For those of you interested in the developing law pertaining to ERISA fiduciary responsibility of directed trustees, please note this recent federal district court opinion from the Eastern District of Virginia–DeFelice v. US Airways. Plaintiffs in the case had brought a class action lawsuit against US Airways and Fidelity, the directed trustee, seeking to recover losses to the Plan resulting from the diminution in value of US Air Group stock between August 1, 2001 and August 11, 2002, the date of the bankruptcy filing.

One of the key facts of the case as cited by the court was that “the Company Stock Fund remained an investment option available to Plan participants throughout the period of US Airways’ descent into bankruptcy.” The court noted that “[d]uring most of the pre-bankruptcy period, in fact, the Company Stock Fund regularly increased its holdings in US Air Group stock.” Also, of note, was the fact that the Company hired an independent fiduciary in 2002 which immediately upon appointment ceased purchasing the stock and began liquidating the “shares then held to the extent possible without adversely affecting the stock’s market value stock.”

The court framed the issue before the court as “whether a directed trustee under ERISA ? 403(a) has a duty to challenge the continued inclusion of company stock as one of several investment choices in the company?s 401(k) plan where, as here, publicly available information indicated that the company was considering filing for bankruptcy protection, but had not yet done so.”

The court held that § 403(a) of ERISA should not be read as imposing on directed trustees a duty to second guess the wisdom of the named fiduciary’s directions as to Plan investment options. The court reasoned that to hold otherwise would “effectively eviscerate § 403(a) by eliminating any distinction between the duty of a directed trustee under § 403(a) and the duty of the ERISA named fiduciary with investment authority, who has the duty of ordinary care and prudence prescribed by § 404(a).” The court noted that § 403(a) of ERISA was plainly meant by Congress “to create a subset of ERISA fiduciaries with a statutorily defined duty different from and more narrowly circumscribed than the general duty of ordinary care imposed on other ERISA fiduciaries by § 404(a).”

The court expounded further on the issue as follows:

To sum up, then, § 403(a), by its terms and context, plays an appropriately distinctive role in the ERISA scheme: It prescribes the duties of an ERISA fiduciary acting as a directed trustee. Specifically, § 403(a) requires a directed trustee to comply with the directions of a named fiduciary. And importantly, a directed trustee under § 403(a) has no duty to assess the merits of a named fiduciary’s direction and to reject that direction, if, in the exercise of the directed trustee’s independent judgment, the direction is imprudent. Indeed, the directed trustee has no discretion to do so and hence incurs no liability for complying with a direction simply because it may arguably be imprudent. To be sure, Section 403(a) makes unmistakably clear that a directed trustee must implement the named fiduciary’s direction provided the directions are proper, i.e., that they meet certain formal requirements and hence are identifiably genuine or valid directions from an authorized fiduciary, and provided further that they are not violative of the plan or ERISA. Nor do either of these provisos import into § 403(a) a duty of ordinary care to second guess the financial wisdom of the named fiduciary’s directions. Rather, the provisos merely insure (i) that a direction is valid, as distinguished from some spurious order or suggestion from an unauthorized source and (ii) that a direction is not patently violative of ERISA or the plan, for example, by requiring the directed trustee to engage in an explicitly prohibited transaction or where the direction is the product of collusive and fraudulent acts based on non-public information. To hold otherwise- to impose on directed trustees a duty to second guess the prudence of a named fiduciary’s proper directions-would negate the purpose and function of § 403(a) and invite wasteful disputes and litigation between named fiduciaries and directed trustees over the wisdom of each direction. Given the construction of § 403(a) reached here, it follows that Fidelity, as a directed trustee, incurred no liability when it did not countermand US Airways’ continuing direction to retain the Company Stock Fund as an investment option for Plan participants despite a reasonable basis for pessimism about the US Air Group’s financial prospects.

Also of interest was the court’s reference to the DOL’s Field Assistance Bulletin 2004-03 in which the DOL had stated that in certain circumstances [i]t might not be imprudent to purchase or hold stock in a distressed company in bankruptcy.” The court held that where “the directed trustee possesses only publicly available information” that the DOL’s standard imposes liability on a directed trustee “only after the named fiduciary has filed for bankruptcy” and even then only “under circumstances which make it unlikely that there would be any distribution to equity-holders with any value . . . .” The court went on to conclude that “in the view of the DOL, a direction to retain company stock as a plan investment option is not contrary to ERISA until the shares are worthless as a matter of fact, and not as a matter of conjecture or investment judgment about the future.”

PlanSponsor.com discusses the opinion here.