ERISA-Sixth Circuit Rules That Transfer Of Plan Investments Previously Selected By Participants To A QDIA Can Meet Safe Harbor For Fiduciary Relief In DOL Regulations

In Bidwell v. University Medical Center, Inc., No. 11-5493 (6th Cir. 2012), the plaintiffs were suing University Medical Center, Inc. (“UMC”) for breach of fiduciary duty under ERISA in connection with the transfer of the plaintiffs’ plan investments from a stable value fund to a Qualified Default Investment Alternative (“QDIA”), as defined by the Department of Labor (“DOL”) in its new regulations. The district court granted summary judgment to UMC.

In 2007, the DOL promulgated new regulations, pursuant to the Pension Protection Act (“PPA”). These regulations created “safe harbor relief from fiduciary liability” for plan administrators that directed automatic-enrollment contributions, generally for which enrollees did not provide any investment direction, into QDIAs. In 2008, UMC sought to apply the new DOL regulation by making its default-investment vehicle under UMC’s retirement plans the Lincoln LifeSpan Fund, and transferring existing investments in the prior default fund for the plans, the Lincoln Stable Value Fund, into the Lincoln LifeSpan Fund. Because UMC did not have records of which participants elected to invest in the Lincoln Stable Value Fund and which participants were investors by default, UMC sent notice of the change to all participants with one-hundred percent of their investment in the Lincoln Stable Value Fund. The notice advised the participants that all existing investments in the Lincoln Stable Value Fund would be transferred to the Lincoln LifeSpan Fund unless the participants gave instruction otherwise by July 16, 2008.

The plaintiffs had one-hundred percent of their UMC plan investment in the Lincoln Stable Value Fund. However, the plaintiffs maintain that they never received the notice of the transfer. As a result they did not respond by the deadline specified in the letter, and UMC transferred their investment from the Lincoln Stable Value Fund to the LincolnLifeSpan Fund without their knowledge. The plaintiffs first learned of the transfer upon receipt of their quarterly account statements, immediately contacted UMC on October 15, 2008 to inquire about the change, and then switched their investments back to the Lincoln Stable Value Fund. Due to market fluctuations in the interim, however, the plaintiffs suffered financial losses prior to the return of their funds to the Lincoln Stable Value Fund. The question for the Sixth Circuit Court of Appeals (the “Court”): Could UMC -as plan fiduciary- have liability for these losses under ERISA?

In analyzing the case, the Court said that the 2007 DOL regulation created a safe harbor from liability for plan fiduciaries who deposit participant contributions in a default-investment (see 29 CFR § 2550.404c-5). The plaintiffs did not claim that UMC failed to satisfy all requirements of the safe harbor. Rather, they argued that the safe harbor applies only to employer-selected investments made on behalf of participants who fail to elect an investment vehicle, and that neither plaintiff qualifies as such a participant because each specifically selected the Lincoln Stable Value Fund. Further, UMC had a duty to maintain records of which investors in the Lincoln Stable Value Fund were investors by election and which were investors by default,in order to allow investors by election to remain invested in the fund they selected. However, the Court noted that the DOL indicated, in the preamble to the regulations, that whenever a participant or beneficiary has the opportunity to direct the investment of assets in his or account, but does not direct the investment of such assets, plan fiduciaries may avail themselves of the safe harbor. The DOL was also clear that the opportunity to direct investment includes the scenario where a plan administrator requests participants who previously had elected a particular investment vehicle to confirm whether they wish for their funds to remain in that investment vehicle (the Court treated UMC has having provided the plaintiffs with the notice about the transfer-hence the plaintiffs received the “request”). As such, the Court ruled that the safe harbor was available, and in fact applied, to UMC, and it upheld the district court’s summary judgment in UMC’s favor.

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