Motion to Dismiss ERISA Claims Denied
The retirement plan community has been anticipating a decision in the lawsuit filed by 401(k), ESOP and cash balance pension plan participants in April 2002 against Enron, individual officers and directors of Enron, the committees, trustees and individuals that administered the plans, and various professional firms that provided advice to Enron. In mid-2002 the defendants filed motions to dismiss the case, and those motions finally have been decided. Judge Melinda Harmon of the Southern District of Texas has ruled that, while the conspiracy, racketeering and various state law claims against the defendants should be dismissed, the ERISA fiduciary claims against most of the defendants may proceed to trial.
This is no simple denial of the motion to dismiss the ERISA claims. The Court went to great lengths to describe the applicable legal standards by which it would judge the fiduciary actions (and nonactions). It is in the detailed description of the Court’s standards for fiduciary conduct that other plan fiduciaries can find useful guidance.
Certainly the Enron situation involves an egregious set of facts, and it would be reasonable for other plan sponsors to assume that the Enron litigation would have little bearing on them. However, the Court’s decision addresses fairly common plan administration dilemmas, and the general notoriety of the case will likely lead to its being viewed by other courts as influential in articulating the standards of conduct for plan fiduciaries.
As a result, plan sponsors and fiduciaries can derive important implications from the Enron case as to how they should carry out their own responsibilities in a manner that best serves plan participants and minimizes fiduciary risk.
Know Exactly Who is a Fiduciary and to What Extent
The Court explained that plan fiduciaries can be formal (i.e., named in the plan document) or functional. A person need not be named as a fiduciary to be treated as one, if that person in fact exercises discretionary authority or control over plan administration, or if that person in fact exercises authority or control over plan assets.
Lesson One:
Each plan sponsor should know exactly who serves as a plan fiduciary – whether formal or functional.Lesson Two:
Each plan sponsor should provide fiduciary education to those employees of the sponsor who serve as formal or functional fiduciaries. The training should include the extent of the fiduciary’s duties, the legal standards that apply, the steps to take when the fiduciary is concerned that another fiduciary might be breaching his or her duties, and the procedures that should be used to minimize the risk of liability.Special Standards for "Two-Hat" Fiduciaries
One of the big issues in the Enron case is the role played by officers of Enron who also served as plan fiduciaries (so-called "two-hat" fiduciaries). The Court examined the legal standards that apply to individuals in this situation and concluded that a two-hat fiduciary may only wear one hat at a time. When an officer is in a position of having to make a fiduciary decision, the officer is acting as a fiduciary and cannot later claim that he or she was acting merely as an officer.
Lesson Three:
Plan sponsors should consider providing special fiduciary training for officers of the plan sponsor who also serve in a fiduciary capacity. Officer fiduciaries must clearly separate their dual roles, so that they act and speak solely in the best interest of plan participants when acting (or when perceived by participants as acting) in a fiduciary capacity.Duty to Disclose Material Information to Plan Participants
Courts have consistently recognized that, when a fiduciary responds to a request for information from a plan participant or chooses to communicate to plan participants, the fiduciary has a duty to communicate truthfully and to provide all material information. The more difficult issue is the point at which a fiduciary has a duty to provide information to participants who have made no request and raised no question. The Court adopted as its standard that a fiduciary has a duty to inform plan participants when (1) the fiduciary has material information relevant to plan participants and (2) silence by the fiduciary could be misleading.
Lesson Four
: With each new item of information that a fiduciary learns, the fiduciary must ask whether that information is material and would help participants make important plan decisions, and whether the fiduciary’s silence on the issue could be misleading to participants. If the answer to both questions is yes, the fiduciary should disclose the information truthfully and completely.Securities Laws do not Shield Fiduciaries from Disclosure Duty
One of the principal arguments made by Enron defendants is that they could not disclose nonpublic information to plan participants without violating federal securities laws, and that the fiduciary standards should give way to the securities laws. The Court rejected this argument and stated that these dual sets of federal law duties are equally binding. The Court endorsed suggestions made by the Department of Labor (in a "friend of the court" brief submitted for this case in August 2002) as to how fiduciaries might satisfy both their disclosure duties under ERISA and their obligations under federal securities laws. These suggestions included eliminating company stock as an investment option for new contributions, ceasing all further purchases of company stock, disclosing the information to all shareholders (including plan participants), or consulting with the SEC and the Department of Labor.
Lesson Five
: If plan assets are invested in company stock, plan now for the courses of action that will be considered if and when fiduciaries receive material nonpublic information that would, if known, be likely to have a substantial adverse impact on the value of the stock.Lesson Six:
If plan assets are invested in company stock, make sure that fiduciaries are familiar with the cases that impose liability on fiduciaries following a significant drop in value of company stock. This will enable these fiduciaries to take steps to differentiate their conduct from the actions (or nonactions) that led to fiduciary liability in these other cases.Burden of Proof for 404(c) Protection Is on Fiduciary
Most defined contribution plans that allow participants to direct the investment of their accounts are structured to take advantage of ERISA Section 404(c). This provision of ERISA protects fiduciaries from liability for investment losses if the plan has given participants a broad range of investment alternatives, frequent opportunities to make and change investment decisions, and sufficient information to make informed investment decisions. The Department of Labor has issued regulations explaining the standards for assessing whether 404(c) applies. This Court ruled that the burden of proof is on the fiduciary to demonstrate that the required elements of 404(c) have been met (and not on the participants to prove that 404(c) elements are missing).
Lesson Seven
: The fiduciaries of a defined contribution plan that permits participant-directed investments should be prepared to demonstrate with the strongest possible argument how the plan satisfies the required elements of 404(c) protection. This argument is a combination of plan features and plan administration procedures, which should be described in a memorandum that lays out the strongest possible 404(c) argument.Standards of Fiduciary Responsibility and Liability Vary by Circuit
ERISA actions must be brought in federal district courts, each of which is located in a distinct circuit for appeals. This means that each district court is bound by the precedents set by the court of appeals for that circuit. For example, the district court for the Southern District of Texas is bound by the precedents set by the Fifth Circuit Court of Appeals. The flip side of this coin is that district courts in other circuits are not bound by Fifth Circuit precedent, but by the decisions of their respective circuit courts of appeal.Different circuit courts of appeal have different standards for fiduciary conduct on different issues. While the Enron litigation is likely to be viewed as very influential in coming years, it is still considered to reside within the Fifth Circuit and will not be binding on district courts outside the Fifth Circuit (unless adopted by other circuits).
Lesson Eight
: Each plan sponsor should be familiar with the standards for fiduciary conduct that apply to the circuit in which the plan sponsor is located, and it should be those standards of conduct (and liability) that serve as the basis for the training of employed fiduciaries of that plan.Certainly this decision of over 300 pages has many other interesting points and important lessons. However, the intent of this article is to convey the most important implications of this decision for all retirement plan sponsors, whether they are taxable or tax-exempt, and whether or not they make employer stock available as an investment option for plan participants.
Copyright 2003 Gardner Carton & Douglas
This article is not intended as legal advice, which may often turn on specific facts. Readers should seek specific legal advice before acting with regard to the subjects mentioned here.
