Trustee Not Liable for Participant-Directed Investments in Non-404(c) Plan

April 17, 2006 ( - The 7th Circuit US Court of Appeals has determined that a plan trustee did not breach his fiduciary duties by allowing participant investment direction of 401(k) accounts although the plan did not meet the requirements of Employee Retirement Income Security Act (ERISA) Section 404(c).

The court determined, however, that he may be liable for losses to the profit-sharing portion of the plan where assets are held in a pooled trust fund and investments are not participant-directed.

The court opinion pointed out that in order for a fiduciary to be protected from liability for losses to participant-directed accounts under 404(c), one condition that must be met is that participants are allowed to change their investment direction at least once every three months.   Since the defendant’s plan did not allow for that, it was not a 404(c) plan, however, this did not mean the trustee could not delegate his duty to invest 401(k) assets to participants.   Participant direction of investments was allowed, but the trustee was not protected from liability under 404(c).

However, the trustee did not breach his fiduciary duties with regard to the 401(k) investments, the court found.   According to the opinion, the plan’s trustee, Michael Yager, used a reasonable ‘long-term’ strategy in choosing the four funds offered in the plan, and annual meetings and distributed information provided participants with what they needed to make informed investment decisions.

Regarding the profit-sharing portion of the plan, the court said Yager may be liable for those losses since he had sole responsibility for monitoring the investment choices and investing the annual contribution in the funds.   In testimony, Yager did not even know how the contribution was allocated among the four investment choices.

Mid America Motorworks, Inc had a retirement plan that included a profit-sharing portion and a 401(k) portion.   Yager, as trustee, selected the funds in which contributions could be invested.   For the profit-sharing portion, all assets were held in a trust fund for which Yager was responsible for directing investments.   The participants were responsible for directing the investments of their 401(k) contributions.   During the years 2000 through 2002, the profit-sharing trust sustained losses around $400,000 and the 401(k) portion of the plan experienced losses around $700,000.  

Participant Earlene Jenkins sued Yager and the company for breaches in fiduciary duty, claiming that Yager did not properly monitor the funds performance and that the plan provided participants with unduly restrictive means to direct investments.   The participants were allowed to change their investments once per year.   Jenkins also claimed the defendants did not operate the plan under ERISA by allowing participants to direct their 401(k) investments.

The lower court granted summary judgment in favor of the defendants.   While the appellate court agreed on the charges concerning the 401(k) portion of the plan, it reversed the decision regarding the profit-sharing fund and remanded the case back to the lower court for further proceedings.

The opinion in Yager v. Jenkins is  here .