Compliance July 9, 2003

Court: Committee Members Can Be Held Liable For Fiduciary Breach

July 9, 2003 (PLANSPONSOR.com) - Individual members of a company's benefits committee may be held liable for fiduciary breach, by failing to monitor stock investments in a 401(k) plan and employee stock ownership plan (ESOP) for appropriateness.
Reported by

>The US District Court for the District of Massachusetts dismissed the committee members’ contention that their capacity as corporate officers precluded them from fiduciary responsibility.   “Liability – if there is to be any – will be predicated on [the plans’] deliberately conferred [fiduciary] status, not on the happenstance of one’s holding corporate office generally,” the court said in Stein v. Smith , according to Washington-based legal publisher BNA.

>Additionally, the court ruled that while the committee was entitled to a presumption that investment in employer stock was appropriate, the plaintiff employees could present evidence at trial to show how the committee may have breached its duties by failing to better diversify the plans. The court noted that the employees “must clear a high evidentiary hurdle” to rebut the presumption.

Fiduciary Breach

>Former participants in Stone & Webster’s (S&W) 401(K) and ESOP filed suit against the company’s former chief executive officer, members of the company’s employee benefits committee, and the company’s investment and accounting officer, after an alleged policy of underbidding on fixed-priced contracts that led to an accumulation of large, undisclosed losses in the two plans. The lawsuit claims the former plan executives breached their ERISA fiduciary duties by:

  • not disclosing the company’s failing financial condition to plan participants
  • not monitoring the plans’ continued investment in S&W stock
  • failing to diversify the plans.

The defendants initially motioned to have the case dismissed because the ERISA fiduciary breach claims conflicted with securities law. However, the court denied the motion finding, “cases in which there may be overlapping interests or claims brought under the securities laws by public shareholder plaintiffs and claims by employee stakeholders whose securities were acquired through ERISA plans, thus entitling them to the protection of ERISA’s fiduciary duty standards, are not unheard of.”

Therefore, the defendants motioned to dismiss the suit on the grounds that the employees failed to demonstrate that the committee members breached their fiduciary duties because:

  • the decision to make contributions to the ESOP and 401(k) plan was made by S&W as settlor, and thus no fiduciary duty was implicated
  • the committee had no discretionary authority to change or discontinue the plans’ investment options
  • the committee was entitled to a presumption that investment in S&W securities was appropriate.

>The district court agreed that S&W’s decision as the plans’ settlor to make contributions in company stock was not a fiduciary act that gave rise to liability under ERISA. However, the court rejected the committee’s contention that its members lacked discretionary authority to change or discontinue the plans’ investment in S&W stock. In so ruling, the court noted that the plans stated that the company would “continually monitor the suitability of acquiring and holding” company stock.

>In a small victory for the company though, the court dismissed the employees’ contention that S&W’s former chief executive officer breached his ERISA fiduciary duties by failing to disclose complete information about the company’s financial condition via press releases and periodic filings with the US Securities and Exchange Commission (SEC).

The case is Stein v. Smith, D. Mass., No. 01-10500-RCL, 7/3/03.

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