This week EBSA announced that it was amending and restating the Voluntary Fiduciary Correction Program ("VFC") which permits ERISA fiduciaries to correct certain violations that occur under ERISA. Generally, under the program, applicants are required to fully correct any violations, restore to the plan any losses or profits with interest, and distribute any supplemental benefits owed to eligible participants and beneficiaries. A "no action" letter is given to plan officials who properly correct violations.
Proposed amendments include:
Access the following:
DOL's Press Release announcing expansion and simplification of the VFC program
Voluntary Fiduciary Correction Program; Notice 70 Fed. Reg. 17515 (Apr. 6, 2005)]
EBSA's Fact Sheet
Proposed Amendment to Prohibited Transaction Exemption 2002–51 (PTE 2002–51) To Permit Certain Transactions Identified in the Voluntary Fiduciary Correction Program
Please note that the program only allows correction for certain enumerated violations (new ones added by the Notice are underlined):
Also, with respect to the correction of delinquent participant contributions or loan repayments, the documentation requirements of the program have been simplified for breaches involving amounts below $50,000, or amounts greater than $50,000 that were remitted within 180 calendar days after receipt by the employer. Here's what the Notice has to say about this simplified documentation requirement:
EBSA believes that introducing more simplified documentation requirements in certain cases rather than the detailed information and copies of accounting and payroll records required under the original VFC Program will streamline the application process, increase the efficiencey of EBSA's reviewers, and be less burdensome for applicants making smaller corrections. Based on EBSA's experience to date, the majority of VFC Program applicants, under the revised Program, would be able to avail themselves of this reduced documentation requirements.
Jenner & Block has announced a new online resource center devoted to ERISA fiduciary issues pertaining to company stock. A highlight of the resource center for me is this list of ERISA Fiduciary and Company Stock Cases (with links to the actual cases). Also, for those wanting to know what the "Fiduciary Fishbowl" is, check this out.
Pepper Hamilton LLP has posted an article entitled: "ERISA Fiduciary Responsibility: CEOs and Directors In the Bull's Eye."
In a previous post, I discussed the development of case law around this important question: to what extent are directors fiduciaries under ERISA and charged with monitoring the appointment of fiduciaries under ERISA?
Recent cases provide some insight into how the courts are dealing with this ongoing issue as it relates to 401(k) company stock cases which are making their way through the courts. There are now a whole host of recent cases (stemming from the economic turmoil of the past few years) which have made it past the motion to dismiss phase, two of which have seemingly reached opposite results on the issue and are worthy of discussion:
(1) In re: CMS Energy ERISA Litigation: Plaintiffs brought suit against "Employer Named Fiduciaries," "Plan Administrator Fiduciaries" and "Insider Director Fiduciaries." With respect to the directors, plaintiffs alleged a breach of fiduciary duty on account of failing to monitor the other fiduciaries of the plan. Regarding the facts of the case, there were two plans, a 401(k) Plan and an ESOP, which were heavily invested in CMS stock which had, of course, dropped in value. In the plan documents, the employers were designated as the Named Fiduciaries and were charged with the "general administration of the Plan." The Board of Directors was given the power to "appoint such persons, who may be Members under the Plan, as it determines at any time to act as Plan Administrator in all dealings under the Plan."
As to whether or not the directors could be considered fiduciaries under ERISA, the Court ruled that the discretion given to the employer under the Plan provisions was broad enough to support a finding that they were fiduciaries under ERISA:
"[W]here the Board of [Directors] may choose a Plan administrator, and the Employers may choose an Investment Manager, but the Plan does not delegate investment policy or decision making power to such manager, administrator, or any other individual or committee, but in fact reserves the broadest administrative and management responsibility to the Employers, the court is convinced that it is premature to dismiss inside directors of the Employers as non-fiduciaries absent specific findings on what responsibilities were actually assumed by them."
Regarding the duty to monitor, the court stated:
. . .[T]he allegations are that the Employer Named Fiduciaries and the Insider Director Defendants breached their fiduciary duties by failing to adequately monitor the Plan Committees, the Plan Administrators, and other persons, if any, to whom management of Plan assets was delegated. These Defendants knew or should have known that the other fiduciaries were imprudently allowing the Plan to continue offering CMS stock as an investment option and investing Plan assets in CMS stock when it no longer was prudent to do so, yet failed to take action to protect the participants from the consequences of the other fiduciaries' failures.
As a result, plaintiffs' allegation survived the defendants' motion to dismiss on the issue.
(2) In the In re: Dynegy, Inc. ERISA Litigation, the Profit Sharing/401(k) Savings Plans allowed participants to invest in Company Stock. The Benefits Plan Committee was the Administrator of the Plan and also the named fiduciary with respect to the general administration of the Plan, having the authority to control and manage the operation and administration of the Plan. The Board of Directors had the sole authority to appoint and remove the Plan Trustee. Plaintiffs in the lawsuit brought allegations against the Company, the Board of Directors, the Human Resources Committee of the Board of Directors ("HRC"), and the Benefit Plans Committee ("BPC").
Regarding the claims against the Board of Directors, the plaintiffs had alleged that the Company, Board of Directors and members of the Human Resources Committee of the Board of Directors had (1) breached their duty to disclose and inform the BPC incident to their duty to appoint and monitor their members, and (2) failed to monitor the BPC.
The court dismissed both claims pertaining to the duty to monitor issue, although other claims on other issues survived. The difference in the result in this case from the CMS case seems to stem from the plan fiduciary structure as set forth in the Plan document as well as a different interpretation of the law as it relates to the duty to monitor. In the Dynegy case, the court points out that "[n]either Dynegy nor the HRC were designated as fiduciaries in the Plan or mentioned in the fiduciary provisions of the Plan" and that directors were only mentioned in the Plan as having "the sole authority to appoint and remove the Trustee."
Plaintiffs had alleged that the Board of Directors were fiduciaries because they had the power to appoint members of the HRC, which in turn had the power to appoint members of the BPC. In making this argument, they alleged that the Board's fiduciary duty to the Plan was derived from the power given to it in the company's bylaws to appoint a compensation committee [the HRC] to review "the salaries, compensation and employee benefits" for the employees. They further argued that the HRC's fiduciary duty to the Plan was derived from the power given to it by a 2002 Proxy Statement and resolutions of a predecessor compensation committee authorizing and directing the HRC "to review all aspects of the company's benefit and welfare plans and programs, administer the plan, and appoint a person or persons to oversee the administration and operation of the benefit plans."
Despite this language, the court basically said "no dice" to the argument, and held that because the directors were not named as fiduciaries in the governing plan documents, the test of whether or not they achieved fiduciary status was purely functional in nature. Because the directors had not exercised "de facto control" over the BPC or been on notice of any possible misadventure by their appointees, the court held that claims against them should be dismissed.
It is very interesting to note that the plaintiffs unsuccessfully relied on the Enron case in support of their allegations that the directors had breached their fiduciary duties by failing to monitor the BPC and the HRC. The court in Enron had held that because certain directors had been given the power to appoint the fiduciaries of the plans under the plan document, and because they had, in fact, exercised that "discretionary power of appointment", they also had the responsibility of monitoring the Committee which had control over the Plan's investments and that plaintiff's allegations should not be dismissed.
However, the Dynegy court didn't seem to buy the argument that the Dynegy directors could be held to have breached their duties through a failure to monitor unless something more was present. The court made it clear that that "something more" would have included such things as the directors "actively and knowingly" participating in the dissemination of misleading information, the directors encountering "red flags" which might have alerted them to the fact of "possible misadventure by their appointees" or allegations that, if the directors had investigated Dynegy's regulatory filings, they would have discovered accounting improprieties and/or financial problems leading them to take action. The court distinguished the Enron case by stating that that "something more" was present in the Enron case, but not in the Dynegy case.
(In the Enron case, the plan documents had given the Enron Corporation the duty to appoint members of the committee which served as Plan administrator and Enron was designated as the named fiduciary with respect to general administration of the Plan, except for investment of the assets in the trust fund. The plan document also stated that Enron was obligated to provide the Administrative Committee with "any information that the Committee determines is necessary for the proper administration of the Plan" and to the Trustee any such "facts as are deemed necessary for the Trustee to carry out the Trustee's duties under the Plan.")
