Cashed-Out Participant Has Standing in Employer Stock Case

August 1, 2007 ( - The 3rd U.S. Circuit Court of Appeals has decided the Employee Retirement Income Security Act (ERISA) gives a cashed-out former employee the right to sue the administrator of his former employer's 401(k) plan for allegedly mismanaging plan assets and thus reducing his share of benefits.

The court said it was not difficult for it to conclude Howard Graden has standing as a plan participant. “As an account-holder in the Conexant [Systems Inc.] plan, he was entitled to the net value of his account as it should have been in the absence of any fiduciary mismanagement. Because he colorably contends that he has yet to receive that amount, he presses a claim for the remainder of his monetary entitlement under his plan and ERISA – a claim for benefits,” the opinion said.

The appellate court went on to explain that Graden had a colorable claim for benefits because a successful outcome of the suit would restore to the plan assets allocable to Graden’s account, and he would get a second distribution. Remanding the case back to a lower court for further proceedings, the 3 rd Circuit said that when determining participant standing under ERISA, the question is whether the former employee alleges that his benefit payment was deficient on the day it was paid, under the terms of the plan and the statute.

The ruling was considered precedential because most other courts before have determined that a former employee who has cashed out of his retirement plan is no longer considered a participant since he no longer has a “colorable claim for vested benefits.” The 3 rd Circuit, however, agreed with the logic of the 7 th Circuit in the case of Harzewski v. Guidant Corp. (See Cashed-Out Participants Still Have ERISA Legal Standing ) that said, “Benefits are benefits; in a defined-contribution plan they are the value of the retirement account when the employee retires, and a breach of fiduciary duty that diminishes that value gives rise to a claim for benefits measured by the difference between what the retirement account was worth when the employee retired and cashed it out and what it would have been worth then had it not been for the breach of fiduciary duty.”

The court rejected Conexant’s logic that Graden was seeking a claim for damages and not benefits and that this was evident from the fact Graden was suing an individual fiduciary and not the plan. The appellate panel said it was logical that Graden used the part of Section 1132 of ERISA to sue an individual fiduciary because, “[I]t may be that ERISA’s fiduciary obligations prevent plans from paying judgments out of funds allocable to other participants, in which case the plan, though liable, would be judgment proof.”

Also rejecting Conexant’s argument that Graden cannot make a claim for benefits that are unascertainable, the court again quoted the 7 th Circuit in Harzewski, “[T]here is nothing in ERISA to suggest that a benefit must be a liquidated amount in order to be recoverable.” In addition, the 3 rd Circuit said the amount in the Conexant case “is hardly unascertainable,” but that it equaled the amount affected accounts would have earned if prudently invested.

Graden terminated his employment with Conexant in 2002. In October 2004, he cashed out his account which was invested in Conexant stock. In March, Conexant’s common stock reached a 52-week high of $7.42 per share, but by the time Graden voluntarily cashed out, it had plummeted to $1.70 per share.

Graden sued claiming the drop was the result of a risky and ultimately failed merger, and that Conexant breached its fiduciary duties to him and other plan participants by offering the stock fund as an investment option despite the fact that it was not (and was known not to be) a prudent investment, and by making false and misleading statements about the merger that caused him to invest in the fund.

A district court dismissed Graden’s claim for lack of standing saying he was no longer a participant in the plan.

The case is Graden v. Conexant Systems Inc., 3d Cir., No. 06-2337, 7/31/07.