American Bar Association
Section of Labor and Employment Law
Employee Benefits Committee
Mid-Winter Meeting
San Antonio, Texas
February 3 – 6, 2010
REPORT OF THE
FIDUCIARY RESPONSIBILITY SUBCOMMITTEE
Management Co-Chairs:
James A. (Al) Holifield
Holifield & Associates, P.C.
Knoxville, Tennessee
Union Co-Chairs:
Susan Lahne
Bredhoff & Kaiser P.L.L.C.
Washington, D.C.
Robert W. Rachal
Proskauer Rose, LLP
New Orleans, Louisiana
Gregory Moore
O’Donoghue & O’Donoghue LLP
Washington, D.C.
Individual Employee Co-Chairs:
Ellen Doyle
Stember Feinstein
Doyle & Payne LLC
Pittsburgh, Pennsylvania
Neutral Co-Chairs:
Michael A. Crabtree
Operating Engineers Central
Pension Fund
Washington, D.C.
Ron Kravitz
Liner Grode Stein Yankelevitz
Sunshine Regenstreif & Taylor
San Francisco, California
Jayne Zangelin
WCU College of Business
Cullowhee, North Carolina
Additional Contributors
Deborah S. Davidson
Morgan, Lewis & Bockius LLP
Chicago, Illinois
Kara L. Lincoln
Proskauer Rose LLP
New Orleans, Lousiana
Maureen Davidson-Welling
Stember Feinstein
Doyle & Payne LLC
Pittsburgh, Pennsylvania
Stephen P. Lucke
Dorsey & Whitney
Minneapolis, Minnesota
Nicole Eichberger
Proskauer Rose LLP
New Orleans, Louisiana
Pamina Ewing
Stember Feinstein
Doyle & Payne LLC
Pittsburgh, Pennsylvania
David A. Hardesty
Clark Hill, PLC
Detroit, Michigan
Tina Haley
Holifield & Associates, P.C.
Knoxville, Tennesse
Andrew Holly
Dorsey & Whitney
Minneapolis, Minnesota
Jan Steinhour
Rothgerber Johnson & Lyons
Colorado Springs, Colorado
Paul Tobias
Liner Grode Stein Yankelevitz
Sunshine Regenstreif & Taylor
San Francisco, California
Simon Torres
Morgan, Lewis & Bockius LLP
Washington, D.C.
Aaron Triplett
J.D. Candidate, May 2009
The University of Tennessee College of Law
Joe Viglione
Holifield & Associates, P.C.
Knoxville, Tennessee
TABLE OF CONTENTS
I.
Introduction:............................................................................................................... 1
A.
II.
Plans to Which ERISA’s Fiduciary Duty Provisions Apply ............................ 1
Who Is a Fiduciary..................................................................................................... 2
A.
ERISA’s Functional Definition of Fiduciary.................................................... 2
B.
The Three Categories of Fiduciary Conduct..................................................... 2
1. Management or Investment of Plan Assets ................................................. 2
2. Investment Advice ....................................................................................... 2
C.
Applications and Limitations of the Functional Fiduciary Standard ............... 3
1. Plan Sponsors; Employers, Unions, and the “Settlor Function”Rule....... 3
2. Corporate Officers and Directors............................................................... 4
3. Mutual Funds and Insurers......................................................................... 5
b. Insurers and Guaranteed Benefit Contracts .......................................... 5
4. Banks........................................................................................................... 6
5. Attorneys, Accountants, and Actuaries ....................................................... 6
8. Third-Party Administrators ........................................................................ 7
9. Taft-Hartley Plan Trustees’ Plan Design Decisions .................................. 7
b. Contributing Employers and Their Principals ...................................... 8
D.
Importance and Identification of Plan Assets ................................................... 8
3. Plan Assets: Participant Contributions ..................................................... 9
III.
Plan and Trust Requirements..................................................................................... 9
A.
Formal Requirements........................................................................................ 9
ABA EBC CHAPTER 10
Master Compiled Report 2010
1. Written Instrument ...................................................................................... 9
2. Named Fiduciary....................................................................................... 11
3. Plan Content.............................................................................................. 11
a. Mandatory Provisions ......................................................................... 11
IV. Fiduciary Standards Under Section 404 .................................................................. 12
A.
ERISA’s Exclusive Purpose Rule................................................................... 12
B.
Prudence Standard .......................................................................................... 13
1. Procedural Prudence ................................................................................ 13
C.
Diversification................................................................................................. 20
1. In General ................................................................................................. 20
2. Individual Account Plans.......................................................................... 21
D.
V.
Action in Accordance With Plan Provisions .................................................. 23
Application of the Section 404 Fiduciary Standards ............................................... 25
A.
Fiduciary Communications............................................................................. 25
2. Cases Where Participant Inquiry Was Not Required ............................... 25
3. The Requirement of Serious Consideration.............................................. 26
4. Circuit Court Decisions in Common or Notable Factual Settings........... 26
5. Other Issues............................................................................................... 28
B.
Selection and Monitoring of Service Providers.............................................. 33
1. Excessive Fee Litigation. .......................................................................... 33
C.
Collections ...................................................................................................... 37
D.
Benefit Administration.................................................................................... 39
E.
Employer Securities Issues ............................................................................. 40
ABA EBC CHAPTER 10
Master Compiled Report 2010
2. Employee Stock Ownership Plans ............................................................ 40
F.
Investment Policy............................................................................................ 41
1. In General.................................................................................................. 41
4. Directed Individual Account Plans ........................................................... 42
a. Section 404(c) Issues .......................................................................... 42
b. Other Issues Relating to Directed Individual Account Plans............. 47
5. Participant Education ................................................................................ 47
a. ERISA Section 408 -- Participant Investment Advice Regulations.... 47
VI. Duty to Protect Against Violations by Other Fiduciaries ........................................ 48
VII. Liability for Breach of Fiduciary Duty .................................................................... 49
B. Pre-existing Breaches.......................................................................................... 49
C. Burden of Proof and Causation ........................................................................... 49
1. Section 404(c) ........................................................................................... 49
2. Employer Stock Cases -- Moench Presumption........................................ 51
3. Overriding the Terms of the Plan -- Extraordinary Circumstances ........ 52
4. Causation of Damages to the Plan ........................................................... 52
D. Measure of Loss Under Section 409 ................................................................... 54
E. Extent of Injunctive Relief under Section 409 .................................................... 56
F. Plan and Individual Recovery for Breaches of Fiduciary Duty.......................... 56
G. Liability of Non-Fiduciaries for Fiduciary Misconduct...................................... 57
3. Developments after Harris Trust .............................................................. 57
I.
Contractual Exculpation, Insurance, and Indemnification....................................... 58
J. Equitable Contribution and Indemnification........................................................ 60
ABA EBC CHAPTER 10
Master Compiled Report 2010
VIII. Prohibited Transaction............................................................................................. 60
A.
ERISA ............................................................................................................. 60
1. Statutory Provisions.................................................................................. 60
b. ERISA Section 406 ............................................................................. 60
B.
Internal Revenue Code................................................................................... 62
2. IRA............................................................................................................ 62
D. Application of the Prohibited Transaction Rules ................................................ 63
3. Furnishing of Goods, Services, and Facilities .......................................... 63
6. Section 406(b)—Fiduciary Self-Dealing .................................................. 63
b. Acting on Behalf of Adverse Parties .................................................. 64
E. Exemptions From the Prohibited Transaction Restrictions................................ 65
1. Statutory Exemptions................................................................................. 65
b. Reasonable and Necessary Services ................................................... 65
iii
Reasonable Compensation ........................................................................ 65
e. Bank Deposits ..................................................................................... 65
i. Investment Advice – Participants and Beneficiaries .......................... 66
3. Class Exemptions...................................................................................... 66
4. Individual Exemptions ............................................................................. 66
a. Property............................................................................................... 66
c. Securities and Notes............................................................................ 69
e. Other Situations .................................................................................. 75
IX. Bonding.................................................................................................................... 77
X.
Statute of Limitations for Breach of Fiduciary Duty Claims................................... 77
ABA EBC CHAPTER 10
Master Compiled Report 2010
A.
In General........................................................................................................ 77
B.
Three Years After “Actual Knowledge”......................................................... 78
D.
Fraud or Concealment..................................................................................... 79
E.
Continuing Violation and Repeated Series of Violations ............................... 80
F.
Other Tolling Issues........................................................................................ 81
TABLE OF AUTHORITIES
CASES
In re AEP ERISA Litigation, 2009 WL 614951.................................................................82
Abbott v. Lockheed Martin Corp., 2009 WL 839099 ............................................42, 80, 81
Aikens v. U.S. Transformer, Inc., 2009 WL 1940559........................................................48
Alton Memorial Hospital v. Metropolitan Life Ins. Co., 565 F.2d 245 (7th
Cir. 1981) .....................................................................................................................61
Amara v. CIGNA Corp., 2009 WL 3199061 .....................................................................28
Taylor v. United Techs. Corp., 2009 WL 4255159 ...................................16, 32, 35, 42, 55
American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974) ...................................82
Arivella v. Lucent Technologies, Inc., 623 F. Supp. 2d 164 ..............................................82
Bamgbose v. Delta-T Group, Inc., 638 F. Supp. 2d 432....................................................81
Banks v. Healthways, Inc., 2009 WL 211137....................................................................30
Bell Atlantic v. Twombly, 550 U.S. 544 (2000) .................................................................50
Bellah v. American Airlines, Inc., 623 F. Supp. 2d 1183.....................................................4
Benitz v. Humana, Inc., 2009 WL 3166651.................................................................18, 21
Bilello v. JP Morgan Chase Ret. Plan, 649 F. Supp. 2d 142.......................................28, 79
Blankenship v. Chamberlain, 2009 WL 1421201..............................................................41
Bocchino v. Trustees of District Council Ironworkers Funds of
Northern New Jersey, 336 F. App’x 197 (3d Cir. 2009) .............................................29
Braden v. Wal-Mart Stores, Inc., 588 F.3d 585.....................................................53, 62, 66
Braden v. Wal-Mart Stores, Inc., 2009 U.S. App. LEXIS 25810....................17, 32, 33, 35
Brasley v. Fearless Farris Service Stations, 2009 U.S. Dist. LEXIS 19785.....................59
ABA EBC CHAPTER 10
Master Compiled Report 2010
Brieger v. Tellabs, 629 F. Supp. 2d 848 (N.D. Ill. 2009) ............................................18, 79
Briscoe v. Preferred Health Plan Inc., 578 F.3d 481 ..............................................7, 29, 55
Brown v. Medtronic, 619 F. Supp. 2d 646 .........................................................................47
Browning v. Tiger's Eye Benefits Consulting, 313 Fed. App’x 656 (4th Cir.
2009) ......................................................................................................................79, 80
Brubaker v. Deere & Co., ---, F. Supp. 2d -- 2009 WL 3378980
(S.D. Iowa Oct. 16, 2009) ............................................................................................27
Bunch v. W.R. Grace & Co., 555 F.3d 1................................................................18, 21, 51
Burns v. Marley Co. Pension Plan, 2009 WL 3233052 ....................................................29
Canada v. American Airlines Inc. Pilot Retirement Benefit Program,
2009 WL 2176983 .........................................................................................................3
Canestri v. NYSA-ILA Pension Trust Fund & Plan, 2009 WL 799216.............................26
Central Illinois Health & Welfare Trust Fund v. Struben,
2009 U.S. Dist. LEXIS 14234 (C.D. Ill. 2009)............................................................39
Chao v. Linder, 2007 U.S. Dist. LEXIS 40425 .................................................................57
Chao v. Unique Manufacturing Co., 2009 U.S. Dist. LEXIS 4608...................................57
Chao v. Unique Mfg. Co., 649 F. Supp. 2d 827...................................................................9
Chao v. Wagner, 2009 WL 102220 (N.D. Ga. Jan. 13, 2009)...........................................78
In re Citigroup ERISA Litig., 2009 WL 2762708..............................................................24
Clark v. Feder Semo and Bard P.C., 634 F. Supp. 2d 99..............................................6, 30
In re Computer Sciences Corp., 635 F. Supp. 2d 1128 ...............................................19, 21
Cook v. Jones & Jordan Eng'g, Inc., 2009 WL 37376 ......................................................31
Craig v. Smith, 597 F. Supp. 2d 814..................................................................................79
Craig v. Smith, 597 F. Supp. 2d 817....................................................................................3
DeCosta v. Rodrigues, 334 Fed. App’x 807 (9th Cir. 2009) ................................................2
ABA EBC CHAPTER 10
Master Compiled Report 2010
DeFazio v. Hollister, Inc., 636 F. Supp. 2d 1045 (E.D. Cal. 2009),
reconsid. den., 2009 WL 2868631 (E.D. Cal. Sept. 2, 2009) .....................................81
In re Delphi Corp. Sec., Derivative & "ERISA" Litig., 602 F. Supp. 2d 810 ..........2, 19, 52
DiFelice v. U.S. Airways, 497 F.3d 410.............................................................................46
Donovan v. Bierwirth, 754 F.2d 1049................................................................................57
Dupont v. Sklarsky, 2009 WL 776947 ...............................................................................81
Dura Pharms, Inc., v. Croudo, 544 U.S. 336 (2005).........................................................54
In re Enron Corp. Securities, Derivative & ERISA Litigation, 284 F.
Supp. 2d 511 ................................................................................................................52
Faulman v. Security Mutual Financial Life Insurance Co.,
2009 WL 4367311 .............................................................................................9, 29, 65
Fernandez v. K-M Industries Holding Co., Inc., 646 F. Supp. 2d 1150 ......................41, 59
Finkel v. Romanowicz, 577 F.3d 79.....................................................................................8
In re First American Corp., 258 F.R.D. 610,
2009 WL 2430879 (C.D. Cal. July 27, 2009)..............................................................46
Frulla v. CRA Holdings, Inc., 596 F. Supp. 2d 275...............................................30, 38, 80
In re G.S. Consulting, Inc., 414 B.R. 454 ............................................................................7
Gartenberg v. Merrill Lynch Asset Mgmt., 694 F.2d 923 (2d Cir. 1982) ..........................14
George v. Kraft Foods Global, Inc., 2009 U.S. Dist. LEXIS 117754
(N.D. Ill. Dec. 17, 2009) ........................................................................................17, 18
George v. Kraft Foods Global, Inc., ---, F. Supp. 2d -- 2009 WL 4884027
(N.D. Ill. Dec. 17, 2009) ..............................................................................................81
Gipson v. Wells Fargo & Co., 2009 U.S. Dist. LEXIS 20740 ....................................17, 35
Gipson v. Wells Fargo & Co., 2009 WL 702004 ..............................................................67
Giudice v. Employee's Profit-Sharing Profit Sharing Plan of the
Bank of New York Co., Inc., 2009 WL 2634898..........................................................81
ABA EBC CHAPTER 10
Master Compiled Report 2010
Godina v. Resinall Int'l, Inc., ---, F. Supp. 2d -- 2009 U.S. Dist. LEXIS
117830
(D. Conn. Dec. 17, 2009)...............................................................................................1
Griffiths v. Ohio Farmers Ins. Co., 2009 WL 3817592.....................................................10
Haddock v. Nationwide Fin. Servs., 419 F. Supp. 2d 156 (D. Conn. 2006) ......................35
Haddock v. Nationwide Fin. Servs., 2009 U.S. Dist. LEXIS 103837
(D. Conn. Nov. 6, 2009) ........................................................................................35, 56
Haddock v. Nationwide Financial Services, Inc., ---, F.R.D. -- 2009 WL
3762339........................................................................................................................62
Harley v. Minnesota Mining Co., 284 F.3d 901 ..........................................................53, 61
In re Harley Davidson, Inc., Sec. Litig., --, F. Supp. 2d -- 2009 WL
3233747..................................................................................................................22, 25
Harris v. Koenig, 602 F. Supp. 2d 39 ..............................................................49, 52, 54, 57
Harris v. Koenig, ---, F. Supp. 2d -- 2009 WL 4784511 (D.D.C. Dec. 14,
2009) ............................................................................................................................79
Hausmann v. Union Bank of Cal., N.A., 2009 WL 1325810 .............................................30
Hecker v. Deere & Co., 556 F.3d 575 .....................................13, 15, 14, 31, 34, 42, 43, 50
Hecker v. Deere & Co., 569 F.3d 708 (7th Cir. 2009).............13, 14, 31, 34, 35, 42, 44, 50
Henry v. U.S. Trust Co. of Cal., 569 F.3d 96.....................................................................55
Heritage Equity Group 401(k) Savings Plan v. Crosslin Supply Co.,
638 F. Supp. 2d 869 .....................................................................................................58
Hill v. Blue Cross and Blue Shield of Mich., 2009 U.S. Dist. LEXIS 26603 ....................56
Holdeman v. Devine, 572 F.3d 1190............................................................................38, 54
In re Honda of America Mfg., Inc. ERISA Fees Litigation, ---, F. Supp. 2d
–
2009 WL 3270490 .................................................................................................15, 64
Hunter v. Custom Business Graphics, 635 F. Supp. 2d 420..............................................81
In Re Huntington Bancshares, Inc. ERISA Litigation, 620 F. Supp. 2d 842 .........13, 19, 20
ABA EBC CHAPTER 10
Master Compiled Report 2010
Iron Worker's Local No. 25 Pension and Benefit Funds v. Steel
Enterprises, Inc.,
2009 WL 3645633 ...................................................................................................8, 39
Johnson v. Couturier, 572 F.3d 1067 ................................................................4, 40, 41, 59
Johnson v. Couturier, 2008 WL 4443085 .........................................................................65
Johnson v. Radian Group, Inc., 2009 WL 2137241 ....................................................22, 25
Jones v. NovaStar, 2009 WL 331553 ................................................................................22
Kennedy v. Plan Adm'r for DuPont Sav. and Inv. Plan, 129 S. Ct. 865..............................9
Kerber v. Qwest Group Life Ins. Plan, ---, F. Supp. 2d -- 2009 WL
2710207........................................................................................................................27
Kerber v. Qwest Group Life Ins. Plan, 2009 WL 807443 .................................................11
Kirschbaum v. Reliant Energy, Inc., 526 F.3d 243 (5th Cir. 2008)...................................25
Kuper v. Iovenko, 66 F.3d 1447.........................................................................................51
L.I. Head Start Child Dev. Serv., Inc. v. Econ. Opportunity Comm'n of
Nassau County, Inc., 634 F. Supp. 2d 290...................................................................38
LaRue v. DeWolff, 552 U.S. 248 (2008) ............................................................................46
Ladouceur v. Credit Lyonnais, 584 F.3d 510 ....................................................................10
Larsen v. AirTran Airways, Inc., 2009 WL 4827522 (M.D. Fla. Dec. 14,
2009) ............................................................................................................................26
Leavitt v. Northwestern Bell Telephone Co., 921 F.2d 160 (8th Cir. 1990) ................59, 60
Lingis v. Motorola, Inc., 649 F. Supp. 2d 861 ...............................................................4, 45
Loomis v. Exelon Corp., 2009 WL 4667092 (N.D. Ill. Dec. 9 ), appeal
docketed,
No. 09-4081, (7th Cir. Dec. 21, 2009) .........................................................................14
McCullough v. AEGON USA, Inc., 585 F.3d 1082......................................................52, 61
McMahon v. McDowell, 794 F.2d 100 ..............................................................................49
ABA EBC CHAPTER 10
Master Compiled Report 2010
Mehling v. New York Life 7 Ins. Co., 173 F. Supp. 2d 502 (E.D. Pa. 2001) .....................67
In re Merck & Co. Sec., Derivative & ERISA Litig., 2009 WL 331426 ............................47
Moench v. Robertson, 62 F.3d 553 ....................................................................................51
Mondry v. American Family Mutual Insurance Co., 557 F.3d 781...................................28
Montoya v. ING Life Ins. Annuity Co., 653 F. Supp. 2d 344 ...............................................1
Morrison v. MoneyGram Int'l, Inc., 607 F. Supp. 2d 1003 ...............................................23
Morrison, v. Money Gram Int'l Inc., 607 F. Supp. 2d 1033 ..............................................52
Nat'l Prod. Workers Union Ins. Trust v. Harter, 2009 U.S. Dist. LEXIS
54468
(N.D. Ill. June 24, 2009) ..............................................................................................61
Neil v. Zell, ---, F. Supp. 2d -- 2009 WL 4927915...................................................5, 41, 58
New Orleans Employers Int'l Longshoremen's Ass'n, AFL-CIO Pension
Fund v.
Mercer Investment Consultants, 635 F. Supp. 2d 1351 (N.D. Ga.
2009) ............................................................................................................................80
Noel v. Laclede Gas Co., 2009 WL 912647 ........................................................................6
Novella v. Empire State Carpenters Pension Fund, 2009 WL 812271
(S.D.N.Y. Mar. 26, 2009), aff'd, 2009 WL 3849694 (2d Cir. Nov. 18,
2009) ......................................................................................................................79, 82
Olivet Boys' & Girls' Club of Reading and Berks County v. Wachovia
Bank N.A.,
2009 WL 1911049 .........................................................................................................2
Olivo v. Elky, 646 F. Supp. 2d 95 ......................................................................................30
Osberg v. Foot Locker, Inc., ---, F. Supp. 2d -- 2009 WL 2971834............................28, 81
Otero v. Nat'l Distrib. Co., Inc., 627 F. Supp. 2d 1232 (D.N.M. 2009) ............................29
Overby v. National Ass'n of Letter Carriers, 601 F. Supp. 2d 101....................................12
Page v. Impac Mortgage Holdings, Inc., 2009 WL 890722..............................................46
Peabody v. Davis, 2009 WL 2916824 (N.D. Ill. Sept. 2, 2009) ........................................78
ABA EBC CHAPTER 10
Master Compiled Report 2010
Perreca v. Gluck, 295 F.3d 215 .........................................................................................11
Pfahler v. National Latex Products Co., 2009 U.S. Dist. LEXIS 30322...........................56
In re Pfizer Inc. ERISA Litigation, 2009 WL 749545........................................4, 20, 23, 49
Phillips v. Brink's Co., 632 F. Supp. 2d 563......................................................................29
Plumbers Local 98 Defined Benefit Pension Fund v. M&P Master
Plumbers of Michigan, Inc., 608 F. Supp. 2d 873 .......................................................39
Poore v. Simpson Paper Co., 566 F.3d 922.................................................................26, 27
Rahm v. Halpin, 566 F.2d 286 (2d Cir. 2009) ...................................................................38
Rahm v. Halpin, 566 F.3d 286 .............................................................................................8
Rogers v. Baxter Int'l, Inc., 2009 WL 3378510 .................................................................20
Safran v. Donagrandi, 2009 WL 230536 ..........................................................................29
Scharff v. Raytheon Co. Short Term Disability Plan, 581 F.3d 899..................................28
In re Schering-Plough Corp. ERISA Litig., ---, F.3d -- 2009 WL 4893649 ......................45
In Re: Schering Plough Corp. ERISA Litigation, 2009 U.S. App. LEXIS
27930............................................................................................................................60
Schornhorst v. Ford Motor Co., 606 F. Supp. 2d 658 .......................................................26
Schultz v. Stoner, 46 Empl. Benefits Cas. 2337 (S.D.N.Y. 2009) .....................................39
Sec'y of Labor v. Payea, 2009 WL 2046135 .......................................................................6
Shanehchian v. Macy's, Inc., 2009 WL 2524562 ..............................................................23
Sharp Electronics Corp. v. Metropolitan Life Insurance Co., 578 F.3d 505.....................54
Shirk v. Fifth Third Bancorp, 2009 WL 3150303........................................................33, 80
Shirk v. Fifth Third Bancorp., 2009 WL 692124.....................................................5, 11, 12
Solis v. Consulting Fiduciaries, Inc., 557 F.3d 772...........................................................26
Solis v. Couturier, 2009 WL 1748724 ...............................................................................79
ABA EBC CHAPTER 10
Master Compiled Report 2010
Solis v. Couturier, Jr., 2009 U.S. Dist. LEXIS 51888.......................................................58
Solis v Plan Benefit Services, Inc., 620 F. Supp. 2d 131 .............................................38, 60
Spinedex Physical Therapy USA Inc. v. United Healthcare of Arizona,
Inc.,
2009 U.S. Dist. LEXIS 77257 (D. Ariz. Aug. 26, 2009).............................................39
Spinedex Physical Therapy USA, Inc. v. United Healthcare of Arizona,
Inc., ---,
F. Supp. 2d -- 2009 WL 1154128 (D. Ariz. Apr. 29, 2009) ........................................64
Sprint Communications Co. v. APCC Services, Inc., _____ U.S. _____
128 S. Ct. 2531 (2008)...........................................................................................53, 61
Stahly v. Salomon Smith Barney, Inc., 319 Fed. App’x 654 (9th Cir. 2009)......................30
Stanford v. Foamex L.P., ---, F.R.D. -- 2009 WL 3075390...............................................47
Stanton v. Couturier, ---, F. Supp. 2d -- 2009 WL 3297293 (E.D. Cal. Oct.
13, 2009) ......................................................................................................................65
Summers v. State Street Bank & Trust Co., 453 F.3d 404 .................................................60
Taylor v. United Tech. Corp., 2009 U.S. App. LEXIS 26068 ...........................................34
Taylor v. United Technologies Corp., 2009 WL 535779 ................................16, 17, 32, 42
Tibble v. Edison Int'l, et al., 639 F. Supp. 2d 1074..............................15, 16, 24, 35, 44, 45
Tomlinson v. El Paso Corp., No. 04-2686, 2009 WL 151532...........................................28
Trustees of the Auto. Mechanics Local 701 Pension and Welfare Funds v.
Union Bank, 630 F. Supp. 2d 951 (N.D. Ill. 2009)......................................................60
Tullis v. UMB Bank, 2009 U.S. Dist. LEXIS 78587..........................................................50
Tullis v. UMB Bank, N.A., 640 F. Supp. 2d 974 ..........................................................30, 63
Turner v. Talbert, 2009 U.S. Dist. LEXIS 67124 (M.D. La. July 30, 2009).....................58
In re Tyco Intl., Ltd. Multidistrict Litig., 606 F. Supp. 2d 166 ....................................46, 51
Unisys Corp. Retiree Med. Benefits ERISA Litig., 579 F.3d 220 ................................26, 27
ABA EBC CHAPTER 10
Master Compiled Report 2010
U.S. Sugar Corp. Litig., 2009 WL 2460770 ......................................................................30
Vengurlekar v. HSBC Bank USA, 2009 WL 362003 ...........................................................6
In re Washington Mutual Inc. Securities, Derivative & ERISA Litigation,
2009 WL 3246994 .............................................................................................5, 25, 47
Watson v. Consolidated Edison of New York, 645 F. Supp. 2d 291 ..................................80
Watson v. Rentenbach Engineering, 2009 WL 3784960...................................................81
W.E. Aubuchon Co. v. BeneFirst LLC. ---, F. Supp. 2d -- 2009 WL
3272491..........................................................................................................................7
Will v. General Dynamic Corp., 2009 U.S. Dist. LEXIS 105987 .....................................60
Young, v. GM Investment Management Corp.,
325 Fed. App’x 31 (2d Cir. 2009)........................................................14, 20, 21, 33, 55
MISCELLANEOUS
DOL Opinion No. 2009-04A .............................................................................................37
DOL Opinion No. 2009-01A .............................................................................................66
Chapter 10.
I.
Fiduciary Responsibility
Introduction:
A.
Plans to Which ERISA’s Fiduciary Duty Provisions Apply
In Godina v. Resinall Int’l, Inc., --- F.Supp.2d ----, 2009 U.S. Dist. LEXIS
117830 (D. Conn. Dec. 17, 2009), the district court granted defendants’ motion for
summary judgment, finding that the plan was a “top hat” plan as defined in ERISA
section 401(a)(1) (29 U.S.C. § 1101(a)(1)) and therefore exempted from Part 4 (Fiduciary
Responsibility) of title I of ERISA. The court rejected plaintiff’s argument that the plan
was funded (and therefore not a top-hat plan) because the defendant employer, Resinall
Corp., had purchased life insurance policies on the lives of plan beneficiaries that inured
to the benefit of the employer. The court noted that the plan unambiguously provided
that the insurance policies were general assets of the employer and that plan beneficiaries
had no rights under the plan greater than the rights of any unsecured general creditor of
the employer. The court also found that the plan was maintained primarily for a select
group of employees, noting that the plan named only seven beneficiaries (the employer
had approximately 300 employees when the plan was executed), three of whom were top
executives and the others of whom were not shown to lack bargaining power. Further,
the plan’s preamble expressly stated that the plan was intended to cover a select group of
highly compensated employees, and plaintiff had admitted that the plan was intended for
a select group of management or highly compensated employees.
In Montoya v. ING Life Ins. Annuity Co., 653 F.Supp.2d 344, , 47 Empl. Benefits
Cas. (BNA) 2185 (S.D.N.Y. 2009), the district court granted defendants’ motion to
dismiss service provider “kick-back” claims related to the sale of 403(b) annuity
contracts under the New York State Teacher’s Opportunity Plus Program (“OPP”), a
403(b) retirement savings program serving 575,000 teachers and health care workers,
finding that the OPP was a governmental plan exempt from ERISA under ERISA section
3(32) (29 U.S.C. § 1002(32)). Under the OPP, the school districts were permitted to buy
annuities from defendant ING on behalf of participants on a tax-deferred basis pursuant
to IRC section 403(b). Plaintiffs had alleged that their union had endorsed the OPP in
return for kickback payments from ING and that OPP’s fiduciaries had violated ERISA
sections 404, 405, and 406. The court based its dismissal on: (1) congressional intent in
enacting ERISA; (2) an analysis of the school district’s involvement with the OPP under
Second Circuit precedent and relevant Department of Labor (DOL) opinion letters; and
(3) the tension between ERISA and IRC section 403(b) that would result from a contrary
holding. The court noted that Congress had included an exemption for governmental
plans in ERISA because of federalism concerns and, rejecting plaintiff’s assertion that the
OPP’s funding came from employee contributions, found that the OPP was established
by the school district, funded by the school district, and limited to public employees. The
court noted that IRC section 403(b) required employers, and not employee organizations,
to have a central role in creating and administering plans that receive tax-favored
treatment under section 403(b). The court further noted that if it were to hold that the
school district had not established or did not maintain the OPP under section 1002(32),
the holding would call into question the validity of the tax benefits plaintiffs received by
Page 1 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
participating in the OPP. Thus minimizing the school district’s role in establishing and
maintaining the 403(b) annuity plan would put plaintiffs’ tax benefits at risk.
II.
Who Is a Fiduciary
A.
ERISA’s Functional Definition of Fiduciary
Utilizing the well-established functionality analysis, a district court granted
summary judgment for defendant State Street Bank dismissing claims that, while acting
as a directed trustee for a participant-directed 401(k) plan, the bank had breached its
fiduciary duties to the plan by failing to divest the plan’s extensive holdings of employer
stock until just three days before the sponsor employer filed for bankruptcy. In re Delphi
Corp. Sec., Derivative & “ERISA” Litig., 602 F.Supp.2d 810, 46 Empl. Benefits Cas.
(BNA) 1499 (E.D. Mich. 2009). Plaintiffs had claimed that the bank should have acted
sooner. The court disagreed, reasoning that the decisions of a directed trustee are judged
under ERISA section 404(a) general prudence standards only under extraordinary
circumstances (such as the imminent bankruptcy of the employer) and finding that State
Street’s duty arose only when it actually knew of the likelihood that the plan sponsor
would file for bankruptcy. In reaching its decision, the court gave great weight to the
DOL’s FAB 2004-03, as well as other courts’ decisions involving similar Master Trust
Agreement provisions.
B.
The Three Categories of Fiduciary Conduct
1. Management or Investment of Plan Assets
A plan administrator who was not a named fiduciary was nevertheless found to be
a fiduciary by virtue of the fact he alone made decisions to loan plan moneys to a startup
company. DeCosta v. Rodrigues, 334 Fed.Appx. 807, 46 Empl. Benefits Cas. (BNA)
2594 (9th Cir. 2009) (unpublished). After first holding that the plan was not a
governmental plan, the court of appeals affirmed the district court’s finding that
defendant Rodrigues became a fiduciary when he alone exercised control over plan assets
by approving the loans at issue, without the approval or knowledge of the plan’s named
fiduciaries. The court had little difficulty affirming the finding of a fiduciary breach,
given the defendant’s lack of due diligence in making the decision to approve the loans at
issue.
