A Selected highlights of recent court decisions point to significant liability concerns for employer and service providers to 401(k) and other ERISA plans:

Personal Liability – Think Twice Before Diverting Plan Contributions

In ruling on a motion to dismiss a complaint filed by the U.S. Department of Labor alleging fiduciary responsibility of an employer and three corporate officers (including the employer’s CEO), a federal judge in Florida has held that the complaint asserts a valid cause of action. The holding is based on the signature authority of the corporate officers over company bank accounts from which participant welfare plan premium and COBRA contributions were supposed to have been forwarded to the plan, but were not. This holding is far from the last word on this matter but it does suggest that the DOL may take a similar position in cases involving participant 401(k) contributions that are not promptly transferred from employer bank accounts into participant plan accounts.

The U.S. Court of Appeals for the Second Circuit was issued a more definitive holding of personal liability for an employer’s failure to make required contributions to a multi-employer welfare benefit plan. The employer’s owner was held personally liable for delinquent plan contribution plus interest and attorney’s fees because the owner had control over the management of the employer and exercised such authority by paying company creditors other than the multiemployer plan. The plan document in this case expressly defined required contributions as “plan assets,” and the owner was determined to have wrongfully withheld those assets from the plan. See Bricklayers & Allied Craftworkers Local 2, Albany, New York Pension Fund v. Moulton Masonry & Const., LLC (2nd Cir., 2015).

Service Providers as Fiduciaries – Even If You Can Control Your Own Fees – Don’t

Do third party administrators (TPAs) and other plan service providers become “functional fiduciaries” by performing their contract duties for their clients? TPAs typically disclaim all fiduciary responsibility but they can get tagged for liability if they exercise control over plan assets – especially if they use that control to increase their own compensation. 

In Hi-Lex Controls, Inc. v. Blue Cross Blue Shield of Michigan, the U.S. Court of Appeals for the Sixth Circuit affirmed a $5 million judgment against the third party administrator of a self-insured group health plan. As such, the TPA processed employee claims and paid those claims from funds advanced to the TPA by the employer on a regular basis. The TPA also paid its own administrative fees from those employer advances, and for a number of years retained additional fees that were not disclosed to the employer. Although the TPA’s service agreement expressly permitted such fee increases, the Court of Appeals held that BCBS was acting in a fiduciary capacity because it exercised discretion over the amount of its own fees and paid those increased fees from plan funds in its possession. The opinion went on to conclude that the TPA had engaged in fraud by misrepresenting the amount of its fees in both documents submitted to the employer and in schedules to the plan’s annual reports. Compare the similar result in Golden Star, Inc. v. Mass Mutual Life Ins. Co., where the trial court, in denying Mass Mutual’s motion for summary judgment, determined that the provider of investment and record keeping services was acting as a plan fiduciary because it had the discretion to unilaterally increase its fees, and did so. Notably, Mass Mutual did not notify its 401(k) clients in advance of fee increases. Mass Mutual agreed in November, 2014 to make a payment of $9,475,000 to settle this case.

Retirement plan TPAs can take some comfort in a recent U.S. Court of Appeals opinion holding that a TPA was not acting in a fiduciary role when it selected a mutual fund investment “menu” from which the plan sponsor chose a smaller number of funds to offer its plan participants. The TPA also offered its customers a “Fiduciary Standards Warranty” which provided that, if the employer included at least 19 of its funds in the plan’s investment array, ERISA’s fiduciary standard of prudence would be satisfied. Because the TPA’s service agreement vested final authority over fund selection with the plan sponsor, the TPA’s own fund selection activities and allegedly excessive fee arrangements were held not to relate to the TPA’s fiduciary conduct. The excess fee claims against the TPA were dismissed in part because the parties’ service agreement allowed the TPA to increase fees only on notice to the plan trustees, who could then terminate the service agreement without penalty if they did not consent to the fee increase. See Santomenno v. John Hancock Life Ins. Co. (3rd Cir., 2014).

“Could Have” or “Would Have”? – More Trouble for Retirement Plans Invested in Employer Stock

The Fourth Circuit recently considered the standard to be applied in evaluating the damages caused by the misconduct of retirement plan fiduciaries. The issue in Tatum v. RJR Pension Ins. Comm. was the decision of the plan’s investment committee, with insufficient deliberation, to eliminate a company stock fund from the investment menu for the sponsor’s defined contribution plan. The investment fund was eliminated at a time when the company stock was trading at an all-time low. Soon thereafter the stock recovered much of its value, and plan participants filed a class action to recover their investment losses allegedly resulting from the committee’s misconduct. The district court ruled that the plaintiffs’ allegations were insufficient because a prudent fiduciary “could have” made the same decision as the defendant plan fiduciaries. The U.S. Court of Appeals remanded the case so the trial court could apply a more stringent test – whether or not a prudent fiduciary “would have” made the same decision. If so, then the procedural misconduct of the plan’s investment committee would not be deemed to have caused the claimants’ investment losses. So, it’s “could have” versus “would have.” Who says courts don’t deal with plain English terminology?