Plan Fiduciaries not Required to Announce Own Stock Sale to Participants

January 7, 2008 ( - The 7th U.S. Circuit Court of Appeals affirmed a lower court's decision that plan fiduciaries were not obligated to tell Thrift Plan participants that they had decided to sell their own holdings in company stock, both within the plan and otherwise.

In its opinion, the appellate court pointed out the fiduciaries had disclosed the sale of their stock held through the Thrift Plan, and also stock they were able to acquire by exercising vested options they had received in their roles as managers or directors of Indianapolis Power & Light, in filings with the Securities and Exchange Commission (SEC) and the markets. The court noted that rank-and-file workers do not read such filings, but investment analysts do – and the fiduciaries had hired Merrill Lynch to provide advice to each participant personally.

According to the ruling, the Employee Retirement Income Security Act (ERISA) “does not hold a fiduciary responsible for the decline in an investment’s value, when an informed and independent investment adviser has been furnished without charge to all beneficiaries, who exercise full control over which investments their accounts will hold.”

The 7 th Circuit agreed with the district court that an ERISA fiduciary is not obliged to strip participants of the ability to make their own decisions, nor to disregard the plan’s provision requiring all of the employer’s contributions to be held as IPALCO stock.

After the district court ruled in favor of the defendants on all claims, the plaintiffs, representing a class of participants in the Thrift Plan, abandoned all claims on appeal except the dispute that the fiduciaries had to tell the participants they were selling most of their own stock in IPALCO.

The plaintiffs accused the fiduciaries of promoting AES Corporation, which merged with IPALCO, as a good prospective employer (and implicitly as a good investment) while divesting their own holdings, thereby demonstrating their true beliefs were otherwise (See  Indianapolis Power Employees Cry Foul Over Co. Stock Plummet ). However, the district judge determined the fiduciaries actually (and reasonably) believed everything they told the participants, and sold IPALCO stock, and cashed out their options, only because AES had announced it would replace the management team at Indianapolis Power & Light, leaving the fiduciaries no reason to hold company stock.

The plaintiffs insisted that many of the participants would have sold IPALCO as soon as they learned of the managers’ decisions, not because the information actually affected the stock’s value (or suitability), but because they wanted to copy the managers’ investment strategies as an information-conservation device.

According to the appellate court, due to the plaintiffs’ reasoning, “the case boils down to an argument that an ERISA fiduciary has a duty to disclose, directly to a pension plan’s participants, even non-material information that may affect the participants for reasons unrelated to the value of the investment.”

The opinion in Joseph J. Nelson and Michael Wycoff, on behalf of a class, v. John R. Hodowal, et. al. is here .