2. Investment Advice
A district court found that Wachovia Bank did not give investment advice to
pension plan participants when it advised them in a form letter of a forthcoming merger
of investment funds, describing the two investment funds’ investment objectives and
strategies as substantially similar. Olivet Boys’ & Girls’ Club of Reading and Berks
County v. Wachovia Bank N.A., 2009 WL 1911049, 47 Empl. Benefits Cas. (BNA) 1300
(E.D. Pa. July 1, 2009). The bank had sent the form letter to investors in a “Limited
Duration Fund,” advising that the fund would be merging into a “Ultra Short Duration
Fund” and requesting investors’ consent to the exchange of shares of the former fund for
Page 2 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
those of the new fund. All of the plan’s assets had been invested in the “Limited Duration
Fund” and the plaintiffs claimed the form letter misrepresented the two funds’ investment
objectives and strategies as being substantially similar. When the plaintiffs lost almost
$200,000 after the merger of the two funds, they brought suit claiming a breach of
fiduciary duty. The court granted the bank’s motion to dismiss, however, holding that
Wachovia could not be considered a fiduciary under the facts alleged because Wachovia
had not rendered any investment advise for a fee, nor performed any other fiduciary
function.
C.
Applications and Limitations of the Functional Fiduciary
Standard
1.
Plan Sponsors; Employers, Unions, and the “Settlor
Function”Rule
Where a plan document clearly named a plan sponsor (American Airlines) as the
plan administrator and named fiduciary, a district court not surprisingly denied the
sponsor’s motion to dismiss fiduciary breach claims, based on the sponsor’s assertion that
it was not a fiduciary. Canada v. American Airlines Inc. Pilot Retirement Benefit
Program, 2009 WL 2176983, 47 Empl. Benefits Cas. (BNA) 2893 (M.D. Tenn. July 21,
2009). The case involved a challenge to the airline’s refusal to make actuarial
adjustments to pension benefits for pilots who continued to fly past their normal
retirement age. The airline had argued it could not be considered a fiduciary under the
definition found in ERISA section 3(21) (29 U.S.C. § 1002(21)(A)) because the airline
did not perform any of the specified functions listed in that section. The court noted,
however, that the airline was clearly a fiduciary as defined in ERISA section 3(21)(A)
(29 U.S.C. § 1002(21)(A)), given that the plan named the airline as plan administrator
and named fiduciary and the airline had authority to control and manage the operation
and administration of the plan.
The sponsor of an ESOP and the Chairman of its Board of Directors with the
authority to select members of the ESOP committee were both found to be functioning as
fiduciaries of the ESOP in Craig v. Smith, 597 F.Supp.2d 817, 45 Empl. Benefits Cas.
(BNA) 2645 (S.D. Ind. 2009). The case involved a legal challenge to the plan’s cash-out
of a participant’s ESOP benefits in the form of a promissory note payable over 10 years.
After a non-jury trial, the court entered judgment for the plaintiff, noting that IRC section
409(h)(1)(B) requires that ESOP participants be given the opportunity to exercise a put
option meeting certain standards when they receive distributions in the form of company
stock not readily tradable on an established market. This requirement can only be
satisfied if the participant is paid over a period of time not to exceed five years.
Therefore, the plan’s violation of this requirement constituted a breach of fiduciary
duties. The court found that both the corporation and its chairman were fiduciaries,
because they had the authority to select, retain and monitor members of the committee
that administered the ESOP.
Page 3 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
A union was found not to be a fiduciary with respect to a long term disability plan
and, therefore, did not breach any fiduciary duty by not ensuring that premiums needed to
continue coverage were paid in a timely manner. Bellah v. American Airlines, Inc., 623
F.Supp.2d 1183, 46 Empl. Benefits Cas. (BNA) 2247 (E.D. Cal. 2009). The district court
noted that, while the union was the policyholder of the long-term insurance policy for the
plan, being the policyholder by itself did not establish a fiduciary relationship. The court
found that the union did not exercise any discretionary authority or control over the
management or administration of plan assets because all premiums were paid directly by
the employer of employee/union members receiving long-term disability benefits
pursuant to the employees’ agreements regarding withholding from their paychecks.
In In re Pfizer Inc. ERISA Litigation, 2009 WL 749545, 46 Empl. Benefits Cas.
(BNA) 1792 (S.D. N.Y Mar. 20, 2009), the district court found that plaintiffs had
sufficiently alleged that a plan sponsor and various members of its Board of Directors
were acting as fiduciaries with respect to the administration of a 401(k) plan and
therefore prevailed against defendants’ motion to dismiss. Plaintiffs had alleged that
defendants had breached their fiduciary duties by permitting the plan to invest almost
exclusively in employer stock and failing to evaluate whether such continued investments
would be prudent. In denying defendants’ motion to dismiss, the court found it sufficient
that plaintiffs had alleged that the plan sponsor exercised discretionary authority and
control relative to the administration and management of the plans, was responsible for
designating the procedures for the investment of assets, and had the authority to appoint
and remove other plan fiduciaries. Similar allegations were made with respect to the
various members of the company’s Board of Directors.
2. Corporate Officers and Directors
Members of the Board of Directors of the sponsor of an ESOP were found to be
fiduciaries by virtue of the fact that board members had served at various times as
trustees for the plan and also had appointed others to serve as trustees. Johnson v.
Couturier, 572 F.3d 1067, 47 Empl. Benefits Cas. (BNA) 1449 (9th Cir. 2009). The
defendants had appealed the district court’s issuance of a preliminary injunction
preventing defendants from using corporate assets to advance payment for their costs of
defense pursuant to various indemnification agreements. The Ninth Circuit affirmed and
remanded with instructions, finding that plaintiffs were likely to prevail on their fiduciary
breach claims and therefore would not be entitled to indemnification or advancement of
defense costs. The court relied on ERISA section 410(a), which voids any
indemnification agreement that would exculpate plan fiduciaries from liability for their
misconduct.
In a mixed result, a district court allowed employees to move forward with their
claim that a bank’s board of directors had breached its fiduciary duties by failing to
provide retirement plan committees with information critical to assessing the bank’s
stock fund, but dismissed their claim that the directors had breached their duties by
failing to timely review and remove plan committee members, In re Washington Mutual
Inc. Securities, Derivative & ERISA Litigation, 2009 WL 3246994, 47 Empl. Benefits
Cas. (BNA) 2505 (W.D. Wash. Oct. 5, 2009). While finding that plaintiffs had stated a
Page 4 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
plausible cause of action concerning the alleged failure to provide information needed for
assessing the bank’s stock fund, the court also observed that the ultimate resolution of
such claims would be fact-intensive and require a significant amount of discovery.
Rejecting claims based upon the alleged failure to timely review and remove appointees,
the court found that plaintiffs had made no specific allegations concerning the board’s
procedures for conducting periodic reviews and/or how those procedures were deficient.
The outside directors of a 401(k) plan sponsor were found not liable on summary
judgment for the plan fiduciaries’ allegedly imprudent decision to offer employer stock as
an investment option, during a period when the sponsor was allegedly concealing its
financial problems. Shirk v. Fifth Third Bancorp., 2009 WL 692124, 46 Empl. Benefits
Cas. (BNA) 2502 (S.D. Ohio Jan. 29, 2009). The district court found that the outside
directors were not plan fiduciaries because they had had no responsibility for managing
the plan’s investments; nor did they have any authority to appoint the plan’s fiduciaries.
The court also found that the plan fiduciaries were entitled to a presumption of prudence
concerning the plan’s investments in employer stock because the employer stock
component of the plan qualified as an ESOP and that the plan sponsor and the fiduciaries
did not breach any fiduciary duty of disclosure by failing to provide complete and
accurate information regarding employer stock.
The chief executive officer and Board of Directors of the Tribune Company were
found not to have been acting as fiduciaries when they approved a deal calling for the
Tribune to be sold to an ESOP. Neil v. Zell, --- F.Supp.2d ----, 2009 WL 4927915, 48
Empl. Benefits Cas. (BNA) 1462 (N.D. Ill. Dec. 17, 2009). Although the district court
dismissed the fiduciary breach claims against the Chief Executive Officer and the Board
of Directors, the court refused to dismiss claims against the ESOP trustee. The court
observed that, although the Chief Executive Officer and the Board of Directors were not
plan fiduciaries, they could still be held liable if they were ultimately found to have
knowingly participated in fiduciary breaches of the ESOP trustee.
3. Mutual Funds and Insurers
b. Insurers and Guaranteed Benefit Contracts
The widow of a participant in an employee welfare plan, the benefits of which
were provided through a group life insurance policy with Great West Life and Annuity
Insurance Company, sufficiently alleged a fiduciary breach claim against Great West
based on Great West’s alleged failure to give the participant information about his right
to convert his group policy to an individual one. Noel v. Laclede Gas Co., 2009 WL
912647, 46 Empl. Benefits Cas. (BNA) 2002 (E.D. Mo. Mar. 31, 2009). Great West had
provided administrative services for the plan pursuant to an administrative services
contract with the employer and had issued the life insurance policy in question. In
denying Great West’s motion to dismiss, the court found plaintiff’s state law claims
preempted, but also found plaintiff had stated a plausible claim that Great West could be
found to be an ERISA fiduciary and liable for fiduciary breach, based on the allegation
that Great West had issued the policy under which the plan provided the benefits at issue.
Page 5 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
4. Banks
A bank that mistakenly paid an IRS tax levy against a corporation by using assets
from two pension plans established by the corporation was found not to have been acting
as an ERISA fiduciary in a case brought by the DOL. Sec’y of Labor v. Payea, 2009 WL
2046135, 47 Empl. Benefits Cas. (BNA) 2495 (E.D. Mich. July 9, 2009). The bank was
acting as a depository bank for the pension plans and the professional corporation that
sponsored the plans. When the IRS served the defendant bank with notices of levy for
unpaid taxes due from the corporation, the bank released funds from the plans’ accounts
to the IRS, completely exhausting the plans’ account balances. While the bank did not
dispute that the tax obligations of the corporation should not been satisfied through plan
assets, the district court held that the DOL had not sufficiently alleged conduct
establishing the bank’s fiduciary status. The court noted that the DOL had relied
exclusively on the single transaction in which the bank paid the IRS levy and had made
no allegation that the bank actually played a role in the management of the plan. The
court specifically rejected DOL’s claim that the bank’s having complied with the IRS
levy constituted the exercise of discretionary authority over the management of the plan
or over plan assets so as to create a fiduciary relationship.
Neither a bank that extended a $30 million line of credit to a 401(k) plan sponsor,
nor the consulting firm hired by the bank to provide financial consulting services to the
plan sponsor, were found to have been acting as fiduciaries in Vengurlekar v. HSBC Bank
USA, 2009 WL 362003, 46 Empl. Benefits Cas. (BNA) 1001 (S.D.N.Y. Feb. 11, 2009).
Plaintiffs had alleged that the bank had failed to ensure that the plan sponsor had
forwarded employees’ contributions to the plan before the sponsor’s failure. After a
bench trial, the court found no evidence that the bank or the consulting firm had any
decision-making responsibility with respect to the plan sponsor’s disbursement of its
general assets, no checking signing authority, or any other authority to control disposition
of the plan sponsor’s assets. Accordingly, the court could find no legal basis to find that
defendants were fiduciaries under ERISA’s functionality test.
5. Attorneys, Accountants, and Actuaries
A law firm and an actuarial consulting firm retained by a plan sponsor were found
not to have been acting in a fiduciary capacity in connection with claims that the plan
sponsor had failed to properly fund a defined benefit pension plan. Clark v. Feder Semo
and Bard P.C., 634 F.Supp.2d 99, 47 Empl. Benefits Cas. (BNA) 2808 (D.D.C. 2009).
The plan was underfunded by $1.1 million at the time the plan was terminated. In
granting the defendants’ motion to dismiss a third party complaint brought by a plan
participant, the district court noted that attorneys and actuaries, when performing their
usual professional functions for a plan, typically are not considered to be acting as plan
fiduciaries. The court further held that plaintiff’s allegation that the plan sponsor simply
followed the advice it was given did not establish that the lawyers’ or actuaries’ actions
with respect to the plan constituted the exercise of discretionary authority concerning the
management of the plan or otherwise fell outside the scope of normal professional
services.
Page 6 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
8. Third-Party Administrators
A third-party administrator of a self funded health plan was found to be a
fiduciary, although only to the extent it exercised discretionary authority over the
disposition of the plan’s assets. Briscoe v. Preferred Health Plan Inc., 578 F.3d 481, 47
Empl. Benefits Cas. (BNA) 2020 (6th Cir. 2009). In affirming a district court’s partial
grant and partial denial of summary judgment to plaintiffs, the Sixth Circuit noted that
the third-party administrator had exercised discretion with respect to plan assets, although
only in its actions allotting to itself its unpaid administrative fee and returning the
remaining funds in the plan’s account after its relationship with the plan sponsor had been
terminated. The court rejected other claims not relating to these specific actions.
Accordingly, the Sixth Circuit affirmed the district court’s grant of summary judgment
for plaintiffs with respect to three transfers of assets made by the third party
administrator, totaling $10,679.09, and also affirmed the district court’s denial of
summary judgment on plaintiffs’ remaining claims for unpaid benefits, totaling in excess
of $300,000.
The sponsors of a self funded welfare benefit plan were allowed to go forward
with their claims against the plan’s third party administrator for damages arising from
claimed breaches of fiduciary duty, allegedly for making claims processing errors that
had cost the plans millions of dollars, although, again, only to the extent that such claims
were based on the third party administrator’s status as named fiduciary of the plans. W.E.
Aubuchon Co. v. BeneFirst LLC. --- F. Supp. 2d ----, 2009 WL 3272491, 47 Empl.
Benefits Cas. (BNA) 2629 (D. Mass. June 12, 2009). The district court, as a result,
dismissed claims alleging that the third-party administrator had acted as a functional
fiduciary, finding that the third-party administrator’s limited exercise of discretionary
control over the plans, along with its exercise of limited check writing authority to pay
claims out of the plan’s bank accounts, were insufficient to support that assertion. The
court also emphasized that the plan sponsors had retained the ultimate discretion to
decide disputed claims, which fact argued against finding the service provider to be a
fiduciary of the plans.
The claims of the sponsors of two welfare benefit plans were found in this
bankruptcy case to take priority over the claims of a bank to the assets of a bankrupt
third-party administrator. In re G.S. Consulting, Inc., 414 B.R. 454, 46 Empl. Benefits
Cas. (BNA) 2212 (N.D. Ind. 2009). In a somewhat unusual fact pattern, a third-party
administrator had filed a Chapter 7 voluntary bankruptcy petition. At the time the petition
was filed, the third-party administrator maintained two accounts with the bank on behalf
of its employee benefit plan clients. The bank, which had a claim against the debtor,
asserted a right of set-off against the bank accounts, which claim was opposed by the plan
sponsors. The bankruptcy court ruled in favor of the plans, finding that the third party
administrator had been acting as a fiduciary in light of the control it exercised over plan
assets (albeit unauthorized). The district court affirmed the bankruptcy court’s ruling and
rejected the bank’s claim that the third party administrator was acting only in a nonfiduciary ministerial capacity.
9. Taft-Hartley Plan Trustees’ Plan Design Decisions
Page 7 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
b. Contributing Employers and Their Principals
In this delinquent contribution action brought under ERISA section 515, the
Second Circuit affirmed a district court decision holding a corporate officer personally
liable under New York’s Uniform Commercial Code for three dishonored checks he
signed and tendered to multiemployer plans , but not personally liable for his company’s
failure to timely remit employees’ salary-deferral contributions to a 401(k) plan and other
collectively bargained benefit plans because the officer was not a fiduciary. Finkel v.
Romanowicz, 577 F.3d 79, 47 Empl. Benefits Cas. (BNA) 1822 (2d Cir. 2009). The
defendant had defaulted on its contribution obligations to the plans, but the district court
refused to impose joint and several liability for the contributions upon the defendant
corporate officer because plaintiffs had failed to establish that the officer was an ERISA
fiduciary. The Second Circuit on appeal held insufficient for this purpose evidence
showing that the corporate officer was authorized to sign checks and to decide which bills
to pay.
The Second Circuit affirmed a ruling that unpaid employer contributions are not
plan assets until paid, allowing the owner of a bankrupt company to discharge in his
personal bankruptcy proceedings the debt for his company’s unpaid contributions to
various multiemployer plans. Rahm v. Halpin, 566 F.3d 286, 46 Empl. Benefits Cas.
(BNA) 2153 (2d Cir 2009). The multiemployer plans had objected to the discharge on the
basis of § 523(a)(4) of the Bankruptcy Code, which bars the discharge of any debts
arising from fraud or defalcation while acting in a fiduciary capacity. The bankruptcy
court had denied the plans’ objections and the district court affirmed, concluding that the
unpaid contributions were not plan assets and, therefore, the owner could not be
considered a fiduciary. The Second Circuit affirmed, noting the DOL’s view that unpaid
employer contributions are generally not considered plan assets until paid to the plan.
The multiemployer plans in Iron Worker’s Local No. 25 Pension and Benefit
Funds v. Steel Enterprises, Inc., 2009 WL 3645633, 47 Empl. Benefits Cas. (BNA) 2827
(E.D. Mich. Oct. 30, 2009), fared a little better. The district court held that the
owner/operator of a steel erecting company had breached his fiduciary duty to the plans
by not making the contributions required under the terms of the applicable collective
bargaining agreement, finding the owner clearly a fiduciary with respect to employee
contributions withheld from paychecks for deposit with the 401(k) plan, which were plan
assets under DOL regulations, specifically 29 CFR § 2510.3-102(a). The court also held
that the owner had exercised discretionary control over the plan assets by knowingly
failing to make the required contributions to the plans.
D.
Importance and Identification of Plan Assets
The Third Circuit held that a life insurance company that sold a group policy to a
small employer did not breach its fiduciary duties by allegedly misappropriating
contributions made by the employer to a reserve account in Faulman v. Security Mutual
Financial Life Insurance Co., 2009 WL 4367311, 48 Empl. Benefits Cas. (BNA) 1356
(3d Cir. Dec. 3, 2009) (unpublished). The court reasoned that the insurance company
could not be considered a fiduciary because the contributions in question were not plan
Page 8 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
assets as they were deposited into the defendant’s general account, not in a plan account,
and were to be used to offset the cost of premiums when employees converted their
coverage to a whole life policy. The court also affirmed the trial court’s finding that
defendant had not engaged in self-dealing.
3. Plan Assets: Participant Contributions
The owner of a management consulting firm that had taken over a struggling
company was found to be an ERISA fiduciary liable for failing to forward employee
contributions to the company’s 401(k) plan. Chao v. Unique Mfg. Co., 649 F.Supp.2d
827, 46 Empl. Benefits Cas. (BNA) 1952 (N.D. Ill. 2009). The district court noted that
the unpaid, withheld employee contributions had become plan assets once 15 days had
elapsed after the employees were paid, pursuant to DOL’s participant-contribution planassets regulation, 29 CFR § 2510.3-102(b). Since the unpaid contributions remained in
the corporate account, over which the owner of the management consulting firm had
control, the court concluded the owner of the firm could be considered a fiduciary and
liable for failing to ensure that the contributions were transferred to the plan. The defunct
employer’s former president was also found to be personally liable for the unpaid
contributions owed to the plan prior to the retention of the management consultant
because he was a named fiduciary for the plan.
III.
Plan and Trust Requirements
A.
Formal Requirements
1. Written Instrument
ERISA generally obligates administrators to administer ERISA plans “in
accordance with the documents and instruments governing [them],” ERISA section
404(a)(1)(D) (29 U.S.C. § 1104(a)(1)(D)), a directive that can cause dilemmas for plan
administrators seeking to reconcile a plan’s terms with conflicting outside imperatives.
In Kennedy v. Plan Adm’r for DuPont Sav. and Inv. Plan, 129 S.Ct. 865, 45 Empl.
Benefits Cas. (BNA) 2249 (2009), the Supreme Court ruled on one such conflict, finding
that a plan administrator must honor a divorced and deceased participant’s designation, in
accordance with plan terms, of his former spouse as his beneficiary, despite the
subsequent divorce of the participant and spouse and the former spouse’s unequivocal
waiver of the plan benefits in connection with the divorce decree that had ended their
marriage prior to his death. The participant had simply neglected, at any time subsequent
to the divorce and before his death, to change his prior beneficiary designation under the
plan. A unanimous Supreme Court ruled that a federal common-law waiver of benefits
under a plan, included in a divorce decree signed by a participant’s ex-spouse, did not
implicate ERISA’s anti-assignment and alienation provision, and that a plan
administrator must under ERISA follow the plan’s terms regarding beneficiary
designations made in conformity with the plan’s requirements and disregard conflicting
federal common-law waivers. Moreover, the Court found that the divorce decree at issue,
which attempted to waive the former spouse’s benefit rights, was not a “qualified
domestic relations order” under 29 U.S.C. § 1056(d)(1) (QDRO provisions) and thus was
Page 9 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
preempted by ERISA and could not be considered effective to amend the terms of the
plan. The Court declined to create exceptions to ERISA’s uncomplicated bright-line
“plan documents rule,” which permits plan administrators to understand and meet their
responsibilities by following the rules set out in the plan documents.
In Griffiths v. Ohio Farmers Ins. Co., 2009 WL 3817592, 48 Empl. Benefits Cas.
(BNA) 1087 (N.D. Ohio Nov. 13, 2009), a district court denied plaintiffs’ claims that
their employer, defendant Ohio Farmers, had created a separate ERISA-covered pension
plan through statements made in two 1999 newsletters sent to them, which they alleged
had induced them to retire early by promising certain lifetime profit-sharing and life
insurance benefits under the Westfield Earnings Bonus Plan (“WEB Plan”) and Ohio
Farmers Insurance Co. Life Insurance Plan (“Life Insurance Plan”); and then had refused
to pay the promised benefits. Applying the well-known Dillingham test, the court found
the plaintiffs’ evidence insufficient to establish that the statements made in the two
newsletters had created a separate employee benefit plan.
The facts showed that, prior to their retirement in 1999 plaintiffs had received
two newsletters from their employer discussing a special retirement benefit for certain
employees and coming changes to the currently provided retirement benefits. These
newsletters had informed plaintiffs that, if they retired early, they would not be subject to
the changes. Plaintiffs had opted to retire early and to accept the special retirement
benefit, but in 2008 the employer had reduced the benefits.
The district court held that the newsletters lacked essential elements under the
Dillingham test, specifically the establishment of a procedure for receiving benefits,
making claims, and administering a plan. While the newsletters had discussed upcoming
changes in the current pension benefits, they explicitly referred employees to other
documents, which were clearly pre-existing plan documents, for more information on
benefits, procedures and administration. The newsletters accordingly did not themselves
constitute a plan under ERISA.
In Ladouceur v. Credit Lyonnais, 584 F.3d 510, 47 Empl. Benefits Cas. (BNA)
2345 (2d Cir. N.Y. 2009), the Second Circuit affirmed a district court’s dismissal, on
summary judgment, of employees’ claims for promissory estoppel based on assertions
that their employer, a Credit Lyonnais subsidiary, had breached its fiduciary duty by
orally misrepresenting the effect of a merger on their pension benefits. Citing ERISA
section 402(a)(1) (29 U.S.C. § 1102(a)(1)) and existing case law, specifically Perreca v.
Gluck, 295 F.3d 215, 225, 28 Empl. Benefits Cas. (BNA) 1513, (2d Cir. 2002), the court
of appeals upheld the proposition that oral promises regarding changes in plan benefits
are generally unenforceable under ERISA. Because, under ERISA, every employee
benefit plan must be established and maintained pursuant to a written instrument, the
court reasoned, an oral statement that purports to alter the terms of an ERISA benefit plan
cannot give rise to a claim for promissory estoppel.
The court reasoned that, because an oral representation cannot effect a change in
an ERISA-covered plan, to give such oral statements effect by re-characterizing them as a
Page 10 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
breach of fiduciary duty would undermine ERISA’s requirement that plans be governed
by written documents and dilute the protection conferred by this requirement, which
prevents employees’ benefits from being eroded by oral modifications to the plan.
While acknowledging plaintiffs’ argument that no court has previously held that a
fiduciary breach claim must be founded on a writing, the court eschewed establishing
such a categorical requirement to decide this case, limiting its holding to finding that a
party alleging a breach of fiduciary duty based on a purported alteration of the terms of
an ERISA benefit plan must point to a written document containing the alleged alteration.
2.
Named Fiduciary
In Shirk v. Fifth Third Bancorp, 2009 WL 692124, 46 Empl. Benefits Cas. (BNA)
2502 (S.D. Ohio Jan. 29, 2009), the district court held that plaintiffs, former employees
and participants in an ESOP, could pursue their claims of fiduciary breach, based on
alleged failure to prudently manage the plan’s assets, only against the parties designated
as plan administrator or named fiduciary of the plan, not against the board of directors of
the corporate plan sponsor or its directors.
The district court noted that the plan language explicitly vested sole authority to
manage the plan’s assets with the plan administrator. In addition, the corporate directors
had submitted evidence that they did not manage the plan’s assets because the plan
administrator was given that authority. Therefore, the court held that the directors were
not fiduciaries of the Plan and not proper party defendants.
3. Plan Content
a.
Mandatory Provisions
A district court rejected plaintiffs’ claims that a revised plan document did not
govern their benefits because the plan did not comply with ERISA section 404(b)(3),
which requires that every ERISA plan provide a procedure for amending such plan and
for identifying the persons who have authority to amend the plan. Kerber v. Qwest
Group Life Ins. Plan, 2009 WL 807443, 46 Empl. Benefits Cas. (BNA) 2715 (D. Colo.
Mar. 25, 2009). The plan document contained a Reservation of Rights clause stating that
"the Company reserves the right to amend the Plan at any time, in any manner, including,
without limitation, the right to amend the Plan to reduce, change, eliminate, or modify the
type or amount of Benefits provided to any class of Participants."
Relying on Curtiss-Wright, the district court stated that the Reservation of Rights
clause set forth an amendment procedure that satisfied ERISA section 402(b)(3). The
court determined that, although the language was somewhat sparse, it satisfied the
requirement that the plan specify a procedure for identifying the persons who have
authority to amend the plan by identifying the Company as the person authorized to make
amendments, and the requirement that the plan specify an amendment procedure by
stating that the plan may be amended by the Company as opposed to any other person.
Page 11 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
In Overby v. National Ass’n of Letter Carriers, 601 F.Supp.2d 101, 46 Empl.
Benefits Cas. (BNA) 2490 (D.D.C. 2009), the district court ruled in favor of plaintiffs, a
retired letter carrier with the United States Postal Service and officer of the National
Association of Letter Carriers (“NALC”) and his wife, on their claim that the wife was
wrongly denied the right to receive survivor’s benefits under the NALC Annuity Trust
Fund to be paid upon the retired letter carrier’s death. The plaintiffs were married four
months after the letter carrier retired and, at the time this case was heard, had been
married for over 17 years. Defendants, the NALC and the Fund, argued that the Fund’s
rule for eligibility for spousal survivor’s benefits had been amended in 1985 to require
that a spouse be married to an annuitant before retirement in order to be eligible for a
survivor’s benefit. The court found that, in attempting to adopt the 1985 amendment to
the eligibility rules, the Fund’s trustees had failed to act in accordance with the Fund’s
amendment procedures, which required amendments to be submitted to the Fund’s
actuaries “for an evaluation and estimate of [their] cost.” The defendants’ failure to
comply with this requirement invalidated the amendment and resulted in the wife’s being
entitled to the survivor’s benefits..
IV.
Fiduciary Standards Under Section 404
A.
ERISA’s Exclusive Purpose Rule
In Shirk v. Fifth Third Bancorp, 2009 WL 692124, 46 Empl. Benefits Cas. (BNA)
2502 (S.D. Ohio Jan. 29, 2009), the district court found inadequate plaintiffs’ (former
employees and participants in an ESOP) allegations that losses in the values of their
benefits resulted from defendants’ breaches of their fiduciary duty to prudently invest
plan assets. The plaintiffs’ claims were based on assertions that the ESOP’s investments
in the stock of the employer sponsor was imprudent and that the defendant fiduciaries
knew or should have known that the stock was not a suitable and appropriate investment
for the plan and failed to take meaningful steps to prevent the plan from suffering losses
when the value of the stock plummeted. Defendants claimed that because the plan was
an ESOP, the fiduciaries were exempt from ERISA’s diversification requirements and
were entitled to a presumption of reasonableness when making the decision to invest in
the employer’s stock. The court rejected these arguments, confirming that the plan
documents, which expressly mandated that the employer stock be offered as an
investment option, gave the plan administrator discretion to adopt the reasonable
interpretation that the plan required employer stock to be offered as an investment.
Further, the court found that the plaintiffs had failed to meet their burden of rebutting the
presumption of reasonableness
In In Re Huntington Bancshares, Inc. ERISA Litigation, 620 F. Supp. 2d 842, 45
Empl. Benefits Cas. (BNA) 2773 (S.D. Ohio 2009), the district court dismissed 401(k)
plan participants’ claims against the employer sponsor, its board of directors, the board’s
pension review committee, and the committee members for breach of fiduciary duty
under ERISA, which asserted that the decision to continue offering employer stock as an
investment option after the value of the stock fell after the employer became involved in
subprime mortgage lending was not prudent. Dismissing plaintiffs’ fiduciary breach
claims, the court stated that only discretionary acts of ERISA plan management or
Page 12 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
administration or those acts designed to carry out the very purpose of the plan are subject
to ERISA’s fiduciary duties and that the acquisition of the subprime lender business was
not conduct governed by ERISA. Further, nothing had occurred to trigger a duty to
investigate whether the employer’s stock continued to be an appropriate investment under
the plan — that is, there was nothing “akin to a ‘red flag’ of misconduct.” Id. The court
also found that the fiduciaries had satisfied their duty to provide information to plan
participants regarding the potential risk of holding their investments in the employer’s
stock value, following the acquisition of the subprime mortgage lender business. The
employer made multiple specific public disclosures regarding its potential exposure to
credit and market risk both before and throughout the period at issue.
B.
Prudence Standard
1. Procedural Prudence
During the past year, several important rulings have been issued on procedural
prudence in the numerous pending 401(k) plan “excessive fee” cases, with recent rulings
emphasizing that there is no one-size-fits-all approach to constructing a prudent set of
investment options with reasonable fees. For example, in Hecker v. Deere & Co., 556
F.3d 575, 45 Empl. Benefits Cas. (BNA) 2761 (7th Cir.) (“Hecker I”), pet. for reh’g and
pet. for reh’g en banc denied, 569 F.3d 708, 47 Empl. Benefits Cas. (BNA) 1097 (7th
Cir. 2009) (“Hecker II”), pet. for cert. pending, the Seventh Circuit in Hecker I affirmed
dismissal of participant plaintiffs’ claims alleging that their employer’s (Deere & Co.)
401(k) plan’s investment offerings charged excessive asset fees because investment
advisor Fidelity Management and Research Company (“Fidelity Management”) engaged
in undisclosed revenue-sharing with plan trustee Fidelity Management Trust Company
(“Fidelity Trust”). The Hecker I court ruled that 401(k) fiduciaries do not have a duty to
“scour the market to find and offer the cheapest possible fund,” and that the Deere
fiduciaries had discharged their duties by ensuring that the plan offered participants a
wide range of different funds as investment options with a wide range of expense ratios.
In addition to 26 specified investment options, the plans offered a brokerage window
through which participants could invest in more than 2,500 additional (non-Fidelity)
mutual funds. See 556 F.3d at 586. The court stated: “We see nothing in the statute that
requires plan fiduciaries to include any particular mix of investment vehicles in their
plan.” Id. The court also questioned “whether Deere’s decision to restrict the direct
investment choices in its Plans to Fidelity Research funds is even a decision within
Deere’s fiduciary responsibilities,” but found that, even assuming it was, plaintiffs had
failed to state a claim upon which relief could be granted. Id.
In Hecker II, the Seventh Circuit denied plaintiffs’ petition for rehearing and
rehearing en banc, noting that the Hecker I opinion was “tethered closely to the facts
before the court.” The court emphasized that plaintiffs had made no allegations that the
plan’s proffered investment options were “unsound or reckless” as opposed to simply
imposing excessive fees. See 569 F.3d at 710-11. Rejecting plaintiffs’ new argument
that Deere had breached its fiduciary duty by providing largely retail mutual funds under
the plan,, the court noted that, if the plan had been receiving both fund management and
Page 13 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
plan services from the providers for the same fees that retail investors would pay to invest
in the funds, the effective cost of the investments for participants “may in fact have
approached wholesale levels.” Id. The court also attempted to limit its prior ruling,
stressing that “this complaint, alleging that Deere chose this package of funds to offer for
its 401(k) Plan participants, with this much variety and this much variation in associated
fees, failed to state a claim upon which relief can be granted.” Id. (emphasis in original).
The district court in Loomis v. Exelon Corp., 2009 WL 4667092, 48 Empl.
Benefits Cas. (BNA) 1440 (N.D. Ill. Dec. 9, 2009), appeal docketed, No. 09-4081, (7th
Cir. Dec. 21, 2009), dismissed another excessive fees complaint, finding that the
allegations were not “materially distinguishable” from the Hecker complaint. Id. at *3.