Commentary: All of these cases should be of great interest to those involved in plan documentation and those involved in seeking to insulate Board members from ERISA liability. They demonstrate how the fiduciary structure set forth in the plan documents plays a critical role in determining whether the courts are willing to hold the directors personally liable under the fiduciary responsibility rules of ERISA, if investments go sour and plan participants sue. While the Department of Labor has in its Amicus Briefs, as well as publicly, been fairly vocal about its view that directors should be held responsible under ERISA when they are vested with the power to appoint fiduciaries, but fail to be actively involved in monitoring the appointed fiduciaries through prudent processes and procedures, some courts have seemed more reluctant to hold them responsible, absent a finding of "something more" in the way of imprudent conduct on the part of directors that goes beyond the mere duty to appoint.
Until the issue is resolved, there will continue to be uncertainty surrounding this particular area of the law. However, directors and those who represent directors should be aware of the following:
(1) Approving or adopting plan documents willy-nilly without giving thought to plan fiduciary structure is foolish in today's legal environment with the threat of lawsuits from participants being a real risk as plaintiff's lawyers now view ERISA as a fertile ground for recovery. Many employers have in the past taken a rather lackadaisical approach to plan documentation, trying to cut costs by utilizing "canned" documents supplied by vendors and record-keepers. However, it is hard to imagine that such a casual attitude towards plan documentation will continue as these cases play out in the courts and the case law develops.
(2) For those seeking to limit director liability, there seems to be two distinct approaches developing:
D-4 Q: In the case of a plan established and maintained by an employer, are members of the board of directors of the employer fiduciaries with respect to the plan?
A: Members of the board of directors of an employer which maintains an employee benefit plan will be fiduciaries only to the extent that they have responsibility for the functions described in section 3(21)(A) of the Act. For example, the board of directors may be responsible for the selection and retention of plan fiduciaries. In such a case, members of the board of directors exercise "discretionary authority or discretionary control respecting management of such plan'' and are, therefore, fiduciaries with respect to the plan. However, their responsibility, and, consequently, their liability, is limited to the selection and retention of fiduciaries (apart from co-fiduciary liability arising under circumstances described in section 405(a) of the Act). In addition, if the directors are made named fiduciaries of the plan, their liability may be limited pursuant to a procedure provided for in the plan instrument for the allocation of fiduciary responsibilities among named fiduciaries or for the designation of persons other than named fiduciaries to carry out fiduciary responsibilities, as provided in section 405(c)(2).
. . .
FR-17 Q: What are the ongoing responsibilities of a fiduciary who has appointed trustees or other fiduciaries with respect to these appointments?A: At reasonable intervals the performance of trustees and other fiduciaries should be reviewed by the appointing fiduciary in such manner as may be reasonably expected to ensure that their performance has been in compliance with the terms of the plan and statutory standards, and satisfies the needs of the plan. No single procedure will be appropriate in all cases; the procedure adopted may vary in accordance with the nature of the plan and other facts and circumstances relevant to the choice of the procedure.
The same type of theory was advanced in the Dynegy case discussed above where, even though the duty to appoint fiduciaries was vested in certain directors, allegations against them for failure to monitor were dismissed where they were not involved in any additional "functional" activity which would have made them fiduciaries.
All of this raises a very interesting, and somewhat disturbing, question as to whether or not directors who actually engage in the prudent processes of monitoring contemplated by the DOL could in jurisdictions holding to the latter view, actually find themselves in a Catch 22 position of "crossing over the line" into fiduciary functionality, meaning that if they then could be found to have "failed" somehow in their activities of monitoring, they would then be held personally liable under ERISA (i.e. whereas total inactivity in such jurisdictions would likely have achieved a different result.)
At the ALI-ABA Annual Spring Employee Benefits Law and Practice Update held last week, Louis Campagna, Jr., Chief of the Division of Interpretations, from EBSA, discussed the recent mutual fund investigations and reiterated what has already been set forth in the DOL's statement issued in February, 2004. Mr. Campagna stated that after the mutual fund scandals broke, the DOL was flooded with questions from plan fiduciaries wanting guidance regarding their duties under ERISA with respect to the investigations. Mr. Campagna discussed how statements made by the DOL in speeches (here and here) and in the statement issued in February are designed to reinforce that fiduciaries should not panic, but can take applicable steps to fulfill their duties under ERISA as follows:
(1) First and foremost is the requirement that plan fiduciaries be informed. He stated that prudence requires that, if fiduciaries are not informed, they are not exercising prudence as required under ERISA. If plans are invested in funds with providers under investigation, fiduciaries have a duty to contact the fund directly in an effort to obtain specific information about the nature of any alleged abuses. If the funds have been involved in market timing or late trading, fiduciaries have a duty to investigate the possible economic impact of the abuses on plan investments and perform an evaluation regarding such impact, as well as evaluate the steps being taken by the funds to limit the potential for such abuses in the future.
(2) Fiduciaries should take appropriate action where necessary. The guiding principle for fiduciaries, as stated in their guidance, is to to ensure that appropriate efforts are being made to act reasonably, prudently and solely in the interests of participants and beneficiaries, and that actions taken are fully documented.
(3) Plan fiduciaries should consider any steps available to make the plan participants whole, such as participating in lawsuits. However, fiduciaries should weigh the costs to the plan against the potential for recovery in such lawsuits before participating.
(4) Plan fiduciaries should consider other plan assets, not just mutual fund investments, which could also involve similar abuses and take additional action with respect to such investments, such as pooled separate accounts and collective trusts. Mr. Campagna mentioned that the DOL is currently investigating these type of investments for possible abuses.
(Comment: Please note that in remarks of Assistant Secretary Ann L. Combs To the Washington Forum of the U.S. Institute on March 8, 2004, Ms. Combs mentioned this investigation by the DOL and stated as follows: EBSA is currently conducting its own review of practices by mutual funds and other pooled investment vehicles, such as bank collective trusts, as well as service providers and so-called “intermediaries” to such funds, to determine whether there have been any violations of ERISA. We are examining a sample of mutual fund and other financial service providers to see whether activities such as market timing or illegal late trading may have harmed retirement plan beneficiaries. Under ERISA, a mutual fund affiliate or other retirement plan fiduciary that engages in or facilitates market timing or late trading, causing losses to an ERISA covered plan, is liable to restore losses to the plan.
We are focusing on investment companies and banks that offer 401(k) services to plans more than employers who run their own retirement plans. We are looking for improper payments for directed investments, and whether retirement accounts have been used to facilitate market timing or late trading for clients.
I should note that this review is exploratory and not the result of specific evidence that investment professionals serving as fiduciaries have engaged in improper or illegal activity. We don’t know yet if there are any real problems here but we have an obligation to look.)
(5) Mr. Campagna discussed how plan fiduciaries have been very concerned about whether they can take any steps to address market-timing by plan participants. Fiduciaries have been particularly concerned with the impact these restrictions on market-timing might have on ERISA section 404(c) safe harbor protection. In an effort to address these concerns, the DOL stated in its guidance that imposing reasonable redemption fees on sales of mutual fund shares and/or placing restrictions on the number of times a participant can move in and out of a particular investment within a particular period would not affect the safe harbor protection of section 404(c). Mr. Campagna also emphasized that any such restrictions must be clearly disclosed to the plan’s participants and beneficiaries.
Pam Perdue, attorney with Summers, Compton, Wells & Hamburg and a panelist, emphasized the importance of disclosure. If the plan fiduciaries receive a statement from the provider regarding alleged abuses, her position is that the plan fiduciaries should make this information available to participants and beneficiaries. She also noted that courts have upheld the validity of market-timing restrictions on plan investments where there was adequate and prior disclosure of such restrictions to plan participants.
Panelists noted that fiduciaries should beware of targeting certain plan participants with market-timing restrictions since this could run afoul of the 3-day advance notice requirements for blackout periods under Sarbanes-Oxley.
(What is being referred to here are the requirements that apply to so-called “black-out periods” in participant-directed retirement plans under Sarbanes-Oxley. Black-out periods occur when the ability of plan participants (or of a plan participant) to take certain actions is temporarily suspended. Under Sarbanes-Oxley, participants must receive advance written notice of certain black-out periods, and corporate insiders are restricted in trading in employer securities during such black-out periods. The DOL and the SEC have issued final rules implementing the new requirements. Substantial penalties may be imposed for non-compliance with the black-out notice requirement or the insider trading prohibition under Sarbanes-Oxley.)
The DOL also emphasized this point in its guidance, stating that "[t]he imposition of trading restrictions that are not contemplated under the terms of the plan raises issues concerning the application of section 404(c), as well as issues as to whether such restrictions constitute the imposition of a “blackout period” requiring advance notice to affected participants and beneficiaries."
