Fiduciary Responsibility Comes in Many Forms

Cases clearly define responsibilities of plan fiduciaries

Fiduciary responsibilities continue to be a primary concern for plan sponsors. Described below are two separate cases in which fiduciary guidelines are addressed and clearly defined.

Fiduciary Rules Set Forth by ERISA Upheld
On August 1st, the Fourth Circuit Court of Appeals ruled in favor of the plan sponsor and fiduciaries of a 401(k) plan in a case involving employer stock. In De Felice v. U.S. Airways Incorporated (Fourth Circuit No. 06-1892, August 1, 2007), the participant claimed that the plan sponsor and fiduciaries breached their fiduciary duties under ERISA by continuing to allow participants to invest in employer stock when the company was in serious financial trouble, which eventually resulted in its bankruptcy.

The U.S. Airways participant-directed account plan offered participants a choice of 13 investment fund options, one of which was employer stock. The most significant restrictions on investments choices involved limitations on participants’ investment in employer stock: no portion of company matching contributions could be invested in the stock fund, and transfers in and out of the fund were subject to a 30-day waiting period. The summary plan description and other participant communications emphasized the importance of a diversified investment portfolio and the risk involved in concentrating investments in the employer stock fund.

Investment funds offered under the plan were the responsibility of and monitored by the company’s pension investment committee, which met regularly to review the performance of the plan’s investment funds (including employer stock). During the period leading up to the company’s bankruptcy, the committee met a number of times specifically to consider the prudence of retaining the employer stock fund and consulted both internal and external legal counsel.

When U.S. Airways filed forms with the SEC indicating that a bankruptcy reorganization was possible, the committee retained an independent fiduciary to take responsibility for the employer stock investment fund. The independent fiduciary immediately liquidated a portion of the stock fund and halted the purchase of additional shares, but continued to allow participants to move in and out of the fund. After the company filed for bankruptcy, existing shares of company stock held in the plan were cancelled, and participants (along with other stockholders) were to receive no distribution.

Employees of U.S. Airways filed a class action claiming, among other things, that the company and the committee breached their fiduciary responsibility of prudence by insufficiently monitoring the company stock investment fund and failing to close the company stock fund at a point when the stock still had some value. Based on the facts described above, the district found that the company and the committee had acted prudently and ruled against the employees. On appeal, the Court of Appeals affirmed the district court’s ruling stating that prudence was not determined based on hindsight and concluding that the fiduciaries fulfilled their fiduciary duty of prudence by the following actions:

• permitting participants to move freely among investment funds under the plan (including twelve funds other than company stock) except for limitations on participants’ investments in company stock,
• clearly communicating information to participants regarding the importance of diversification and the risk of concentrating investments in a single stock,
• monitoring the prudence of con tinued investments in company stock, and,

• hiring an independent fiduciary when necessary.

None of the fiduciaries’ actions were novel, or even unusual, and the court’s decision was clearly in line with ERISA’s fiduciary rules, but this is worth noting simply because it points out what should be obvious. If a plan sponsor and fiduciary take the basic steps required for prudence and document their process, they will be able to fulfill their fiduciary responsibilities under ERISA.

Former Employees Still Considered Plan Participants
Another recent decision, this one by the Third Circuit Court of Appeals, is less encouraging for plan sponsors and other fiduciaries. In Graden v. Conexant Systems Inc. (Third Circuit, No. 06-2337, July 31, 2007), a cashed-out former plan participant sued plan fiduciaries for mismanagement of plan funds resulting in a reduction in his benefits. The district court dismissed Graden’s suit on the basis that he had right to sue or “standing” under ERISA. Graden appealed its decision with the support of amicus briefs by the Department of Labor and AARP.

In considering the former participant’s standing to sue, the Third Circuit looked at ERISA’s definitions of “participant” and “benefit” under an “individual account plan” and concluded that a former employee falls within the definition of a participant, even though he had already received a distribution of his account. ERISA provides that participants and beneficiaries have standing to sue fiduciaries for breaches of their fiduciary duties. The statute defines a participant as any employee or former employee who is or may become eligible to receive a benefit of any type under an employee benefit plan. A straightforward reading of this language leads to the conclusion that a former employee who has already received his benefit from the plan is not a participant. The Third Circuit did not agree.

Instead it held that Graden’s benefit under the plan was the value of his account “unencumbered by any fiduciary impropriety” stating “In other words, ERISA entitles individual-account-plan participants not only to what is in their accounts, but also to what should be there given the terms of the plan and ERISA’s fiduciary obligations.” As a result, even after receiving a distribution from the plan of what was already in his account Graden still had the right to receive a benefit from the plan for his share of any additional funds paid to the plan if the claim succeeded; this meant that he was a participant under ERISA.

It should be noted that earlier this summer, the U.S. Supreme Court agreed to hear the case of LaRue v. DeWolff Boberg & Associates, Incorporated (Docket No. 06-856), an appeal of a Fourth Circuit ruling that a participant lacked standing to sue for losses to his individual plan account (instead of the plan as a whole). Since then the defendants have filed a motion to dismiss the case because LaRue had taken a distribution of his account balance from the plan. It will be interesting to see if the Supreme Court reaches the same conclusion on this question as the Third Circuit.

Ian Kopelman is a partner at DLA Piper Rudnick Gray Cary US LLP. Ian is also PSCA’s legal counsel.