The Loomis plaintiffs had alleged that plan fiduciaries had selected investment options
(as part of a revenue-sharing system) that imposed excessive fees on participants and had
failed to negotiate and select cheaper alternatives. Id. Citing Hecker, the court ruled that
nothing in ERISA requires plan fiduciaries to “scour the market” to find the cheapest
available fund. Id. (citation omitted). The court also found stronger support for
dismissal in this case than the allegations considered in Hecker. Unlike the plan in
Hecker, the Exelon plan had offered both retail and wholesale mutual funds, and the
Exelon participants therefore had an even greater opportunity than the plaintiffs in
Hecker to move their money to lower-cost options. Id. at *4.
Several courts have also rejected other blanket fee challenges to the inclusion of
commonly available retail investment products as investment options in 401(k) plans.
For example, in Young v. General Motors Investment Management Corp., 325 Fed.
Appx. 31, 46 Empl. Benefits Cas. (BNA) 2278 (2d Cir. 2009), the Second Circuit
affirmed the dismissal of fiduciary breach claims alleging improper investment in
Fidelity mutual funds, holding that plaintiffs had failed to allege that the fees were so
excessive relative to the services rendered that they could not have been the products of
arm’s-length negotiations. Relying on the standard for excessive fee claims articulated
under the Investment Company Act (“ICA”), 15 U.S.C. § 80a-35(b), the court found that
plaintiffs had failed to allege “that the fees were excessive relative ‘to the services
rendered.’” Id. (citing Gartenberg v. Merrill Lynch Asset Mgmt., 694 F.2d 923, 928 (2d
Cir. 1982)). Because plaintiffs had alleged “no facts concerning other factors relevant to
determining whether a fee is excessive under the circumstances,” the court ruled that
“plaintiffs do not provide a basis upon which to infer that defendants’ offering of the
Fidelity Funds was a breach of their fiduciary duties.” Id.
Similarly, in In re Honda of America Mfg., Inc. ERISA Fees Litig., 2009 WL
3270490, 47 Empl. Benefits Cas. (BNA) 2610 (S.D. Ohio, Oct. 9, 2009), the district court
dismissed plaintiffs’ claims that Honda’s 401(k) plan fiduciaries had breached their
duties by including Merrill Lynch’s (the plan’s directed trustee and recordkeeper) retail
mutual funds as investment options in the plan. As an initial matter, the Honda court
questioned whether the decision to include Merrill Lynch mutual funds “is a decision
within these defendants’ fiduciary responsibilities.” Id. at *4. Assuming that it was, the
court noted that only nine Merrill Lynch mutual funds had been included among the plan
24 investment options and that “[t]here is nothing in ERISA that prohibits this type of
investment offering nor that requires plan fiduciaries to include any particular mix of
Page 14 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
investment vehicles in their plan.” Id. (citing Hecker I, 556 F.3d at 586-87). The court
also dismissed plaintiffs’ claim that defendants had breached their fiduciary duties by
offering retail mutual funds as plan investments, reasoning that the funds “were offered to
investors in the general public, setting the expense ratios against the backdrop of market
competition.” Id. at *5.
In Tibble v. Edison Int’l, et al., 639 F.Supp.2d 1074, 47 Empl. Benefits Cas.
(BNA) 1652 (C.D. Cal. 2009), the district court dismissed on summary judgment certain
claims concerning the inclusion of certain funds in a 401(k) plan, but denied summary
judgment on other claims based on “revenue-sharing” arrangements pertaining to retail
mutual funds offered as investment options under the plan. The court granted summary
judgment to defendants on claims that they imprudently (i) included retail mutual funds, a
technology sector fund and a money market fund (instead of a stable value fund) in the
collectively-bargained 401(k) plan’s investment lineup; and (ii) structured the plan’s
company stock fund as a unitized fund rather than a direct ownership fund. Id. at 111619. With respect to inclusion of the retail mutual funds, the court noted that plan
participants, through their union representatives, had requested the addition of 40 “namebrand” retail mutual finds to the plan’s investment options and that, with the addition of
those funds, “the Plan was comparable to other defined contribution plans, which also
regularly include retail mutual funds.” Id. at 1116. More importantly, the court found
that “the fiduciaries regularly reviewed the mutual funds included in the Plan, and in fact
removed certain funds when their performance was in question.” Id.
Similarly, the court held that defendants had acted prudently with respect to the
technology sector fund, which was removed prior to plaintiffs’ suit for underperformance
(though plaintiffs challenged both the selection and removal of the fund). Id. at 1117.
The court found that, although the fund “had experienced subpar returns in recent years,
its ten-year performance rating was strong at the time it was selected. Indeed, the
Investments Staff appropriately relied on its four-star Morningstar rating when making its
decision to offer the fund as an investment option.” Id. Further, when the fund’s
performance “began to deteriorate, it was placed on a watch list, participants were no
longer allowed to invest new money into the fund, and it was ultimately removed from
the Plan in 2003.” Id. The court concluded that “these management decisions reveal that
the relevant fiduciaries chose and then managed the Science & Technology Fund in a
prudent manner.” Id. at 1116.
The court also held that defendants had engaged in a prudent process in selecting
the money market fund rather than a stable value fund: “Defendants considered the
possibility of including a stable value fund, but instead decided on a money market
because the money market fund would provide more consistent returns and have lower
risk.” Id. at 1118. Finally, the court held that defendants had prudently structured the
company stock fund as a unitized fund because “Plan participants wanted the ability to
execute faster trades in Edison stock.” Id. The court noted that “offering faster trades
was expressly included as one of the additional terms to the Plan as a result of the
collective bargaining process.” Id. The court also emphasized that “the Plan fiduciaries
Page 15 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
monitored the amount of cash that was being held in the Edison stock fund and made
needed adjustments accordingly.” Id. (citations omitted).
However, the court denied summary judgment on plaintiffs’ separate claim that
the fiduciaries breached their duty of loyalty “by choosing retail mutual funds in order to
maximize the amount of revenue sharing at the expense of the Plan participants.” 639
F.Supp.2d at 1105-14, 1122. The court found that “certain internal communications,
when viewed in the light most favorable to plaintiffs, could be interpreted as revealing
that individuals involved in the mutual fund selection process were impermissibly
considering revenue sharing when deciding which mutual funds would become
investment options for the Plan participants.” Id. at 1112. In a second opinion following
supplemental briefing, the court denied summary judgment with respect to an additional
claim that the fees charged by the money market fund were unreasonable. Tibble v.
Edison Int’l, et al., 639 F.Supp.2d 1122, 1128, 47 Empl. Benefits Cas. (BNA) 2363 (C.D.
Cal. 2009). The surviving claims proceeded in a bench trial in October 2009. At the
conclusion of trial, the court invited further briefing and the submission of additional
evidence from the parties. See Tibble, No. 2:07-cv-05359-SVW-AGR at Dkt. 369, 372
(C.D. Cal.). As of December 30, 2009, the court had not issued a decision.
In Taylor v. United Technologies Corp., 2009 WL 535779, 46 Empl. Benefits
Cas. (BNA) 1935 (D. Conn. Mar. 3, 2009), aff’d, 2009 WL 4255159, 48 Empl. Benefits
Cas. (BNA) 1193 (2d Cir. Dec. 1, 2009) (summary order), the district court granted
summary judgment for defendants on claims that they had breached their fiduciary duties
by offering actively-managed (as opposed to index or “passive”) mutual funds as plan
investments and by allowing the plan’s company stock fund to hold cash. 2009 WL
535779, at **10-11. Noting that the fiduciaries had analyzed “the impact of the ‘cash
drag’ on the portfolio, consideration of the ‘cash drag’ in mutual funds, and alternatives
to a unitized stock fund,” the court held that defendants had properly evaluated the merits
of retaining cash in the stock fund. Id. at **2, 9.
The court also held that plan fiduciaries had followed a prudent process in
selecting and retaining the mutual fund investment options. In 1996, UTC first evaluated
placing mutual funds in the plan and formulated a set of key criteria for its desired fund
line-up (which included performance track record, fees charged and performance record
net of fees), met with mutual fund managers, and narrowed a list of “preferred funds”
accordingly. Id. at *14. Fiduciaries had discussed “the merits of passive and active
management” in plan committee meetings in 1997, 1998 and 2003. Id. The court
concluded that “UTC’s selection process included appropriate consideration of the fees
charged on the mutual fund options, and of the returns of each mutual fund net of its
management expenses.” Id. at *10. The court emphasized that “ERISA does not require
a fiduciary to take ‘any particular course’ so long as the fiduciary’s decision meets the
prudent person standard.” Id. (citation omitted).
Not all cases have resulted in summary dismissals of fee claims. In Braden v.
Wal-Mart Stores, Inc.,, 2009 U.S. App. LEXIS 25810, 48 Empl. Benefits Cas. (BNA)
1097 (8th Cir. Nov. 25, 2009), the Eighth Circuit reversed the district court’s dismissal
Page 16 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
of an excessive fees complaint.
Plaintiff had alleged that plan fiduciaries had
imprudently chosen investment fund options that imposed excessive fees, continued to
offer investment options that were unreasonably expensive compared to alternatives, and
permitted the plan’s mutual fund investments to pay revenue sharing and alleged
kickbacks to the plan’s trustee, Merrill Lynch.
In reversing the district court’s dismissal, the Eighth Circuit held that the
complaint had alleged “extensive facts in support” of its claims, including that, given the
size of its 401(k) plan, Wal-Mart could have obtained lower fees arrangements for its
participants by negotiating for institutional classes of funds, rather than selecting retail
mutual funds; that the investment options included in the plan had less favorable
investment experience than lower-cost alternatives, and that mutual fund companies
whose funds were included in the plan’s investment line-up provided quid pro quo
kickbacks to trustee Merrill Lynch. Id. at *4-6. While agreeing with Hecker that
“nothing in ERISA requires every fiduciary to scour the market to find and offer the
cheapest possible fund,” the Braden court noted that, unlike the Deere plan, “the far
narrower range of investment options available in this case [ten mutual funds] makes
more plausible the claim that this Plan was imprudently managed,” especially when
considered for the purposes of a Rule 12 motion. Id. at *23-24 nn. 6 & 7. See also
Gipson v. Wells Fargo & Co., 2009 U.S. Dist. LEXIS 20740, at **14-15, 46 Empl.
Benefits Cas. (BNA) 1391 (D. Minn. Mar. 13, 2009) (denying defendants’ motion to
dismiss fiduciary breach claims because plaintiffs adequately pled that defendants
selected mutual funds that had higher administrative fees when less expensive and betterperforming mutual funds were available).
In George v. Kraft Foods Global, Inc., 2009 U.S. Dist. LEXIS 117754, at **4045 (N.D. Ill. Dec. 17, 2009), the district court, citing Braden, denied defendants’ motion
to dismiss, ruling that plaintiffs had sufficiently pled that defendants had selected and
retained high-cost, underperforming investment options for the plan. The court found
that plaintiffs had met Rule 8’s pleading requirements by alleging that defendants had
failed (i) to monitor and account for the fees paid for plan administrative services; (ii) to
evaluate the potential for direct investment in the plan sponsor’s common stock rather
than in a unitized stock fund; and (iii) to utilize a “meaningful” process to review the
continued prudence in maintaining plan investment options. Id. at **40-44. The court
found that Hecker was not controlling as to plaintiffs’ excessive administrative services
claim: “[A]t a fundamental level, Hecker says nothing regarding the duty a fiduciary
holds with respect to a 401(k) investment plan’s administrative services fees.” Id. at *42
n.17.
Courts have also made numerous rulings regarding procedural prudence in “stock
drop” claims:
·
Bunch v. W.R. Grace & Co., 555 F.3d 1, 45 Empl. Benefits Cas. (BNA) 2505 (1st
Cir. 2009). The First Circuit affirmed summary judgment dismissing a “reverse”
stock-drop claim. Plaintiffs had filed a class action challenging the sale of
employer stock — during a bankruptcy — by an independent fiduciary. The First
Page 17 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
Circuit affirmed summary judgment in favor of defendants W.R. Grace and State
Street Bank & Co., concluding that neither had breached its fiduciary duty in
connection with State Street’s decision, as the delegate trustee, to divest the Grace
plan of company stock. In so holding, the court reasoned that State Street, with
the assistance of experts, had thoroughly studied Grace’s corporate health and had
properly concluded that divestment of the stock was the only action consistent
with ERISA’s prudent fiduciary standard. In addition, the court rejected
plaintiffs’ argument that State Street’s decision to divest the plan of company
stock should be presumed imprudent because there is a presumption of prudence
in investing in company stock, finding it an inappropriate attempt to use
Moench’s rebuttable presumption of prudence as a sword against a prudent
fiduciary.
·
Brieger v. Tellabs, 629 F.Supp.2d 848 (N.D. Ill. 2009). Following a bench trial,
the district court rendered a verdict in favor of defendants as to all breach of
fiduciary duty claims. Tellabs and various individual defendants were sued over
the offering of Tellabs’ common stock as an investment option in Tellabs’ Profit
Sharing and Savings Plan. Plaintiffs filed a class action alleging various fiduciary
breaches, including a breach of the fiduciary duty of prudence and a breach of the
fiduciary duty to disclose, based on the decline in the value of Tellabs’ stock as a
result in the general market downturn in the telecommunications industry. With
respect to the imprudent investment claim, the district court held that, regardless
of whether the Moench “presumption of prudence” applied to the initial inclusion
of Tellabs’ stock as a plan investment option, plaintiffs failed to prove that it was
imprudent to continue offering Tellabs stock as an investment option. The district
court reasoned that, although defendants’ procedural prudence in reviewing the
Tellabs’ stock fund could have been better, the absence of any formal
consideration of Tellabs’ stock in committee meetings did not show procedural
imprudence in light of the committee members’ intimate knowledge of Tellabs,
and their continuous discussion of its business and future prospects in other
contexts. The court also held that plaintiffs failed to show that the investment was
substantively imprudent, as there was never any real threat of bankruptcy and
Tellabs reasonably expected its industry and business to rebound.
·
Benitz v. Humana, Inc., 2009 WL 3166651, 47 Empl. Benefits Cas. (BNA) 2441
(W.D. Ky. Sept. 30, 2009). The district court granted defendants’ motion to
dismiss in this putative class action arising out of Humana’s offering of an
unitized company stock fund in its defined contribution plan. Plaintiffs’ claims
stemmed from internal control and old software problems that had caused
miscalculations in the pricing of prescription drug plans and projected earnings.
The district court held that fiduciaries’ decision to invest in employer securities
are presumed reasonable and subject to review only for abuse of discretion.
While fiduciaries are not exempt from the duty to investigate whether an
investment decision is appropriate, the district court held that a failure to
investigate is actionable only if “an adequate investigation” would have shown a
reasonable fiduciary that the investment at issue was imprudent and that the
Page 18 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
existence of internal control and old software problems that caused the
miscalculations did not trigger a duty to investigate.
·
In re Computer Sciences Corp., 635 F.Supp.2d 1128, 47 Empl. Benefits Cas.
(BNA) 1542 (C.D. Cal. 2009). The district court granted defendants’ motion for
summary judgment on “stock drop” claims related to the alleged backdating of
stock options. On the day that an SEC backdating investigation was disclosed,
Computer Sciences’ stock value dropped 12%; however, most of this loss was
recouped within the next two weeks. Plaintiffs filed a class action alleging breach
of fiduciary duty claims relating to the holding of company stock in light of the
alleged backdating of company stock options and the movement of price of
company stock. The district court held that plaintiffs’ prudent investment claim,
should be evaluated not according to how the investment performed, but
according to how the fiduciary acted. The court found no fiduciary breach arising
from defendants’ failure to divest the stock fund of the Computer Sciences stock
upon learning of the SEC’s stock option backdating investigation.
·
In re Delphi Corp. Sec., Derivative, & ERISA Litig., 602 F.Supp.2d 810, 46 Empl.
Benefits Cas. (BNA) 1499 (E.D. Mich. 2009). The district court granted
defendants’ motion for summary judgment dismissing a class action alleging
breaches of fiduciary duty by an employer company, individual defendants, and
directed trustee, State Street, arising from the retention of Delphi stock in a 401(k)
plan during a period in which the value of the stock dropped precipitously. [What
was the gravamen of this case? ESOP? Employer stock? Just plain old stock
drop?] State Street had sold Delphi’s stock three days before Delphi filed for
bankruptcy. The district court found, under the DOL’s guidance in FAB 2004-03
(Dec. 17, 2004), that State was acting as a “directed trustee” and, under the
circumstances, had no duty to inquire as to the correctness of instructions from
other fiduciaries to retain the Delphi stock, which State Street was therefore
required to follow under the date of sale. State Street had closely monitored the
performance of Delphi stock from March 2005 through October 2005, and the
court agreed that State Street did not have reliable public information that showed
Delphi’s bankruptcy was imminent until the end of September 2005. Therefore,
the court held that State Street’s failure to sell the stock until October 5, 2005 was
not a breach of fiduciary duty.
·
In re Huntington Bancshares Inc. ERISA Litig., 620 F.Supp.2d 842, 45 Empl.
Benefits Cas. (BNA) 2773 (S.D. Ohio 2009). The district court granted
defendants’ motion to dismiss a class action alleging various breaches of fiduciary
duty related to the offering of a company stock fund under a 401(k) plan.
Plaintiffs alleged that defendants (the employer sponsor, its board of directors and
several plan committees) breached various ERISA fiduciary duties by offering the
option of investing in Huntington’s stock. Huntington’s stock declined in value
from $22 to $7 per share during the putative class period, during which time the
company allegedly suffered $1.5 billion in losses as a result of a merger that
exposed Huntington to the subprime market. In dismissing plaintiffs’ prudent
Page 19 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
investment claim, the district court observed that plaintiffs’ allegations concerning
the merger were “simply an attempt to second-guess Huntington’s business
decision and is not conduct governed by ERISA,” noting that Huntington’s stock
price “moved in tandem with the other regional banks in Huntington’s geographic
footprint over the Class period.” Id. at 849-52. The court concluded that nothing
had occurred to trigger a duty to investigate whether Huntington’s stock
continued to be an appropriate investment under the plan — that is, there was
nothing “akin to a ‘red flag’ of misconduct.” Id.
·
In re Pfizer, Inc. ERISA Litig., 2009 WL 749545, 46 Empl. Benefits Cas. (BNA)
1792 (S.D.N.Y. Mar. 20, 2009).
The district court denied in large part
defendants’ motion to dismiss a putative class action stemming from the offering
of company stock funds as investment options for a 401(k) plan, in light of
revelations relating to Pfizer’s marketing of two new drugs, Celebrex and Bextra,
which were later withdrawn by Pfizer following fraud claims. In declining to
dismiss the plaintiffs’ prudent investment claim, the district court held that
plaintiffs had alleged sufficient facts to render their claim plausible, even if it
were appropriate to consider the presumption of prudence at the pleading stage, to
support a conclusion that defendants should have been aware of the drug
controversy and conducted an inquiry with respect to the advisability of offering
the company stock funds.
·
Rogers v. Baxter Int’l, Inc., 2009 WL 3378510, 47 Emp. Benefits Cas. (BNA)
2476 (N.D. Ill. Sept. 28, 2009). The district court granted defendants’ 12(c)
motion for judgment on the pleadings dismissing breach of fiduciary duty claims
in a “stock drop” class action against the employer sponsor (Baxter) of a 401(k)
plan and various individual defendants. In dismissing the prudent investment
claim, the district court held that defendants had had no reason to investigate the
prudence of offering the stock fund, based on the company’s financial restatement
arising out of problems with a Brazilian subsidiary.
C.
Diversification
1. In General
In Young v. General Motors Investment Management Corp., 325 Fed.Appx. 31,
46 Empl. Benefits Cas. (BNA) 2278 (2d Cir. 2009), the Second Circuit affirmed the
dismissal of claims that plan fiduciaries breached their duty of diversification by offering
“undiversified single-equity funds that they ‘knew or should have known ... [were] too
risky and volatile [as] investment[s] for a pension plan ... designed to provide retirement
income.’” Id. at *33 (citation omitted). Emphasizing that ERISA’s diversification
provision “contemplates a failure to diversify claim when the plan is undiversified as a
whole,” the court held that plaintiffs’ diversification claims failed because they focused
only “on a few individual funds . . .” Id.
Diversification issues continue to arise in employer “stock drop” litigation:
Page 20 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
·
Bunch v. W.R. Grace & Co., 555 F.3d 1, 45 Empl. Benefits Cas. (BNA) 2505 (1st
Cir. 2009). The First Circuit affirmed summary judgment dismissing a “reverse”
stock-drop claim. Plaintiffs filed a class action suit challenging the sale of
employer stock — during a bankruptcy — by an independent fiduciary. The First
Circuit affirmed summary judgment, reasoning that the independent fiduciary,
State Street, with the assistance of experts, had thoroughly studied Grace’s
corporate health and concluded that divestment of stock was the only action
consistent with ERISA’s prudent fiduciary standard. In addition, the court
rejected plaintiffs’ argument that State Street’s decision to divest the plan of
company stock should be presumed imprudent because there is a presumption of
prudence in investing in company stock, finding it an inappropriate attempt to use
Moench’s rebuttable presumption of prudence as a sword against a prudent
fiduciary.
·
In re Computer Sciences Corp., 635 F.Supp.2d 1128, 47 Empl. Benefits Cas.
(BNA) 1542 (C.D. Cal. 2009). The district court granted defendants’ motion for
summary judgment on “stock drop” claims related to the alleged backdating of
stock options. On the day the SEC backdating investigation was disclosed,
Computer Sciences’ stock dropped 12%; however, most of this loss was recouped
within the next two weeks. Plaintiffs filed a class action alleging breach of
fiduciary duty claims relating to the holding of company stock in light of the
alleged backdating of company stock options and the movement of price of
company stock. In dismissing the prudent investment claim, the district court
held plaintiffs’ claim suffered from numerous defects, including that: plan
investments are made over a long-term horizon; and eliminating a company’s
stock as an investment option would have been a “clarion call” to the investment
world that the fiduciaries lacked confidence in the value of the stock, which
would have risked a catastrophic drop in Computer Sciences’ stock price.
2. Individual Account Plans
·
Benitz v. Humana, Inc., 2009 WL 3166651, 47 Empl. Benefits Cas. (BNA) 2441
(W.D. Ky. Sept. 30, 2009). The district court granted defendants’ motion to
dismiss in a putative class action arising out of Humana’s offering of a unitized
company stock fund as an investment option in its defined contribution plan.
Plaintiffs’ claims stemmed from internal control and old software problems that
caused miscalculations in pricing prescription drug plans and projected earnings.
In dismissing Plaintiffs’ breach of fiduciary duty claims, the district court held
that the plan at issue was an eligible individual account plan (“EIAP”) and that
EIAPs, like ESOPs, are entitled to an exemption from the duty to diversify. The
district court held that EIAP fiduciary decisions should be reviewed only for an
abuse of discretion, and that the fiduciaries’ decisions to invest in employer
securities are presumed reasonable.
Page 21 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
·
In re Harley Davidson, Inc., Sec. Litig., -- F.Supp.2d --, 2009 WL 3233747, 47
Empl. Benefits Cas. (BNA) 2618 (E.D. Wis. Oct. 8, 2009). The district court
granted defendants’ motion to dismiss under Fed. R. Civ. P. 12(b)(6) in a putative
class action suit stemming from Harley Davidson’s announcement that it had
“slashed” expected earnings and adjusted its projected earnings forecast.
Following the announcement, the value of Harley Davidson stock dropped from
$58.77 per share to $45.42 per share. Plaintiffs alleged various breaches of
fiduciary duty relating to the offering of Harley Davidson stock as an investment
option in the company’s defined contribution plans. In dismissing plaintiff’s
imprudent investment claim, the district court held that the plans at issue were
EIAPs and thus entitled to the same presumption of prudence as ESOPs. In light
of the presumption of prudence, the district court stated that a viable claim of
imprudence requires more than allegations that there were gaps between supply
and demand and a corresponding bad quarter, and the decline in stock price was
in no way indicative of a “chronic, deteriorating financial condition.” Id. at *11.
·
Johnson v. Radian Group, Inc., 2009 WL 2137241, 47 Empl. Benefits Cas.
(BNA) 2066 (E.D. Pa. July 16, 2009). The district court granted defendants’
motion to dismiss “stock drop” claims arising out of the continued offering of
Radian common stock as an investment option in Radian’s Savings Incentive Plan
following its loss of value as a result of the deteriorating conditions of the
subprime mortgage market and other investments. Radian provides mortgage
insurance and financial products and services to financial institutions, including
mortgage lenders. Plaintiffs had alleged that the continued offering of Radian
common stock was imprudent. In dismissing the claim, the court held that the
plan was an EIAP and thus entitled to the presumption of prudence articulated in
Moench. The court stated that the holdings in “Moench and Edgar stand for the
proposition that short-term financial difficulties do not create a duty to halt or
modify investments in an otherwise lawful fund that consists primarily of
employer securities.”
·
Jones v. NovaStar, 2009 WL 331553, 45 Empl. Benefits Cas. (BNA) 2784 (W.D.
Mo. Feb. 11, 2009). The district court denied defendants’ motion to dismiss
various fiduciary breach claims relating to a 401(k) plan participant’s investment
in NovaStar stock, which had declined in value 99% as a result of NovaStar’s
alleged “serious mismanagement and improper business practices” related to its
subprime business. The court concluded that plaintiff had “pleaded facts
indicating a precipitous decline in NovaStar stock and that defendants knew, or
should have known, of NovaStar’s impending collapse . . . . Though the evidence
will eventually show whether [plaintiff] can prove the allegations of Count I, she
has adequately pleaded facts overcoming any presumption of prudence applicable
to the NovaStar stock investments.”
·
Morrison v. MoneyGram Int’l, Inc., 607 F.Supp.2d 1003, 46 Empl. Benefits Cas.
(BNA) 1673 (D. Minn. 2009). The district court granted in part and denied in part
defendants’ motion to dismiss in a suit alleging various breaches of fiduciary duty
Page 22 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
against MoneyGram and various individual defendants stemming from the
offering of MoneyGram stock as an investment option in a 401(k) plan. Even
though the district court declined to dismiss the prudent investment claim, the
district court held that EIAPs are treated similar to ESOPs and therefore entitled
to the Moench presumption of prudence. However, the district court relied on the
Ford decision in holding that the standard for overcoming the presumption of
prudence is the “excessive-risk standard,” which plaintiffs had satisfied in their
complaint.
·
In re Pfizer, Inc. ERISA Litig., 2009 WL 749545, 46 Empl. Benefits Cas. (BNA)
1792 (S.D.N.Y. Mar. 20, 2009).
The district court denied in large part
defendants’ motion to dismiss in a putative class action lawsuit stemming from
the offering of company stock funds as investment options for a 401(k) plan, in
light of revelations relating to Pfizer’s marketing of two new drugs, Celebrex and
Bextra, which were later withdrawn by Pfizer following fraud claims. In
declining to dismiss the prudent investment claim, the district court held that the
Moench presumption of prudence is an evidentiary burden and should not be
decided on a motion to dismiss. In so holding, the court did not address the many
circuit and district court decisions rejecting this argument. The court also
determined that, even if it were appropriate to consider the presumption of
prudence at the pleading stage, plaintiffs alleged sufficient facts to render their
claim plausible under that presumption.
·
Shanehchian v. Macy’s, Inc., 2009 WL 2524562, 47 Empl. Benefits Cas. (BNA)
2052 (S.D. Ohio Aug. 14, 2009). The district court denied defendants’ motion to
dismiss stock drop claims brought against Macy’s for including a company stock
option in its 401(k) plan. Plaintiff had filed a putative class action lawsuit over
the offering of a company stock fund in light of the merger of Macy’s with May
Department Stores and the subsequent drop in price of company stock following
the merger. Although finding that the plan was an EIAP and exempt from the
duty to diversify, the district court declined to dismiss the prudent investment
claim because plaintiffs’ claim was not one of diversification but rather a claim
that any investment in company stock was imprudent in light of the
circumstances, which defendants knew or should have known, regarding the
problems associated with the merger. Even applying the presumption of prudence
at the pleading stage, the court held the prudent investment claim survived
because plaintiffs had pled sufficient facts to rebut the presumption.
D.
Action in Accordance With Plan Provisions
In Tibble v. Edison Int’l, et al., 639 F.Supp.2d 1074, 47 Empl. Benefits Cas.
(BNA) 1652 (C.D. Cal. 2009), the district court granted summary judgment to defendants
on plaintiffs’ claim that plan fiduciaries had violated the plan’s terms by allowing
revenue sharing to be used to offset the costs of recordkeeping services. At the outset,
the court noted the “peculiar” nature of plaintiffs’ claim because “the Plan suffered no
economic loss simply because revenue sharing was used to pay the cost” of
Page 23 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
recordkeeping. The court went on to hold that that the plan fiduciaries reasonably
interpreted a plan provision that stated that “[t]he cost of administration of the Plan will
be paid by [the plan sponsor]” to allow for the use of revenue sharing to offset
recordkeeping costs. Id. at 1097-1101. The court found nothing in the plan that
prohibited “the use of revenue sharing from the mutual funds to offset… recordkeeping
costs.” Id. at 1101. The court also noted that (i) during collective bargaining, there had
been “extensive” discussions about how revenue sharing from the plan’s mutual funds
would be used to offset recordkeeping costs; (ii) there had been numerous disclosures to
participants explaining that fees from the mutual funds were being used to reduce
recordkeeping costs, and the fiduciaries had received no objections to this arrangement;
and (iii) the use of revenue sharing did not directly harm participants. Id. at 1100.
The court also rejected plaintiffs’ claim that the fiduciaries had violated the plan’s
terms by allowing the plan’s trustee to retain float (interest on cash earned before it was
distributed to plan participants) as part of its compensation. Id. at 1102-03. The court
noted that nothing in the plan specifically prohibited fiduciaries from allowing the trustee
to retain float and, “the fact that [the trustee] retained the float did not necessarily inure to
the detriment of the Plan participants; [the trustee] simply earned interest on the cash it
held until the Plan participant cashed its check.” Id. The court further found that
plaintiffs “presented no evidence that [the trustee] unreasonably delayed issuing the
checks so that it could further capitalize on the float” and plaintiffs adduced no evidence
that the trustee’s retention of float “was inconsistent with the accepted practice in the
industry at the time.” Id. In the absence of any loss to plan participants, the court ruled
that “any decision by Defendants to allow [the trustee] to retain float was not a violation
of the Plan documents.” Id. at 1102-03, reaffirmed in subsequent op., 639 F.Supp.2d
1122, 1128 (C.D. Cal. 2009).
In the employer stock drop context, in In re Citigroup ERISA Litig., 2009 WL
2762708, 47 Empl. Benefits Cas. (BNA) 2025 (S.D.N.Y. Aug. 31, 2009), the district
court granted defendants’ motion to dismiss plaintiffs’ stock drop claims, which plaintiffs
had filed following the impact of the collapse of the housing market on Citigroup. In
dismissing the prudent investment claims, the court observed that the fiduciary breach
claims turned on an analysis of defendants’ authority over the stock funds, which in turn
required a close analysis of the plan terms. The court determined that defendants
generally were not acting in a fiduciary capacity by maintaining Citigroup stock as an
investment option because the plan terms stated that “the Citigroup Common Stock Fund
shall be permanently maintained.” Thus, the court reasoned, defendants had no
discretion to override the plan; indeed, the court concluded that eliminating the stock
fund investments would be akin to amending the plan, which was a settlor function to
which no fiduciary duties attach.
Other stock drop rulings include:
·
In re Harley Davidson, Inc., Sec. Litig., -- F.Supp.2d --, 2009 WL 3233747, 47
Empl. Benefits Cas. (BNA) 2618 (E.D. Wis. Oct. 8, 2009). The district court
granted defendants’ motion to dismiss under Fed. R. Civ. P. 12(b)(6) in a putative
Page 24 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
class action suit stemming from Harley Davidson’s announcements that it had
“slashed” expected earnings and adjusted its projected earnings forecast.
Following the announcement, Harley Davidson stock dropped from $58.77 per
share to $45.42 per share. Plaintiffs alleged various breaches of fiduciary duty
relating to the offering of Harley Davidson stock in the company’s defined
contribution plans. In dismissing Plaintiff’s imprudent investment claim, the
district court stated that a fiduciary risks liability for violating the terms of the
plan and divesting the plan of stock where a plan’s provisions require the offering
of employer securities.
·
Johnson v. Radian Group, Inc., 2009 WL 2137241, 47 Empl. Benefits Cas.
(BNA) 2066 (E.D. Pa. July 16, 2009). District court granted defendants’ motion
to dismiss “stock drop” claims in a putative class action arising out of the
continued offering of Radian common stock as an investment option in Radian’s
Savings Incentive Plan following its loss of value as a result of the deteriorating
conditions of the subprime mortgage market and other investments. Radian
provided mortgage insurance and financial products and services to financial
institutions, including mortgage lenders. Plaintiffs had alleged that the continued
offering of Radian common stock was imprudent. In dismissing the prudent
investment claim, the district court held that fiduciaries “do not have a duty to
depart from ESOP or EIAP plan provisions whenever they are aware of
circumstances that may impair the value of company stock.” Rather, the court
stated that “there should be ‘persuasive and analytically rigorous facts
demonstrating that reasonable fiduciaries would have considered themselves
bound to divest,’” quoting from Kirschbaum v. Reliant Energy, Inc., 526 F.3d 243
(5th Cir. 2008).