(6) In the Q & A portion of the seminar, a question was asked as to whether or not the mutual fund guidance issued by the DOL applies to self-directed brokerage accounts. Mr. Campagna remarked that under SEC rules, the plan is the customer which buys the mutual fund product. Therefore, if information regarding funds targeted in an investigation is in the possession of the fiduciary, the plan fiduciaries would likely have fiduciary responsibility regarding the investment, and therefore the guidance would be applicable.
The International Foundation of Employee Benefit Plans has published an article entitled "Changes in Legal Landscape Turn Fiduciary Response Upside Down in 2004." The article notes some interesting statistics:
A recent survey conducted by the investment advice firm, Financial Engines, found that 73% of plan sponsors believe their fiduciary responsibilities or liabilities have increased over the past 12 to 24 months. . . . At the same time, according to the survey, which was conducted at the beginning of February, only 48% of sponsors agree that their role as a fiduciary is clear. . .
The article makes a good point about the need for those advising retirement committees (attorneys, consultants, etc.) to educate and train the retirement committees about their fiduciary duties under ERISA. Dittos on this quote from Michael E. Falcone, a vice president with Aon Consulting's Employee Benefits Group:
"I think one of the things they [attorneys, consultants, etc.] can do is do some fiduciary training for the committees, to make the committees aware of what their responsibilities are," he explains. "But they also can talk about how they're going to help the committees [fulfill]. . . their fiduciary duties. Make sure the fiduciaries have all the information they need to do their right job-disclosure on fees, fund reviews."
Regarding ERISA fiduciary duty pertaining to company stock, the article makes the statement that "[a]mong the outstanding issues regarding company stock is whether sponsors have to disclose nonpublic data to participants" and that "[c]ourts have yet to rule on that question." Please note that there have been some recent decisions holding that those individuals who serve on retirement committees and who are also corporate insiders with "inside information," may under some circumstances have an obligation to disclose such information to other plan fiduciaries and participants. See Opinion and Order entered in the In Re WorldCom, Inc. ERISA Litigation and this post at Benefitsblog: "From My Notes: Review of the In re: WorldCom, Inc. ERISA Litigation Opinion" as well as the Memorandum and Order entered in the In Re Enron ERISA Litigation which states:
The duty to disclose the relevant information to the plan participants and beneficiaries, which the Plaintiffs assert these Defendants owed as ERISA fiduciaries, is entirely consistent with the premise of the insider trading rules: that corporate insiders owe a fiduciary duty to disclose material nonpublic information to the shareholders and trading public.
Also, regarding fiduciary duties pertaining to recent mutual fund developments, the following articles discuss the DOL's recent guidance issued addressing "Duties of Fiduciaries In Light of Recent Mutual Fund Investigations":
You can read previous posts at Benefitsblog about ERISA fiduciary compliance at this link.
After an economic downturn such as the last two years, with week after week bringing more news of company lay-offs, the following case could have relevance for employers seeking to deal with the myriads of legal issues which can result from such lay-offs: Johnson v. Gore & Associates decided January 23, 2004 by the Ninth Circuit. The case highlights the confusion surrounding the term "lay-off," and how the use of this term can have significance in determining what terminated employees are entitled to under severance plans and retirement plans.
The Facts: The employer here (the "Employer") announced that it was closing a plant and repeatedly described to employees that it was a "layoff." However, the Employer also issued a WARN notice and stated that, due to a "business relocation," employment with the Employer would be permanently terminated. The plan at issue here was called the "Associates Stock Ownership Plan" and credited service based on the elapsed time method of crediting service, had a five year "cliff" vesting schedule, and had an "employment on the last day" requirement for receiving an allocation of Employer contributions for the year. Employees who lost their job due to the plant closing joined in a class action, seeking credit for an additional year of service. Their benefits had not yet vested because they had worked for the Employer more than four, but less than five years. There was also an additional class of plaintiffs who were vested, but did not share in the Plan contribution for the year because they lost their jobs prior to the last day of the Plan year. The Employer sought a motion for summary judgment which was granted by the district court and affirmed on appeal.
A debate over the "elapsed-time" method of crediting service. Before we glean some lessons for ERISA plan fiduciaries from the case, it is worth noting that the Ninth Circuit ruled in the case that the "elapsed time" regulations do not violate ERISA. (We can all breathe a sigh of relief . . .) Now, I don't know about you, but I have drafted many, many plans which provide for the "elapsed time" method of crediting service, and never given much thought to the issue of whether or not the regulations governing the drafting of these provisions violate ERISA. Nevertheless, the regulations were the subject of much discussion in the case, which gives a history of the regulations and then holds that they do indeed comply with ERISA.
(Can you imagine the stir that would have been created had the Ninth Circuit ruled that they did violate ERISA, i.e. 27 years after they were promulgated? I suppose it could have been worse than the stir created by the recent IBM case in which a district court held that a cash balance plan violated ERISA.)
For those of you not familiar with this intricate concept of "elapsed time", the "elapsed time" regulations, initially promulgated by the DOL in 1976, provide for a method of crediting service under a plan that is an alternative to the traditional hours of service method (where employees are credited with a year of service when they work 1,000 hours during a 12-month period.) As the regulations provide, under this alternative method of crediting service, "an employee's statutory entitlement with respect to eligibility to participate, vesting and benefit accrual is not based upon the actual completion of a specified number of hours of service during a 12-consecutive-month period" but "is determined generally with reference to the total period of time which elapses while the employee is employed (i.e., while the employment relationship exists) with the employer maintaining the plan." Reg. 1.401(a)-7.
This alternative method set forth in the regulations is designed to enable a plan to lessen the administrative burdens associated with the maintenance of records of an employee's hours of service, by permitting each employee to be credited with his or her total period of service with the employer, irrespective of the actual hours of service completed in any 12-consecutive-month period. However, under a 5-year cliff vesting schedule (0% vesting for less than 5 years of service, and then 100% vesting after reaching the 5-year mark), the "elapsed time" method can have a harsh result if employees terminate near the end of the fifth year of employment. This is what happened in the case at hand where employees, due to circumstances beyond their control, were suddenly cut-off from reaching the 5-year mark and achieving their goal of 100% vesting. (On the other hand as noted in the case, the "elapsed time" method can actually achieve a more generous result where employees would not otherwise meet the 1,000 hour requirement under an hours-based approach to crediting service, but do receive a year under the "elapsed time" method.)
It is likely this harsh result which has brought the issue to the attention of other circuit courts as noted by the Ninth Circuit:
Other courts have addressed the question of whether the elapsed-time method violates the vesting provisions of ERISA and have upheld the regulation. We agree with the Second Circuit in Swaida, the Seventh Circuit in Coleman v. Interco Inc. Divisions' Plans, 933 F.2d 550, 552 (7th Circ. 1991), and the Eighth Circuit in Jefferson v. Vickers Inc., 102 F.3d 960, 964 (8th Circ. 1996), and hold that the elapsed-time regulation does not violate ERISA.
(Interesting point to note here: The Swaida case mentioned was against IBM: Swaida v. IBM Ret. Plan, 570 F. Supp. 482 (S.D.N.Y. 1983), aff'd, 728 F.2d 159 (2d Cir. 1984).
Lessons for ERISA Plan Fiduciaries. Regarding lessons for plan fiduciaries, there are many:
(1) Make sure your plan document has the "magic" language of the Firestone case. While it is hard to imagine any plan not now containing this language, after benefits attorneys have hammered away at this point for many years, the Gore case represents one of those few cases where the plan document under review did not contain sufficient language so as to satisfy the requirements of Firestone. (See previous post on the subject here.) As you may recall, if the plan document gives the plan administrator discretionary authority to determine eligibility for benefits or to construe the terms of the plan documents, the decisions reached by the plan administrator will not be overturned by a court unless the decision was "arbitrary and capricious." The court in Gore held that the Plan language did not provide the necessary "discretionary authority" under Firestone and therefore the court went ahead with a "de novo" review of the decision. The "defective" language contained in the Plan was as follows:
The Committee shall administer the Plan in a uniform, nondiscriminatory manner for the exclusive benefit of the Participants and their Beneficiaries. The Committee shall establish and maintain Accounts and records to record the interest of each Participant, Inactive Participant, and their respective Beneficiaries in the Plan. The Committee shall make such rules, regulations, interpretations, discussions, and computations as may be necessary. Its decision on all individual matters will be final . . .The Committee shall have all powers which are reasonably necessary to carry out its responsibilities under the Plan. It may act as provided herein and shall give instructions to the Trustee on all matters within its discretion as provided in the Plan and Trust Agreement.(The court went ahead and upheld the plan fiduciary's decision in spite of the de novo review.)
