Compliance

Court Finds Directed Custodian not a Fiduciary under ERISA

July 29, 2010 (PLANSPONSOR.com) – A custodian that transferred retirement plan assets at the direction of plan trustees is not liable under the Employee Retirement Income Security Act (ERISA) for plan losses.

By Rebecca Moore editors@plansponsor.com | July 29, 2010

U.S. District Judge Edward J. Lodge of the U.S. District Court for the District of Idaho found ING Life Insurance & Annuity Company (ILIAC) did not exercise authority and control over plan assets and acted as a mere custodian, so therefore, cannot be an ERISA fiduciary under § 1002(21)(A)(i) and is not subject to ERISA liability.   

Lodge said the Building Materials Holding Corp. (BMHC) argument that ILIAC could be an ERISA fiduciary merely because it disposed of plan funds at the express direction of the plan’s trustees would expand ERISA liability beyond the scope intended in the fiduciary statute and recognized in the caselaw. BMHC said the 9th U.S. Circuit Court of Appeals' holding in IT Corp. v. General Am. Life Ins, that “’[a]ny’ control over disposition of plan money makes the person who has the control a fiduciary” mandates that the court find ILIAC a fiduciary. The plaintiffs contended that ERISA should be construed as broadly as possible such that ILIAC’s power to write checks would automatically confer fiduciary status on it.  

The plaintiffs contend that IT Corp stands for the proposition that all entities with the power to write checks be considered fiduciaries, but Lodge pointed out that in its opinion, the 9th Circuit held that there may be some entities with that power that nevertheless might not be considered fiduciaries.  

Lodge also cited a case in which the 10th U.S. Circuit Court of Appeals  found there “were never any express plan policies direct[ing] [third party administrator’s] checkwriting activities, and [plaintiff] was unaware [third-party administrator] was writing the checks to [investment advisor]. As such, [third party administrator] assumed control over disposition of the funds by exercising his own judgment rather than acting at the plan’s direction.” Lodge said the 10th Circuit seems to indicate that had the third-party administrator been writing checks pursuant to a directive from the plan or its trustees, it would not have assumed authority and control over the plan’s assets.  

According to the opinion, in early January 2008, plan representatives began discussions with ILIAC regarding the intent to terminate its contract with ILIAC and to transfer the plan’s funds to Prudential. In April 2008, a named plan trustee directed ILIAC to “liquidate the assets in all of the plans . . . and wire the proceeds to Prudential on May 1, 2008 using the wire instructions [enclosed].” The plaintiffs claim that because Prudential did not receive the plan funds of approximately $104 million by 4:00 pm EST on the day of the transfer, the plan lost in excess of $375,790.16 in gains it would have otherwise realized from the market on May 1.  

Lodge granted partial summary judgment in ILIAC’s favor, but noted that this does not foreclose the plaintiffs’ recovery because whether ILIAC breached its contract or performed its duties under that contract negligently are beyond the scope of the motion it was deciding.   

The case is Erickson v. ING Life Insurance & Annuity Co., D. Idaho, No. 1:09-CV-00204-EJL.

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