·
In re Washington Mut., Inc. Sec., Derivative & ERISA Litig., 2009 WL 3246994,
47 Empl. Benefits Cas. (BNA) 2505 (W.D. Wash. Oct. 5, 2009). The district
court denied in part and granted in part defendants’ motion to dismiss in a stock
drop class action against Washington Mutual and various individual defendants
stemming from the subprime mortgage fallout. In declining to dismiss the
prudent investment claim, the district court distinguished this case from other
employer stock drop cases by finding that the plan document had provided
defendants with discretion to remove the employer stock fund.
V.
Application of the Section 404 Fiduciary Standards
A.
Fiduciary Communications
2. Cases Where Participant Inquiry Was Not Required
In Solis v. Consulting Fiduciaries, Inc., 557 F.3d 772, 777-78, 46 Empl. Benefits
Cas. (BNA) 1294 (7th Cir. 2009), the Seventh Circuit held that a trustee who valued and
managed plan property during a plan’s forced termination, in which participants had the
option to receive cash and/or property for their vested benefits, had a duty to disclose to
Page 25 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
participants an offer to buy the plan property, so participants would have full information
about their options.
In Schornhorst v. Ford Motor Co., 606 F.Supp.2d 658, 666-68, 46 Empl. Benefits
Cas. (BNA) 2060 (E.D. Mich. 2009), the district court concluded that Ford had violated
ERISA by failing to disclose in the summary plan description of a welfare benefit plan,
that the plan would not pay accidental death benefits if a participant’s death was alcoholrelated. However, the court ruled that the participant’s widow was not entitled to an
award of benefits as a substantive remedy, observing that the “Sixth Circuit has
repeatedly held that a substantive award of benefits is not the appropriate remedy for a
violation of the ERISA notice and disclosure requirements in denial of benefits claims.”
Id. at 668-69. See also Larsen v. AirTran Airways, Inc., 2009 WL 4827522, at *8-*11
(M.D. Fla. Dec. 14, 2009) (holding AirTran breached its duties by failing to provide a
copy of the SPD, but there was no remedy for the negligent failure to disclose, because an
award of benefits is only proper if the nondisclosure impacted the benefits determination
or if there are aggravated circumstances, such as a “deliberate act intended to deceive
plaintiff and deprive him of necessary information”).
In Canestri v. NYSA-ILA Pension Trust Fund & Plan, 2009 WL 799216, at *5-*6,
46 Empl. Benefits Cas. (BNA) 2732 (D.N.J. Mar. 24, 2009), a district court held that
genuine issues of material fact precluded summary judgment as to whether a plan
representative, who was present when pension election forms were signed, had a duty to
inform a participant and his spouse that waiving the survivor annuity would not be
beneficial for them, where the representative knew that the participant was in ill health
and that the spouse was relying upon the representative to accurately complete the forms
and did not understand forms she was signing. Id.
3. The Requirement of Serious Consideration
The Third Circuit held that an employer had breached its fiduciary duty by failing
to tell potential retirees about the employer’s right to terminate the plan, even though
termination was not under “serious consideration.” Unisys Corp. Retiree Med. Benefits
ERISA Litig., 579 F.3d 220, 231, 47 Empl. Benefits Cas. (BNA) 1929 (3d Cir. 2009). In
contrast, the Ninth Circuit held there was no duty to advise of the employer’s right to
terminate the plan at retirees’ exit interviews unless a retiree inquired and the termination
was under serious consideration. Poore v. Simpson Paper Co., 566 F.3d 922, 927-28, 46
Empl. Benefits Cas. (BNA) 2446 (9th Cir. 2009).
4. Circuit Court Decisions in Common or Notable Factual
Settings
In the latest ruling in Unisys Corporation Retiree Medical Benefits ERISA
Litigation, 579 F.3d 220, 47 Empl. Benefits Cas. (BNA) 1929 (3d Cir. 2009), the Third
Circuit held that Unisys had breached its fiduciary duties by failing to adequately disclose
that it could terminate its retiree health plan, which offered low- or no-cost medical
insurance coverage. Human resources representatives had misrepresented the retirees’
Page 26 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
benefits by informing them, individually or in groups prior to retirement, as to the
retirement benefits without informing them the plan could be terminated. Id. at 231. The
court held that the possibility of plan termination was material information that Unisys
had a duty to communicate at the time it conveyed the other benefit information. Id.
Although the plan’s reservation of rights clause was in the SPD, the retirees did not
receive an SPD until after retirement. Id. Additionally, there was evidence that
employees did not understand that retirees’ benefits were provided under the same plan
as active employees’ benefits. Id. at 232. The Third Circuit found it irrelevant that
Unisys was not “seriously considering” terminating the plan when the retiree meetings
were held, three to five years before the subsequent actual termination of the plan. Id. at
231. Despite finding the breach, the court held that two of the fourteen retirees had failed
to prove reliance, where one was involuntarily terminated and another retired as part of a
settlement agreement. Id. at 233-34. As a remedy for the twelve other retirees, Unisys
was ordered to reinstate its former plan and was enjoined from reducing or terminating
the other retirees’ benefits going forward. Id. at 234-37. The court refused to award the
retirees damages or restitution of the profits that Unisys had gained due to the termination
of the plan seventeen years previously, reasoning that damages and restitution of profits
were not appropriate equitable relief under ERISA because the retirees could not point to
particular funds that rightfully belonged to them. Id. at 237-39.
In contrast, where the possibility of plan termination had been disclosed to
retirees in plan documents, the Ninth Circuit held there was no duty to advise of the
possibility of termination at retirees’ exit interviews – unless a retiree had inquired and
the termination was under serious consideration. Poore v. Simpson Paper Co., 566 F.3d
922, 927-28, 46 Empl. Benefits Cas. (BNA) 2446 (9th Cir. 2009); accord Brubaker v.
Deere & Co., --- F. Supp. 2d ----, 2009 WL 3378980, at *20-21 (S.D. Iowa Oct. 16,
2009) (holding retirees’ supervisors did not misrepresent that health benefits would be for
life, where the SPD notified of the right to amend or terminate the plan such that any
reliance upon any such statements could not be reasonable); Kerber v. Qwest Group Life
Ins. Plan, ---F.Supp.2d ----, 2009 WL 2710207, at *8-*11, 48 Empl. Benefits Cas. (BNA)
1487 (D. Colo. Aug. 25, 2009) (holding that plan documents did not misrepresent that life
insurance benefits would be for life, because they did not express an intent to continue
the current benefits indefinitely, where, e.g., although the SPD said the benefits would be
“continued without further reduction,” it also contained an express reservation of rights
clause).
Similarly, in Scharff v. Raytheon Co. Short Term Disability Plan, 581 F.3d 899,
907-08, 47 Empl. Benefits Cas. (BNA) 2300 (9th Cir. 2009), the Ninth Circuit held that
there is no duty to affirmatively inform a participant of a plan-imposed limitations period
on benefit claims that is disclosed in the plan’s SPD. The court explained that there is no
duty to disclose anything that ERISA does not expressly require to be disclosed. It noted
that the Fifth and Eighth Circuits have held that there is no duty to separately disclose
provisions that are contained in the SPD. Id. at 908.
In Mondry v. American Family Mutual Insurance Co., 557 F.3d 781, 807-08, 46
Empl. Benefits Cas. (BNA) 1403 (7th Cir. 2009), the Seventh Circuit held that a
Page 27 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
participant was entitled to receive the plan’s internal claims guidelines and ruled that a
plan administrator could have breached its duty to disclose them by failing to diligently
seek them from the claims’ administrator, where that failure could have contributed to the
claim administrator’s delay in producing them. The related claim against the claims
administrator was properly dismissed because only the plan administrator has a duty to
disclose plan documents. Id. at 808.
In Amara v. CIGNA Corp., 2009 WL 3199061, at *1, 47 Empl. Benefits Cas.
(BNA) 2709 (2d Cir. Oct. 6, 2009) (unpublished), the Second Circuit affirmed that there
was no duty to disclose a plan amendment concerning a cash balance plan conversion to
employees who were rehired after it became effective.
5. Other Issues
District courts have held that there could be a duty to disclose the wear-away
effect of a cash balance conversion. See, e.g., Osberg v. Foot Locker, Inc., No. 07-1358,
2009 WL 2971834, at *10-*11, 47 Empl. Benefits Cas. (BNA) 2249 (S.D.N.Y. Sept. 16,
2009) (refusing to dismiss claim for SPD’s alleged failure to adequately disclose “wear
away” effect of plan’s new cash balance formula, i.e., that some participants’ benefits
under the new formula would be less than under the old formula and could remain so for
a lengthy period of time); Bilello v. JP Morgan Chase Ret. Plan, 649 F.Supp.2d 142,
161-67, 48 Empl. Benefits Cas. (BNA) 1224 (S.D.N.Y. 2009) (refusing to dismiss claim
for misrepresentation of the “wear-away” effect from conversion to cash balance plan
where participant alleged that several communications he received from the plan were
misleading, including his annual account statements, which indicated that his
hypothetical cash account balance was increasing without indicating that it was less than
his protected benefit from the pre-cash-balance plan); see also Tomlinson v. El Paso
Corp., No. 04-2686, 2009 WL 151532, at *6-*7, 45 Empl. Benefits Cas. (BNA) 2534 (D.
Colo. Jan. 21, 2009) (granting summary judgment because participants could not show
reliance, where they had not consulted the SPD regarding the cash balance plan
conversion, or prejudice, where they had learned of the effects of the conversion from
other sources, such as individualized account statements comparing each participant’s
projected account balance and benefits under the old and new plans through age 65 and
showing that the frozen account balance exceeded the new balance even at age 65, and an
employer-distributed “Employee Update” that stated that “[u]nder the cash balance plan,
employees will earn future benefits at a lower rate than under the current plan.”).
Courts continue to hold that it is unreasonable to rely on estimates of benefits,
even when they are erroneous. For example, in Burns v. Marley Co. Pension Plan, 2009
WL 3233052, at *5-*6, 46 Empl. Benefits Cas. (BNA) 2381 (E.D.N.Y. Oct. 2, 2009), the
court held that a participant could not reasonably have relied on the years of service
shown as credited to him in his official “Pension Statement” from the plan, where it
stated (six times) that the pension benefit calculations shown on the statement were
“estimates” and that the amount of his final benefits would be calculated at termination,
based on actual years of service, and could be higher or lower. The court also held the
employer had no affirmative duty to accurately inform the participant of his actual years
of service. Id. at *6-*7. See also Otero v. Nat’l Distrib. Co., Inc., 627 F. Supp. 2d 1232,
Page 28 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
1238-44 (D.N.M. 2009) (granting summary judgment for defendants on claim that
administrator’s letter stating participant would be eligible for LTD benefits breached
fiduciary duties and supported equitable estoppel, where participant was clearly ineligible
under plan terms).
On the other hand, courts have held that erroneous estimates precluded
recoupment of overpaid benefits. E.g., Phillips v. Brink’s Co., 632 F.Supp.2d 563, 574,
47 Empl. Benefits Cas. (BNA) 1377 (W.D. Va. 2009) (holding plan could not collect
overpayment of disability payments resulting from administrative committee’s negligent
approval of incorrect benefit calculation because committee had breached its duty of
loyalty and its duty to communicate accurately). In Bocchino v. Trustees of District
Council Ironworkers Funds of Northern New Jersey, 336 F. App’x 197, 200-01, 47 Empl.
Benefits Cas. (BNA) 1594 (3d Cir. 2009), the Third Circuit affirmed the dismissal of a
claim based on an SPD’s failure to disclose a delayed retirement option that provided
enhanced pension benefits, finding that plaintiff had failed to prove reliance where he
was not aware of the potential enhanced benefits when he chose to retire and had retired
expecting a smaller pension than he ultimately received. The participant was not entitled
to rely on erroneous benefit estimates or payments, although the plan could reduce his
future payments to the proper amount, but the participant did not have to return the prior
overpayments. Id. at 199-201.
In contrast, where the employer/administrator not only provided erroneous
estimates of benefits (in that they had based the benefit calculations on employer
contributions that were not made), but also made false representations in response to
inquiries about the unpaid contributions, the employer was found to have breached his
fiduciary duty and was held personally liable for the unpaid contributions. Safran v.
Donagrandi, 2009 WL 230536, at *3-*4, 46 Emp. Benefits Cas. (BNA) 1054 (E.D.
Mich. Jan. 30, 2009).
Claims continue to fail where there was no fiduciary status or communication.
See, e.g., Briscoe v. Preferred Health Plan, Inc., 578 F.3d 481, 486, 47 Empl. Benefits
Cas. (BNA) 2020 (6th Cir. 2009) (affirming that a plan administrator had no duty to warn
participants of the plan’s underfunding, where the administrator was a fiduciary only as
to assets within his control – not as to plan management or the $300,000 worth of
benefits that went unpaid following employer’s bankruptcy); Faulman v. Sec. Mut. Fin.
Life Ins. Co., 2009 WL 4367311, at *3-*4, 48 Empl. Benefits Cas. 1356 (3d Cir. Dec. 3,
2009) (unpublished) (affirming that a life insurance broker did not owe a duty to disclose
that the employer’s contributions to the plan for its life insurance policy were not tax
deductible, where it was a fiduciary only as to the policy, not as to the contributions
(because they were paid directly to the plan)); Stahly v. Salomon Smith Barney, Inc., 319
Fed.App’x 654, 657 (9th Cir. 2009) (unpublished) (investment advisor was not a
fiduciary and, thus, had no duty to, inter alia, disclose status of investment manager’s
investments to trustees). On the other hand, a district court noted that fiduciary status is a
fact-intensive inquiry and stated: “It is typically premature to determine a defendant’s
fiduciary status at the motion to dismiss stage of the proceedings.” Banks v. Healthways,
Page 29 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
Inc., 2009 WL 211137, at *4, 45 Empl. Benefits Cas. (BNA) 2640 (M.D. Tenn. Jan. 28,
2009).
Courts continue to find that certain state law claims are not preempted by ERISA.
E.g., Hausmann v. Union Bank of Cal., N.A., 2009 WL 1325810, at *4-6, 47 Empl.
Benefits Cas. (BNA) 1558 (C.D. Cal. May 8, 2009) (holding claims alleging
misrepresentations as to the tax deductibility of contributions to the plan were not
preempted); U.S. Sugar Corp. Litig., 2009 WL 2460770, at *16-*19, 47 Empl. Benefits
Cas. (BNA) 1461 (S.D. Fla. Apr. 28, 2009) (holding claims based on failure of directors
and others to disclose offer to purchase ESOP shares were not preempted).
Courts continue to hold that claims accrue on the date of the alleged
nondisclosure or misrepresentation, even if participants did not learn of their claim until
later. See, e.g., Olivo v. Elky, 646 F.Supp.2d 95, 101-02, 48 Empl. Benefits Cas. (BNA)
1312 (D.D.C. 2009) (dismissing as untimely claims for failure to inform participants they
were eligible to participate in pension plan because their suit was not filed within six
years after they became eligible to participate – the date on which the duty to disclose
was owed, rejecting argument that the failure to inform was a continuing violation until
plaintiffs were notified of their eligibility because it was an initial breach with continuing
effects rather than multiple breaches of a duty, and noting no fraud or concealment had
been alleged that could cause ERISA’s discovery rule to apply).
With many plans in financial trouble, participants have alleged breaches related to
communications about facts that could affect the plan’s financial condition and ability to
pay benefits, with mixed success. E.g., Frulla v. CRA Holdings, Inc., 596 F.Supp.2d 275,
284-85, 45 Empl. Benefits Cas. (BNA) 2291 (D.Conn. 2009) (refusing to dismiss claim
based on misrepresentations on Form 5500 reporting plan’s deteriorating financial
condition that led to increase in participant contribution amounts); Tullis v. UMB Bank,
N.A., 640 F.Supp.2d 974, 981-83, 47 Empl. Benefits Cas. (BNA) 1645 (N.D. Ohio 2009)
(holding plan’s directed trustee had no duty to inform participants of possible
malfeasance by the plan’s investment advisor, where the trustee knew the SEC had
obtained a temporary restraining order against the advisor’s firm but continued to honor
his instructions regarding plan investments; thus, participants were sufficiently informed
and exercised control over their investments such that the § 404(c) safe harbor defense
applied to bar recovery for their claim); Cook v. Jones & Jordan Eng’g, Inc., 2009 WL
37376, at *9, *10, 45 Empl. Benefits Cas. (BNA) 2580 (S.D. W.Va. Jan. 7, 2009)
(holding employer and officers/administrators breached their duties by failing to inform
participants of plan’s failure to pay premiums, which resulted in the denial of benefits;
denying summary judgment as to claims that plaintiff’s supervisor (and engineering
company’s officer and plan’s co-administrator) had misrepresented that a medical
coverage termination notice was a mistake or misunderstanding; that if coverage had
lapsed the company would pay instead; and that the company was cooperating with the
DOL).
In the fee context, courts have continued to reach different results as to whether
revenue-sharing and other fee-related information should be disclosed. In Hecker v.
Page 30 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
Deere & Co., 556 F.3d 575, 585-86 (7th Cir.) (“Hecker I”), pet. for reh’g and reh’g en
banc denied, 569 F.3d 708 (7th Cir. 2009) (“Hecker II”), pet. for cert. filed (U.S. Oct. 14,
2009), the Seventh Circuit rejected plaintiffs’ disclosure claim, holding that there is no
ERISA duty to affirmatively disclose revenue sharing arrangements in mutual fund
investment options offered under a 401(k) plan as long as total “expense ratios” are
disclosed. 556 F.3d at 585-86. The court also rejected plaintiffs’ claims that plan
participants had been misled through SPD supplement statements that allegedly gave “the
impression that Deere was paying the administrative costs of the Plans, even though in
reality the participants were paying through the revenue sharing system we have
described.” Id. at 585. The court emphasized that, in fact, “the participants were told
about the total fees imposed by the various funds, and the participants were free to direct
their dollars to lower-cost funds if that was what they wished to do. The SPD
supplements told participants to look to the fund prospectuses for detailed information on
fund-level expenses, and the prospectuses in fact furnished that information.” Id. While
noting that Deere “may not have been behaving admirably by creating the impression that
it was generously subsidizing its employees’ investments by paying something to Fidelity
Trust when it was doing no such thing,” the court found that “the Complaint does not
allege any particular dollar amount that was fraudulently stated.” Id. Further, “[h]ow
Fidelity Research decided to allocate the monies it collected (and about which the
participants were fully informed) was not, at the time of the events here, something that
had to be disclosed.” Id.
The court also found that Deere had not omitted any material information in its
disclosures to participants because Deere had disclosed the total fees for the funds and
had directed participants to the fund prospectuses for fund-level expense information. In
the view of the Seventh Circuit, “[t]he total fee, not the internal, post-collection
distribution of the fee, is the critical figure for someone interested in the cost of including
a certain investment in her portfolio and the net value of that investment . . . . The later
distribution of the fees by Fidelity [Management] is not information the participants
needed to know to keep from acting to their detriment . . . . The information is thus not
material, and its omission is not a breach of Deere’s fiduciary duty.” Id. at 586. These
rulings were not challenged in plaintiffs’ petition for rehearing and rehearing en banc.
Similarly, in Taylor v. United Technologies Corp., 2009 WL 535779, at **12-13,
46 Empl. Benefits Cas. (BNA) 1935 (D. Conn. Mar. 3, 2009), aff’d, 2009 WL 4255159,
48 Empl. Benefits Cas. (BNA) 1193 (2d Cir. Dec. 1, 2009) (summary order), the court
granted summary judgment for defendants on claims of alleged fiduciary
misrepresentations regarding revenue sharing of administrative and recordkeeping fees.
2009 WL 535779, at **12-14. The court ruled that the fiduciaries had not misrepresented
the fee arrangements because the total expense ratios for each mutual fund were disclosed
to plan participants, as were prospectuses, which disclosed “the portions of the total
expenses used for investment management, distribution services and other administrative
fees.” Id. at *12. Alternatively, the court found that the information was immaterial, as
plaintiffs had testified in their depositions that they had made their investment decisions
based on returns and risk, not the investment expenses and fees challenged in their
complaint. Id. at *13. The Taylor court also held that the fiduciaries had not breached
their disclosure duties by representing that the plan’s actively-managed funds had a
Page 31 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
higher expense ratio because of their superior investment performance. Those claims
were premised on plaintiffs’ prudence challenge to the plan’s inclusion of activelymanaged funds in the first instance, which the court rejected on the merits (see supra
discussion at Part IV.B). Id. at *13.
On the other hand, in Braden v. Wal-Mart Stores, Inc., 2009 U.S. App. LEXIS
25810, **30-35, 48 Empl. Benefits Cas. (BNA) 1097 (8th Cir. Nov. 25, 2009), the Eighth
Circuit reversed a district court’s 12(b)(6) dismissal of claims that plan fiduciaries had
failed to provide participants with complete and accurate information about (i) the plan’s
investment options and the process by which they were selected; and (ii) revenue-sharing
payments made by mutual fund companies to the plan’s trustee. Id. at *30. The Eighth
Circuit disagreed with the district court’s ruling that ERISA does not require the
disclosure of revenue sharing and that the information plaintiff claimed to be lacking
from plan disclosures (e.g., that the funds charged higher fees than and underperformed
comparable alternatives, that the plan’s fees were paid from plan assets, and that the plan
offered only retail-class mutual funds, although it had access to cheaper institutional-class
funds) was “immaterial.” Id. at *31.
In the court’s view, plaintiff’s allegations that the revenue-sharing payments
“corrupted the fund selection process – that each fund was selected for inclusion in the
Plan because it made payments to the trustee, and not because it was a prudent
investment, . . . [i]f true, . . . could influence a reasonable participant in evaluating his or
her options under the Plan.” Id. at 34. . The court further noted that “ERISA’s duty of
loyalty may require a fiduciary to disclose latent conflicts of interest which affect
participants’ ability to make informed decisions about their benefits.” Id. While the
court acknowledged that “there may be no per se duty to disclose” revenue-sharing
payments, “that conclusion is not dispositive here . . .[and] . . . materiality is a fact and
context sensitive inquiry.” Id.
The court ultimately found that plaintiff had sufficiently stated a claim based on
failure to disclose information about plan fees because “[a] reasonable trier of fact could
find that failure to disclose this information would mislead a reasonable participant in the
process of making investment decisions under the Plan.” Id. at *33. The court went on
to suggest that “[p]articipants might conclude in light of this information that Plan funds
were not selected using appropriate criteria and might therefore direct their investments
toward other options.” Id. (internal citations omitted).
In Shirk v. Fifth Third Bancorp, 2009 WL 3150303, *6, 47 Empl. Benefits Cas.
(BNA) 2523 (S.D. Ohio Sept. 30, 2009), the district court relied on the breadth and
substance of plan-related disclosures in ruling that plaintiffs’ fiduciary breach claims
relating to the fees and costs of six investment options were barred by ERISA’s threeyear statute of limitations. The court emphasized that participant communications,
prospectuses, semi-annual reports and annual reports had been provided or made
available to plan participants as early as November 2003 and had disclosed “the fees and
investment-related expenses for each of the Fifth Third Funds…” Id. For example, plan
prospectuses “plainly delineated the fees and expenses for each of the Fifth Third Funds
in a section entitled ‘Shareholder Fees and Fund Expenses.’ This section included fee
Page 32 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
tables which listed the total fees and expenses for each fund and delineated the total
annual fund operating expenses and net expenses.” Id. The court also noted that “the
semi-annual and annual reports for the Fifth Third Funds further itemized the fees and
investment-related expenses,” including investment advisor fees. Id. Finally, the court
noted that plaintiffs and other plan participants “received numerous Plan communications
about the 401(k) fund offerings, specifically and conspicuously directing them to easily
accessible information about fees and expenses for the Fifth Third Funds” as early as
2003 and “no later than March 5, 2004.” Id. Based on this combination of disclosures,
the court held that plaintiffs had “actual knowledge” of the facts giving rise to their
claims more than three years before filing suit, and plaintiffs’ claims were barred by
ERISA’s three-year statute of limitations. Id.
B.
Selection and Monitoring of Service Providers
1. Excessive Fee Litigation.
District courts again this year confronted issues regarding the duty to select and
monitor service providers in excessive fees cases, and the appellate courts had the
opportunity to address them for the first time. In addition to raising issues concerning
ERISA’s prudence standard, these cases also typically involved alleged breaches of other
ERISA standards, such as the exclusive purpose requirement and the prohibited
transaction rules. The application of ERISA standards other than the selection and
monitoring of service providers and prohibited transactions are discussed elsewhere in
the Main Volume and these materials.
The Second Circuit reviewed two excessive fees cases and upheld summary
dismissal in each case. In Young v. General Motors Inv. Mgmt. Corp., 325 Fed.Appx. 31,
46 Empl. Benefits Cas. (BNA) 2278 (2d Cir. 2009), the Second Circuit reviewed an
excessive fee claim that was dismissed by the lower court as time-barred. Characterizing
the claim as one of imprudent investment, the court applied the standard for excessive
fees articulated by the Investment Company Act; i.e., that the fee was so
disproportionately large that it bore no reasonable relationship to the services rendered
and could not have been the product of arm’s-length bargaining. Given the absence of
allegations showing that the challenged fees were excessive to relation to the services
rendered or any other factors relevant to determining that those fees were excessive under
the circumstances, the Second Circuit held that plaintiffs had failed to state a claim upon
which relief could be granted. In Taylor v. United Tech. Corp., 2009 U.S. App. LEXIS
26068, 48 Empl. Benefits Cas. (BNA) 1193 (2d Cir. Dec. 1, 2009), upholding the district
court’s summary dismissal of claims based on allegedly excessive recordkeeping and
administrative fees and excessive investment management and brokerage fees paid by
401(k) plan fiduciaries, the Second Circuit stated simply that it agreed with the lower
court’s "thorough and well-reasoned decision". The district court had granted summary
judgment on both claims, finding no evidence that the recordkeeping and administrative
fees were materially unreasonable and beyond the market rate and rejecting plaintiffs’
contention that the fiduciaries had not sufficiently investigated the investment options
selected for the 401(k) plan. To the contrary, the court found that the fiduciaries had
undertaken an appropriate selection process, including consideration of the fees charged
Page 33 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
by the various fund options and the past returns of each fund net of its management
expenses.
Cases decided in 2009 involving excessive fee claims related to service providers
addressed the following issues::
·
Fiduciary status of service provider:
o In Hecker v. Deere & Co., 556 F.3d 575, 45 Empl. Benefits Cas. (BNA) 2761
(7th Cir. 2009) (“Hecker I”), pet. for reh’g and reh’g en banc denied, 569
F.3d 708, 47 Empl. Benefits Cas. (BNA) 1097 (7th Cir. 2009) (“Hecker
II”), pet. for cert. filed (U.S. Oct. 14, 2009), the Seventh Circuit affirmed
the dismissal of claims against two Fidelity defendants (Fidelity Trust
Management Company (“Fidelity Trust”) and Fidelity Management and
Research Company (“Fidelity Management”)) and rejected plaintiffs’
allegations that Fidelity defendants were fiduciaries on two grounds. First,
the court held that the Fidelity entities lacked “the authority to delete and
substitute mutual funds from the plan without seeking approval from the
named fiduciary,” and merely “played a role” in the selection of plan
funds by recommending Fidelity funds to Deere as investment options,
which was “not enough to transform a company into a fiduciary.” Hecker
I, 556 F.3d at 584. In the court’s view, “[m]any people help develop and
manage benefit plans – lawyers and accountants, to name two groups – but
despite the influence of these professionals we do not consider them to be
Plan fiduciaries.” Id. (citations omitted)). Second, the court found that
the Fidelity entities’ exercise of discretion in deciding how to allocate fees
through revenue sharing did not constitute control over “plan assets”
because the fees collected by Fidelity Management were not plan assets
under Section 401(b)(1) of ERISA, 29 U.S.C. § 1101(b)(1), as they were
drawn from the assets of the mutual funds: “[o]nce the fees are collected
from the mutual fund’s assets and transferred to one of the Fidelity
entities, they become Fidelity’s assets again, not the assets of the Plans.”
556 F.3d at 584 (citation omitted). The court reaffirmed these rulings in
denying plaintiffs’ petition for rehearing and rehearing en banc. Hecker
II, 569 F.3d at 711.
o See also Taylor v. United Tech. Corp., 2009 WL 535779, 46 Empl.
Benefits Cas. (BNA) 1935 (D. Conn. Mar. 3, 2009) (holding that
plaintiffs’ sub-transfer fees claim, based on two-part test to determine
whether plan assets include items held by defendants as set forth in
Haddock v. Nationwide Fin. Servs., 419 F.Supp.2d 156, 36 Empl. Benefits
Cas. (BNA) 2953 (D. Conn. 2006), failed because plan record keeper was
not a fiduciary; the court also found that plaintiffs’ claim failed because
plaintiffs did not proffer evidence that record keeper’s receipt of its
negotiated base fee and sub-transfer agent fees were materially
unreasonable and because defendants showed that it had evaluated
recordkeeping proposals according to base fee amounts and income
Page 34 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
received from mutual funds), aff’d, 2009 WL 4255159, 48 Empl. Benefits
Cas. (BNA) 1193 (2d Cir. Dec. 1, 2009) (summary order).
o But see Haddock v. Nationwide Fin. Servs., 2009 U.S. Dist. LEXIS
103837 (D. Conn. Nov. 6, 2009), in which the district court – granting
plaintiffs’ motion for class certification – found that the issuer of group
and individual variable annuity contracts held by ERISA plans could be
found to be a fiduciary because it had held “billions of dollars of plan
assets under its authority and control” and was “charged with selecting the
mutual funds that would then be made available to the Plans and
participants as investment options.” Id. at **87-90.
·
Prohibited transactions: See Braden v. Wal-Mart Stores, Inc., 2009 U.S. App.
LEXIS 25810, 45 Empl. Benefits Cas. (BNA) 1097 (8th Cir. Nov. 25, 2009)
(reversing dismissal of claim that plan fiduciaries had engaged in impermissible
revenue sharing and kickback payments, finding district court wrongly
placed “the burden of pleading facts showing that the revenue sharing payments
were unreasonable in proportion to the services rendered” on plaintiff when
ERISA § 408’s statutory exemptions “are defenses which must be proven by the
defendant”); Gipson v. Wells Fargo & Co., 2009 U.S. Dist. LEXIS 20740, 46
Empl. Benefits Cas. (BNA) 1391 (D. Minn. Mar. 13, 2009) (declining to dismiss
prohibited transaction claim against plan fiduciary for payment of mutual fund
management fees, rejecting defendants’ assertion that complaint failed to
affirmatively allege lack of compliance conditions of class exemption and finding
sufficient that plaintiffs alleged that plan fiduciaries had had “dealings with the
investment company on terms that are less favorable than between the investment
company and any other shareholder” (citing PTE 77-3, 42 Fed. Reg. 18, 734
(1977)); Tibble v. Edison Int’l, 639 F.Supp.2d 1122, 1124-27, 47 Empl. Benefits
Cas. (BNA) 2363 (C.D. Cal. 2009) (dismissing claim that plan fiduciaries had
caused plan to engage in prohibited transaction under ERISA section 406(a)(1)
and (b)(1) by allowing trustee to retain “float;” plan was not a party to the
recordkeeping contract between plan sponsor and trustee, and the alleged failure
to act was not a “transaction” that could give rise to a violation of section
406(a)(1) – “[t]he failure to recapture float is not the kind of commercial bargain
contemplated by the statute that ‘involve uses of plan assets that are potentially
harmful to the plan’”; further, plaintiffs failed to show that defendants had dealt
with the assets of the plan for their own interests with respect to float within the
six-year statute of limitations period and therefore could not state a violation of
ERISA section 406(b)(1)) (internal citations omitted).
The DOL also released guidance this past year germane to issues facing plans and
their service providers. On October 23, 2009, the DOL released guidance on how to
complete the new Schedule C, which is part of the Form 5500 Series and which must be
used for plan years beginning on or after 1/1/2009 to report both compensation that a
service provider receives directly from the plan or plan sponsor and indirect
compensation that a service provider receives in connection with the plan from other
parties. See Supplemental Frequently Asked Questions About the 2009 Schedule C
Page 35 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
(DOL, Oct. 23, 2009). The guidance takes the form of answers to 25 “Frequently Asked
Questions” (“FAQs”) about the new Form 5500 Schedule C, which supplement both the
instructions to Schedule C and the FAQs previously released by the DOL in July 2008.
Id. at Q1. The new FAQs specifically provide that:
·
Promotional items of insignificant intrinsic value – such as branded mugs and
calendars, greeting calendars and plaques – are generally not considered to be
reportable compensation.
·
A person’s position or relationship with the plan determines whether that person’s
compensation is reportable on Schedule C.