(2) In questions of ambiguity or areas needing clarity, seeking the advice of counsel can help to establish that the the plan fiduciaries employed "prudent procedures" in reaching a decision about the issue and can show that the fiduciaries are diligent in seeking to comply with the law. In the Gore case, the plan committee sought the advice of legal counsel on the interpretation of the phrase "lay-off" under the plan, and the court emphasized this advice in upholding the decision of the Plan committee:
The Committee did not ignore the facts and the law when it determined that a "layoff" under this regulation connotes a temporary absence. A memorandum from Plan counsel Brown (Brown Memorandum) to the Committee is clearly concerned with the meaning of the term "layoff" and cites several cases supporting the definition ultimately applied by the Committee. Most importantly, the Plan clearly states in section 21.1 that "The provisions of the Plan shall be construed, administered, and enforced according to the laws of the United State and the State of Delaware." . . . Accordingly, we cannot say that the Committee's decision is contrary to fact or law in light of the validity of the elapsed-time regulation and our holding that the term "layoff" in that regulation connotes a temporary absence.(Of course, it goes without saying that such advice from counsel could also work the other way, showing that plan fiduciaries were "arbitrary and capricious" where the plan fiduciaries, for whatever reason, decide to ignore the advice given, and where such advice then becomes discoverable in a lawsuit.)
(3) Remember that informal discussions among committee members memorialized through emails may eventually be used against the committee members in a later lawsuit. The plaintiffs tried to use an email between Committee members as evidence that Committee members were influenced by a material conflict of interest, thereby meriting a de novo review. The email reflected a conversation that a Committee member had with outside counsel, in which the attorney advised that the term "leave of absence" could be stretched to include the employees who had lost their jobs due to the plant closing. Although the court held there should be a de novo review for other reasons, the case demonstrates how those internal memos can sometimes come back to haunt you. (You can read about another case where a "smoking gun" memo made a difference in a case here.)
(4) Even with "defective" plan language and grey areas of the law where reasonable persons could differ, plan fiduciary decisions will often be upheld by courts where "prudent procedures" were employed in reaching the decision. Here the "prudent procedures" employed by the fiduciaries involved seeking the advice of counsel who advised the fiduciaries regarding interpretation of the plan language, citing several cases supporting the decision reached by the plan fiduciaries.
(Note: My guess is that a "partial termination" and 100% vesting argument was not advanced by the plaintiffs due to the numbers of employees involved.)
A previous post here at ERISAblog entitled "Perils for Plan Fiduciaries: Deciding When and How to Sue For Losses" discussed some worrisome news in the In re WorldCom, Inc. Securities Litigation case about how certain fiduciaries of pension funds had possibly jeopardized their claims on behalf of plan participants by filing individual actions prior to a decision on class action certification and how the judge in the case had followed up with tough criticism of the law firm that represented the fiduciaries. I noted how "there is much for ERISA plan fiduciaries to be wary of in contemplating individual and class action lawsuits on behalf of plan participants." Apparently, the Department of Labor thinks so too as evidenced in their issuance of final Prohibited Transaction Exemption 2003-39 (pdf version) (html version) covering issues pertaining to the settlement of litigation by employee benefits plans with parties in interest. The main purpose of the exemption is to permit plans to release claims against "parties in interest" in connection with settlements of ongoing or threatened litigation where the DOL is not a party to the litigation. The exemption is an important one for the benefits community in light of the fact that, as discussed previously, many plans will be, or already are, bringing lawsuits on behalf of plan participants trying to recoup losses from recent corporate scandals as well as mutual fund scandals.
Why does the DOL need to issue an exemption for a plan fiduciary to enter into a settlement on behalf of a plan? When plan fiduciaries enter into such agreements on behalf of plans which are suing such entities as the employer, an investment provider, etc, those entities are normally "parties in interest" (i.e. related to the plan under ERISA and DOL regulations). And without going into detail about all of the complicated prohibited transaction rules, suffice it to say that the DOL views a potential claim or "chose in action" as a type of property and that a plan's release of its claim against such party in interest may constitute a prohibited sale or exchange with the plan, as well as a prohibited transfer or use of plan assets for the benefit of a party in interest. (See DOL Opinion Letter 95-26A which provides some guidance regarding how this type of prohibited transaction can occur. Also, see PTE 1999-31.)
However, in spite of its views, the DOL notes the confusion surrounding the issue and that "some attorneys may have advised their clients that the settlement of litigation with a party in interest is not the type of transaction intended to be covered by section 406 of the Act." With this in mind, here is what the DOL says about the reason for its issuance of the exemption:
As the Department noted in proposing this exemption, the fact that a transaction is subject to an administrative exemption is not dispositive of whether the transaction is, in fact, a prohibited transaction. Rather, the exemption is being granted in response to uncertainty expressed on the part of plan fiduciaries charged with the responsibility under ERISA for determining whether it is in the interests of a plan's participants and beneficiaries to enter into a settlement agreement with a party in interest. The comments have confirmed the department's earlier conclusion that there was considerable uncertainty surrounding this issue. After considering all of the comments, the Department has determined that the exemption, as revised, appropriately balances the concerns of these commentators while allowing plan fiduciaries to properly carry out their responsibilities under ERISA.
The exemption is really narrowly tailored to address those settlement agreements which result in prohibited transactions. However, there is DOL guidance in the exemption which really has application for fiduciaries on a broader scale so that the exemption can serve somewhat as a "manual" for ERISA plan fiduciaries who find themselves having to enter into settlements on behalf of plan participants.
However, I wish to note one aspect of the exemption which is troubling from the standpoint of the effect it will have on the cost of litigation and trying to make plan participants whole--that is, the DOL's requirement in the exemption that the plan must obtain the opinion of an attorney representing the plan that a "genuine controversy exists." (i>Formal legal opinions are almost always a costly endeavor.) Now I suppose I should be singing' Dixie and praising the DOL for enhancing the flow of work to benefits and ERISA attorneys around the country, but I get concerned when I think of all that is going on here. When you think about the fact that participants have already been harmed in the matter and that attorneys representing the plan will receive a sizable portion of any settlement, and when you add to that, the requirement that the plan engage an "independent fiduciary" as well as this requirement that the plan engage an attorney to write an opinion that there is a "genuine controversy," all of this adds up to a great deal of cost which will eat away at any recovery for plan participants. Apparently, according to language in the original proposed exemption, the purpose of the attorney opinion requirement is as follows:
The Department believes that this condition is necessary to prevent the plan and parties in interest from engaging in a sham transaction purporting to fall within this class exemption, thus shielding a transaction, such as an extension of credit, that would otherwise be prohibited. The existence of a genuine controversy must be determined by an attorney retained to advise the plan. That attorney must be independent of the other parties to the litigation.
In the preamble to the final exemption, the DOL notes one commenter who recommended retaining the requirement for a genuine controversy, but without requiring an attorney opinion so that the attorney review would be permitted, but not required, as a safe harbor in certain situations. To me, this makes much more sense and would avoid needless cost for the majority of plans which find themselves in the position of having to recoup losses in litigation, for which the issue of "genuine controversy" is a far-gone conclusion. In other words, requiring all plans to obtain the opinion of counsel to avoid the possible abuse which can occur in the minority of cases is rather like trying to kill a fly with a bazooka. Nevertheless, this final exemption will require the opinion of counsel, except in situations where the case has been certified for class-action.
Some additional comments about the exemption:
(1) The DOL has eliminated the requirement that the independent fiduciary "negotiate" the settlement because it realizes that in class action settlements, the "plan fiduciary's role in negotiating the terms of the settlement may be limited." However, the DOL warns that "even where negotiation does not take place between the plan and the defendant, a fiduciary will be compelled, consistent with ERISA's fiduciary responsibility provisions, to make a decision regarding the settlement on behalf of the plan, even if that decision is merely to accept or reject a proposed settlement negotiated by other class members."
(2) Regarding class action lawsuits, the DOL had much to say in the exemption. A Plan fiduciary, faced with a non-opt out class action settlement, "must take such actions as are appropriate under the particular circumstances" and "object to its terms" where necessary on behalf of plan participants. "If the fiduciary takes no action, and the case is settled for far less than the full value of the plan's losses, the burden will be on the fiduciary to justify its inaction."
