Originally published April 20, 2006
The nascent body of case law concerning participant-directed plans recently received a contribution from the Seventh Circuit, which affirmed summary judgment for a plan trustee even though the plan did not satisfy the "safe harbor" of ERISA section 404(c). Jenkins v. Yager, __ F.3d ___ (7 Circuit, April 14th, 2006).
The plan in question was a small plan (approximately 100 participants) that made available four investment options from the American Funds family. The plan trustee selected and monitored the options, making no changes in the funds from 1991 through at least 2002. The trustee also directed the investment of profit-sharing contributions to the plan. The participants directed the investment of their 401(k) accounts; they could change their investments either once a year (1991 to 2002) or every six months (starting in 2002). The plan trustee did not review the individual investment choices made by participants.
After her plan accounts sustained losses in 2000 through 2002, a former participant brought suit alleging that the trustee failed to satisfy his duties under ERISA, in particular "[b]y providing plan participants with unduly restrictive means to direct investments, by failing to prudently monitor the plan’s investments, and by failing to operate the plan according to ERISA." On the last point, the plaintiff’s argument was that delegating control of a 401(k) account to the participant was contrary to ERISA absent an applicable statutory exception. It was undisputed that the plan did not qualify under section 404(c) – the provision of ERISA providing relief for fiduciaries under participant-directed plans that meet certain requirements – because participants did not have the opportunity to change investments at least quarterly.
The district court granted summary judgment for the trustee and, on appeal, the Seventh Circuit affirmed as to the 401(k) accounts directed by participants. (The appellate court determined there were triable issues with respect to the profit-sharing accounts, the investment of which were controlled by the trustee.) Working through the structure of ERISA, the court ruled that, subject to exceptions not applicable here, section 403(a) charges the trustee with the exclusive authority and discretion to manage plan assets; that the duty to invest plan assets is a "trustee responsibility" under section 405(c) excepted from the rules of that section permitting the allocation of responsibilities among fiduciaries; and that section 405 does not provide an exception to section 403(a). The court reasoned, however, that nothing in ERISA or its regulations made section 404(c) the "exclusive method of creating a participant-directed exception to sections 403 and 405," relying in part on Labor Department guidance. While failure to follow section 404(c) meant that the relief from liability provided by that section was unavailable to the fiduciary, it did not mean that the plan violates ERISA. Instead, there is an "implied exception" to sections 403 and 405 for participant-directed plans, under which the actions of the fiduciary in delegating investment decisions to participants are subject to the fiduciary standards of ERISA section 404 (the general fiduciary duty provision of ERISA). The court specifically rejected the plaintiff’s contention that, under ERISA, the trustee was obligated to review each participant’s investment directions throughout the year to assure they were appropriate.
On the record developed for summary judgment, the court found that the trustee satisfied these fiduciary standards in each of the following respects:
- In his initial fund selection. The record showed that the trustee adopted a long-term investment strategy of selecting reliable funds that could be held through market fluctuations;
- In his monitoring of the funds. The trustee regularly consulted with and received bimonthly reports from a financial adviser about the funds, and reviewed the four funds at least annually;
- In not altering the funds during the years they were incurring losses. The court was clear that investment loss is not proof of breach of fiduciary duty, and concluded that the trustee’s long-term investment strategy was neither unreasonable nor imprudent; and
- In allowing participants to direct their 401(k) accounts. On this point, it was essential to the court’s ruling that the trustee set up an annual informational meeting for participants with the financial adviser and made available the necessary written information about the funds to enable participants to direct their accounts, even for those who did not ask for such information.
While the result in Jenkins is the proper result, and is anticipated in the design and administration of many participant-directed plans, it is well to see it ratified by a Court of Appeals. In the language, structure and regulations underlying ERISA, the court found authority to delegate investment decisions to participants even if the plan does not meet section 404(c), which the court characterized as a safe harbor. In addition, on the facts, the court was satisfied with the trustee’s diligence in selecting and overseeing the fund options, with the opportunity afforded participants to direct their accounts – the opinion does not flyspeck the restrictions on when participants could change investments, and notes that there were funds available under the plan that did not lose value in 2000 to 2002 – and with the investment information provided to participants. In these circumstances, the court determined to leave the plaintiff with legal responsibility for her investment choices. The court made no mention of an alternative argument that also might have sustained the trustee’s position: that participants may become ERISA fiduciaries for their own accounts to whom investment authority may be delegated under sections 403 and 405. It appears that the Labor Department did not make an appearance in the appeal.
Please contact any of the following members of our Employee Benefits and Executive Compensation practice if you have any questions regarding this development:
George H. Bostick, Daniel M. Buchner, Adam B. Cohen, Ian A. Herbert, Alice Murtos, Robert J. Neis, W. Mark Smith, William J. Walderman, Carol A. Weiser and Brendan M. Wilson
© 2006 Sutherland Asbill & Brennan LLP. All Rights Reserved.
This article is for informational purposes and is not intended to constitute legal advice.