·
Eligible indirect compensation may include mutual fund revenues (like 12b-1
fees, sub-transfer fees and shareholder services fees) paid to a plan record keeper
through an agent of a mutual fund or other intermediary (rather than directly by
the mutual fund itself). Moreover, an alternative reporting option for eligible
indirect compensation is provided on the Schedule C, but certain requirements
must be met.1
·
The 2009 good-faith safe harbor (set forth in the July 2008 FAQs) is available
only where a service provider makes a good-faith effort to collect and provide the
required information to the plan administrator, fails to collect all such information
despite its best efforts, and reports all information it does collect even if such
information is incomplete. The FAQs indicate that the DOL expects plan
administrators to contact the plan’s service providers who rely on the 2009 safe
harbor to ascertain the steps that service providers are taking to meet the reporting
requirements in subsequent years.
·
The plan’s investment charges, such as redemption fees, contingent deferred sales
charges (defined by the FAQs as “back-end or deferred sales loans commissions
investors pay when they redeem mutual fund shares or other investments”),
market value adjustments and surrender/termination charges, are reportable
compensation on Schedule C only to the extent such fees, charges or expenses are
received and retained by a plan service provider.
·
Fees paid to service providers under a bundled arrangement must be separately
reported.
·
Health and welfare plans subject to the Schedule C filing requirement must report
indirect service provider compensation, but if a sponsor pays all of the direct
See Frequently Asked Questions About the 2009 Schedule C (DOL, July 2008) at Q2
(“Although direct compensation paid by the plan should be reported based on the plan’s
year, the amount or estimate of indirect compensation or the formula used to calculate
indirect compensation may be based for Schedule C reporting purposes on a service
provider’s fiscal or other reporting year that ends with or within the plan year, as long as
the selected method is used consistently from year to year”).
1
Page 36 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
expenses of an unfunded, self-insured welfare plan and receives no
reimbursement from the plan, the plan may qualify for a limited exception from
filing a Schedule C and therefore would not need to report revenue sharing among
its service providers.
On December 4, 2009, the DOL issued Advisory Opinion No. 2009-04A, which
responded to a request for guidance as to whether the assets of target-date or lifecycle
mutual funds constitute “plan assets” of investing employee benefit plans, and whether
investment advisers to such mutual funds are fiduciaries to the investing plans under
ERISA. The DOL noted that ERISA Section 3(21)(B) provides that a plan’s investment
in a registered investment company “shall not by itself cause such investment company
or such investment company’s investment adviser or principal underwriter to be deemed
to be a fiduciary or a party in interest” unless the investment company “acts in connection
with the plan.” DOL Adv. Op. 2009-04A at 1. The DOL also stated that ERISA Section
401(b)(1) provides that when a plan invests in a security issued by a company registered
under the Investment Company Act of 1940, “the assets of such plan shall be deemed to
include such security but shall not, solely by reason of such investment, be deemed to
include any assets of such investment company.” Id. The DOL cautioned, however, that
ERISA’s mutual fund exclusion is not “absolute,” as it does not apply to a fiduciary’s
decision to invest plan assets in a mutual fund or to a situation in which a mutual fund
investment adviser is a plan fiduciary for a reason other than the plan’s investment in the
securities of his or her investment company. Id. at 2. In response to the direct question,
the DOL stated:
[T]here is nothing in section 3(21)(B) or section 401(b)(1)
of ERISA that suggests that a registered investment
company’s investment in the shares of affiliated mutual
funds would, by itself, affect the application of the Act’s
exclusion. Accordingly, the fact that a target-date or
lifecycle mutual fund’s assets consist of shares of affiliated
mutual funds does not, on that basis alone, make the assets
of the target-date or lifecycle mutual fund “plan assets” of
investing employee benefit plans or the investment advisers
to such mutual funds fiduciaries to the investing plans
under ERISA.
Id.
C.
Collections
The DOL’s Field Assistance Bulletin (FAB) No. 2008-01, issued on February 1,
2008, addressed the issue of whether a multiemployer plan could absolve trustees from
responsibility for collecting contributions from employers required to contribute under
the plan and trust documents. The Bulletin first analyzed whether required contributions
were themselves plan assets, concluding: 1) contributions withheld from wages or paid to
an employer become plan assets on the earliest date on which they can be segregated
from the employer’s general assets; 2) employer contributions become plan assets only
Page 37 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
when the contributions have been made to the plan, unless the plan documents provide
otherwise; but 3) the claim for delinquent contributions becomes a plan asset when the
contributions are due. The DOL Bulletin concluded that, because a trustee’s duties
include preservation and maintenance of plan assets, ERISA requires that the named
fiduciary of a plan, including a multiemployer plan, must ensure that the responsibility to
collect contributions owing to the plan is properly assigned to a trustee or investment
manager.
The courts have generally followed FAB No. 2008-01. E.g., Holdeman v. Devine,
572 F.3d 1190, 47 Empl. Benefits Cas. (BNA) 1397 (10th Cir. 2009) (failure to consider
appropriate actions to collect delinquent contributions is a fiduciary breach, although
there is no duty to take any particular action); Rahm v. Halpin, 566 F.2d 286 (2d Cir.
2009) (employer is not a plan fiduciary due to mere failure to pay employer
contributions because contributions become plan assets only when contributed).
However, courts have recognized that a fiduciary may also have a responsibility beyond
the collection of delinquent contributions to ensure that an employer-sponsor funds a
plan. In L.I. Head Start Child Dev. Serv., Inc. v. Econ. Opportunity Comm’n of Nassau
County, Inc., 634 F.Supp.2d 290, 47 Empl. Benefits Cas. (BNA) 2787 (E.D.N.Y. 2009),
the district court found that participating employers in a multiemployer health benefit
fund that were each a fiduciary with respect to that fund breached their duty to administer
the plan solely in the interest of the fund participants by failing to adequately collect
delinquent premiums and to increase their premiums to remedy the resulting shortfall of
monies for benefits payments. Frulla v. CRA Holdings, Inc., 596 F.Supp.2d 275, 45
Empl. Benefits Cas. (BNA) 2291 (D. Conn. 2009) (employer has a contractual rather than
a fiduciary duty to fund a welfare benefit plan, but participant had successfully stated a
claim for breach of fiduciary duty based on alleged failure to investigate how to prevent
unfunded welfare benefit plan from becoming insolvent due to the employer-sponsor’s
inability to pay future benefits).
In contrast, in Solis v Plan Benefit Services, Inc., 620 F. Supp. 2d 131, 46 Empl.
Benefits Cas. (BNA) 1691 (D. Mass. 2009), the district court relied on FAB No. 2008-01
to find that the named employer sponsor and fiduciary of a multiemployer plan had
committed a breach of fiduciary duty by failing to make required contributions to the
plan. DOL had brought suit against the named sponsor and fiduciary of a multi-employer
retirement benefit plan (“PBS”). The court found that the FAB was “entitled to respect”
as an “opinion” to the extent that it had “power to persuade” and concluded, in
conformity with the FAB, that a claim for contributions due and owing constituted a plan
asset. The court also followed the reasoning of the FAB in finding that the plan
documents, which purported to relieve the trustee of its obligation to collect
contributions, was void as against public policy. However, the court held that PBS was
not liable for violation of its fiduciary duties for failing to amend the plan documents.
Another district court, however, went beyond the FAB 2008-1 to hold that all unpaid
contributions become plan assets when due and to find, consequently, a fiduciary breach
occurred when an employer obligated to make multi-employer plan contributions failed
to make any such contribution. Iron Workers’ Local 25 Pension & Benefits Funds v.
Steel Enter., Inc., 2009 WL 3645633, 47 Empl. Benefits Cas. (BNA) 2827 (E.D. Mich.
Page 38 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
Oct. 30, 2009); Plumbers Local 98 Defined Benefit Pension Fund v. M&P Master
Plumbers of Michigan, Inc., 608 F.Supp.2d 873, 46 Empl. Benefits Cas. (BNA) 2146
(E.D. Mich. 2009).
The district court in Central Illinois Health & Welfare Trust Fund v. Struben,
2009 U.S. Dist. LEXIS 14234 (C.D. Ill. 2009), held that the sole shareholder of a
corporate employer was a fiduciary and liable, under an alter ego theory, for the full
amount of the employer’s unpaid contributions to a multiemployer plan that had been
deducted by the employer from employee paychecks.
D.
Benefit Administration
This year, courts considered a variety of circumstances involving the fiduciary
implications of improper benefits administration. One recurring issue was the extent of
the fiduciary duty to collect unpaid plan contributions, discussed in part V.C. above.. In
addition, several courts considered deficient plan claims procedures. In Schultz v. Stoner,
46 Empl. Benefits Cas. (BNA) 2337 (S.D. N.Y. 2009), the district court reversed and
remanded a claims administrator’s decision that workers were ineligible to participate in
an employer’s pension plans because they were independent contractors excluded from
coverage under the plans’ terms. The plaintiffs had worked through third-party staffing
agencies for an employer whose retirement and savings plans excluded independent
contractors. The workers sued for benefits under ERISA section 502(a)(1)(B) and
equitable relief under section 502(a)(3) for allegedly deficient and biased claims
procedures. Finding the plans’ procedures lacked even the rudiments of proper attention
to the ERISA fiduciary standards applicable to claims determination, the court remanded
the benefits claims to the claims administrator for calculation of the benefits owed and
directed the plans to appoint an independent legal advisor to ensure compliance with
ERISA’s fiduciary provisions and proper application of the terms of the plans in
connection with the required benefit determinations. The district court in Spinedex
Physical Therapy USA Inc. v. United Healthcare of Arizona, Inc., 2009 U.S. Dist. LEXIS
77257 (D. Ariz. Aug. 26, 2009) declined to dismiss fiduciary breach claims based on the
improper denial or delay of benefits claims by a claims administrator for a number of
unrelated employer health plans. These fiduciary breach claims had been brought in a
class action by a professional association on behalf of its member providers, by various
providers on behalf of their patients who were participants, and individually by several
participants. In addition to finding that the association and the providers had standing,
the court denied dismissal of the plaintiffs’ claims under ERISA section502(a)(2), finding
that the claims administrator’s alleged willful and systemic failure to disburse benefits,
and its alleged under-compensation of providers, stated claims for breaches of fiduciary
duty harmful to the plans.
Finally, in Olivo v. Elky, 646 F.Supp.2d 95, 48 Empl. Benefits Cas. 1312 (D.D.C.
2009), the district court dismissed, as time-barred, alleged breaches of fiduciary duty
under ERISA sections 502(a)(2) and 502(a)(3) arising from a failure to notify employees
of their right to participate in their employer’s 401(k) plan. The plan had stated that the
employees would be notified of their eligibility for participation, and the court recognized
Page 39 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
that the fiduciary breach claims had accrued on the date when the employees should have
been notified of their 401(k) plan eligibility.
E.
Employer Securities Issues
2. Employee Stock Ownership Plans
Courts continue to address the fiduciary issues raised by ESOPs:
·
Johnson v. Couturier, 572 F.3d 1067, 47 Empl. Benefits Cas. (BNA) 1449 (9th
Cir. 2009). The Ninth Circuit affirmed preliminary injunctions issued by a district
court, addressing two issues of importance to companies owned by Employee
Stock Ownership Plans (ESOPs).
Plaintiff participants in the Noll
Manufacturing Corporation ESOP had sued Couturier, the former president of the
employer company, and two other of its directors for allegedly breaching their
fiduciary duties under ERISA by awarding $34.8 million (approximately twothirds of the company’s value) to Couturier in a buyout compensation package.
Defendants had also served as ESOP trustees. Under various indemnification
agreements executed between 2001 and 2005, defendants sought advancement of
their defense costs from the company, which had become wholly owned by the
ESOP in 2001. On August 10, 2007, the company’s successor was purchased for
approximately $61 million. After bank debt, executive compensation and other
expenses were satisfied, about $15.8 million remained,,$5 million of which was
distributed to participants in January 2008. Approximately $10.8 million
remained, at least partly in escrow, to be distributed to participants once
remaining legal costs (potentially including defendants’ claimed advances) were
deducted. Concluding that plaintiffs were likely to prevail on the merits of their
claims, and that these funds were functionally the same as plan assets, the district
court had issued a preliminary injunction preventing the company from advancing
defense costs to defendants. The Ninth Circuit, upholding the injunction, ruled
that (1) an ESOP fiduciary’s setting of his executive compensation as a corporate
officer is subject to ERISA fiduciary duties; and (2) ERISA precludes use of the
company’s assets to pay defense costs under corporate indemnification
agreements. The court first rejected defendants’ contention that determining
Couturier’s compensation was a business decision not subject to ERISA. The
court observed that, while corporate pay decisions are generally not subject to
ERISA scrutiny, where an ESOP fiduciary also serves as a corporate director or
officer, ERISA duties, including the prohibition on self-dealing, may apply to
business decisions from which that individual could directly profit. Because
plaintiffs were likely to succeed in proving that defendants had breached their
fiduciary duties by approving Couturier’s buyout package of $34.8 million
(approximately 65% of the company’s total assets as of June 2004), the court
concluded that the injunction was appropriate to protect the ESOP. The court also
found that ERISA preempted state contract law regarding advancement, under
indemnification agreements, of defense costs.
Page 40 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
·
Fernandez v. K-M Industries Holding Co., Inc., 646 F.Supp.2d 1150, 48 Empl.
Benefits Cas. (BNA) 1301 (N.D. Cal. 2009). The district court denied defendantsuccessor trustee’s cross claim for indemnification in this suit against a company
and the trustees (past and present) of the company’s ESOP, which alleged
breaches of fiduciary duty arising from the plan’s purchase of company stock at
an inflated price. The court relied on the Ninth Circuit’s decision in Johnson v.
Couturier, 572 F.3d 1067, 47 Empl. Benefits Cas. (BNA) 1449 (9th Cir. 2009)
(discussed above), holding that the ESOP would indirectly bear the costs of the
company’s indemnification of the trustees’ expenses in defending the alleged
breach of fiduciary duty claim.
·
Blankenship v. Chamberlain, 2009 WL 1421201, 46 Empl. Benefits Cas. (BNA)
2773 (E.D. Mo. May 20, 2009). The district court dismissed, without prejudice,
fiduciary breach claims that were based on the decisions of ESOP fiduciaries
acting also as the company sponsor’s CEO, president, and board of directors’
chair to dissolve and liquidate the company. The district court found that
plaintiffs had failed to allege that the defendant was acting in a fiduciary capacity
when he made the allegedly injurious decisions, but gave plaintiffs leave to file an
amended complaint. The district court also followed other courts in ruling that
the ESOP lacked standing to bring a section 502(a)(2) claim.
·
Neil v. Zell, --- F. Supp. 2d ----, 2009 WL 4927915, 48 Empl. Benefits Cas.
(BNA) 1462 (N.D. Ill. Dec. 17, 2009). The district court denied in part and
granted in part defendants’ motion to dismiss in this suit, stemming from an
ESOP’s purchasing all outstanding shares of its company sponsor as part of the
company’s going private. Plaintiffs had alleged that defendants breached their
fiduciary duty of prudence and ERISA’s prohibited transaction sections by
permitting the deal. The court declined to dismiss the allegations concerning
fiduciaries who had actually acted on behalf of the ESOP in arranging the
transaction. In so holding, the district court rejected defendants’ argument that
their actions were per se prudent because the ESOP had purchased the company
shares at below-market rates.
F.
Investment Policy
1. In General
In Taylor v. United Technologies Corp., 2009 WL 535779, 46 Empl. Benefits
Cas. (BNA) 1935 (D. Conn. Mar. 3, 2009), aff’d, 2009 WL 4255159, 48 Empl. Benefits
Cas. (BNA) 1193 (2d Cir. Dec. 1, 2009) (summary order), the Second Circuit affirmed a
district court’s grant of summary judgment for defendants, dismissing claims that they
breached their fiduciary duties by offering actively-managed (as opposed to index or
“passive”) mutual funds as plan investments. In ruling that the fiduciaries had acted
prudently in selecting and retaining the mutual fund investments, the district court had
rejected plaintiffs’ contention that the plan was required to have an investment policy
statement: “ERISA does not require a fiduciary . . . to create such a document.” Id. at
*10.
Page 41 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
4. Directed Individual Account Plans
a. Section 404(c) Issues
In Hecker v. Deere & Co., 556 F.3d 575 45 Empl. Benefits Cas. (BNA) 2761 (7th
Cir.) (“Hecker I”), pet. for reh’g and pet. for reh’g en banc denied, 569 F.3d 708, 47
Empl. Benefits Cas. (BNA) 1097 (7th Cir. 2009) (“Hecker II”), pet. for cert. filed (U.S.
Oct. 14, 2009), the Seventh Circuit affirmed, as an alternative basis, its dismissal of the
complaint based on section 404(c), finding that plaintiffs “cho[se] to anticipate the
[Section 404(c)] defense in their Complaint explicitly” and therefore “put it in play” by
alleging that section 404(c) was unavailable to defendants because of their alleged
failure to disclose the details of the revenue-sharing arrangement among the Fidelity
entities. Hecker I, 556 F.3d at 588. The court also noted that, by so “extensively”
discussing in their complaint the ways in which the plans allegedly fell short of section
404(c) compliance, plaintiffs had waived the right to argue that defendants had failed to
comply with section 404(c) in any other way not addressed in their complaint. Id. at 58889. Thus, plaintiffs could argue against defendants’ 404(c) compliance only based on
those aspects of section 404(c) that were preemptively challenged in the complaint. Id. at
589. See also Abbott v. Lockheed Martin Corp., 2009 WL 839099, at *13, 46 Empl.
Benefits Cas. (BNA) 1914 (S.D. Ill. Mar. 31, 2009) (following Hecker and holding that
plaintiffs’ decision to anticipate section 404(c) in their complaint “waived the right to
complain about [defendants’] compliance with all but” those aspects of the section 404(c)
regulations that plaintiffs addressed in their complaint).
Inasmuch as the complaint and documents referenced in the complaint had
addressed section 404(c)’s actual requirements, the Seventh Circuit held that it could
consider defendants’ compliance with section 404(c) on a motion to dismiss and found
that dismissal on the basis of section 404(c) was appropriate. Hecker I, 556 F.3d at 58990. The court emphasized that the 404(c) regulations provide that the safe harbor defense
is available if a plan offers “‘a broad range of investment alternatives.’” Id. at 589
(quoting 29 C.F.R. § 2550.404c-1(b)(3)). Under those regulations, a plan must provide
participants with sufficient investment alternatives to accomplish three goals: (1) “the
ability materially to affect potential return and degree of risk in the investor’s portfolio;”
(2) “a choice from at least three investment alternatives each of which is diversified and
has materially different risk and return characteristics;” and (3) “the ability to diversify
sufficiently so as to minimize the risk of large losses.” Id. (citing 29 C.F.R. §§
2550.404c1(b)(3)(i)(A)-(C)). Pointing to the 2,500 mutual funds available to participants
through the Deere plans’ brokerage option, the court found implausible “[a]ny allegation
that these options did not provide the participants with a reasonable opportunity to
accomplish the three goals outlined in the regulation, or control the risk of loss from
fees.” Id. at 590. The court concluded: “Given the numerous investment options, varied
in type and fee, neither Deere nor Fidelity (assuming for the sake of argument that it
somehow had fiduciary duties in this respect) can be held responsible for those choices.”
Id.
Page 42 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
The Hecker I court also rejected plaintiffs’ argument that the protection of 404(c)
was unavailable to defendants under the “concealment” exception of the DOL’s 404(c)
regulations (see 29 C.F.R. § 2550.404c-1(c)(2)(ii)) because they had failed to provide
participants with information about revenue-sharing and other matters not otherwise
required to be disclosed under ERISA. See Hecker I, 556 F.3d at 589. The court noted
that the 404(c) regulations explicitly set out the information that must be provided and do
require additional information to be provided in any circumstances. Id.; see also 29
C.F.R. § 2550.404c-1(b)(2)(i)(B)(1)(v) (regulation addressing fee disclosures required
under section 404(c)).
The court likewise rejected plaintiffs’ argument, based on a footnote discussion in
the preamble to the final 404(c) regulations, that section 404(c) is not available to protect
a fiduciary’s initial decisions in “assembling an imprudent menu of investment options in
the first instance,” 556 F.3d at 589 (internal quotations and alterations omitted). The
court declined to accord Chevron deference to the DOL’s footnote discussion (it appears
in footnote 27 of the Preamble to the Final 404(c) Regulations, 57 Fed. Reg. 46,906;
46,924 n.27 (Oct. 13, 1992)), which states this point. The court noted that the position
expressed in footnote 27 was “never embodied in the final regulations, [and which
therefore] cannot override the language of the statute and regulations.” Id.
The court further declined to decide what it called the “abstract question” of
whether section 404(c) would be available in all circumstances to shield a fiduciary’s
selection of the array of investment options for a plan, but stated:
Even if [section 404(c)] does not always shield a fiduciary from an
imprudent selection of funds under every circumstance that can be
imagined, it does protect a fiduciary that satisfies the criteria of
[section 404(c)] and includes a sufficient range of options so that
the participants have control over the risk of loss.
Id. at 589.
The court emphasized that the investment decisions were made by the individual
participants, concluding that, given the breadth of investment options provided in Deere’s
plans, “[i]f particular participants lost money or did not earn as much as they would have
liked, that disappointing outcome was attributable to their individual choices.” Id. at 590.
Because the plan was structured and operated to satisfy the criteria of section 404(c) in
providing investment options, the court found that “the risk of loss” had shifted to
plaintiffs. Id.
The Seventh Circuit, somewhat unusually, issued a second opinion in connection
with denying plaintiffs’ petition for rehearing and rehearing en banc, which the DOL
supported in a separate amicus curiae brief. See Brief of the Secretary of Labor, Hilda L.
Solis, As Amicus Curiae in Support of Panel Rehearing at 4-8 (“DOL Amicus Brief”)
(No. 07-3605). Hecker II, 569 F.3d 708. In Hecker II, the court denied the DOL’s
request for Chevron deference for its footnote 27 position, emphasizing that the court had
not, in its initial opinion, “ignore[d] any language in the regulation proper.” Id. at 709-
Page 43 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
10. DOL had argued that its footnote position was a reasonable and necessary
interpretation of section 404(c) that the DOL has consistently taken.
The Hecker II court also sought to set aside or downplay DOL’s other arguments,
asserting that Hecker I would not allow plan fiduciaries to escape liability, as DOL had
asserted, “by the simple expedient of including a very large number of investment
alternatives” in a plan portfolio, which would result in “obvious, even reckless,
imprudence in the selection of investments.” Id. at 711; see also DOL Amicus Brief at
14. The Hecker II court claimed that the DOL’s concerns were “more hypothetical than
real,” 569 F.3d at 710, and that Hecker I did not stand for the “broad proposition” that a
fiduciary could immunize itself from liability in all instances by imprudently selecting an
overpriced portfolio so long as the portfolio contained “a very large number of
investment alternatives.” Id. at 710-11. The court emphasized that its earlier opinion
“was not intended to give a green light” to such conduct, but rather was “tethered closely
to the facts before the court,” which included no allegations that the investment
alternatives were “unsound or reckless,” as opposed to simply involving excessive fees.
Id. at 711.
In Tibble v. Edison Int’l, et al., 639 F.Supp.2d 1074, 47 Empl. Benefits Cas.
(BNA) 1652 (C.D. Cal. 2009), the district court declined to follow Hecker with respect to
section 404(c), stating:
[H]ere the Plan included only forty different mutual funds.
Thus, this case does not justify the same broad application
of the safe harbor provision as the Seventh Circuit used in
Hecker. Instead, because this case involves a possible
breach of the duty of loyalty, the better view is that
expressed by other courts, and supported by the DOL, that
the fiduciaries should not be shielded from liability for
offering the participants investment options that are the
result of a conflict of interest.
Id. at 1121.
On September 8, 2009, the DOL released Field Assistance Bulletin (“FAB”)
2009-3, stating that a plan may satisfy the prospectus delivery requirements of the 404(c)
regulations by providing participants with a summary prospectus instead of the full
prospectus. The prospectus delivery requirements are among the conditions specified by
the 404(c) regulations necessary to establish that participants have been given adequate
“control” over their accounts to make investment decisions for which the plan fiduciaries
are not responsible. As stated in the 404(c) regulations, a participant must be given,
immediately before or immediately after he or she first makes investment decisions
regarding mutual funds (or other investment company options) a copy of the most recent
prospectus for that investment provided to the plan. See 29 C.F.R. § 2550.404c1(b)(2)(i)(B)(1)(viii). Another condition is that the plan must the most recent prospectus
to participants on request. See 29 C.F.R. § 2550.404c-1(b)(2)(i)(B)(2)(ii). In stating that
the summary prospectus will suffice for these purposes, FAB 2009-3 notes that the term
Page 44 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
“prospectus” is not defined in the regulations and describes the summary prospectus as “a
short-form document, written in plain English in a clear and concise format,” which
provides “a summary of key information about a mutual fund that is useful to participants
. . . in evaluating and comparing their plan investment options” and provides participants
with information on how to obtain a full prospectus either on the internet or by mail if
they wish. Id. The position taken in the new FAB parallels the Securities and Exchange
Commission’s current rules requiring mutual fund disclosures, which provides that a fund
choosing to make streamlined information available in a summary prospectus must post
the full prospectus on a website and mail or e-mail the full prospectus to any person
requesting it. See 17 C.F.R. § 230.498.
The courts also addressed section 404(c) issues arising in stock drop claims:
·
In re Schering-Plough Corp. ERISA Litig., --- F.3d ----, 2009 WL 4893649, 48
Empl. Benefits Cas. (BNA) 1385 (3d Cir. Dec. 21, 2009). The Third Circuit
vacated on appeal a district court’s class certification in an employer stock drop
suit against Schering-Plough and various individual defendants alleging breaches
of fiduciary duty for offering a company stock fund as an investment option in a
401(k) plan. The court remanded the case for further consideration, declining to
rule on defendants’ argument on appeal that ERISA section 404(c) negated
certification under Fed. R. Civ. P. 23(b)(1) and leaving that issue open for
consideration by the court below.
·
Lingis v. Motorola, Inc., 649 F.Supp.2d 861, 47 Empl. Benefits Cas. (BNA) 1099
(N.D. Ill. 2009). On cross motions for summary judgment, the district court ruled
in favor of defendants and against plaintiffs in this class action over the offering
of Motorola common stock as an investment option in Motorola’s 401(k) plan.
Plaintiffs’ allegations stemmed from several loans that Motorola had made to a
major telecommunications customer, Telsim, in an aggregate amount of
approximately $2 billion in the late 1990s-2001 during a period in which
Motorola stock had lost 50% of its value. The district court held that ERISA
section 404(c) shielded the defendant fiduciaries from liability, rejecting
plaintiffs’ allegation that the participants had not exercised independent control (a
required pre-condition for application of section 404(c)) because defendants
allegedly had concealed material information with respect to Telsim. The court
concluded that section 404(c)’s disclosure duty is equivalent to that imposed by
ERISA generally and, because defendants had not made any misrepresentations in
a fiduciary capacity (any alleged negligent misrepresentations having occurred in
SEC filings), the fiduciaries had no duty to issue corrective disclosures. The court
held that section 404(c) applied to protect the defendants because the plan had
offered a broad range of investment alternatives in addition to Motorola stock.
·
In re First American Corp., 258 F.R.D. 610, 2009 WL 2430879 (C.D. Cal. July
27, 2009). The district court denied plaintiffs’ motion for class certification in
this suit under ERISA section 502(a)(2), which claimed that defendants had
breached their fiduciary duties by offering First American stock as an investment
Page 45 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
option for a 401(k) plan when the stock price was artificially inflated. The court
found that, under Ninth Circuit precedent, class certification was not appropriate
in this case under Fed. R. Civ. P. 23(b)(1)(A) because plaintiffs primarily sought
monetary damages. Relying on LaRue v. DeWolff, 552 U.S. 248 (2008), the court
also declined to certify a class under Fed. R. Civ. P. 23(b)(1)(B), finding that
because the individual members could bring claims on their own behalf under
ERISA section 502(a)(2), separate actions would not alter the substance of the
rights of others having similar claims. However, the court rejected the
defendants’ argument that class certification was inappropriate for lack of
typicality inasmuch as the court would need to analyze whether each participant
exercised “independent control” over their participant-directed investments as
defined by ERISA section 404(c). The court reasoned that class certification
issues should not be determined on the basis of an affirmative defense like that
provided under section 404(c).
·
Page v. Impac Mortgage Holdings, Inc., 2009 WL 890722, 46 Empl. Benefits
Cas. (BNA) 2171 (C.D. Cal. Mar. 31, 2009). The district court granted in part
and denied in part defendant’s motion to dismiss in this putative class action
against Impac Mortgage Holdings, Inc. and various individual defendants, which
claimed that 401(k) plan fiduciaries had acted imprudently by offering company
stock as an investment option to plan participants and that defendant mortgage
company had breached its fiduciary duties by making false statements in public
documents and offering mortgages to high credit risk borrowers. The court ruled
that defendant was not entitled to assert an affirmative defense based on ERISA
section 404(c), following the Fourth Circuit’s reasoning in DiFelice v. U.S.
Airways, 497 F.3d 410, 41 Empl. Benefits Cas. (BNA) 1321 (4th Cir. 2007), and
reasoning that the 404(c) safe harbor did not apply to a fiduciary’s selection and
maintenance of the range of investment options.
·
In re Tyco Intl., Ltd. Multidistrict Litig., 606 F.Supp.2d 166, 46 Empl. Benefits
Cas. (BNA) 1933 (D.N.H. 2009). The district court granted plaintiffs’ motion for
summary judgment that plan fiduciaries were not entitled to use ERISA
section 404(c) as an affirmative defense in a stock-drop litigation in this class
action involving alleged breaches of fiduciary duty with respect to the offering of
company stock as an investment option in a 401(k) plan. The district court agreed
with plaintiffs that section 404(c) did not apply to claims of fiduciary breach
involving a fiduciary’s selection of the array of investment options to be made
available to participants for investment of their individual accounts under the
plan.
·
In re Washington Mutual, Inc. Sec., Derivative & ERISA Litig., 2009 WL
3246994, 47 Empl. Benefits Cas. (BNA) 2505 (W.D. Wash. Oct. 5, 2009). The
district court denied in part and granted in part defendants’ motion to dismiss in
this stock drop class action against Washington Mutual and various individual
defendants, which stemmed from the subprime mortgage fallout. In declining to
dismiss prudent investment claims, the district court held that ERISA
Page 46 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
section 404(c) had no application to a claim of imprudence in offering employer
stock as an investment option.
·
Stanford v. Foamex L.P., --- F.R.D. ----, 2009 WL 3075390, 47 Empl. Benefits
Cas. (BNA) 2479 (E.D. Pa. Sept. 24, 2009). The district court granted plaintiffs’
motion for class certification in this “reverse” stock drop lawsuit, which involved
defendants’ decisions on divestiture of company stock as an investment option
under a 401(k) plan. The court rejected defendants’ arguments that the fact that
ERISA section 404(c) would be an affirmative dense negated class certification,
holding that the application of ERISA section 404(c) would be determinable as
against the class as a whole, thereby permitting class certification.
b. Other Issues Relating to Directed Individual
Account Plans
·
Brown v. Medtronic, 619 F.Supp.2d 646, 46 Empl. Benefits Cas. (BNA) 2596 (D.
Minn. 2009). The district court granted defendants’ motion to dismiss on Article
III standing grounds in this putative class action claiming that Medtronic’s stock
was an imprudent plan investment option for a 401(k) plan because its value was
allegedly artificially inflated. Plaintiff had asserted that defendant had failed to
disclose information relevant to the stock’s value, but the court found that
plaintiff had sold his Medtronic stock before these issues were disclosed to the
market and therefore lacked constitutional standing under Article III to bring a
fiduciary breach claims on these facts.
·
In re Merck & Co. Sec., Derivative & ERISA Litig., 2009 WL 331426, 46 Empl.
Benefits Cas. (BNA) 1102 (D.N.J. Feb. 10, 2009) (unpublished). The district
court ruled, in this putative class action involving allegedly artificially inflated
company stock that was offered as an investment option in a 401(k) plan, that
participants who had selected the company stock as an investment could proceed,
but that the class would not include participants who had either profited from the
artificially inflated stock or signed post-separation settlement agreements waiving
their ERISA claims. The court ruled, however, that plaintiffs’ disclosure claim
was not suitable as a class claim because adjudication of the claim would require
individualized determinations about each employee’s investment decisions and
the information they received from Merck.
5. Participant Education
a. ERISA Section 408 -- Participant Investment Advice
Regulations
On January 21, 2009, the DOL published final regulations providing guidance on
the provision of investment advice to participants and beneficiaries of participantdirected individual account plans and to beneficiaries of individual retirement accounts
implementing the new statutory exemption provisions added to ERISA by the Pension
Protection Act of 2006, ERISA sections 408(b)(14) and 408(g) (with parallel provisions
Page 47 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
in IRC section 4975). These regulations essentially adopted the proposed regulations
released on August 22, 2008. As did the proposed regulations, the final regulations
separately provided an administrative class exemption granting additional relief under
circumstances not included in the statutory exemption or the final regulations.