(3) The original proposed exemption only allowed the receipt of cash in exchange for a release. The final exemption permits "assets other than cash" where necessary to rescind a transaction that is the subject of the litigation, or where such assets are qualifying employer securities for which there is a generally recognized market and value.
(5) The final exemption provides that the settlement must be reasonable in light of the plan's likelihood of full recovery, the risks and costs of litigation, and the value of claims foregone.
(6) Finally, the DOL addresses the fact that it is not uncommon for the same transactions to give rise to both ERISA and securities fraud claims and that participants and/or fiduciaries have been able to modify the terms of a release to permit the plan to receive a share of the securities fraud settlement without releasing its ERISA claims against the parties in interest. The DOL notes "that plan fiduciaries should consider whether additional relief may be available for the ERISA claims before agreeing to a broad release."
With the New York Attorney General, the SEC, and a number of other regulatory agencies investigating mutual funds for improper trading practices, many executives, human resource professionals, and other individuals who serve on retirement plan committees and/or who are involved in communicating benefits to employees have concerns about their obligations under ERISA. Fresh on everyone's mind are the Enron and WorldCom decisions in which executives and HR professionals were alleged to have violated ERISA through their inaction and lethargy in the face of corporate scandals. In addition, as the news brings more and more evidence of improper mutual fund practices to light, the mere job of keeping track of the different funds implicated is challenging in itself and has been likened to "trying to stop a dam from bursting by using your fingers to fill the holes."
The selection of a mutual fund as an option for investment in a 401(k) plan subjects those who are responsible for making the selection to ERISA's fiduciary standards. Those who serve as ERISA fiduciaries must monitor the mutual funds offered to participants on a continuing basis and determine whether or not they remain suitable investment options for participants. In connection with these fiduciary standards, the Department of Labor (which is in charge of ERISA enforcement) recently made the following comments about the mutual fund scandals:
What should plan fiduciaries do in light of the allegations? ERISA requires that plan investment decisions, including the selection of mutual funds, must be prudent and solely in the interest of the plan's participants and beneficiaries. Allegations of improper mutual fund practices where a plan is invested must be factored into the fiduciary's determination of the continuing appropriateness of that investment. . . .We expect that fiduciaries will be attentive to activities that materially affect the plan's investment in the mutual fund or expose the plan to additional risk. . .[We] hope that the issues raised by Enron and similar cases have focused corporate officials on the important role fiduciaries play in protecting plan participants and has provided a necessary wake up call for people to take their fiduciary responsibilities seriously.
Plan fiduciaries should obtain information and stay on top of what is happening with respect to the mutual fund companies in their 401(k) plan line-up. While the New York Attorney General and the SEC have been investigating mutual fund practices, plan fiduciaries should be proceeding with their own independent investigation as well. In order to take appropriate action such as removing funds from a plan's line-up, fiduciaries should gather accurate information about a mutual fund's involvement in the current investigation. This would include seeking and keeping track of information from various news sources, from consultants who advise the plan, and most importantly from the fund managers themselves. Many plan fiduciaries have already sent letters to all of their investment providers (even those not implicated) asking that a checklist of information be completed by them in order for the fiduciaries to be able to prudently monitor the provider's status and involvement in the mutual fund scrutiny. Included in this checklist would be such questions as to whether or not the mutual fund complex represented in the plan has been implicated in market timing or late trading as well as what procedures the mutual fund has in place to prevent such practices.
Plan fiduciaries should analyze information and evaluate alternatives. It is apparent that, of the mutual funds under scrutiny, not all are engaged in the same level of activity as others and that different levels of involvement would require that different actions be taken with respect to the various mutual funds implicated. Here are a few of the questions that plan fiduciaries may want to consider in evaluating their mutual fund providers who have been involved in market timing or late trading:
The investment policy statement can also be very helpful in evaluating the information collected and determining whether or not fund offerings continue to meet the standards set forth in the investment policy statement.
Plan fiduciaries should act prudently based on available information and in accordance with applicable laws. Plan fiduciaries should not "act in a vacuum" without considering the following legal constraints:
Plan fiduciaries should also consider the following courses of action with respect to an implicated mutual fund offering, depending on the information gathered and the results of the analysis performed:
Plan fiduciaries should communicate with participants and beneficiaries where necessary and appropriate. Recent developments in the law have further emphasized the principle that participants and beneficiaries need to be informed on an ongoing basis of any material information which would affect participants' and beneficiaries' interests in the plan. In the wake of mutual fund scandals, plan fiduciaries including HR professionals who communicate benefits to participants will be faced with difficult decisions regarding their disclosure obligations to plan participants, particularly if the plan is a 401(k) plan where participants direct their own investments. These individuals must determine whether or not prudence requires them to disclose to participants that a fund's manager is under investigation and what steps the fiduciaries are taking in response to the allegations. They must also decide whether or not prudence requires them to issue a communication to all participants or to simply respond to individual inquiries. Many of these questions should be answered with the help of legal counsel who has been apprised of all of the pertinent facts and circumstances. Certainly if funds are removed and new ones offered, section 404(c) of ERISA would require participants to receive reasonable advance notice of such changes. However, the replacement of a fund would not constitute a "blackout period" requiring a Sarbanes-Oxley type advance notice, according to language in the preamble to regulations finalized by the DOL this year, unless the replacement constituted a "temporary" replacement, or unless in connection with implementing a permanent replacement, some rights would be temporarily suspended, limited or restricted.
Additional Note to Fiduciaries:
Document, document, document! It is important that all aspects of the prudent processes described above be fully and carefully documented. Plan fiduciaries should keep communication logs, recording relevant information that has been considered, and should document the decisions made and the decision-making process through preparation of minutes of their plan fiduciary meetings.
Plan Committees should meet frequently as needed. In addition, while retirement plan committees may normally meet on a quarterly basis, the current mutual fund scrutiny will likely require more frequent meetings otherwise known as "special meetings" to be called and attended by plan fiduciaries. In the recent Enron decision, the judge mentioned the lack of frequent meetings by plan committee members as one indication that fiduciaries may not have met their fiduciary standards under ERISA.
The 10b-5 Daily here and the New York Law Journal here discuss this opinion and order issued by Judge Denise Cote in the In re: WorldCom, Inc. Securities Litigation. Judge Cote in the opinion takes a law firm to task for not presenting "a forthright description of the advantages and disadvantages of both the individual action and class action options" as it pursued representation of pension funds in individual actions. The judge accused the law firm of "running the coordinated individual actions much as a de facto class action" and held that efforts to enlist plaintiffs had "resulted in some confusion and misunderstanding of the options available to the putative class members." As of October 3, 2003, the law firm had filed at least 47 individual actions on behalf of over 120 pension funds, many of them public employee or union pension funds.
While the primary focus of the case is on the law firm and its alleged failings, the case also serves as a warning to ERISA plan fiduciaries and other fiduciaries who will be making decisions as to whether or not to sue and/or join class action lawsuits which may inevitably be filed on behalf of plans' affected by recent corporate and mutual fund scandals. A decision to sue or not to sue on behalf of a pension fund is a fiduciary act subject to all of the fiduciary duties and responsibilities under ERISA. (Granted, the issue is more important with respect to 401(k) plans and other defined contribution plans where individual participant accounts must bear the risk of investment losses.) While the case mentioned also involved public funds which are not subject to ERISA, nevertheless even fiduciaries of these plans are subjected to state and common law fiduciary obligations and requirements. What the case reminds us of, I think, is how important it is for plan fiduciaries to engage in prudent processes, and document such processes, in reaching a decision as to whether or not to sue on behalf of a pension plan, whether or not to join a class action lawsuit, and in selecting a law firm for representation. As the opinion indicates, there is much to be wary of in making a prudent decision and selection.
Continue reading for excerpts from the opinion, keeping in mind that the term "investor" is referring to the various pension funds which are plaintiffs in the Individual Actions:
1) It is appropriate to begin with some bedrock truths. Every investor who has suffered a loss has the right to seek recovery. Every investor has the right to bring an individual action if it chooses to do so. Every investor will have the right to opt out of the certified class action.
2) [The law firm] has engaged in an active campaign to encourage pension funds not to participate in the class action and instead to file Individual Actions with [the law firm] as their counsel.
3) At this stage, [the law firm] is running the coordinated Individual Action much as a de facto class action.
4) [The law firm] has targeted a relatively sophisticated audience with important and serious fiduciary duties to its membership and beneficiaries. The private and public pension funds can be expected to have access to independent legal advice should they seek it, and to have attorneys on retainer or on their staffs who would be in a position to obtain alternative advice from that offered by [the law firm] should they desire it.
