Continuing Exposure for ERISA Plan Fiduciaries in Today's Economy

Robert Saffelle, David E. Perry and Allison M. Perry
November 20, 2009 — 2,049 views  
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Everyone is well aware of the effect the economy has played on retirement accounts across the country this past year. With the drop in stock prices and the value of 401(k) plans sinking, we saw the rise in lawsuits against ERISA plan fiduciaries alleging breach of fiduciary duty and imprudent practices. While these lawsuits are on the rise, fiduciaries have generally fared well in the courts. What is clear from recent breach of fiduciary cases is that fiduciaries must fulfill their responsibilities faithfully and have in place prudent practices and procedures. Courts by no means, however, are expecting fiduciaries to predict the future of the economy or stock values, and recent cases seem to suggest that the courts realize managing a plan is always easier in hindsight.

Recent Breach of Fiduciary Duty Cases
Plan fiduciaries realized a victory in In Re: Delphi Corporation Securities, Derivative & “ERISA” Litigation, 602 F. Supp. 2d 810 (E.D. Mich. 2009), when a Michigan court dismissed the suit after holding that the case turned on a provision in the directed trustee’s agreement with the company’s four 401(k) plans.1 The provision stated that the directed trustee’s discretionary authority over dealing with assets in company stock funds was expressly limited as being subject to the master trust agreement and fund policy. According to the trust agreement, the directed trustee was subject to the direction of General Motors Investment Management Company, which was the named fiduciary for the 401(k) plans.

Plan participants sued the directed trustee for breach of fiduciary duty, alleging that the trustee did not act properly in divesting the 401(k) plans of its investment in company stock because it did so just three days before the company filed for bankruptcy. bankruptcy.  The participants believed the directed trustee, as “investment manager,” had the discretionary authority to divest the company stock in the fund at any time. The participants had directed the investment through a company stock investment option under the plans. The employer amended the plans six months before filing for bankruptcy to ban further investment in the stock fund, but the employer did not amend the plans to close down the fund.

The directed trustee argued that it had met its fiduciary duty by following the limited role it had been given under the plan documents.  The Michigan court agreed and found that the trustee had not breached its fiduciary duty by failing to override the provisions in the plan documents and not selling the stock before it did. The court determined that the directed trustee would have needed “extraordinary circumstances” before overriding the master trust agreement and selling the shares of the company stock.

In Brieger v. Tellabs, No. 06-1882, 2009 U.S. Dist. LEXIS 65659 (N.D. Ill. June 1, 2009), an Illinois court ruled the fiduciaries for the 401(k) plan at Tellabs had not breached their ERISA fiduciary duties by continuing to offer Tellabs stock as an investment option.

A class of plan participants sued the fiduciaries and Tellabs claiming that the 401(k) plan investment option of Tellabs stock was “imprudent.” The plan participants alleged the Tellabs executives/ plan fiduciaries inflated the stock price by misrepresenting to them and the market the demand for Tellabs products. The stock value dropped by approximately 90% between December 2000 and July 2003 when the telecom industry plummeted.

In finding for the 401(k) plan fiduciaries, the court held the fiduciaries’ procedures were prudent and that any other reasonably prudent individual in that situation would not have sold the Tellabs stock held by the plan or removed that stock as an investment option. Further, the plan document required the availability of the Tellabs stock fund as an option for investment. The fiduciaries would only have a duty to close the fund if continuing to offer the fund would violate the prudence rules under ERISA. In court’s view, the drop in Tellabs stock and downturn in the telecom industry were not sufficient enough to make the fund an imprudent investment. Even though business was down for Tellabs, the fiduciaries had reason to believe the industry would rebound and Tellabs’ business would improve.

The court also rejected the plaintiffs’ claim that the fiduciaries had made misrepresentations to the market, finding that Tellabs executives and plan fiduciaries made statements that were “accurate based on the information that was available to [them], including their internal forecasting, discussions with Tellabs sales teams, information received from customers, and analysis provided by industry experts.”

In a similar telecom industry stock-drop case, the same court found that 401(k) plan fiduciaries did not breach their duties by continuing to offer a company stock fund as an investment option to plan participants. In Lingis v. Motorola, Inc., No. 03-C-5044, 2009 U.S.  Dist. LEXIS 50684 (N.D. Ill. June 17, 2009), plan participants alleged that fiduciaries for the Motorola 401(k) plan did not disclose to them that fiduciaries would not be liable for participant investment decisions. The participants also alleged that the plan did not adequately inform them of the “risk and return” for each investment option.

Motorola had loaned Telsim, a Turkish telecom company, approximately $2 billion, and Telsim pledged 66% of its outstanding shares as collateral. Telsim defaulted on the loan and did not honor its pledge. The participants believed Motorola and the fiduciaries concealed material information about this deal, which prevented them from making educated decisions with respect to the funds in the plan.

The Illinois court disagreed, finding that under ERISA Section 404©, the defendant fiduciaries were not required to show that all material information necessary to make informed investment decisions was disclosed to participants. Fiduciaries are not required to make such a guarantee. They simply have to refrain from concealing such material facts.

The court also held that the plan prospectus sent to all participants clearly outlined the liability for participant investment decisions and that the participants were given ample information regarding investment alternatives. Furthermore, the fiduciaries did not act imprudently by continuing to offer Motorola stock. The court noted that Motorola was not at risk of closing, and it did not have an elderly workforce seeking less risky investments.

What Can Plan Fiduciaries Do to Avoid Liability?
While plan fiduciaries have fared well in the recent stock-drop lawsuits, fiduciaries should nevertheless re-evaluate their practices in this economic climate to avoid liability in potential lawsuits by plan participants with dwindling retirement accounts. Several recommended steps that plan fiduciaries should take are as follows:

  • Re-evaluate procedures for selecting, monitoring, and removing investment options for a particular plan. Fiduciaries should have in place a prudent procedure that assists them in evaluating the performance of certain investment options and determining what investments should be prohibited. The procedure should be set forth in an investment policy, which should include how information is to be reviewed, how advisors are to be selected, the investment goals, etc.
  • Conduct due diligence with respect to 404© compliance; excessive fees; fraud; and risk exposure from investment options such as mortgage-backed securities, money market funds, and stable value funds.
  • Carefully monitor plan investments, regardless of whether participants have the right to direct their individual investments.
  • Carefully judge whether employer stock should be included as an investment option in the plan.
  • Ensure the plan and summary plan description language is up-to-date.
  • If delegating fiduciary responsibilities to another, continue to monitor that delegate to ensure fiduciary responsibilities are being carried out faithfully.

1 The company’s four 401(k) plans included: (1) the Delphi Savings-Stock Purchase Program for Salaried Employees; (2) the Delphi Personal Savings Plan for Hourly-Rate Employees; (3) the ASEC Manufacturing Savings Plan; and (4) the Delphi-Mechatronic Systems Savings-Stock Purchase Program.


The lawyers on LeClairRyan’s Compensation & Benefits Team advise and represent employers on employee benefits and executive compensation matters.  We deal regularly with the Internal Revenue Service, Department of Labor, Pension Benefit Guaranty Corporation, and assist clients in obtaining private letter rulings, determination letters, exemptions, and informal guidance from these agencies. Our Compensation & Benefits practice covers all types of benefit arrangements, including retirement and welfare plans, fringe benefits, equity and incentive compensation, and executive compensation programs.

Robert N. Saffelle [email protected]
David E. Perry [email protected]
Allison M. Perry [email protected]

Robert Saffelle, David E. Perry and Allison M. Perry

LeClair Ryan