These regulations and class exemption were withdrawn by the DOL on November
20, 2009. As published, the regulations were to go into effect on March 23, 2009.
However, the DOL initially postponed that effective date until May 2009, reopening the
comment period for the regulations. Thereafter, the DOL postponed the effective date
twice more, stating it needed the extra time to consider the issues raised by
commentators, who argued that the class exemption’s safeguards were not sufficient to
ensure that permitted investment advice would be unbiased and unconflicted.
VI.
Duty to Protect Against Violations by Other Fiduciaries
In Aikens v. U.S. Transformer, Inc., 2009 WL 1940559, 47 Empl. Benefits Cas.
(BNA) 2537 (D. Idaho July 2, 2009), a suit involving the sale of assets of a corporate
sponsor of a welfare plan, the district court dismissed co-fiduciary breach claims for
failure to state a claim on which relief could be granted. The suit had alleged, inter alia,
that defendants (inter alia, plan fiduciaries, legal counsel, and the corporate purchase of
the assets of the employer health care plan sponsor) had diverted plan assets to their own
use and the use of parties adverse to the plan in connection with the sale of the
employer’s assets. Plaintiffs asserted that the sales proceeds were un-segregated plan
assets, withheld by the former employer from employees’ wages for health care
premiums payments, which had been intended to be used for the purpose of settling a
separate state court lawsuit brought by plaintiffs. Plaintiffs had sought to assign cofiduciary liability to the purchaser of the assets and other parties to the transaction. The
court concluded that plaintiffs’ allegations had failed to establish that legal counsel or the
corporate purchaser had ever possessed assets of the welfare plan.
In Harris v. Koenig, 602 F.Supp.2d 39, 46 Empl. Benefits Cas. (BNA) 1806
(D.D.C. 2009), the district court denied defendants’ motion to dismiss plaintiffs’ claims
based on co-fiduciary liability, finding sufficient plaintiffs’ allegations that the cofiduciary defendants had had actual knowledge of the other fiduciaries’ breaches of
fiduciary duties, yet had failed to make reasonable efforts to remedy those breaches. The
court explained that a co-fiduciary can be held liable under ERISA section 405(a)(3) if:
“(1) the co-fiduciary has actual knowledge of the other fiduciary’s breach; (2) the cofiduciary failed to make reasonable efforts to remedy the other fiduciary's breach; and (3)
damages resulted therefrom.” Id. at 62. The court also ruled that a prior settlement did
not serve to release the co-fiduciary defendants. Id. at 61.
In In re Pfizer Inc. Erisa Litigation, 2009 WL 749545, at *14, 46 Empl. Benefits
Cas. (BNA) 1792 (S.D.N.Y. Mar. 20, 2009), a class action targeting the offering of
employer stock as an investment option in a 401(k) plan, the district court similarly
declined to dismiss claims of co-fiduciary liability, holding that the plaintiffs’ pleadings
were sufficient to meet the requirements of Rule 8 and Rule 12(b)(6) because “Plaintiffs
specify numerous facts and circumstances that they claim made the subject stock
Page 48 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
investments imprudent, as well as structures and means of access that they contend did or
should have put Defendants on notice of those facts and circumstances and/or of their cofiduciaries' alleged breaches.” Moreover, the court explained, while ERISA sections
405(a)(1) and (a)(3) require actual knowledge of a co-fiduciary's breach, section
405(a)(2) provides for liability if a fiduciary's failure to comply with its duties under
ERISA enabled another's breach.
VII.
Liability for Breach of Fiduciary Duty
B.
Pre-existing Breaches
In Harris v. Koenig, 602 F.Supp.2d 39, 46 Empl. Benefits Cas. (BNA) 1806
(D.D.C. 2009), the district court denied defendant trustee State Street Bank’s motion to
dismiss claims that the defendant had failed to adequately investigate and preserve
fiduciary breach claims against co-fiduciaries, finding that plaintiffs had stated a valid
cause of action against State Street for failure to adequately investigate and protect a
potential ERISA claim of the plan. Plaintiffs in this case were seeking to recoup losses in
value to their individual accounts in a 401(k) plan suffered as a result of the diminution in
value of employer stock after a merger.
Citing McMahon v. McDowell, 794 F.2d 100, 112, 7 Empl. Benefits Cas. (BNA)
1859 (3d Cir. 1986), the Harris court found that trustees (like State Street Bank) have a
duty to investigate relevant facts and to explore alternative courses of action, including
whether to bring suit, when they become aware of a potential breach by a co-fiduciary.
The court cited the class exemption for settlements of litigation, PTE 2003-39, 68 Fed.
Reg. 75,632 (Dec. 31, 2003), as support for requiring fiduciaries to evaluate settlements
of plan claims to determine whether they are fair. The court thus denied State Street’s
motion to dismiss, finding that plaintiffs stated a valid cause of action against State Street
for failing to adequately investigate and protect its potential ERISA claims in the
securities action.
C.
Burden of Proof and Causation
1. Section 404(c)
In Hecker v. Deere & Co., 556 F.3d 575, 45 Empl. Benefits Cas. (BNA) 2761
(7th Cir. 2009), in upholding the district court’s dismissal of this class action involving an
employer stock investment option under a self-directed 401(k) plan, the Seventh Circuit
based its decision, at least as an alternative matter, on its conclusion that defendants were
entitled, under the facts pled in plaintiffs’ complaint, to the safe harbor protection
provided by ERISA section 404(c), even though the safe harbor relief is considered
generally to provide only an affirmative defense. Although the court noted that a district
court should generally not base a dismissal under Rule 12(b)(6) on affirmative defenses,
the court reasoned that the plaintiffs had alleged in their complaint sufficient facts to
establish that the defendants were entitled to the protection of section 404(c). The district
court stated that the complaint had so thoroughly anticipated the safe harbor defense that
the district court could reach that issue on summary judgment, despite the requirement to
Page 49 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
consider factual allegations in the light most favorable to the plaintiffs. Restricting its
analysis to the facts alleged in the complaint, the court concluded that it saw no plausible
basis for concluding that the plans were not entitled to the safe harbor relief provided
under section 404(c).
As noted earlier in this outline, the Seventh Circuit panel, somewhat unusually,
issued a second opinion in connection with denying plaintiffs’ petition for rehearing.
Hecker v. Deere & Co., 569 F.3d 708, 45 Empl. Benefits Cas. (BNA) 1097 (7th Cir.
2009). In that opinion, the Seventh Circuit responded directly to arguments raised by the
DOL in an amicus curiae brief (also discussed elsewhere in this outline), specifically
deferring to the DOL’s concerns by refraining from making a definitive pronouncement
on whether section 404(c) applies to a fiduciary’s selection of array of investment options
under a plan and limiting its decision to the specific facts of the case. The court
emphasized that, under the pleading standards enunciated in Bell Atlantic v. Twombly,
550 U.S. 544 (2000), plaintiffs had failed to state a claim for the kind of fiduciary
misfeasance described by the DOL in its brief.
In Tullis v. UMB Bank, 2009 U.S. Dist. LEXIS 78587, 27 Empl. Benefits Cas.
(BNA) 1645 (N.D. Ohio Aug. 11, 2009), the district court, relying on ERISA section
404(c), dismissed on summary judgment plaintiffs’ claims that defendants had breached
their fiduciary duties by including an employer stock option in a 401(k) plan. The court
cited Hecker v. Deere, 556 F.3d 575, 45 Empl. Benefits Cas. (BNA) 2761, concluding
that defendant fiduciary had offered a broad range of investment alternatives and had
properly invoked the safe harbor defense of section 404(c). The court rejected plaintiffs’
argument that the safe harbor defense was unavailable because the defendant had
concealed material nonpublic facts concerning the investment options. The court noted
that plaintiffs had not requested information from the fiduciary and held that a plan
fiduciary could be found to have an affirmative duty to disclose material nonpublic facts
to a beneficiary under certain circumstances, but only in response to a participant inquiry.
In distinction to the holdings in Hecker and Tullis, a New Hampshire district
court found that section 404(c) does not shield fiduciaries from liability arising from their
selection of the array of available investment options under a 401(k) plan. In In Re: Tyco
Int’l, Ltd. Multi-District Litigation, 606 F.Supp.2d 166, 46 Empl. Benefits Cas. (BNA)
1933 (D.N.H. 2009), the district court granted summary judgment to participants on their
claim that defendants were not entitled to rely on section 404(c) to defend their
designation of employer stock as an available investment option. The court relied, in so
ruling, on the DOL’s view that a fiduciary’s selection of the options to be made available
under a plan is not itself protected from fiduciary liability under section 404(c).
Similarly distinguishing Hecker, the district court in In Re Wash. Mutual Inc.,
Securities, Derivative & ERISA Litigation, 2009 WL 3246994, 47 Empl. Benefits Cas.
(BNA) 2505 (D. Wash. October 5, 2009), another suit based on the offering of employer
stock as an investment option in a 401(k) plan, denied defendants' motion to dismiss
based on the section 404(c) safe harbor defense. Plaintiff participants had alleged that the
employer stock was an imprudent investment option because it had lost value due to the
company’s involvement in the sub-prime mortgage debacle and defendants had created
Page 50 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
misleading financial statements that failed to accurately account for its sub-prime
operations. The court noted that, similar to Hecker, plaintiffs had alleged facts in their
complaint seeking to negate a possible section 404(c) defense and plaintiffs had had
access to information on the stock via a brokerage link that provided information on other
investment opportunities. Nonetheless, the court declined to dismiss on the basis of
section 404(c), finding a critical distinction from Hecker in that plaintiffs had challenged
the decision to select (and retain) a particular investment alternative, rather than
challenging the fees associated with the investment. The complaint, in essence, asserted
that the fiduciaries had failed to give participants effective control over their investment
decisions by selecting the employer stock and providing complete and inaccurate material
information about the investment. The court concluded that a factual inquiry would be
necessary before the court could decide the applicability of section 404(c).
2. Employer Stock Cases -- Moench Presumption
In Bunch v. W.R. Grace, 555 F.3d 1, 45 Empl. Benefits Cas. (BNA) 2505 (1st Cir.
2009), the First Circuit affirmed summary judgment dismissing a “reverse” stock-drop
claim. Plaintiffs had filed a class action challenging the sale of employer stock — during
a bankruptcy — by an independent fiduciary. The First Circuit affirmed summary
judgment in favor of defendants W.R. Grace and State Street Bank & Co., concluding
that neither had breached its fiduciary duty in connection with State Street’s decision, as
the delegate trustee, to divest the Grace plan of company stock. In so holding, the court
of appeals reasoned that State Street, with the assistance of experts, had thoroughly
studied Grace’s corporate health and had properly concluded that divestment of the stock
was the only action consistent with ERISA’s prudent fiduciary standard. The district
court had declined to apply the Moench rebuttable presumption, under which retention of
employer stock in a falling market is generally deemed prudent unless shown otherwise.
See Kuper v. Iovenko, 66 F.3d 1447, 1459, 19 Empl. Benefits Cas. (BNA) 1969 (6th Cir.
1995), and Moench v. Robertson, 62 F.3d 553, 561, 19 Empl. Benefits Cas. (BNA) 1713
(3d Cir. 1995). On appeal, plaintiffs raised Moench again, and the court of appeals
affirmed the district court’s ruling, noting that the Moench presumption favoring
retention in a stock drop case was intended as a shield for a prudent fiduciary and its
application in this case would effectively force the court to judge a fiduciary’s actions in
hindsight and would thus reverse the purpose of the presumption by converting the
standard to a sword for use against a prudent fiduciary.
In Harris v Koenig, 602 F.Supp.2d 39, 46 Empl. Benefits Cas. (BNA) 1806
(D.D.C. 2009), the district court denied defendants’ motion to dismiss, which was based
in part on the argument that, under the Moench presumption, defendants had been
prudent in purchasing and retaining employer stock investments in an ESOP, despite
losses in value following a merger and that plaintiffs had not pled facts rebutting the
presumption. The court noted that the D.C. Circuit had not adopted the Moench
presumption and, even if had, it would be premature to apply the presumption at the
preliminary stage of a motion to dismiss, citing In re Enron Corp. Securities, Derivative
& ERISA Litigation, 284 F.Supp.2d 511 at 534, n.3, 31 Empl. Benefits Cas. (BNA) 2281
(N.D. Tex. 2003). The court also noted that other district courts have found that plaintiffs
are not required to plead facts rebutting the presumption.
Page 51 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
In Morrison, v. Money Gram Int’l Inc., 607 F.Supp.2d 1033, 46 Empl. Benefits
Cas. (BNA) 1673 (D. Minn. 2009), the district court found, in an employer stock
investment option case, that plaintiffs had adequately pled facts rebutting the Moench
presumption by alleging that the fiduciaries breached their duties of prudence by
continuing to accept employer contributions in the form of stock when the employer had
understated its losses and the stock value had openly dropped after the losses were
disclosed.
3. Overriding the Terms of the Plan -- Extraordinary
Circumstances
In In re Delphi Corp. Securities, Derivative & “ERISA” Litigation, 602
F.Supp.2d 810, 46 Empl. Benefits Cas. (BNA) 1499 (E.D. Mich. 2009), the district court
granted State Street Bank & Trust Company’s motion for summary judgment and denied
plaintiffs’ motion for partial summary judgment, finding that State Street had acted
properly, as directed trustee, in continuing to follow directions to invest in employer
stock until the employer’s bankruptcy was imminent. The court reasoned that
extraordinary circumstances, such as the imminent bankruptcy of the employer, would be
required before a directed trustee could properly override the trust and plan provisions
limiting its authority with respect to investment in employer stock. State Street had
carefully monitored changes in the value of the stock and the company’s efforts to
ameliorate its financial situation.
4. Causation of Damages to the Plan
In McCullough v. AEGON USA, Inc., 585 F.3d 1082, 47 Empl. Benefits Cas.
(BNA) 2761 (8th Cir. 2009), the Eight Circuit affirmed a decision of the district court
granting defendants summary judgment on fiduciary breach claims arising from a plan
fiduciary’s selection of investment options that allegedly resulting in excessive fees paid
to the fiduciary and its affiliates. The district court had dismissed the complaint based on
the fact that the plan was “substantially overfunded” and therefore plaintiffs lacked
Article III standing to bring any claims under ERISA section 502(a)(2). The court of
appeals affirmed, although on the different ground that there was no possibility of
plaintiffs’ suffering any actual harm because of the plan’s overfunding under controlling
Eighth Circuit precedent. The court declined to reconsider the controlling case, Harley v.
Minnesota Mining Co., 284 F.3d 901, 27 Empl. Benefits Cas. (BNA) 2089 (8th Cir.
2002), despite an intervening Supreme Court decision, Sprint Communications Co. v.
APCC Services, Inc., _____ U.S. _____ , 128 S.Ct. 2531 (2008), that recognized standing
of an assignee of a legal claim for money, even though the assignee had promised to
remit any proceeds to the assignor, and rejected arguments that Harley, which involved
only monetary relief, not injunctive relief, had too narrowly construed the concept of
“injury” in connection with pension plans governed by ERISA. The court of appeals
asserted that the holding of Harley could be set aside only by the Eighth Circuit sitting en
banc. The dissenting judge argued that Sprint compelled reconsideration of Harley and a
different result in this case, and that standing should be based on whether the plan, not the
individual participants acting as plaintiffs, suffered harm from the alleged actions.
Although the district court had decided the prohibited transaction claim on its merits for
Page 52 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
defendants, the court of appeals expressly extended its reliance on Harley to find that
Article III lack of standing separately required dismissal.
In contrast, in Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 48 Empl. Benefits
Cas. (BNA) 1097 (8th Cir. 2009), the Eight Circuit reversed the decision below, holding
that a participant had Article III standing to pursue claims of fiduciary breach and
prohibited transactions against the employer-sponsor of a participant-directed 401(k) plan
and various executives of the employer-sponsor. Plaintiff had claimed that defendants
had not used their bargaining power to obtain lower-fee institutional investment options
for plan participants, which resulted in participants’ payment of excessive fees under the
retail mutual funds that were offered, and that defendants permitted Merrill Lynch, which
acted as trustee and selected the array of mutual funds available for inclusion as
investment options, to receive unreasonable compensation by sharing in the retail fees.
The court of appeals found, distinguishing the contrary Eighth Circuit decision in Harley,
that plaintiff had alleged sufficient personal injury to establish Article III standing by
alleging “actual injury” to his own account under the plan and therefore could proceed to
assert claims on behalf of the entire plan. The court of appeals also reversed the district
court’s finding that plaintiff’s pleadings were insufficient to survive a motion to dismiss
under Rule 12(b)(6).
The court held that, while the participant could not have suffered injury before he
began participating in the plan, earlier actions may have caused his subsequent injury.
The court noted that participants suing under section 502(a)(2) do so in a representative
capacity on behalf of the plan as a whole and that remedies may be provided under
section 409 that will protect the entire plan. The court ruled that the complaint had
successfully stated a claim for breach of fiduciary duty and losses to the plan because it
asserted that the plan fiduciary had made selected a limited menu of investments for
participants, despite the availability of better options; that the designated investments
received fees at the participants’ expense; and that the selection process could have been
tainted by a failure of effort, competence, or loyalty. In addition, plaintiffs had alleged a
nondisclosure claim on fees that paralleled the fiduciary duty claim, and it could be found
that the failure to disclose the fees had misled a participant in making investment
decisions. Importantly, the court also found that the facts alleged were sufficient to shift
the burden to defendants to show that the trustee was paid only reasonable compensation
under ERISA section 408(b)(2).
In Harris v Koenig, 602 F.Supp.2d 39, 46 Empl. Benefits Cas. (BNA) 1806
(D.D.C. 2009), the district court denied defendant fiduciaries’ motion to dismiss fiduciary
breach claims related to their decision to retain plan investments in employer stock that
had depreciated in value following a merger, specifically rejecting defendants’ argument
that plaintiffs’ complaint was defective for failing to plead facts supporting a conclusion
that the fiduciaries caused losses to the plan. Defendants particularly targeted, relying on
Dura Pharms, Inc., v. Croudo, 544 U.S. 336 (2005), the complaint’s failure to alleged
that losses resulted from the fiduciaries’ actions to secure recoveries by participating in
Illinois and Texas securities actions without receiving adequate consideration. The court
found that plaintiffs did not need to plead causation, ruling that once plaintiffs had proven
a breach of fiduciary duty and a prima facie case of loss to the plan, the burden would
Page 53 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
shift to defendants to prove that the fiduciaries had not caused the loss. The court found
Dura inapposite because it related to the Securities Exchange Act of 1934 and not
ERISA.
In Holdeman v. Devine, 572 F.3d 1190, 47 Empl. Benefits Cas. (BNA) 1397 (10th
Cir. 2009), the Tenth Circuit affirmed a district court judgment, following a bench trial,
in favor of a fiduciary defendant who had been sued for having allegedly failed to take
action to ensure that a health plan would be adequately funded before the employer
company terminated the plan and filed for bankruptcy, leaving plaintiffs with substantial
unpaid medical bills. The district court had ruled that it was more likely than not that the
defendant’s actions had not caused losses to the plan, and, recognizing that courts are
divided over how to assign burdens of proof in fiduciary breach cases, the court of
appeals nonetheless upheld the district court’s factual findings that the plan was unlikely
to have received any more funds, had the alleged breaches of fiduciary duty not occurred.
In Sharp Electronics Corp. v. Metropolitan Life Insurance Co., 578 F.3d 505, 47
Empl. Benefits Cas. (BNA) 1725 (7th Cir. 2009), the Seventh Circuit affirmed the district
court’s grant of summary judgment in favor of defendant fiduciary, an insurer that
provided administrative services for a long-term disability plan, against claims that the
fiduciary had breached a duty owed to the employer plan sponsor, also a fiduciary. The
insurer had settled a claim brought by a participant (an alleged failure to allow the
participant to convert his coverage to a single policy). The employer had incurred costs
in defending against the claim, and had sought indemnification from the insurer for those
costs, claiming that it was entitled to relief under ERISA sections 502(a)(2) and 409(a).
The district court had found that ERISA did not authorize the relief sought by the
employer, who had not sued to recover anything on behalf of the plan and had not
suffered a loss caused by a fiduciary breach. The Seventh Circuit, in affirming, found
that, although both the insurer and the employer were plan fiduciaries, they had no
fiduciary relationship to each other; their relationship was purely contractual. Further,
the employer had no indemnification right under ERISA unless a loss to the plan could be
shown.
D.
Measure of Loss Under Section 409
In Henry v. U.S. Trust Co. of Cal., 569 F.3d 96, 47 Empl. Benefits Cas. (BNA)
1001 (2d Cir. 2009), the Second Circuit reversed and remanded a district court’s award of
damages in a prohibited transaction claim, ruling that the lower court had failed to
accurately value the harm to the plan (an ESOP) of having paid an inflated price for
employer stock. The plaintiffs had sued U.S. Trust in connection with its allegedly
inflated valuation of employer stock for the ESOP. The facts showed that the employer
stock had been purchased through a debt transaction followed by a sale in exchange for
cancellation of a portion of the debt. On review of the damage award granted by the
district court, which had found for plaintiffs on their prohibited transaction claim, the
court of appeals ruled that the district court had wrongly reduced the damages by the setoff from the second transaction, which the court treated as having reduced the purchase
price paid by the ESOP. The court of appeals found error in this approach, ruling that, in
Page 54 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
measuring the loss to the plan under ERISA section 409, the debt cancellation in the
second transaction should not have been treated as having reduced the ESOP’s purchase
price for the stock.
In Briscoe v. Preferred Health Plan, Inc., 578 F.3d 481, 47 Empl. Benefits Cas.
(BNA) 2020 (6th Cir. 2009), in a case involving a group health plan that was terminated
when the employer went bankrupt, leaving participants with large unpaid medical bills,
the Sixth Circuit affirmed a lower court decision that limited the third-party
administrator’s potential liability to claims arising from the administrator’s set-off of
certain assets of the employer, over which the administrator had had control, against
administrative fees. The circuit court affirmed the district court’s dismissal of claims
asserting that the administrator had had a duty to inform participants of the employer’s
impending bankruptcy or problems paying for plan benefits or that the administrator
could be held liable for the employer’s failure to contribute funds to the plan. The circuit
court, however, ruled that the district court had properly treated the administrator could be
found liable under section 409 for its use of the assets it had transferred from a plan
account because the administrator was a fiduciary to the extent that it had exercised
control over plan assets under its control and had benefited personally from the exercise
of control by allotting to itself an administrative fee prior to returning the remaining funds
after its relationship with the employer terminated.
In Haddock v. Nationwide Fin. Servs., Inc., 2009 U.S. Dist. LEXIS 103837 (D.
Conn. Nov. 6, 2009), the district court granted class certification to plaintiffs asserting
claims against a 401(k) plan fiduciary (Nationwide) based on its alleged acceptance of
revenue sharing payments from the mutual funds it had selected and made available to
plans and participants on its investment platform, allowing both fiduciary breach and
prohibited transaction claims to go forward. Plaintiffs are asserting in this nation-wide
class action, that Nationwide violated fiduciary duties under ERISA sections 404(a)(1)(A)
and (B) and committed prohibited transactions under ERISA sections 406(b)(1) and (3)
and seek relief under section 409, including declaratory judgment, permanent injunction,
and either disgorgement/restitution of all the revenue sharing payments received by
Nationwide or, alternatively, payment of the difference between the revenue sharing
payments and the fair market value of any services provided by Nationwide to the mutual
funds for which the revenue sharing payments reportedly constituted payment. The court
noted that section 409(a) provides for monetary damages to compensate the plan for
breach of fiduciary and requires a fiduciary to make good to the plan any losses to the
plan resulting from each such breach and enables the plan to recover any profits the
fiduciary has made based on the use of plan assets even when the plan has not suffered a
loss. The court further noted that a plaintiff seeking disgorgement of ill-gotten profits on
behalf of a plan under ERISA sections 409 and 502(a)(2) need not prove loss because
ERISA imposes liability on fiduciaries who profit by using trust assets even if the plan
does not suffer financial loss.
In Hill v. Blue Cross and Blue Shield of Mich., 2009 U.S. Dist. LEXIS 26603, 46
Empl. Benefits Cas. (BNA) 2102 (E.D. Mich. Mar. 31, 2009), in a fiduciary breach case
involving alleged denial of emergency medical benefits under a welfare plan, the district
court dismissed claims for accounting, restitution, and disgorgement under sections
Page 55 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
502(a)(2) and (3) for lack of jurisdiction, ruling that there was no evidence of any losses
to the plan resulting from the alleged fiduciary breach or any profits made by defendants
through the use of plan assets.
In Pfahler v. National Latex Products Co., 2009 U.S. Dist. LEXIS 30322, 47
Empl. Benefits Cas. (BNA) 1221 (N.D. Ohio April 7, 2009), the district denied
defendants’ motion to cap damages in an action alleging their failure to transfer employee
contributions to a welfare benefit plan funded by both employer and employee
contributions. Defendants had sought to limit damages to an amount equal to the loss
suffered by the plan due to the alleged fiduciary breach, to be measured by the amount of
employee contributions established as misappropriated, adjusted for any medical expenses
already paid or still outstanding that were incurred solely due to plaintiffs’ reliance on
alleged misrepresentations by defendants. The court reasoned that misappropriated plan
assets and profits or benefits experienced by breaching fiduciaries as a result of the
misappropriation must both be treated as losses to the plan. Citing Donovan v. Bierwirth,
754 F.2d 1049, 1056, 6 Empl. Benefits Cas. (BNA) 1033 (2d Cir. 1985), the court also
noted that any doubt or ambiguity in determining the amount of the losses should be
construed against the fiduciaries.
E.
Extent of Injunctive Relief under Section 409
In Chao v. Unique Manufacturing Co., 2009 U.S. Dist. LEXIS 4608, 46 Empl.
Benefits Cas. (BNA) 1952 (N.D. Ill. Jan. 7, 2009), the district court granted the DOL’s
motion for summary judgment for breach of fiduciary duty against an employer that had
withheld salary deferrals and payments from employees’ wages, but then failed to
transfer those monies to a 401(k) plan, and against individual fiduciaries who failed to
ascertain or ensure that these transfers were made. However, noting that the facts
involved in the case did not reach the egregious levels cited by the DOL in other cases,
e.g., Chao v. Linder, 2007 U.S. Dist. LEXIS 40425, 41 Empl. Benefits Cas. (BNA) 2278
(N.D. Ill. May 31, 2007), the court declined to issue a permanent injunction sought by the
DOL to prohibit defendants from providing services in the future to an ERISA plan.
F.
Plan and Individual Recovery for Breaches of Fiduciary Duty
In Harris v Koenig, 602 F.Supp.2d 39, 46 Empl. Benefits Cas. (BNA) 1806
(D.D.C. 2009), the district court denied motions to dismiss fiduciary breach and
prohibited transactions claims in a class action involving the loss in value of employer
stock investments in a 401(k) plan following a corporate merger. Class plaintiffs are
seeking to recoup losses they assert resulted from the plan’s purchase of the employer
stock at artificially inflated prices. The court rejected defendants’ argument that
plaintiffs had failed to state a claim seeking plan-wide relief under section 502(a)(2),
which was based on the fact that the complaint requested that relief be allocated only to
the accounts of those participants who had invested in the employer stock during the
periods in question, concluding, rather, that plaintiffs were suing on behalf of the plan as
a whole and that all plan members would benefit if plaintiffs succeeded. The court
reasoned that the entire plan had been affected by the alleged fiduciary breaches, as all
plan beneficiaries had portions of their accounts invested in employer stock, either as a
Page 56 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
result of their individual investment decisions investments or because employer matching
contributions were automatically invested in employer stock. Further, most of the plan’s
assets were invested in employer stock, and the complaint alleged that the employer
maintained the employer stock investment option, despite knowing of financial
irregularities that may have rendered it an inappropriate investment for the plan.
In Turner v. Talbert, 2009 U.S. Dist. LEXIS 67124 (M.D. La. July 30, 2009), the
district court declined to certify a class in a case involving fiduciary breach claims arising
out of alleged failures of 401(k) plan fiduciaries to transfer employee contributions to the
plan. Participant plaintiffs are also suing the plan’s third-party administrator for its
alleged failure to notify plaintiffs that employee contributions were not being forwarded
to the plan and for its unilateral decision to freeze plan assets, which had prevented
plaintiffs from making investment decisions, receiving distributions, or otherwise acting
to protect the value of their account balances under the plan. Plaintiffs had proposed a
class definition that would include only participants who were damaged and/or suffered
losses. The court noted that plaintiffs had not asserted they were bringing claims against
the administrator in a representational capacity or that damages would inure to the plan
rather than to their individual accounts and ruled that individual issues would
predominate because determining damages for the members of the proposed class would
require individualized calculations damages, rather than a determination of damages on a
plan wide basis. Therefore, class certification was precluded under Rule 23(3)(b).
G.
Liability of Non-Fiduciaries for Fiduciary Misconduct
3. Developments after Harris Trust
In Heritage Equity Group 401(k) Savings Plan v. Crosslin Supply Co., 638
F.Supp.2d 869, 47 Empl. Benefits Cas. (BNA) 1245 (M.D. Tenn. 2009), the district court
granted defendants’ motion to dismiss state law claims involving the allegedly fraudulent
transfer of 401(k) plan assets from the plan’s account to defendants by way of the thirdparty non-fiduciaries who had managed the plan assets were preempted by ERISA.
Defendants had removed the action, originally brought exclusively under state law, from
state to federal court, and plaintiff had amended the complaint to allege a claim under
ERISA section 502(a)(3) alongside the original state law claim for unjust enrichment.
The district court, finding the state claim preempted by ERISA, noted that the ERISA
claim could proceed against the non-fiduciary defendants under the Harris Trust
decision, which provides that a plan fiduciary may bring a claim seeking a remedy for
violation of ERISA against a non-fiduciary under section 502(a)(3).
In Neil v. Zell, --- F. Supp. 2d ----, 2009 WL 4927915, 48 Empl. Benefits Cas.
(BNA) 1462 (N.D. Ill. Dec. 17, 2009), the district court denied a motion to dismiss,
finding that ESOP participants had adequately stated a claim for liability for fiduciary
breach and prohibited transactions, under the principles enunciated in Harris Trust,
against a non-fiduciary that was alleged to have knowingly participated in a fiduciary
breach.
Page 57 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
In Solis v. Couturier, Jr., 2009 U.S. Dist. LEXIS 51888, 47 Empl. Benefits Cas.
(BNA) 1196 (E.D. Cal. June 19, 2009), the district court declined to dismiss a nonfiduciary defendant from an action seeking disgorgement of fees the non-fiduciary
defendant was accused of having received as a knowing participant in a fiduciary breach.
Citing Harris Trust, the district court found that ERISA section 502(a)(5) did not place a
limit on who may be a defendant to the suit as there was no limit on the universe of
possible defendants who might have knowingly participated in fiduciary violations under
ERISA. The court also noted that a plaintiff may seek disgorgement of fees against a
non-fiduciary if it received a transfer of plan assets or was unjustly enriched for its
participation in a fiduciary breach. Such a remedy would be equitable and could not be
characterized as a payment of money damages.
I.
Contractual Exculpation, Insurance, and Indemnification
In Brasley v. Fearless Farris Service Stations, 2009 U.S. Dist. LEXIS 19785, 46
Empl. Benefits Cas. (BNA) 2642 (D. Idaho Mar. 9, 2009), the district court denied
defendants’ motion for summary judgment in this fiduciary breach case, in which
defendants had argued that two of the plaintiffs’ execution of a settlement agreement in a
dispute related to the issues underlying the case precluded, under ERISA section 410(a),
their fiduciary breach action. The district court, noting the absence of Supreme Court or
Ninth Circuit precedent addressing the section 410(a) issue, found the reasoning in
Leavitt v. Northwestern Bell Telephone Co., 921 F.2d 160, 161 (8th Cir. 1990),
persuasive, but found that genuine issues of material fact as to whether defendant
employer fiduciary had obtained the settlement releases in violation of its fiduciary duties
to the beneficiaries precluded summary judgment.
In Fernandez v. K-M Industries Holding Co., 646 F.Supp.2d 1150, 48 Empl.
Benefits Cas. (BNA) 1301 (N.D. Cal. 2009), the district court ruled that an
indemnification agreement was invalid under ERISA section 410(a) in a case involving
claims that ESOP fiduciaries had caused an ESOP had paid more than fair value for
employer stock. Certain defendants in this action had agreed to a settlement, and other
remaining defendants cross-claimed for contractual indemnification from the settling
defendants. The court noted that the indemnification agreement could result in imposing
liability on the company whose shares constituted the ESOP's sole asset, which would
almost certainly decrease the value of the company and, by extension, the employer
stock. The court therefore concluded that, because the indemnification agreement would
indirectly impose on the ESOP the cost of any breach of fiduciary duty by the remaining
defendant fiduciary, the provision was invalid under section 410(a). The court found
support in Johnson v. Couturier, 572 F.3d 1067, 47 Empl. Benefits Cas. (BNA) 1449 (9th
Cir. 2009), discussed below and elsewhere in this outline.