5) There is no reason to believe that the funds that have filed Individual Actions have done so with any but the best of intentions to obtain the maximum recovery for their constituency. And it is important to remember that constituency. After all, behind the lawyers and the pension fund officers stand the many individual state, local, public, and private employees whose lost retirement savings and benefits the funds seek to recover.
6) There may be sound and good reasons for filing an Individual Action and choosing to opt out of the class action. But, given the seriousness of the claims, and the gravity of the losses the defendants are alleged to have caused, every putative member of the class should have access to all of the relevant information about their legal options and the consequences of each choice. The are entitled to no less.
7) The communications with [the law firm] have resulted in some confusion and misunderstanding of the options available to putative class members. The deficiencies include the following:
a) From these submissions, [the law firm] does not appear to have presented a forthright description of the advantages and disadvantages of both the individual action and class action options.
b) It does not appear that the advantages and disadvantages of excluding Exchange Act claims from the Individual Action complaints have been adequately described.
c) The potential impediments to bringing claims based on the 1998 and December 2000 bonds are not fully described.
d) The potential statute of limitations impediments to bringing certain of the more recently filed Individual Actions do not appear to have been described. This could be a very serious problem for a litigant who chooses to opt out of the class, only to learn that the Individual Action it had filed was barred by the statute of limitations and it had lost all right to recovery. This very issue is not sub judice.
e) It is unclear whether those who have filed Individual Actions and who also had losses from investments in WorldCom stock have been adequately advised of the as yet undetermined risk that they may lose an opportunity to share in any recovery for their stock losses.
f) It does not appear that investors have been adequately advised that a fund does not need to file an Individual Action in order to obtain recovery for its losses. Without doing anything, each fund is a member of the class certified in this litigation, with the right to share in any recovery won on behalf of the class, free of the burden of pursuing its own separate action.
g) It does not appear that investors have been adequately advised that, within the class action, bondholders are represented by their own named representatives, and should there be any reason to believe that the allocation of any settlement between the bondholders and shareholders is not fair, then not only the named representatives of the bondholders, but also members of the class, will have an opportunity to object and to have their objections heard.
h) It does not appear that investors have been adequately advised that no distribution will be made to class members without the Court approving the fairness of the distribution.
i) It does not appear that investors have been adequately advised that before there is any award of attorneys' fees to Class counsel, there will be an opportunity for objections to be heard and a careful review by the Court.
Note: Many of you may remember an article on a related subject--The Invasion of the Class Action Securities Lawyers--which was the subject of a previous post here as well as one at EthicalEsq? here.
One of the reoccurring themes here at ERISAblog is the need for ERISA fiduciaries to become educated and trained about their fiduciary duties and responsibilities under ERISA. A 2002 case from the Central District of California district court, Springate v. Weighmasters Murphy, Inc. Money Purchse Pension Plan, 217 F. Supp. 2d 1007, illustrates how some ERISA fiduciaries are "in a fog" about their status and duties. In fact, at a conference I attended, one litigator commented that some individuals do not even realize that they are ERISA fiduciaries until they are having their deposition taken. A similar situation occurred in this case as the opinion states: "Until the time of his deposition, [Defendant 3] did not understand that one of his obligations was to tell the trustee “how to invest Plan assets.”"
The case involved a money purchase pension plan which had lost significant value in a short period of time. A plan administrative committee comprised of family members who also ran the business served as the "named fiduciaries" of the plan.
The court's discussion of how the three individuals serving on the plan administration committee failed to fulfill their fiduciary duties under ERISA is a lesson in itself:
4. What the fiduciaries did not know about their duties and obligations as fiduciaries
[Defendant 1] does not know the meaning of the word “fiduciary.” [Defendant 1] did not understand the Plan when he read it. [Defendant 1] never read the entire Plan document. [Defendant 1] does not know the meaning of the word “trustee” and never made any inquiries as to what his role as a trustee was. [Defendant 1] does not know the meaning of the words “plan participant.” [Defendant 1] does not know the meaning of the words “plan beneficiary.” [Defendant 1] does not know the meaning of the expression “party in interest.” [Defendant 1] does not know the meaning of the expression “exclusive benefit rule.” [Defendant 1] does not know the meaning of the expression “plan year.” [Defendant 1] does not know the meaning of the expression “plan asset.” [Defendant 1] does not know the meaning of the expression “a prudent man.” [Defendant 1] does not know the meaning of the expression “a prudent fiduciary.” [Defendant 1] does not know the meaning of the expression “diversification of assets.” [Defendant 1] does not know the meaning of the acronym “ERISA.”
By the way, the portion of the opinion which I have quoted here is taken from the District Court case. The case was affirmed on appeal on August 22 of this year by the 9th Circuit. (No link available.)
Continue reading for more excerpts from the case . . .
[Defendant 2] does not know the meaning of the word “fiduciary.” [Defendant 2] does not know the meaning of the word “trustee.” [Defendant 2] does not know the meaning of the words “plan participant.” [Defendant 2] does not know the meaning of the words “plan beneficiary.” [Defendant 2] does not know the meaning of the expression “party in interest.” [Defendant 2] does not know the meaning of the expression “prohibited transaction.” [Defendant 2] does[*pg. 1018] not know the meaning of the expression “exclusive benefit rule.” [Defendant 2] does not know the meaning of the expression “plan year.” [Defendant 2] does not know the meaning of the expression “plan asset.” [Defendant 2] does not know the meaning of the expression “a prudent man” as applied to the obligations of a trustee. [Defendant 2] does not know the meaning of the expression “a prudent fiduciary” as applied to a trust of any type. [Defendant 2] does not know the meaning of the expression “diversification of assets.” [Defendant 2] is not familiar with the expression “ERISA.” [Defendant 2] has not taken any steps to educate himself as to the role of a fiduciary. [Defendant 2] does not know if he read the Plan. [Defendant 2] does not know the meaning of the expression “plan sponsor.” [Defendant 2] is the Secretary Treasurer of Weighmasters Murphy, Inc. [Defendant 2] does not know the source of funding for the Plan.[Defendant 3] defines “trustee” as “somebody who is responsible.” [Defendant 3] states that within the context of a pension plan, the “trustee” is only responsible for choosing someone to handle the responsibility and money. [Defendant 3] has been a “trustee” only once. [Defendant 3] was a “trustee” for his brother's estate. [Defendant 3] defines “fiduciary” within the context of a pension plan as meaning that “you will be faithful in seeing that the assets are in good hands and administered well ....” [Defendant 3] cannot properly define the expression “plan participant.” [Defendant 3] has not read the Plan document. [Defendant 3] is not familiar with the expression “party in interest.” [Defendant 3] defines the expression “prohibited transaction” as “not filing the papers correctly.” [Defendant 3] is not familiar with the expression “exclusive benefit rule.” The named fiduciaries did not consult with a financial advisor concerning any aspect of the Plan assets. [Defendant 3] has taken no steps to ensure that he had a proper level of knowledge when attempting to act as a Named Fiduciary. [Defendant 3] does not have any understanding of the expression “prudent man” within the context of a pension plan. [Defendant 3] contends that as a Named Fiduciary he does not have any responsibility for the monitoring whomever he hired to insure they were diversifying the Plan's assets. [Defendant 3] contends that as a Named Fiduciary he had no obligation to do anything with regard to the assets of the Plan. [Defendant 3] does not have an understanding of the expression “independent trustee.” [Defendant 3] is not familiar with the expression “named beneficiary.” [Defendant 3] is not familiar with, and has no understanding of, the expression “named fiduciary.” Until the time of his deposition, [Defendant 3] did not understand that one of his obligations was to tell the trustee “how to invest Plan assets.”
