ERISA-District Court Extends 404(c) Protection To A Directed Trustee Of A 401(k) Plan, So That The Trustee Will Not Have Liability For Losses Caused By An Investment Advisor

In Tullis v. UMB Bank, N.A., No. 3:06 CV 7029 (N.D. Ohio 2009), the plaintiffs were two physicians who were participants in the Toledo Clinic Employees’ 401(k) Profit Sharing Plan (“Plan”). Pursuant to the terms of the Plan, the plaintiffs had chosen Continental Capital Corporation (“Capital”) to be the investment advisor of the plaintiff’s accounts under the Plan. Subsequently, the U.S. Securities and Exchange Commission entered a temporary restraining order against Capital because two of its brokers were engaged in fraudulent activities. The plaintiffs allege that the defendant, UMB Bank, which served as the Plan’s directed trustee, knew of this fraud yet failed to inform them, and continued to accept and honor forged investment directives from Capital without consulting or warning the plaintiffs. Consequently, the plaintiffs did not dismiss Capital as the investment advisor of their Plan accounts. It was later discovered that a number of Capital’s investments did not exist, resulting in significant loss to the plaintiffs’ accounts under the Plan. The plaintiffs asked the Court to grant them summary judgment against the defendant, on the grounds that its conduct-the failure to warn the plaintiffs and stop taking direction from Capital- constituted a breach of fiduciary duty under ERISA.

The Court noted that Section 404(c) of ERISA relieves fiduciaries from liability for losses in a defined contribution plan caused by a participant’s individual exercise of control over the plan’s assets. This so-called “safe harbor” provided by Section 404(c) represents an affirmative defense to a claim of breach of fiduciary duty under ERISA. Section 404(c) will apply when (1) the participant exercises independent control over the assets held in his or her account in the plan, (2) the participant is able to choose from a broad range of investment alternatives and (3) a number of requirements of the regulations underlying Section 404(c) are satisfied, for example, the participant must be afforded (a) a reasonable opportunity to give investment instructions to a plan fiduciary obligated to comply with those instructions, and (b) sufficient information to make informed decisions regarding investment alternatives available under the plan.

The Court found that, in the instant case, the requirements of Section 404(c) were satisfied with respect to the plaintiffs. In particular, the plaintiffs had exercised complete control over the investment of their accounts under the Plan. The governing documents and manuals:

–indicated that the Plan was intended to comply with Section 404(c);

— provided each plaintiff with an individual account under the Plan;

— vested each plaintiff with the power to direct the investment of his Plan account, and to delegate this power to his selected agent, Capital, thus giving each plaintiff an opportunity to give investment instructions to a plan fiduciary who is obligated to comply with those instructions;

–gave the plaintiffs sufficient information to make investment decisions, and to otherwise properly furnish them with the opportunity to exercise control over the assets in their Plan accounts; and

–gave the plaintiffs a broad range of investment alternatives, since they allowed the Plan to invest in any asset which is administratively feasible for the Plan to hold, and which is allowed as a Plan investment by law.

Since the requirements of Section 404(c) were met, that Section shields the defendant from liability for breach of fiduciary duty.

Further, the court noted that the “safe harbor” defense of Section 404(c) is not available when a plan fiduciary conceals material nonpublic facts from plan participants. However, ERISA does not require a fiduciary to guarantee that all material facts are conveyed to participants. Rather, ERISA prohibits the fiduciary from concealing facts, and requires the fiduciary to speak truthfully when it chooses to do so. Moreover, the cases which have held that a fiduciary has an affirmative obligation under ERISA to disclose material nonpublic information involved an inquiry initiated by a plan participant. In the instant case, no such inquiry was made, and therefore nothing in the instant case makes the Section 404(c) “safe harbor” defense unavailable.

The Court also held that the defendant could not be responsible for any prohibited transaction involving the plaintiffs’ accounts under the Plan, nor for any undervaluation of the investments made by those accounts. Since the participants controlled the activities of their own Plan accounts, the defendant-as directed trustee-only allowed, but did not cause, a prohibited transaction or undervaluation to occur with respect to those accounts. The Court did not grant summary judgment to the plaintiffs, and ultimately dismissed all of the plaintiffs’ claims in the case.

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