DoL stand draws concern of recordkeepers,
directed trustees
While Enron's travails have, for the most part, slipped
from the front pages, participant litigation continues to
move ahead in the case of the beleaguered energy trader's
401(k) plan. As summer drew to a close, the Department of
Labor (DoL) filed an amicus brief, a so-called "friend of
the court" filing, outlining its position on how the
provisions of the Employment Retirement Income Security Act
(ERISA) applied to the roles and responsibilities of the
parties involved.
While the focus was on Enron, the outcome could have a
major impact on plan sponsors and their service providers
for years to come. According to industry experts, the
60-odd page document contains a little something for
everyoneto be nervous about.
The Enron participant-plaintiffs in Pamela Tittle v.
Enron allege that Northern Trust, which was both trustee
and recordkeeper for the Enron plan prior to the now
notorious blackout:
had the authority to stop the "lockdown";
knew that the plan would lose money if the lockdown
proceeded; and
knew, or should have known, of a number of "red flags" that
should have put it on notice that trouble was ahead.
These allegations, taken in combination, are "sufficient
to state a claim that Northern Trust had a duty to act,
even if it was acting as a 'directed trustee' in this
matter, as it claims," according to the DoL brief.
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The Plan Sponsor
Most of the DoL brief is directed at the roles and
responsibilities of plan sponsors and the actions of
Enron's various administrative and executive committees in
upholding their duties to the participants/ beneficiaries.
For the most part, the DoL brief restates well-known and
accepted positions, but it is still well worth revisiting
for plan fiduciaries (see "Fiduciary foundations," page
67).
However, in a statement likely to chill the blood of
many a plan sponsor, the DoL brief states: "The only
circumstances in which ERISA relieves the fiduciary of
responsibility for a participant-directed investment is
when the plan qualifies as a 404(c) plan."
The DoL is not talking about the selection of the
investment options for the plan, though the plan sponsor
certainly would be responsible for that as well. According
to Fred Reish, of Reish Luftman McDaniel & Reicher, "It
is referring to the actual participant decisions about the
investment of their accounts"a conclusion that Reish says
will be "shocking to most 401(k) sponsors and to their
officers who serve as fiduciaries."
Too many plan sponsors still believe that all they must
do to be a 404(c) plan is to (a) offer daily valuation, (b)
offer at least three different investment options, and (c)
hand out prospectuses to plan participants. While complying
with those criteria would put a plan well on its way to
being a 404(c) plan, they would not, in and of themselves,
be sufficient. In fact, while many 401(k) programs meet the
operational and structural requirements to comply with
404(c), the area on which most inadvertently fall short is
simply to acknowledge officially their intent to comply
with 404(c)and to tell participants of that intent and
what it means.
Furthermore, the DoL's brief notes: "Absent a showing
that the plan qualifies as a 404(c) plan, the fiduciaries
retained full fiduciary responsibility for all of the
plan's investments, including the Enron stock that the
participants directed the Trustee to purchase with their
employee contributions."
Of course, even if the plan fully complies with 404(c),
fiduciaries still are accountable for the available options
in the plan. The DoL notes: "The scope of ERISA §404(c)
relief is limited to losses or breaches 'which resulted
from' the participant's exercise of control. Section 404(c)
plan fiduciaries are still obligated by ERISA's fiduciary
responsibility provisions to prudently select the
investment options under the Plan and to monitor their
ongoing performance."
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