5. What the Defendant fiduciaries did not know concerning the composition and value of the Plan's assets
[Defendant 1] was never aware that the Plan owned stock in UNUM Corporation. [Defendant 1] never knew UNUM's stock price. The value of the Plan assets declined after Decedent's death. [Defendant 1] took no steps to interrupt the decline in value of the Plan's assets. [Defendant 1] did nothing to determine the value of [Decedent]'s interest in the Plan at the time of [Decedent]'s death. [Decedent]'s interest in the Plan dropped 40% in the 14 months after her death. [Defendant 1] does not know if any participant, other than [Decedent], sustained a 40% decline in the same period of time. [Defendant 1] does not know why [Decedent]'s interest in the Plan dropped from over $1.5 million to $915,000.00 in the 14 months following her death. [Defendant 1] never found out why [Decedent]'s interest in the Plan dropped from over $1.5 million to $915,000.00 in the 14 months following her death. [Defendant 1] does not know the value of the Plan's assets for any year in which he was a Named Fiduciary. [Defendant 1] does not know the composition of the assets of the Plan for any year in which he was a named Fiduciary. Despite the fact that he had no experience in investing in the stock market, [Defendant 1] never consulted with a financial advisor to determine if any asset owned by the Plan was an appropriate asset to be owned by a pension plan. [Defendant 1] never consulted with a financial advisor about the Plan's assets at all. [Defendant 1] did not know what assets the Plan held as of May 31, 1999, the end of the Plan year in which Decedent died. [Defendant 1] did not know the value of any individual asset held by the Plan on May 31, 1999, the end of the Plan year in which Decedent died. [Defendant 1] never took any steps to inform himself as to what assets the Plan held as of May 31, 1999. [Defendant 1] never took any steps to inform himself as to what assets the Plan held at any time. . . . [Defendant 1] was never aware that the Plan owned 22,852 shares of UNUM stock. [Defendant 1] does not know what UNUM does. [Defendant 1] did not know that UNUM's stock price had dropped from $55.5625 per share on May 31, 1998, to $13.375 per share on February 29, 2000. [Defendant 1] did not know that UNUM's stock price had been reduced by 80% between May 31, 19998 and February 29, 2000. [Defendant 1] does not know what an “asset” is.[Defendant 2] does not know the composition of the Plan's assets. [Defendant 2] does not know what types of assets a Plan may hold under ERISA. [Defendant 2] does not know what types of assets a Plan may not hold under ERISA. [Defendant 2] never took any steps to determine what the Plan's money was invested in, whether it was stocks, bonds, cash or anything else. [Defendant 2] never consulted with a financial advisor concerning what types of assets and investments were appropriate for a plan to hold. Since becoming a Named Fiduciary in May 1999, [Defendant 2] has done nothing to fulfill his obligations he may have had except attend one or two meetings of the Committee. [Defendant 2] has never known what the assets of the Plan consisted of. [Defendant 2] does not know if the Plan ever owned UNUM stock. [Defendant 2] never reviewed the performance of UNUM stock to determine if it was an appropriate investment for the Plan. [Defendant 2] never knew the Plan owned 22,852 shares of UNUM stock. [Defendant 2] does not know what “MFB NORTHRN INSTL FDS Diversified Growth Portfolio” is.
[Defendant 3] is not aware of any Named Fiduciary consulting with a financial advisor. [Defendant 3] has taken no steps to ensure that he fulfills his fiduciary duties. [Defendant 3] never understood until his deposition that it was his obligation to tell the trustee how to invest Plan assets. [Defendant 3] does not know who was responsible for choosing the Plan's assets since May of 1999. [Defendant 3] never chose any asset to be owned by the Plan. [Defendant 3] does not know the value of the assets held by the Plan at the end of the 1999 Plan year. [Defendant 3] does not know the value of the assets held by the Plan at the end of the 2000 Plan year. [Defendant 3] does not know the composition of the Plan assets at the 1999 Plan year end. [Defendant 3] does not the composition of the Plan's assets in the 2000 Plan year end. [Defendant 3] does not know if the assets owned by the Plan were appropriate investments. [Defendant 3] never investigated UNUM stock at all. [Defendant 3] never concerned himself with what assets were in the Plan. As a Named Fiduciary, [Defendant 3] did nothing to minimize the losses suffered by the Plan and its Participants. [Defendant 3] had previously retired from Weighmasters Murphy, Inc. and received his interest in the Plan in a lump sum distribution. [Defendant 3] never reviewed the investments made by the Plan. [Defendant 3] never reviewed the investment returns or losses made by the Plan's assets. [Defendant 3] admits he is not competent to choose stocks for the Plan. [Defendant 3] never consulted with anyone concerning how to properly run or administer the Plan. [Defendant 3] never paid attention to whether the Plan's investments were going up or down in value. [Defendant 3] did nothing to determine if UNUM stock was an appropriate investment of Plan assets. The Plan's investment in UNUM stock constituted of two thirds of the Plan's assets. [Defendant 3] did nothing to determine if it was appropriate to keep two thirds of the Plan's assets in UNUM stock. [Defendant 3] does not know what MFB NORTHRN INSTL Diversified Growth Portfolio is. [Defendant 3] did not know the Plan owned over 30,000 shares of MFB NORTHRN INSTL Diversified Growth Portfolio. [Defendant 3] took no steps as a Named Fiduciary to determine if the Diversified Growth Portfolio was a wise investment of Plan Assets. [Defendant 3] never looked at the Plan's assets in 1999 or 2000 to determine why their value was dropping. [Defendant 3] was not aware that UNUM stock dropped from $55.00 per share to $13.00 per share between May 31, 1999 and February 29, 2000. [Defendant 3] concedes that it was not prudent to “ride it [the UNUM stock] down” 75%. [Defendant 3] never thought that in order to protect the Plan participants and beneficiaries, the Named Fiduciaries should sell the UNUM stock and invest in something else.
Yesterday's Wall Street Journal contained an article discussing "the widening inquiry into mutual-fund firms" which has "prompted some employers to put new restrictions on the trading activity workers can conduct in their 401(k) retirement plans." The article--"Fund Probe Prompts 401(k) Trading Curbs"--notes that AT&T Corp. and DuPont Co. have recently adopted measures aimed at keeping employees from too rapidly trading in or out of certain funds offered in their 401(k) plans. According to the article, AT&T has levied new fees for making certain trades in some international funds, and DuPont has imposed a 15-day window for trades in two of its funds. The article also states that "[p]ension experts and the Labor Department are urging retirement plans to keep a sharp eye on how funds the plans offer may be affected by the investigations."
Previous posts on the mutual fund scrutiny and the ERISA fiduciary issues connected with it are here and here.
USA Today also reports: "Heavy trading in 401(k)s watched."
In a previous post, I noted the fact that plan fiduciaries are inquiring into their ERISA fiduciary duties regarding a 401(k) plan's offering of mutual funds which have been the subject of allegations by New York Attorney General Elliot Spitzer. The allegations relate to improper "late trading" and "market timing" in mutual fund shares by hedge funds. Gardner Carton & Douglas highlights some of the points to consider in a client alert entitled "How Should Plan Fiduciaries Respond to Current Investigations of Mutual Fund Practices?."
For those who do not know, a decision to offer or continue to offer a fund in a 401(k) plan as an investment option for participants is a fiduciary act, subject to all of the fiduciary duties and responsibilities under ERISA. The fiduciaries are subject to an ongoing responsibility of monitoring those investment options, and certainly once fiduciaries receive information that casts some doubt on whether or not an investment option continues to be prudent to offer, they must engage in prudent processes and procedures to evaluate that information and determine whether or not the investment option should be replaced. Such processes and procedures should, of course, be well-documented.
But what about the duty to disclose to participants what is going on with these funds if the fiduciaries decide not to eliminate the mutual fund option? The article states that fiduciaries must, of course, respond to any participant inquiries about the mutual funds in question, but goes on to state that "disclosure would generally not be required" absent a change in the investment funds offered. My view would be that the fiduciaries should tread carefully here. Most of the recent class action lawsuits are pivoted around this duty to disclose and most of the courts have held that fiduciaries have a an affirmative duty to disclose material information which might affect a participant's or beneficiary's interest in the plan even though the participant or beneficiary does not make an inquiry.
The Corporate Board Member has this very good article: "What if Your Company’s 401(k)Plan Lays an Egg?" With respect to the Department of Labor's suit filed against the Enron plan fiduciaries last summer, the article notes:
The lawsuit, filed by the Department of Labor in June, doesn’t just go after the Enron officers in charge of the 401(k) plan and the executives to whom they reported. It also names as defendants Enron’s board of directors, for not properly overseeing the plan. If the Labor Department prevails at trial, each director will be potentially liable for the entire $2.1 billion Enron 401(k) participants lost.The article emphasizes how boards can’t afford to wait for Congress to act in defining their ERISA fiduciary responsibilities. It goes on to point out that the suit brought by the DOL "charges Enron’s top officers and board, the supposed monitors of the retirement investment plan, with failing to act on public and private information about the company’s financial condition" and that "[m]any would define this as a brand-new boardroom responsibility." Quote of note: "Says attorney Sherwin Kaplan: “If plaintiffs’ lawyers had stood up a year ago and said that directors were responsible for telling employees that the company stock was not a good investment, they would have been laughed out of court. This suit has made it a credible position to assert.”