In Johnson v. Couturier, Jr., 572 F.3d 1067, 47 Empl. Benefits Cas. (BNA) 1449
(9th Cir. 2009), the Ninth Circuit affirmed the district court’s grant of a preliminary
injunction preventing the advance payment of legal fees under multiple indemnification
agreements entered into by the president and directors of a corporation that sponsored an
ESOP, who were also fiduciaries of the ESOP. The ESOP participants had sued these
individuals for fiduciary breach claims arising out of their management of the ESOP and
Page 58 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
sought, in this action, to prevent corporate assets from being used to indemnify the
defendants in advance for their legal fees. The Ninth Circuit found that, because the
president and director served as ESOP trustees, each was an ERISA fiduciary subject to
the duties of loyalty and care and to the prohibition against self-dealing. Because the
indemnification agreements would indemnify defendants effectively with plan assets
even if they had breached their fiduciary duties, the agreements were void under ERISA
section 410(a), and any state law to the contrary was preempted under ERISA. The
employees had adequately established a likelihood of success on the merits of the
fiduciary breach claims, and the balance of harm weighed in favor of issuing the
injunction.
In In Re: Schering Plough Corp. ERISA Litigation, 2009 U.S. App. LEXIS 27930,
48 Empl. Benefits Cas. (BNA) 1385 (3d Cir. Dec. 21, 2009), the Third Circuit vacated an
order of the district court that had granted class certification in an action involving
management of a 401(k) plan and had held a release signed by a plan participant on
separation from service void under ERISA section 410(a). Relying on the Eighth Circuit
Court of Appeals’ decision in Leavitt v. Northwestern Bell Telephone Co., 921 F.2d 160
(8th Cir. 1990), the court of appeals ruled that section 410(a) applies only to instruments
that purport to eliminate fiduciary duties and responsibilities. Because the release at issue
merely settled an individual dispute, it did not implicate section 410(a). As a separate
matter, the court of appeals vacated the district court’s class certification and directed the
lower court to consider whether the class representative could meet the typicality and
adequacy of representation standards set forth under Rule 23 in light of his being subject
to the release.
In Solis v. Plan Benefit Services Inc., 620 F.Supp.2d 131, 49 Empl. Benefits Cas.
(BNA) 1691 (D. Mass. 2009), in a suit brought by the DOL to collect unpaid employer
contributions to a pension plan, the district court found void under ERISA section 410(a)
as a matter of public policy a provision in the master pension plan and trust agreement
that purported to relieve the plan trustee of responsibility for monitoring and collective
employer contributions to plans operated pursuant to the master document.
In Trustees of the Auto. Mechanics Local 701 Pension and Welfare Funds v.
Union Bank, 630 F.Supp.2d 951 (N.D. Ill. 2009), the district court denied a motion to
dismiss indemnification counter-claims filed by defendant bank trustee holding assets of
multiemployer pension funds in a suit brought by multiemployer plans for alleged
fiduciary breaches of the defendant. Defendant bank trustee asserted that plaintiffs, the
trustees of the multiemployer plan, were individually liable for the breaches based on
their own actions, and owed bank trustee indemnification on the claims, if proved. In
denying the plaintiff trustees’ motion to dismiss the bank’s indemnification claim, the
district court recognized the split in the circuits on the right to file a counter-claim for
contribution or indemnification under ERISA, and noted that the question of contribution
or indemnity remains open in the Seventh Circuit, as indicated in Summers v. State Street
Bank & Trust Co., 453 F.3d 404, 38 Empl. Benefits Cas. (BNA) 1065 (7th Cir. 2006).
The court determined that granting the plaintiff trustees’ motion to dismiss the
indemnification claim would give rise to a conflict of interest, by requiring the plaintiff
trustees to then decide whether to sue themselves in their individual capacities on behalf
Page 59 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
of the plan. Therefore, the court declined to dismiss the defendant’s counter-claim
without taking a position on the applicability of a right to contribution between cofiduciaries.
J.
Equitable Contribution and Indemnification.
In Nat’l Prod. Workers Union Ins. Trust v. Harter, 2009 U.S. Dist. LEXIS 54468
(N.D. Ill. June 24, 2009), the district court denied a motion to dismiss counterclaims for
contribution and indemnification, brought by defendants in this welfare plan fiduciary
breach case against the plan trustee and third parties. The court ruled that Alton Memorial
Hospital v. Metropolitan Life Ins. Co., 565 F.2d 245 (7th Cir. 1981), in which the
Seventh Circuit upheld the dismissal of a counterclaim for breach of fiduciary duty under
ERISA where the plaintiffs’ underlying claim was not under ERISA, was not applicable
to this case, which clearly involved ERISA claims against defendants for damages to the
plan.
VIII.
Prohibited Transaction
A.
ERISA
1. Statutory Provisions
b. ERISA Section 406
In McCullough v. Aegon USA, Inc., 585 F.3d 1082, 47 Empl. Benefits Cas.
(BNA) 2761 (8th Cir. 2009), a putative class action alleging both fiduciary breach and
prohibited transactions, brought by participants in a defined benefit plan, the court of
appeals affirmed (with a written dissent) summary judgment for defendants, based on the
fact that the plan was “substantially overfunded” and therefore plaintiffs lacked Article
III standing to bring any claims under ERISA section 502(a)(2). Plaintiffs’ claims were
based on allegedly excessive fees received by defendants as a result of defendants’
selection of investment funds for the plans. The court of appeals found no possibility of
plaintiffs’ suffering any actual harm because of the plan’s overfunding under controlling
Eighth Circuit precedent. The court declined to reconsider the controlling case, Harley v.
Minnesota Mining Co., 284 F.3d 901, 27 Empl. Benefits Cas. (BNA) 2089 (8th Cir.
2002), despite an intervening Supreme Court decision, Sprint Communications Co. v.
APCC Services, Inc., _____ U.S. _____ , 128 S.Ct. 2531 (2008), that recognized standing
of an assignee of a legal claim for money, even though the assignee had promised to
remit any proceeds to the assignor, and rejected arguments that Harley, which involved
only monetary relief, not injunctive relief, had too narrowly construed the concept of
“injury” in connection with pension plans governed by ERISA. The court of appeals
asserted that the holding of Harley could be set aside only by the Eighth Circuit sitting en
Page 60 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
banc. The dissenting judge argued that Sprint compelled reconsideration of Harley and a
different result in this case, and that standing should be based on whether the plan, not the
individual participants acting as plaintiffs, suffered harm from the alleged actions.
Although the district court had decided the prohibited transaction claim on its merits for
defendants, the court of appeals expressly extended its reliance on Harley to find that
Article III lack of standing separately required dismissal.
In contrast, in Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 48 Empl. Benefits
Cas. (BNA) 1097 (8th Cir. 2009), the court of appeals reversed the decision below,
holding that a participant had Article III standing to pursue claims of fiduciary breach and
prohibited transactions against the employer-sponsor of a participant-directed 401(k) plan
and various executives of the employer-sponsor. Plaintiff had claimed that defendants
had not used their bargaining power to obtain lower-fee institutional investment options
for plan participants, which resulted in participants’ payment of excessive fees under the
retail mutual funds that were offered, and that defendants permitted Merrill Lynch, which
acted as trustee and selected the array of mutual funds available for inclusion as
investment options, to receive unreasonable compensation by sharing in the retail fees.
The court of appeals found, distinguishing the contrary Eighth Circuit decision in Harley,
that plaintiff had alleged sufficient personal injury to establish Article III standing by
alleging “actual injury” to his own account under the plan and therefore could proceed to
assert claims on behalf of the entire plan. The court of appeals also reversed the district
court’s finding that plaintiff’s pleadings were insufficient to survive a motion to dismiss
under Rule 12(b)(6) (see additional discussion elsewhere in this outline).
In Tibble v. Edison International, 639 F.Supp.2d 1122, 47 Empl. Benefits Cas.
(BNA) 2363 (C.D. Cal. 2009), the district court dismissed on summary judgment
prohibited transaction claims asserted by putative class plaintiffs (participants in a
defined contribution plan), which arose from defendants’ failure to monitor or negotiate
the amount of “float” generated from the investment of plan assets that the trustee could
retain. The court based its ruling on plaintiffs’ failure to allege any “transaction” in
which defendants had engaged that had caused the trustee to retain the “float” income,
asserting that fiduciaries’ inaction could not in itself be deemed a transaction prohibited
under ERISA section 406.
The district court’s decision to certify a class in Haddock v. Nationwide Financial
Services, Inc., ---F.R.D. ---, 2009 WL 3762339, 48 Empl. Benefits Cas. (BNA) 1994 (D.
Conn. Nov. 6, 2009), allowed prohibited transaction claims to go forward together with
fiduciary claims. The class plaintiffs, trustees of participant-directed 401(k) plans that
held or continue to hold group and/or individual variable annuity contracts with
defendants Nationwide Insurance Co. and Nationwide Financial Co., asserted that
revenue-sharing arrangements between the financial services provider defendants and the
mutual funds they offered as investment options to the participants in those plans
constituted prohibited transactions as well as breaches of fiduciary duty. The district
court’s analysis acknowledged as supportable plaintiffs’ theory that liability could flow
from defendants’ merely having the control and authority to include or exclude
investment options, regardless of whether they actually acted upon that power, if the
Page 61 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
revenue-sharing payments were made as an incentive to defendants to make those
investments available as options under the plans.
In Tullis v. UMB Bank, N.A., 640 F.Supp.2d 974, 47 Empl. Benefits Cas. (BNA)
1645 (N.D. Ohio 2009), the district court granted summary judgment for defendant on
prohibited transaction claims based on defendant’s actions taken in compliance with
plaintiffs’ investment directions regarding their individual accounts in a participantdirected 401(k) plan. The court held that the plan was operated in conformity with
ERISA section 404(c) and found that, although prohibited transactions may have
occurred, defendant merely permitted the transactions to occur and did not cause any
transactions. Rather, plaintiffs, through their individual control over investment of their
accounts, caused the plan to engage in the prohibited transactions. Therefore defendant
could not be held liable under ERISA section 406.
B.
Internal Revenue Code
2. IRA
In Opinion No. 2009-02A, issued September 28, 2009, DOL approved, as not
constituting prohibited transactions under Code section 4975, an estate planning
arrangement in which distributions from an individual retirement account (IRA) upon the
death of the IRA owner would be paid into a non-ERISA trust established for the benefit
of the IRA owner’s grandson. The IRA owner was named the trustee of the trust during
his lifetime, with the IRA owner’s son, father of the designated beneficiary grandson,
named as successor trustee. DOL opined that, although the trust itself, the son, and the
grandson were all disqualified persons under Code section 4975, neither the trustee’s
decision to accept the IRA distributions, nor the trust’s receipt of the contributions, would
constitute prohibited transactions under Code section 4975 because an IRA owner should
not be treated as acting as a fiduciary in deciding to make “an otherwise permissible
benefit distribution in accordance with the terms of the IRA.” DOL reasoned that the
Code’s prohibited transaction provisions should be read in conformity with ERISA’s
prohibited transaction provisions to provide that “ordinary benefit distributions are not
prohibited transactions.” Therefore, Code section 4975’s prohibitions should not apply to
a disqualified person’s receipt of a benefit to which he or she is entitled as a participant or
beneficiary. In this regard, DOL read Code section 4975(d)(9) to parallel ERISA section
408(c)(1), which expressly exempts from the prohibited transaction rules a participant’s
or beneficiary’s receipt of benefits, even though, in contrast to ERISA section 3(14)(H),
the definition of “disqualified persons” in Code section 4975(e)(2) does not include
employees. Further, DOL opined that actions of the son as successor trustee of the trust,
following the death of the IRA owner, would not be governed by ERISA, but noted that
to the extent the son may then be acting as the fiduciary of the IRA, his actions would be
subject to the constraints of Code section 4975.
In a second opinion involving IRAs, Opinion No. 2009-03A, issued October 27,
2009, DOL stated that an IRA owner’s grant of a security interest in his non-IRA
Page 62 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
accounts to a broker to cover indebtedness of, or arising from, his IRA would constitute a
prohibited transaction under Code section 4975(c)(1)(B), which prohibits the direct or
indirect lending of money or other extension of credit between a plan and a disqualified
person. In addition, DOL noted that if the arrangement would result in covering the
indebtedness of the IRA owner, it would also likely result in violations of Code sections
4975(c)(1)(D) and (E) as well because the IRA owner would be using or transferring the
IRA’s assets for his own benefit and would be dealing with the IRA’s assets in his own
interest or for his own account.
D.
Application of the Prohibited Transaction Rules
3. Furnishing of Goods, Services, and Facilities
In In re Honda of America Mfg., Inc. ERISA Fees Litigation, ---F.Supp.2d ---,
2009 WL 3270490, 47 Empl. Benefits Cas. (BNA) 2610 (S.D. Ohio Oct. 9, 2009), the
district court dismissed a putative class action filed by plan participants, asserting that
service providers to participant-directed, individual account defined contribution plan
breached their fiduciary duties and engaged in prohibited transactions by limiting the
investment options offered under the plan to retail mutual funds of a single investment
company that allegedly charged participants excessive fees and receiving revenue-sharing
payments from the specific funds based on participants’ investment decisions. With
respect to the prohibited transaction claims, the court held that plaintiffs had failed to
allege with requisite specificity any particular transactions engaged in by defendants
separate from the alleged fiduciary breach claims.
6. Section 406(b)—Fiduciary Self-Dealing
In Spinedex Physical Therapy USA, Inc. v. United Healthcare of Arizona, Inc., --F.Supp.2d ----, 2009 WL 1154128 (D. Ariz. Apr. 29, 2009), the district court denied
motions to dismiss, inter alia, prohibited transaction claims founded on the administration
and benefit claims adjudication processes of 45 employee welfare plans that provided
health care benefits. Participants and beneficiaries of the plans and health care providers
to which participants had assigned benefit claims (including an association of such
providers) brought the class action against six corporations that served as fiduciaries and
administrators of the plans. They alleged a variety of fiduciary breach and prohibited
transaction claims, including allegedly systematic failures to properly determine benefits
and provider compensation under the plans that resulted in self-dealing benefiting the
corporations. With respect to the prohibited transaction claims, the court held, as a legal
matter, that transactions involving benefit claims determinations and provider
compensation could result in violations of ERISA’s prohibited transaction prohibitions
and that plaintiffs had adequately pled facts supporting their position that amounts
Page 63 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
withheld by defendants for claims and provider compensation could be plan assets that
defendants had loaned, transferred, or retained in violation of ERISA section 406.
DOL issued Opinion No. 2009-01A, January 13, 2009, advising a Pennsylvania
state chartered trust company that acted as investment manager for two series of real
estate investment funds in which various Taft-Harley plans invested that its transfer of
cash assets of the funds from an unaffiliated money market mutual fund to an affiliated
fund was not prohibited under ERISA section 406(b)(1), (2), or (3). The DOL relied
upon the statutory exemption in ERISA section 408(b)(4), which permits plan assets to be
invested in deposits of a bank or similar financial institution that is a fiduciary of the
plan, provided that the investment is expressly authorized by a fiduciary (other than such
bank or affiliate thereof) who is expressly authorized by the plan to instruct the trustee
with respect to the investment. DOL cited in support the fact that the trust company’s
chief trust investment officer had reviewed and approved the proposed transfer. With
respect to ERISA section 406(b)(3), DOL noted that the only benefit the affiliate bank
would receive was the ability to reduce its borrowing needs, and therefore its interest
expenses, as a result of having greater access to capital to meet its reserve requirements
under federal banking law; DOL opined that this benefit would not be received “from a
party which itself was dealing with the plan within the meaning of section 406(b)(3)”
and, therefore, no violation of section 406(b)(3) would occur as a result of the transfer.
In Faulman v. Security Mutual Financial Life Ins. Co., 2009 WL 4367311, 48
Empl. Benefits Cas. (BNA) 1356 (3d Cir. Dec. 3, 2009), the court of appeals in an
unpublished decision affirmed rulings denying prohibited transaction claims based on an
insurance company’s treatment of contributions made by an employer under a life
insurance plan benefiting two employees. The court upheld the district court’s
conclusion that the insurance company did not act as a fiduciary in marketing an
insurance policy to the employer that incorporated a whole-life conversion feature with
limitations on the employees’ ability to cash out the contributions made on their behalf or
in depositing, in accordance with the policy terms, the employers’ contributions in the
insurance company’s general account. Because the contributions, once so deposited,
were not “plan assets” under ERISA, the insurance company did not engage in selfdealing or receive excessive compensation.
b. Acting on Behalf of Adverse Parties
In Stanton v. Couturier, --- F.Supp.2d ----, 2009 WL 3297293 (E.D. Cal. Oct. 13,
2009), the district court granted ESOP participants a preliminary injunction enjoining the
corporate director of an ESOP-owned company from participating in an arbitration
seeking enforcement of an indemnification agreement between the company and its
former directors, based on the court’s finding that the indemnification agreement was
likely to violate ERISA section 410 and its execution by the corporate director was likely
to have been a prohibited transaction under ERISA section 406. The Stanton decision is
directly related to Johnson v. Couturier, 2008 WL 4443085, 45 Empl. Benefits Cas.
(BNA) 2562 (E.D. Cal. Sept. 26, 2008), noted in last year’s outline (see p. 39), a pending
Page 64 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
fiduciary breach case in which the district court had issued an injunction barring the
ESOP-owned company from advancing attorneys’ fees under the indemnification
agreement to allegedly breaching company directors. In Stanton, the court reasoned that
enjoining arbitration was warranted based on the balance of harms to avoid depletion of
the ESOP’s assets. Allowing the arbitration to proceed would risk irreparable harm to the
ESOP through potential depletion of its assets; the court directed that the company
instead hold the potential attorneys’ fees in escrow.
E.
Exemptions From the Prohibited Transaction Restrictions
1. Statutory Exemptions
c. Reasonable and Necessary Services
iii Reasonable Compensation
In Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 48 Empl. Benefits Cas. (BNA)
1097 (8th Cir. 2009) the court reversed the district court’s dismissal of prohibited
transactions claims asserted by plaintiff participant in a case involving alleged revenuesharing arrangements between Merrill Lynch and the mutual funds offered to participants
under the plan. The court found sufficient that the complaint alleged that the investment
options provided under the plan made revenue sharing payments to Merrill Lynch and
that these payments were not in exchange for services rendered, but were rather a quid
pro quo for inclusion in the plan, holding that plaintiff was not required to plead facts
raising a plausible inference that the revenue sharing payments were unreasonable in
relation to the services provided by Merrill Lynch. Because the complaint pled sufficient
facts to allege that services were furnished between a plan and a party in interest per
ERISA section 406(a)(1)(C), the court held, the burden shifted to defendants to show that
no more than reasonable compensation was paid as required under ERISA section
408(b)(2). Plaintiff was not required affirmatively to plead unreasonableness to survive
dismissal of his complaint.
e. Bank Deposits
DOL Opinion No. 2009-01A, supra, relied upon the statutory exemption in
ERISA section 408(b)(4), which permits plan assets to be invested in deposits of a bank
or similar financial institution that is a fiduciary of the plan. The investment must be
expressly authorized by a fiduciary (other than such bank or affiliate thereof) who is
expressly authorized by the plan to instruct the trustee with respect to the investment, to
find an investment manager’s transfer of funds of various Taft-Harley plans from an
unaffiliated money market mutual fund to an affiliated bank’s fund not prohibited under
Page 65 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
ERISA section 406(b)(1), (2), or (3). The DOL cited in support the fact that the
investment manager’s chief trust investment officer had reviewed and approved the
proposed transfer.
i. Investment Advice – Participants and Beneficiaries
On November 20, 2009, 74 FR 60156, DOL withdrew final rules promulgated
earlier in the year under ERISA sections 408(b)(14) and 408(g), two statutory exemptions
to the prohibited transaction rules that were added by the Pension Protection Act of 2006.
Sections 408(b)(14) and 408(g) permit a fiduciary that renders investment advice for a
fee to provide investment advice to participants and beneficiaries of participant-directed
individual account plans and to beneficiaries of IRAs, and to receive fees for providing
such advice, under certain limited circumstances (essentially either where the advice
would not affect the fees received by the advisor – so-called “fee-leveling” – or is
provided through computer modeling). The withdrawn final rules had interpreted the
statutory exemption to require fee-leveling only with respect to the entity providing the
advice (excluding affiliates) and had also included an administrative class exemption that
allowed advisers to offer individualized investment advice following the provision of
computer-modeling advice. In withdrawing the final rules, DOL indicated that recent
public comments in response to DOL’s invitation had cast doubt on the rules’ adequacy
to mitigate advisers’ conflicts. DOL stated it intends “shortly” to propose new
regulations implementing ERISA sections 408(b)(14) and 408(g).
3. Class Exemptions
In Gipson v. Wells Fargo & Co., 2009 WL 702004, 46 Empl. Benefits Cas.
(BNA) 1391 (D. Minn. Mar. 13, 2009), granting in part and denying in part motions to
dismiss a putative class action by a former participant in a single-employer 401(k) plan
against the plans’ fiduciaries based on allegedly impermissible investments in mutual
funds affiliated with the employer, the district court denied a motion to dismiss a
prohibited transaction claim. The motion to dismiss asserted that plaintiff had failed to
plead facts showing that defendants had not satisfied the conditions of an applicable
prohibited transaction class exemption (PTE 77-3). Although the court declined to
accept plaintiff’s argument that defendants would have to raise compliance with the
prohibited transaction class exemption as an affirmative defense, noting that at least one
court has held that a plaintiff must allege failure to comply with an exemption to assert a
claim under ERISA section 406 (Mehling v. New York Life 7 Ins. Co., 173 F.Supp.2d 502
(E.D. Pa. 2001)), the court nonetheless refused to dismiss the prohibited transaction
claims because plaintiff had adequately alleged failure to meet “at least” one element of
the class exemption.
4. Individual Exemptions
a. Property
Page 66 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
PTE 2009-05 (February 25, 2009, 74 Fed. Reg. 8571). The DOL granted an
exemption from the prohibited transaction rules of ERISA sections 406(a)(1)(A) and (D)
and section 406(b)(1) and (2) for a plan sponsor’s purchase of units in a limited
partnership held by the defined contribution plan it maintained. In 1997, the DOL had
determined in the course of an investigation that the purchase of 2.5 units in a real estate
limited partnership by the Brewster Dairy 401(k) Profit Sharing Plan (“Plan”) at a cost of
$749,000 had violated the fiduciary responsibility provisions of ERISA. Pursuant to the
terms of a ensuing Consent Order and Judgment (“COJ”), Brewster Dairy, Inc.
(“Brewster”) allocated $333,333 to the account balances of plan participants not involved
in the investment decision. The Plan, however, retained its interest in the partnership.
By June 2008 the value of the Plan’s units had fallen to $57,000, largely because the
value of partnership’s property had declined to $780,000. The depreciation of the
property was attributed to the discovery of landslides on the property. Several months
later, the partnership advised the Plan that it had received a notice of forfeiture due to
unpaid property taxes. The Plan was advised that an adjacent property owner had offered
to purchase the property for $65,000. Brewster sought an exemption from the DOL to
permit it to purchase the Plan’s units in the partnership for $57,000, the appraised value
of the units when the property was worth $780,000. The DOL granted the exemption
subject to satisfaction of a number of conditions, including that: (a) the sale of the units
was a one-time transaction for cash; (b) the Plan paid no commissions, fees or other
expenses in connection with the sale; (c) the terms of the transaction were at least as
favorable to the Plan as those the Plan could obtain in a similar transaction with an
unrelated party; and (d) the fair market value of the units on the date of the sale was
determined by a qualified independent appraiser.
PTE 2009-10 (Mar. 26, 2009, 74 Fed. Reg. 13235). The DOL granted a
retroactive exemption from the provisions of ERISA sections 406(a) and 406(b)(1) and
(2) to a retirement plan’s lease of a medical facility and private residence/office to its
sponsor. The exemption also permits the exercise, by the plan sponsor, of a one-year
option to buy the converted office and a three-year option to buy the medical facility. The
exemption required satisfaction of several conditions, including assurances that the terms
of the lease were no less favorable to the plan than those obtainable in an arm’s length
transaction and that an independent fiduciary had negotiated, reviewed and approved the
terms and conditions of the leases.
PTE 2009-15 (June 26, 2009, 74 Fed. Reg. 30623) permitted a defined
contribution profit-sharing plan with 20 participants and $853,000 in assets to sell real
estate to the owner of its company sponsor. The plan had purchased 80,000 acres of
property for $145,000 and had spent an additional $106,352 renovating the property. The
owner of the company sponsoring the plan offered to buy the property, adjacent to his
land, for $381,991. The offered price reflected the $260,000 fair market value of the
property as determined by an independent appraiser (who did not account for renovations
to the property). The offer also accounted for renovations paid for by the plan and
$15,639 in lost earnings to the plan due to the renovation costs. (The latter figure was
determined using the DOL’s online Voluntary Fiduciary Compliance Program
Page 67 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
calculator.) The DOL granted the exemption subject to satisfaction of the following
conditions: (a) the sale would be a one-time transaction for cash; (b) the terms and
conditions of the sale would be at least as favorable to the plan as those that the plan
could obtain in an arm's length transaction with an unrelated party; (c) the sales price
would be the greater of $381,991 or the fair market value of the real estate as of the date
of the transaction, as determined by a qualified, independent appraiser; (d) the plan would
pay no commissions, costs, or other expenses in connection with the sale; and (e) the plan
fiduciary would review and approve the methodology used by the qualified, independent
appraiser, ensure that such methodology is properly applied in determining the property's
fair market value, and would also determine whether it is prudent to go forward with the
proposed transaction.
PTE 2009-29 (November 16, 2009, 74 Fed. Reg. 59001). The DOL granted an
exemption from the provisions of ERISA sections 406(a)(1)(A) and (D) and 406(b)(1)
and (2) to permit the sale of a leasehold interest, which included an office building and
certain rights pursuant to a ground lease, held by a plan, to the Bridge, Structural and
Ornamental Iron Workers Local Union, a party in interest with respect to the plan. The
exemption requires that (a) the terms and conditions of the sale be at least as favorable to
the plan as those that the plan could obtain in an arm's length transaction with an
unrelated party; (b) the plan receive the greater of $285,000 or the fair market value of
the real estate as of the date of the sale, as determined by a qualified, independent
appraiser; (c) the sale be a one-time transaction for cash; (d) the plan pay no
commissions, costs, or other expenses in connection with the sale (other than fees
associated with the retention of a qualified, independent appraiser and the retention of a
qualified, independent fiduciary); (e) the plan’s Board of Trustees retain a qualified,
independent fiduciary who will review and approve the methodology used by the
qualified, independent appraiser, ensure that such methodology is properly applied in
determining the fair market value of the real estate as of the date of the sale, and
determine whether it is prudent to go forward with the proposed transaction; and (f) prior
to the publication of a final exemption in the Federal Register, the Union must: (i) file
Form 5330 (Return of Excise Taxes Related to Employee Benefit Plans) with the Internal
Revenue Service and pay all applicable excise taxes due by reason of its past prohibited
leasing to the plan of the real estate; and (ii) provide the DOL with copies of Form 5330
and the payment checks showing that the excise taxes were correctly computed and paid.
PTE 2009-32 (November 16, 2009, 74 Fed. Reg. 59011). The DOL granted an
exemption from the provisions of ERISA sections 406(a) and 406(b)(1) and (2) to permit
a Taft-Hartley apprenticeship plan to purchase unimproved real property adjacent to its
existing training facility from the Alaska Construction & General Laborers 942 Building
Association, Inc., a holding company owned by Local 942, Laborers International Union
of North America, a party in interest with respect to the plan. The exemption was
conditioned on the following: (a) the terms and conditions of the proposed transaction
must be no less favorable to the plan than those that the plan would receive in an arm's
length transaction with an unrelated party; (b) the purchase of the real estate will be a
one-time transaction for cash; (c) the plan will not pay any real estate commissions, fees,
or other similar expenses to any party as a result of the proposed transaction; (d) the plan
Page 68 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
will purchase the property from the Building Association for the lesser of (1) $62,791 or
(2) the fair market value of the property as determined on the date of such transaction by
a qualified, independent appraiser; (e) the proposed transaction will be consummated
only after an independent fiduciary (1) determines that proceeding with the transaction is
in the best interests of the plan and its participants and beneficiaries and (2) negotiates the
relevant terms and conditions of such transaction; (f) the independent fiduciary will
calculate, on the date of the transaction (using the applicable certificate of deposit rate in
effect), the amount of interest owed to the plan based upon its earnest money deposit for
the property; (g) on the date of the transaction, the plan's legal counsel will pay to the
plan the interest the plan would have earned if counsel had deposited the plan's earnest
money for the real estate in an interest-bearing account, rather than a non-interest bearing
account; (h) the independent fiduciary will monitor the proposed transaction on behalf of
the Plan to ensure compliance with the agreed upon terms.
c. Securities and Notes
PTE 2009-01 (January 21, 2009, 74 Fed. Reg. 3644). The DOL granted an
exemption from the provisions of ERISA sections 406(a), 406(b)(1) and (2) and 407(a) to
permit a plan to acquire, retain and dispose of warrants issued by the plan sponsor. The
plan sponsor of a participant-directed defined contribution plan filed for relief under
Chapter 11 of the Bankruptcy Code. Under the Plan of Reorganization, (“POR”) the plan
sponsor’s stock was cancelled and delisted. Pursuant to the POR, the plan received
210,000 warrants to purchase shares of the plan sponsor’s “new stock.” An independent
fiduciary was retained and given discretionary authority to dispose of the stock on the
over-the-counter market. The exemption was subject to the following conditions: (a) the
plan may acquire and hold the warrants only in connection with the plan sponsor’s
bankruptcy proceedings pursuant to which all holders of plan sponsor’s “old stock” (i.e.
the delisted stock) were treated in the same manner; (b) the plan had little, if any, ability
to affect the negotiation of the POR; (c) the plan acquired the warrants automatically and
without any independent action of its own; (d) the plan did not pay any fees or
commissions in connection with acquiring and holding the warrants; (e) all decisions
regarding the holding and disposition of the warrants by the plan were made in
accordance with plan provisions for individually directed investment of participant
accounts by the individual participants whose accounts in the plan received the warrants;
and (f) the plan received the same proportionate number of warrants as other owners of
old stock.
PTE 2009-02 (January 21, 2009, 74 Fed. Reg. 3644). This exemption involved a
terminated defined benefit plan with no participants or beneficiaries that held, among
other things, residual assets in a security valued at $5,250.00 by the plan's broker-dealer,
UBS Financial Services, Inc., (UBS). Six years before it was terminated, the plan had
purchased the security for $25,000. The security had been in default for a number of
years and efforts to sell the security had proved futile. The plan sponsor proposed that it
be permitted to purchase the security for $5,250 in cash.
The DOL granted the
exemption from the prohibited transaction rules of ERISA sections 406(a), 406(b)(1) and
Page 69 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
(2) provided that: (a) the sale of the security would be a one-time transaction for cash;
(b) the plan would pay no commissions, fees or other expenses in connection with the
sale; (c) the terms and conditions of the sale would be at least as favorable as those
obtainable in an arm's length transaction with an unrelated third party; (d) the value of the
security would be determined by Interactive Data Systems, a qualified, unrelated entity;
and (e) the plan was in fact a terminated defined benefit plan for which all benefits owed
to participants and beneficiaries have been paid.
PTE 2009-04 (February 25, 2009, 74 Fed. Reg. 8570). The DOL granted an
exemption from the prohibited transaction rules of ERISA sections 406(a)(1)(A) and (D)
and sections 406(b)(1) and (2) to allow a plan sponsor to purchase a non-marketable
interest in a limited partnership held by the defined benefit plan it maintained. Heico
Holding Company had sought to terminate its overfunded and frozen defined benefit
plan, which would require liquidation of the plan’s assets. Complicating matters was the
fact that the plan’s investments included a limited partnership interest in a Cayman Island
partnership. Under the terms of the partnership agreement, interests were transferable
only to the general partner or to an “associate” of the transferring limited partner, such as
Heico. The general partner valued the plan’s partnership interest at $715, 416.93. The
plan’s investment committee obtained an independent appraisal that valued the interest at
$1,050,000.00. Heico requested an exemption from the DOL to purchase the plan’s
interest in the partnership so that the company could proceed with the termination of the
plan. The DOL granted the exemption, subject to satisfaction of the following
conditions: (a) the sale would be a one-time transaction for cash; (b) the plan would pay
no commissions, fees or other expenses in connection with the sale; (c) the terms and
conditions of the sale would be at least as favorable as those obtainable in an arm's length
transaction with an unrelated third party; (d) as a result of the sale, the plan would receive
the greater of: (i) $1,050,000; (ii) the value of the interest as determined by the general
partner of the partnership and reported on the most recent quarterly account statements of
the partnership available at the time of the sale; (iii) the fair market value of the interest
as determined on the date of the sale by a qualified, independent appraiser; or (iv) the
total amount of the plan's contributions to the partnership made on or after January 21,
2005 (i.e., the plan's investment cost basis in the partnership); and (e) it is determined that
the plan, upon termination, is in fact overfunded.
