responsibility. For employees to someday retire, since very few who don't save in employer-sponsored retirement plan save elsewhere, those employees will need to begin saving at young ages and save responsibly and consistently. The more tools they have available to them, the more likely they are to do it, and that is good for our future.

Tuesday, February 5, 2013

CDHPs -- Perhaps I Was Always Correct

It's been more than one year since I wrote my not exactly seminal piece on Consumer Driven Health Plans (CDHPs). In it, I said that insureds forego lots of important medical care, not because they are making a well-considered consumer decision, but because they simply can't afford it. While I don't think anyone posted in the comment section of my blog, several experts told me privately how misguided my thoughts were. They told me how quality of care is increasing as consumers of medical care make wise choices.

Now we have a study published by the Rand Corporation working with researchers from Towers Watson and the University of Southern California. The way I read it, even if the quality of care, when care is sought, is improving, necessary preventive care is sought less often. In my opinion, it's because of one of these factors:

  • Consumers can't afford to pay the costs.
  • Consumers have experienced too many situations in CDHPs where they thought a particular test was covered by their plan as part of well care, but either it's not or it's not fully covered.
  • Consumers have no idea if they can afford the costs, but dealing with the health plan's "Customer No Service" Department is just too painful.
  • Their physician can't figure out whether the test is covered.
From the same study, reading from Figure 4, we see the following reductions in preventive care under CDHPs:
  • 3.7% for Glucose Level
  • 4.2% for Lipid Profile
  • 4.9% for Cervical Cancer
  • 2.8% for Mammogram
  • 2.9% for Colorectal Cancer
I am not saying here that the CDHPs, in an of themselves cause these declines in preventive care, but there certainly does seem to be a correlation. Personally, I know that I am entitled to one physical per year under the employer-sponsored CDHP in which I participate. Frankly, I've been in a plan of that sort for most of the last 6 or 7 years. Of the tests listed above, some are fully covered by the plan, some are partially covered, and some don't seem to be covered at all. 

I don't recall which one it was, but for one of those tests, when I called the health plan, I was told that reasonable and customary (R&C) costs were covered. After they paid R&C costs, I was left with a $200+ bill.

Is my physician particularly expensive? I don't think so. He is an in-network provider. Am I in a particularly high cost of medical care geography? I'm pretty sure that's not the case. Did I do something wrong? Not that I can tell.

The good news is that I am in a pretty well-paid profession and I can afford my share of the costs of these tests. But, especially in a bad economy, many people can't. 

The evidence tells me that CDHPs are not working the way they are intended to. But, employer costs are coming down. So, we are probably stuck with these plans. Lucky us.