SHRM has a great article in this month's issue of the HR Magazine: "Fiduciary Fitness." (Unfortunately, only members can access the article.) The article would be very helpful to those HR professionals and executives seeking to attain a good overview of the complex area of ERISA fiduciary compliance. The article reports:
Interest in fiduciary education is running strong because fiduciaries increasingly want to be sure they're complying with ERISA's complex requirements, particularly in the tense environment created by the dozens of lawsuits against companies-Enron Corp., WorldCom Inc. and R.J. Reynolds Tobacco Co., to name a few-alleging breaches of fiduciary responsibility.
The article emphasizes a point made here quite often at ERISAblog:
As many human resource managers know, ERISA compliance is a complex, time-consuming process that requires close, continuous attention, the expertise of a team of specialists and, above all, prudent behavior. Although the meaning of prudence varies with the situation, experts generally maintain that a fiduciary who creates, follows and documents processes and procedures to make informed decisions is doing the right thing.
Stephen Schurr writes an interesting article for The Street.com: "The Seven Deadly Sins of 401(k) Plans." I concur with Mr. Schurr's comments regarding the lack of clear guidance for plan fiduciaries of 401(k) plans. The article quotes Don Trone, president and founder of the Foundation for Fiduciary Studies, a nonprofit group that offers training for retirement plan sponsors and providers, as stating:
"If the chairman of a company's 401(k) committee called the Department of Labor and asks, 'What should I do to make sure I fulfill all my responsibilities?' There would be no answer, other than act prudently," Trone said. If the same chairman then hired an investment adviser to handle the 401(k) plan and "the adviser calls the Securities and Exchange Commission and asks the same question, there would be no real answer," Trone said. "The industry has never defined the details of a prudent investment process of fiduciaries."
Comment: It is important to note that the courts have provided some guidance in this whole area, by emphasizing that ERISA fiduciaries must engage in prudent process and procedures in order to fulfill their fiduciary obligations under ERISA. The In re Unisys Savings Plan Litigation case (173 F3d 145 (3rd Cir.), cert. denied, 120 S. Ct. 372 (1999), is a good example. In that case, the plan fiduciaries had invested in Executive Life GICs as an investment for one of its funds, but were held not to have violated their fiduciary duties when the GICs became worthless because the court found that they had engaged in prudent conduct in selecting the investments. (An example of some of the prudent processes mentioned by the court in Unisys: the fiduciaries had hired an experienced investment consultant, and, in evaluating potential insurance companies from which to purchase GICs, had obtained information and ratings from Standard and Poor's and A.M. Best ratings services that evaluated the stability and potential profitability of the various types of companies. There was also testimony that the fiduciaries had kept abreast of developments in the GIC industry by reading trade publications and journals and that they had available to them SEC forms 10K and 10Q to review prior to making their selection.)
Despite the lack of clear guidance, it is important for ERISA plan fiduciaries to become educated as much as possible and engage in prudent process and procedures in fulfilling their duties and responsibilities under ERISA.
Reish Luftman McDaniel & Reicher provides this article: Taking Stock: Managing the Risk of Company Stock. The article provides some good suggestions for minimizing ERISA fiduciary risk where a 401(k) offers company stock as a match and/or as an investment option.
(Note: The article does not discuss plan governance structure or procedural prudence which, in my opinion, are also very important in minimizing ERISA fiduciary liability.)
I have read the DOL complaint filed this week against Enron and others, Chao v. Enron Corporation et al., and what follows is a summary of the allegations made in the case. Please remember that these are merely allegations made in the complaint, and that a trier of fact will have to determine which, if any, of the allegations are true. The summary would be helpful, I think, to ERISA plan fiduciaries, as well as those who advise ERISA plan fiduciaries, since it demonstrates to some extent at least the DOL's views on how an ERISA plan fiduciary should or should not act in fulfilling its duties and obligations under ERISA:
Defendants in the Case:
Because they were the "named fiduciaries" the complaint alleges they were responsible for managing and overseeing the Plans' investments in Enron stock "solely in the interest of the Plans' participants and beneficiaries."
It is also alleged that the Savings Plan document specifically gave to the Committee the duty to direct the Trustee as to the investment of the Trust Fund in Enron stock and that the ESOP plan document specifically gave the Committee the responsibility to direct the Trustee as to the purchase and sale of Enron stock as well. If the Committee did not direct the Trustee of the ESOP, the ESOP trustee was responsible for the "administration, investment and management" of the ESOP assets.
Allegations:
The complaint alleges that the Committee only met as a group five times during 2001, that none of the meetings were attended by all of the Committee Defendants, and that "at none of these meetings did the Administrative Committee discuss or review the Plans' investments in Enron stock or discuss the Plans' catastrophic losses." The complaint alleges that, only after an investor class action lawsuit was filed, did the Administrative Committee take notice of the "volatility" of Enron's stock, meeting almost daily after the lawsuit was filed, but even then never taking any action with respect to the Plans' investment in Enron stock.
Finally, the DOL alleges that "at no time did any of the Committee Defendants take any action to effectively monitor, review, analyze, question, alter, slow, stop or protect the plans' investment in Enron stock."
Of particular note, is the allegation that a certain member of the Committee "failed to inform the other members of the Administrative Committee about Watkins' concerns and failed to ensure that any inquiry was undertaken on the Plans' behalf into those concerns."
Comment: Absent from the complaint is any mention of the trustee for the Savings Plan, Northern Trust, which was the directed trustee for the Savings Plan and one of the focuses of the DOL's Amicus Brief filed in the Enron class-action lawsuit.
Also, please note that the governing documents for the ESOP provided that the ESOP would be "primarily" invested in Enron stock. In addition, the governing documents for the Savings Plan provided that participants could contribute up to 15% of their pay to the Plan and could direct their investments into a variety of investment funds, including an Enron stock fund. In addition, Enron made matching contributions to the Savings Plan and the Savings Plan provided that these matching contributions would "primarily" be invested in Enron stock.
More on Enron ERISA litigation here. . .
That's the advice in this article--"401(k) trustees feel heat"--by Harriet Johnson Brackey for the Miami Herald. Derek Loeser, a partner in the Seattle law firm Keller Rohrback, in discussing ERISA plan fiduciaries states: "[t]heir duty as fiduciaries is the highest known to law. This should remind them they can't operate on autopilot.'' Thomas Noonan, president of Union Financial, a registered investment advisor in Fort Lauderdale, warns that "especially at smaller companies, the 401(k) plan trustees often rely blindly on an investment advisor." A good time for ERISA fiduciaries to consider this . . .
Readers have been expressing interest in some links for the ERISA litigation which has been the subject of several posts so I will list some important ones here and will create a section in the index under "401(k) Litigation Links":
This article by Jill Elswick for BenefitNews.com--"DOL develops educational resources for fiduciaries"--comments on the ERISA Advisory Council's Working Group on Fiduciary Education and Training and its educational initiative to help fiduciaries comply with the myriad requirements of ERISA. The Group's final report can be accessed here. The article also reports that the Foundation for Fiduciary Studies has released 27 "prudent investment practices"--each substantiated with existing legislation, case law, and regulatory opinion letters and vetted by the American Institute of Certified Public Accountants (AICPA)--into the public domain for comment here. Finally, the article discusses a new program for fiduciary education offered by New York Life Investment Management's (NYLIM) retirement plan services division which you can read about here.
While it is always important for a plan fiduciary to have an ERISA attorney involved in advising them about their fiduciary duties under ERISA, CFO.com does provide some very good online resources and tools for ERISA plan fiduciaries: this 401(K) Checklist for Fiduciaries, and this article delving into why employees file lawsuits against their employers over their 401(k) plans, as well the this very handy Buyer's Guide to 401(k) Plan Providers. The Guide allows users to compare the different providers and links allow the user to visit, from the online guide, the different websites of the various 401(k) providers.
While it is always important for a plan fiduciary to have an ERISA attorney involved in advising them about their fiduciary duties under ERISA, CFO.com does provide some very good online resources and tools for ERISA plan fiduciaries: this 401(K) Checklist for Fiduciaries, and this article delving into why employees file lawsuits against their employers over their 401(k) plans, as well the this very handy Buyer's Guide to 401(k) Plan Providers. The Guide allows users to compare the different providers and links allow the user to visit, from the online guide, the different websites of the various 401(k) providers.