PTE 2009-06 (February 27, 2009, 74 Fed. Reg. 8892); PTE 2009-07 (February
27, 2009, 74 Fed. Reg. 8893); PTE 2009-08 (February 27, 2009, 74 Fed. Reg. 8895);
PTE 2009-09 (February 27, 2009, 74 Fed. Reg. 8896). The DOL granted exemptions to
the prohibited transaction provisions of ERISA sections 406(a)(1)(A) and (D) and
406(b)(1), and Code sections 4975(a) and (b), by reason of Code section 4975(c), to
permit the sale of illiquid auction rate securities owned by ERISA plans and IRAs,
requested by four investment firms. Three investment firms, Citigroup, Robert W. Baird
& Co. and Raymond James & Associates each served as a broker, dealer, custodian or
fiduciary with respect to the purchase of auction rate securities by ERISA plans and
individual retirement accounts (“IRAs”). In the wake of the February 2008 collapse of
Page 70 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
the auction rate securities markets, ERISA plan and IRA customers of these firms were
left holding illiquid securities, which raised concerns that the plans would be unable to
make benefit payments when due. To avoid this result, each of the firms requested an
exemption from the prohibited transaction rules of ERISA and the Code in order to: (i)
permit plans to sell the auction rate securities to plan sponsors for par value plus any
accrued or unpaid interest; (ii) permit plans to exchange the auction rate securities for
listed securities, U.S. Treasury obligations, FDIC insured certificates of deposit, or
certain fixed-income securities; and (iii) permit either the investment firms, an affiliate of
the investment firm, or an introducing or clearing broker to loan or extend credit to a
customer plan, provided the loan is repaid and guaranteed by the plan sponsor. A fourth
firm, Northwest Mutual Investment Services, LLC, which served only as a broker in
auction rate securities transactions, sought relief from the provisions of ERISA section
406(a) in order to make cash purchases of auction rate securities from client plans at the
greater of (i) par value plus accrued and unpaid interest or (ii) fair market value of the
auction rate securities as of the date of purchase as determined by an independent
appraiser.
Subsequent to issuance of PTE 2009-07, the DOL granted PTE 2009-18 (July 24,
2009, 74 Fed. Reg. 36774), which permitted plans to lend auction rate securities to
Robert W. Baird & Co. and its affiliates. The exemption was conditioned on satisfaction
of a number of conditions, including that (a) the last auction for the loaned auction rate
security was unsuccessful; (b) the plan does not waive any rights or claims with respect
to the auction rate security as a condition for engaging in the loan; (c) the loan is not part
of an arrangement to benefit a party in interest; and (d) Baird remains a registered brokerdealer.
On the same day the DOL issued PTE 2009-18 it also granted two other
exemptions involving auction rate securities. In PTE 2009-20 (July 24, 2009, 74 Fed.
Reg. 36777), the DOL permitted the sale by a plan that had acquired auction rate
securities from Morgan Stanley to sell such security back to the investment services firm.
The exemption required, among other things, that the last auction for the auction rate
security had been unsuccessful. Similarly, in PTE 2009-21 (July 24, 2009 74 Fed. Reg.
45284), the DOL granted an exemption permitting the cash sale by a plan of certain
auction rate securities to BNY Mellon. This exemption imposed conditions similar to
those required in other auction rate securities exemptions. PTE 2009-14 (May 6, 2009, 74
Fed. Reg. 20997). As part of a capital improvement program, financial services
conglomerate UBS replaced its 2007 cash dividend to shareholders with an award of
“Entitlements.” Between April 28, 2008, and May 9, 2008, shareholders (including
participants in the UBS Savings and Investment Plan, the UBS Financial Services Inc.,
401(k) Plus Plan and the UBS Financial Services Inc. of Puerto Rico Pension Plus Plan
(collectively “UBS Plans”)) were permitted to buy or sell Entitlements on a European
securities market. Any entitlements held after May 9 were converted to UBS shares
(twenty Entitlements enabled a holder to receive one share of UBS stock). Additionally,
as part of the capital improvement program, UBS initiated a “Rights” offering for
shareholders (including participants in the UBS Plans). From May 27 through June 9,
Page 71 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
2008, holders could buy and sell Rights on the New York Stock Exchange or exchange
the rights for UBS shares. Any unexercised Rights after this period were of no value.
The DOL granted relief from the provisions of ERISA sections 406(a), 406(b)(1)
and (2) and 407(a) for the acquisition by the UBS Plans of the Entitlements and Rights
and the holding of such Rights. The exemption was granted subject to meeting the
following conditions: (a) all decisions regarding the acquisition and holding of the Rights
and Entitlements by the UBS Plans were made by a qualified, independent fiduciary; (b)
the UBS Plans' acquisition of the Rights and Entitlements resulted from an independent
act of UBS as a corporate entity, and without any participation on the part of the UBS
Plans; (c) the acquisition and holding of the Rights and Entitlements by the UBS Plans
occurred in connection with a capital improvement plan approved by the board of
directors of UBS, in which all holders of UBS common stock, including the UBS Plans,
were treated exactly the same; (d) all holders of UBS common stock, including the UBS
Plans, were issued the same proportionate number of Rights based on the number of
shares of UBS common stock held by such UBS Plans; (e) all holders of UBS common
stock, including the UBS Plans, were issued the same proportionate number of
Entitlements based on the number of shares of UBS common stock held by such holders;
(f) the acquisition of the Rights and Entitlements by the UBS Plans occurred on the same
terms made available to other holders of UBS common stock; (g) the acquisition of the
Rights and Entitlements by the UBS Plans was made pursuant to provisions of each such
plan for the individually-directed investment of participant accounts; and (h) the UBS
Plans did not pay any fees or commissions in connection with the acquisition or holding
of the Rights or Entitlements.
PTE 2009-16 (June 26, 2009, 74 Fed. Reg. 30623). This PTE amends several
previously granted individual exemptions (collectively the “Underwriter Exemptions”),
which provide relief for the origination and operation of certain asset pool investment
trusts and permit employee benefit plans to acquire, hold and dispose of certain assetbacked pass-through certificates representing undivided interests in those investment
trusts. Specifically, PTE 2009-16 amends the Underwriter Exemptions to provide a sixmonth period during which certain conditions of the Underwriter Exemptions are
suspended in order to permit affected parties to resolve problems created by Bank of
America Corporation’s acquisition of Merrill Lynch, which created affiliations that
caused previously exempted transactions to violate conditions of the Underwriter
Exemptions.
PTE 2009-17 (June 26, 2009, 74 Fed. Reg. 30631). The DOL granted an
exemption from the prohibitions of Code sections 4975(c)(1)(A), (D) and (E) for the
cash sale by fifteen self-directed IRAs of bank stock. The cash sale was intended to
avoid the imposition of unrelated business taxable income to which the IRAs would be
subject as a result of a change in corporate status of the bank. The exemption was
conditioned on satisfaction of the following conditions: (a) the sale of the stock by each
IRA was a one-time transaction for cash; (b) the terms and conditions of each sale would
be at least as favorable to each IRA as those obtainable in an arm's length transaction
with an unrelated party; (c) each IRA would receive the fair market value of the stock on
Page 72 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
the date of the sale as determined by a qualified, independent appraiser; and (d) each IRA
would not pay any commissions, costs, or other expenses in connection with each sale.
PTE 2009-19 (July 24, 2009, 74 FR 36775). This exemption retroactively permits
(1) the acquisition by individually-directed accounts (the Accounts) of participants in a
401(k) Savings and Profit Sharing Plan (the Plan), of publicly traded partnership units
(the Units) issued by the Plan sponsor, as a result of the conversion of the common stock
of Hydrocarbon (the Stock) held by the Plan into Units, pursuant to a Plan of Redemption
and Merger (the Merger); and (2) the holding of such Units by the Accounts in the Plan.
PTE 2009-19 also permits, prospectively: (1) the purchase of Units in the future by
Accounts in the Plan; and (2) the holding of such Units by the Accounts in the Plan. The
exemption requires, among other things, that the Plan maintain records concerning all
covered transactions for a period of six years and make such records unconditionally
available to DOL and IRS representatives.
PTE 2009-22 (September 1, 2009, 74 Fed. Reg. 45284). PNC Financial Services
Group (“PNC Financial”) is a bank holding company that owns or controls two banks and
a number of non-bank subsidiaries. PNC Financial provides, through its subsidiaries, a
wide variety of trust and banking services to individuals, corporations, and institutions.
Through its banking subsidiaries, PNC Financial provides investment management,
fiduciary and trustee services to employee benefit plans and charitable and endowment
funds, and provides non-discretionary services and investment options for defined
contribution plans. PNC Financial also provides a range of tailored investment, trust, and
private banking products to affluent individuals and families. In addition, PNC Financial
and its affiliates provide various types of administrative services to mutual funds,
including acting as transfer and disbursing agents and providing custodial and accounting
services.
The DOL granted relief to PNC Financial from the provisions of ERISA sections
406(a) and (b) to permit certain “client plans” with respect to which PNC is a fiduciary
and party in interest to invest in an open-ended investment fund (“Fund”) for which a
wholly owned subsidiary of PNC (BlackRock) provides investment advisory and similar
services; to permit PNC and BlackRock to receive fees from the Fund for providing
secondary services to the Fund; and to permit PNC to receive fees from BlackRock for
mutual fund administrative services provided by PNC to the Fund. The exemption
requires, among other things, that PNC and its officers or directors not purchase shares of
the Fund from any client plan; that client plans not be required to pay any sales
commission in connection with the purchase or sale of shares of the Fund; and that a
second independent fiduciary acting on behalf of the client plan receive, in advance of
any initial investment in the Fund, detailed information concerning the Fund and the
investment.
PTE 2009-23 (September 1, 2009, 74 Fed. Reg. 45290). Verizon Investment
Management Corporation (“VIMCO”) is a wholly-owned subsidiary of GTE
Corporation, which in turn is a wholly-owned subsidiary of Verizon Communications
Inc. (“Verizon”). VIMCO is registered as an investment adviser under the Investment
Page 73 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
Advisers Act of 1940. VIMCO has been delegated authority to invest the assets of
employee benefit trusts of Verizon and of most of Verizon's domestic subsidiaries. In this
capacity, VIMCO's primary function is to act as investment manager or adviser for these
employee benefit trusts, although VIMCO also performs investment management or
advisory services for other entities related to Verizon.
For more than a decade, VIMCO relied on PTE 96-23, which provides class
exemptive relief, under specified conditions, for investment management of assets of an
employee benefit plan by an in-house asset manager (“INHAM”). In 2006 the New York
Regional Office of the DOL advised VIMCO on audit that it could not rely on PTE 96-23
for the 2001 and 2003 plan years because VIMCO had failed to satisfy the audit
requirement of the class exemption in reporting plan mergers during the 2001 and 2003
plan years. DOL concluded that VIMCO had acted in good faith reliance on PTE 96-23,
however, and required VIMCO to seek an individual exemption for the transactions.
Accordingly, the PTE 2009-23 provides retroactive relief for transactions entered into by
Verizon, acting as an in-house asset manager on behalf of plans sponsored by Verizon
Communications, Inc. or its subsidiaries, with parties in interest solely by reason of
providing services to such plans or solely by reason of a relationship to a service provider
described in section 3(14)(F),(G), (H), or (I) of the Act, for the plan years from January 1,
2001, through December 31, 2001, and January 1, 2003, through December 31, 2003.
The exemption requires VIMCO to comply with all other conditions of PTE 96-23, apart
from the annual audit.
PTE 2009-24 (September 1, 2009, 74 Fed. Reg. 45294). The United Steel and
Carnegie Pension Fund (“UCF”) is a non-profit, non-stock membership corporation
created in 1914 to manage the pension plan of the U.S. Steel Corporation. UCF is an
investment manager under ERISA and presently serves as plan administrator and trustee
of several employee benefit plans sponsored by U.S. Steel and its affiliates and joint
ventures. From 1986 through 2001, UCF served as an in-house asset manager
(“INHAM”) for the employee benefit plans sponsored by Marathon Oil and RTI, which
were owned and operated by USX, a successor to U.S. Steel. As a result of corporate
transactions involving Marathon Oil and RTI, UCF no longer qualified as an INHAM and
could no longer rely on PTE 96-23. Nonetheless, UCF continued to manage the assets of
the Marathon Oil and RTI Plans. UCF subsequently received a retroactive exemption for
these transactions under PTE 96-62, effective February 15, 2003 (FAN 2003-03E), for a
period of five years, but subsequently placed its exemption in jeopardy by failing to
timely conduct an annual audit as required. PTE 2009-24 provides retroactive relief,
back to the effective date of FAN 2003-03E, and prospective relief for an additional five
years from the date of the granting of the exemption, provided stricter conditions
regarding the exemption audit are satisfied prospectively.
PTE 2009-26 (September 25, 2009, 74 Fed. Reg. 49034) provides that ERISA
sections 406(a)(1)(A) through (D) and 406(b)(1) and (2) shall not apply to in-kind
redemptions of shares of the MTB Mid Cap Growth Fund and the MTB Large Cap Stock
Fund, held by the M&T Bank Corporation Pension Plan, for which affiliates of
Manufacturers and Traders Trust Company (“M&T” -- the plan sponsor) provide
Page 74 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
investment advisory and other services. The exemption is subject to numerous
conditions, including the following: (a) the plan may pay no sales commissions,
redemption fees, or other similar fees in connection with the redemptions (other than
customary transfer charges paid to parties other than M&T and affiliates of M&T (M&T
Affiliates); (b) the assets transferable to the plan may consist only of cash and
transferable securities, (c) neither M&T nor any M&T Affiliate may receive any fees,
including any fees payable pursuant to Rule 12b-1 under the 1940 Act, in connection
with the redemptions; (d) M&T must retain an independent fiduciary to determine that
the terms of the redemptions are fair to the plan participants and comparable to, and no
less favorable than, terms obtainable at arm's length between unaffiliated parties and that
the redemptions are in the best interest of the plan and its participants and beneficiaries
PTE 2009-30 (November 16, 2009, 74 FR 59002). The DOL granted an
exemption from the prohibited transaction rules of ERISA section 406(a)) and §406(b)(1)
and (2) for the sale of a small equity interest in an unrelated company, which was owned
by a defined contribution plan (“Plan”) and credited to the individual account of a
participant, to the participant. For several years the Plan had incurred UBTI as the result
of owning a small equity interest in a company unrelated to the Plan. The full amount of
the UBTI was debited against the individual account under the Plan of Dr. David Ewalt, a
Plan participant and trustee, to which the equity interest was also credited. In order to
avoid further UBTI, Dr. Ewalt proposed that the Plan be permitted to sell him the equity
interest. The exemption was conditioned on, among other things, satisfaction of the
following conditions: (a) the sale to Dr. Ewalt would be a one-time transaction for cash;
(b) the closing date would occur within 60 days of grant of the final exemption; (c) the
terms and conditions of the sale would be at least as favorable to the Plan (and the
participant’s account) as the terms and conditions obtainable under similar circumstances
negotiated at arm's length with an unrelated party.
PTE 2009-31 (November 16, 2009, 74 Fed. Reg. 59003). This PTE amends
several prior individual exemptions (collectively the “Underwriter Exemptions”). As
described above, the Underwriter Exemptions are individual exemptions that provide
relief for the origination and operation of certain asset pool investment trusts and the
acquisition, holding and disposition by employee benefit plans of certain asset-backed
pass-through certificates representing undivided interests in those investment trusts. In an
action similar to that taken in PTE 2009-16, supra, DOL amended the Underwriter
Exemptions to provide a six-month period during which certain conditions of the
Underwriter Exemptions would be suspended in order to permit affected parties to
resolve problems caused by Wells Fargo & Company’s acquisition of Wachovia.
e. Other Situations
PTE 2009-03 (January 21, 2009, 74 Fed. Reg. 3645). Pursuant to the terms of a
court-approved settlement agreement, General Motors (“GM”), the United Auto Workers
(“UAW”) and members of a class action (“Class Members”) agreed to the creation of a
defined benefit voluntary employee benefit association (“DC VEBA”) to provide health
and dental benefits to GM retirees. The DC VEBA will be administered by a committee
Page 75 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
of three union-appointed representatives and four “public” members appointed by the
court. The committee acts as the named fiduciary and administrator of the DC VEBA
and appoints all trustees and investment managers.
The committee functions
independently of GM and no members of the committee may be an affiliate of GM.
Among other things, the DC VEBA settlement agreement requires GM to provide initial
payment for dental and health care services for which DC VEBA participants would
otherwise be responsible. GM will be reimbursed for this cost out of the assets of the DC
VEBA on a monthly basis. The amount of the monthly reimbursements will be based on
cost estimates prepared by GM and agreed to by the DC VEBA committee.
The DC VEBA settlement agreement also calls for an annual reconciliation, or
true-up, of payments owed to either GM or the DC VEBA. Under this provision of the
settlement agreement, to the extent GM’s actual costs exceed the monthly
reimbursements it receives from the DC VEBA, an additional payment equal to the
underpayment, plus interest, will be made from the DC VEBA to GM. Conversely, if
GM’s actual costs are less than the monthly reimbursements it receives from the DC
VEBA, GM must make a payment to the DC VEBA returning any excess payments, plus
interest. The DOL granted an exemption from the prohibited transaction rules of ERISA
sections 406(a)(1)(B), 406(a)(1)(D) and 406(b)(1) and (2) to allow both the monthly
reimbursement payments to GM and the “true-up” payments to GM or the DC VEBA.
The exemption was conditioned upon continued adherence to the practices established by
the DC VEBA settlement agreement, including practices that ensure that the VEBA
operates independently of GM.
In PTE 2009-28 (September 25, 2009, 74 Fed. Reg. 49036), the DOL addressed
issues and granted an exemption to another defined contribution VEBA on grounds
virtually identical to those discussed in PTE 2009-03.
PTE 2009-11 (Mar. 26, 2009, 74 Fed. Reg. 13236) issued by the DOL on March
26, 2009, amends an exemption originally granted to Chase Manhattan Bank, permitting
the lending of securities to affiliates of Chase Manhattan Corporation by employee
benefit plans, including commingled investment funds holding plan assets for which
Chase Manhattan Corporation affiliates act as directed trustee or custodian and securities
lending agent or subagent, and the receipt of compensation in connection with the
transactions. PTE 2009-11 extends application of PTE 99-34 to JP Morgan Chase Bank,
a successor organization to Chase Manhattan Bank. PTE 2009-11 also provides a
temporary exemption to ERISA sections 406(a)(1)(A) through (D) and ERISA section
406(b)(1) and (2) with respect to the investment of securities lending collateral by JP
Morgan Chase Bank, as investment manager of such collateral on behalf of client plans
or collective funds that have lent the securities, in a specific transaction involving Bear
Stearns. The exemption is subject to extensive conditions.
PTE 2009-12 (Mar. 26, 2009, 74 Fed. Reg. 13226). In December 2005,
Citigroup, Inc., the parent of CGMI, sold substantially all of its asset management
business to Legg Mason, Inc., with the exception of an asset allocation program, which
was retained by Citigroup. In return for Legg Mason’s broker-dealer business, Citigroup
Page 76 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
received 4 percent of Legg Mason’s voting common stock and 10 percent of Legg
Mason’s convertible, non-voting preferred stock. As a result of the merger, Legg Mason
became an affiliate of Citigroup because Citigroup owned 14 percent of Legg Mason’s
stock. This affiliation temporarily affected the independence of two asset allocation
program sub-advisers, which were subsidiaries of Legg Mason. Under PTE 2000-45 and
its predecessor exemptions, all of the asset allocation program sub-advisers were required
to be independent of CGMI and its affiliates. Since, as a result of the merger, satisfaction
of PTE 2000-45 was no longer possible, the DOL elected to replace the PTE and provide
a new exemption regarding the definition of affiliate, retroactive to December 2005, to
address this issue.
PTE 2009-13 (May 6, 2009, 74 FR 20990) permits “affiliated underwriter
transactions,” or “AUTs,” which involve the purchase of securities by an asset
management affiliate of Bank of New York Mellon Corporation (“BNY Mellon”) from
any person other than such asset management affiliate or any affiliate thereof, pursuant to
an underwriting or selling syndicate involving the securities, where a broker-dealer
affiliated with BNY Mellon is a manager or member of such syndicate and the asset
management affiliate of BNY Mellon purchases the securities as a fiduciary on behalf of
a plan invested in a pooled fund. The exemption is conditioned upon satisfaction of
extensive conditions.
IX.
Bonding
In Peabody v. Davis, 2009 WL 2916824 (N.D. Ill. Sept. 2, 2009), the district court
found defendant insurers not liable under the fidelity bonds they had issued to a plan in a
suit against ERISA plan fiduciaries for breaches of fiduciary and co-fiduciary duties. The
court determined that the plaintiff had no statutory standing under any section of ERISA
to pursue recovery from the insurers, who were non-fiduciary third parties. See id. at
*15-17.
In Chao v. Wagner, 2009 WL 102220 (N.D. Ga. Jan. 13, 2009), the district court
entered default judgment against a plan sponsor and fiduciary for failure to maintain a
fidelity bond complying with ERISA section 412(a) in this enforcement action brought
by the DOL, which also asserted other ERISA violations. The court’s order required a
newly appointed independent fiduciary to maintain a bond in compliance with ERISA
section 412, the cost of which could be paid by the benefit plan. Id. at *3.
X.
Statute of Limitations for Breach of Fiduciary Duty Claims
A.
In General
A district court found that a suit brought by the DOL under section 502(a)(5) for
breach of fiduciary duty was subject to the limitation periods specified in ERISA section
Page 77 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
413. Solis v. Couturier, 2009 WL 1748724, 47 Empl. Benefits Cas. (BNA) 1996
(E.D. Cal. June 19, 2009).
A district court ruled that leave to amend a complaint under ERISA in order to
avoid a limitations problem should be freely granted, but should be denied if the
amendment will prejudice the defendant (in this case, leave to file a fourth substitute
complaint was denied). Harris v. Koenig, --- F.Supp.2d ----, 2009 WL 4784511 (D.D.C.
Dec. 14, 2009).
B.
Three Years After “Actual Knowledge”
In Browning v. Tiger’s Eye Benefits Consulting, 313 Fed.Appx. 656, 46 Empl.
Benefits Cas. (BNA) 1201 (4th Cir. 2009), the Fourth Circuit, finding a fiduciary breach
action time-barred, declined an opportunity to decide whether ERISA section 413
requires actual knowledge of both the facts that would constitute a fiduciary breach and
that those facts constituted a fiduciary breach. Trustees had alleged violation of the duties
to diversify plan assets and to properly investigate an investment that turned out to be a
Ponzi scheme. The court held that the trustees had had actual knowledge of both the facts
constituting the violation and the concomitant harm to the plan no later than February
2002, when they received notice that the investment had been placed in a court-ordered
receivership, and that it was not necessary to further explicate the meaning of “actual
knowledge. The suit was therefore dismissed as untimely filed in March, 2005.
Courts continue to make determinations on when plaintiff have acquired actual
knowledge sufficient to cause the statute of limitations to begin to run. For example, a
district court held that a plaintiff had actual knowledge of a breach when the ESOP plan
defaulted on its note to plaintiff. Craig v. Smith, 597 F.Supp.2d 814, 45 Empl. Benefits
Cas. (BNA) 2645 (S.D. Ind. 2009). In another case, a district court ruled that a retiree did
not have actual knowledge of the “wear away” effect of backloading on his pension
benefit until he had received the documents that showed how the plan calculated his
benefits. Bilello v. JPMorgan Chase Retirement Plan, 649 F.Supp.2d 142, 48 Empl.
Benefits Cas. (BNA) 1224 (S.D.N.Y. 2009). See also Novella v. Empire State
Carpenters Pension Fund, 2009 WL 812271 (S.D.N.Y. Mar. 26, 2009), aff’d, 2009 WL
3849694 (2d Cir. Nov. 18, 2009) (actual notice was acquired when plan refuted that
plaintiff’s benefits were miscalculated, not on plaintiff’s initial receipt of miscalculation
of benefit).
Likewise, in stock drop cases courts have held that plaintiffs acquired actual
knowledge when the plan sponsor issued a press release announcing a restatement of
prior earnings, Harris v. Koenig, 602 F.Supp.2d 39, 46 Empl. Benefits Cas. (BNA) 1806
(D.D.C. 2009), and when the plan sponsor publicly commented on a downturn in sales
and customer concerns. Brieger v. Tellabs, Inc., 629 F.Supp.2d 848 (N.D. Ill. 2009).
Plaintiffs may been deemed to have acquired actual knowledge when they receive
documents that disclose facts that form the basis for the breach, even though the plaintiffs
do not actually read the documents. See Shirk v. Fifth Third Bancorp, 2009 WL
3150303, *3, 47 Empl. Benefits Cas. (BNA) 2523, *3 (S.D. Ohio Sept. 30, 2009) (“In
Page 78 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
other words, a plaintiff may not avoid commencement of the statute of limitations merely
by refusing to read or examine information disclosing relevant facts that would trigger
the statute of limitations.”). In Shirk, the court further held that “[t]o trigger the ERISA
statute of limitations, the plaintiff need only have knowledge of the act and cannot wait
until the consequences of the act become painful.” Id. at *4. The court held that plaintiffs
had actual knowledge when the bank transferred plan assets from low fee investments to
high fee investments.
In a case of first impression, a district court held that actual knowledge of a
breach by current trustees who were not named as plaintiffs could be imputed to the
named plaintiffs because, otherwise, plaintiffs “could avoid the three-year accrual
knowledge statute of limitations through careful selection of the named plaintiffs.” New
Orleans Employers Int’l Longshoremen’s Ass’n, AFL-CIO Pension Fund v. Mercer
Investment Consultants, 635 F.Supp.2d 1351, 1380 (N.D. Ga. 2009). The court stated
that, “[s]tarting the limitations period when the later-appointed Trustees learned of the
alleged breaches of fiduciary duty is a manipulation of the statute of limitations.” Id. at
1381.
D.
Fraud or Concealment
In Browning v. Tiger’s Eye Benefits Consulting, 313 Fed.Appx. 656, 46 Empl.
Benefits Cas. (BNA) 1201 (4th Cir. 2009), the Fourth Circuit held that the “the fraudulent
concealment doctrine does not trigger the six-year limitations period under [ERISA
section 413] if the concealing act does not delay actual or constructive notice of the
fiduciary’s wrongdoing.” Id. at 663. The trustees had had actual notice of the breach by
February 2002, thus triggering the three-year limitation period. The court refused to hold
that a letter sent in 2003 could have concealed knowledge of the breach.
In Watson v. Consolidated Edison of New York, 645 F.Supp.2d 291, 48 Empl.
Benefits Cas. (BNA) 1397 (S.D.N.Y. 2009), the district court held that plaintiffs had
failed to plead their fraud with particularity so as to fall within the fraud or concealment
exception under ERISA section 413. See also Abbott v. Lockheed Martin Corp., 2009
WL 839099, 46 Empl. Benefits Cas. (BNA) 1914 (S.D. Ill. Mar. 31, 2009). In contrast,
in Frulla v. CRA Holdings, Inc., 596 F.Supp.2d 275, 279, 45 Empl. Benefits Cas. (BNA)
2291 (D. Conn. 2009), where plaintiff was held to have adequately pled fraud with
particularity, the district court allowed plaintiff to proceed with discovery “to attempt to
demonstrate that defendants took steps to prevent his discovery of his claims,”
notwithstanding disclosure in the plan’s Form 5500.” The court further held that
discovery of the breach occurred (and the statute of limitations therefore began to run)
when plaintiff received a letter stating that he would be required to contribute to his
health insurance premiums because the fund was “running out of money.” Id.
ERISA section 413 had been held to provide an affirmative defense. In George v.
Kraft Foods Global, Inc., --- F.Supp.2d ----, 2009 WL 4884027, at *11 (N.D. Ill. Dec. 17,
2009), the district court held that “Plaintiffs need not plead fraudulent concealment with
particularity to negate Defendants’ statute of limitations defense.”
Page 79 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
A district court held that a participant’s claim that his benefit was reduced by a
plan amendment was not time barred because the defendant allegedly fraudulently
concealed the “wear away” effect of the provision. Osberg v. Foot Locker, Inc., --F.Supp.2d ----, 2009 WL 2971834, 47 Empl. Benefits Cas. (BNA) 2249 (S.D.N.Y. Sept.
16, 2009).
In Dupont v. Sklarsky, 2009 WL 776947. 46 Empl. Benefits Cas. (BNA) 2737
(D.N.J. Mar. 20, 2009), the district court held that the fraudulent concealment doctrine
does not apply unless defendant took affirmative steps to conceal the fraud. Similarly, in
DeFazio v. Hollister, Inc., 636 F.Supp.2d 1045 (E.D. Cal. 2009), reconsider den., 2009
WL 2868631 (E.D. Cal. Sept. 2, 2009), the district court held that passive concealment
does not trigger the fraudulent concealment doctrine. See also Giudice v. Employee’s
Profit-Sharing Profit Sharing Plan of the Bank of New York Co., Inc., 2009 WL 2634898,
48 Empl. Benefits Cas. (BNA) 1402 (D.N.J. Aug. 25, 2009).
E.
Continuing Violation and Repeated Series of
Violations
In Hunter v. Custom Business Graphics, 635 F.Supp.2d 420, 47 Empl. Benefits
Cas. (BNA) 1482 (E.D. Va. 2009), the district court held that an employer’s failure to
remit contributions was not a continuing violation for purposes of the statute of
limitations. The court held that the “alleged breach or violation occurred when defendants
decided how to contribute into the SARSEP; each subsequent contribution which was
part of that initial plan did not constitute a new violation.” Id. at 429. Likewise, in
Bamgbose v. Delta-T Group, Inc., 638 F.Supp.2d 432, 47 Empl. Benefits Cas. (BNA)
2543 (E.D. Pa. 2009), a district court held that the relevant action was the
misclassification of a worker as an independent contractor, and therefore, plaintiffs could
not claim a continuing violation that extended the limitation period to cover the date on
which benefits were denied based on that misclassification. See also Dupont v. Sklarsky,
2009 WL 776947, at *8 n.3, 46 Empl. Benefits Cas. (BNA) 2737 (D.N.J. Mar. 20, 2009)
(no continuing violation theory is available in the Third Circuit); Abbott v. Lockheed
Martin Corp., 2009 WL 839099, 46 Empl. Benefits Cas. (BNA) 1914 (S.D. Ill. Mar. 31,
2009) (no continuing violation theory available); Tibble v. Edison Int’l, 639 F.Supp.2d
1122, 1126 n.1, 47 Empl. Benefits Cas. (BNA) 2363 (C.D. Cal. 2009) (rejecting
continuing violation theory for alleged prohibited transaction based on “float”).
The district court reached a different conclusion in Watson v. Rentenbach
Engineering, 2009 WL 3784960, 48 Empl. Benefits Cas. (BNA) 1084 (E.D. Tenn. Nov.
10, 2009), holding that where plaintiff had alleged three distinct violations, each “a
separate and self-contained breach of fiduciary duty which would, if true, suffice to
constitute an independent violation,” although the continuing violation theory did not
apply, the circumstances were sufficient to support the existence of three separate
breaches. Plaintiff had alleged that her husband conspired with the plan administrator to
obtain three lump sum payments ($67,500 in 2001, $10,000 in 2004, and $30,000 in
2005) without her consent. The distributions made in 2004 and 2005 were allegedly paid
Page 80 of 97
ABA EBC CHAPTER 10
Master Compiled Report 2010
in reliance on a forged spousal signature, while the 2001 distribution was paid without
any spousal consent form.
F.
Other Tolling Issues
Relying on American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), the
court in Arivella v. Lucent Technologies, Inc., 623 F.Supp.2d 164, 47 Empl. Benefits Cas.
(BNA) 2290 (D. Mass. 2009), a district court tolled the limitation period from the time a
class action was filed in 2002 until the court denied the motion for class certification in
2005. In In re AEP ERISA Litigation, 2009 WL 614951, at *5, 46 Empl. Benefits Cas.
(BNA) 2486 (S.D. Ohio Mar. 6, 2009), the district court allowed plaintiff to intervene as
a new class representative and tolled the limitation period during the period in which the
class action plaintiffs were inadequately represented.
A district court held that dismissal without prejudice does not toll the limitation
period. Novella v. Empire State Carpenters Pension Fund, 2009 WL 812271, at *3, n.6
(S.D.N.Y. Mar. 26, 2009), aff’d, 2009 WL 3849694. A district court held that an ERISA
action is not tolled while plaintiff pursues discrimination claims with the EEOC. Mounts
v. United Parcel Service of Am., Inc., 2009 WL 2778004 (N.D. Ill. Aug. 31, 2009).
Page 81 of 97