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Jousting with ERISA Fiduciaries and the Security of Your Retirement

By John Dietz - Email Editor

Date : April 15, 2008

When people hear ERISA (Employment Retirement Income Security Act) they think of “security”. ERISA was passed in 1974 over a growing concern that American workers were not receiving the benefits of the pensions that they were rightfully due, Nachman Corp. v. Pension Benefit Guar. Corp., 446 U.S. 359, 374-75 (1980). Congress passed ERISA to guarantee that an employee, who has been guaranteed a pension and fulfilled his obligation to that pension, will receive that pension.

ERISA protects employees by requiring that retirement plans have standards of conduct and responsibility, and obligation to duty of care by fiduciaries and also provides appropriate remedies, sanctions and access to the federal courts for correction. A fiduciary has the highest duty of loyalty and responsibility of “trust”.

When the fiduciary fails to perform, the question at bay is whether or not a person as an individual is permitted to sue a pension or retirement plan on behalf of himself instead of on behalf of the entire plan. In Massachusetts Mutual Life Insurance Co. v. Russell, 473 U.S. 134 (1985) the court of appeals ruled that the suit brought against a 401(k) did not benefit the “whole” plan, and therefore, it was not a valid suit, and consequently the petitioner could not bring a claim forward on his or her individual behalf.

As it went with Russell, the issues of fiduciary responsibility were far from over in their interpretation of duty. Lawfully, with a 401(k), the accounts are held by individuals, which are funded by employee contributions and usually include other contributions. A participant does not hold title to the assets in his account. He must rely on the fiduciaries to follow his investment directions and make any requested transfers. If the plan meets the requirements of section 404(c) of ERISA, 29 U.S.C. Section 1104 (c), the plan fiduciary is not responsible for any loses caused by individual decisions by the participants.

The interpretations of fiduciaries and the intention of Congress continued to evolve with many cases edging toward “responsibility” while most decisions maintained concern for preserving the “whole”, meaning favoring the “plan” rather than honoring an individual’s rights.

The court of appeals again expressed fear in making fiduciaries liable for losses resulting from the failure to follow participant’s directions, LaRue, 450 F.3d at 577 when they were asked to revisit the Russell decision. However the Supreme Court, overturning the court of appeals in LaRue, determined that provisions in Sections 502(a)(2) and thus 409(a) may be used by the beneficiary of a defined-contribution account that suffers a loss even though other participants are uninjured by the acts said to cause a breach of fiduciary duty entitling them to remedy.

In the most recent case in the Seventh Circuit Court of Appeals, the court upheld (using LaRue) that fiduciaries had knowledge and acted contrary to the beneficiaries' directions causing losses. Two individuals were entitled to seek remedy on behalf of themselves. (David E. Rogers, et. al. v. BAXTER INTERNATIONAL, 2008 U.S. App. LEXIS 6907). The Seventh Circuit recognized that, after LaRue, a plan participant can move forward with such a claim, at least in terms of having standing to pursue relief that is not plan wide.

Without LaRue and Rogers, fiduciary responsibility, in an increasingly volatile and insecure world, may have been swept under the rug. These cases took over fifteen years to materialize. With all of this history and all of this said, a person should ask themselves the threshold questions, “Is my retirement plan safe?” They should also ask, “What assurances do I have to keep my retirement safe?”

As with every case and every argument, there is another side to the coin. Are these disgruntled employees who were not satisfied with their returns? In the case of Rogers, Baxter had a defined benefit plan based on the purchase of stock. Rogers claimed that the fiduciaries for Baxter knew that the stock would under perform and even pushed to the point that the stock was known to have no material substance or positive prediction for growth. Baxter of course argued that the stock under performed unbeknownst to their ability to accurately predict the declines.

This raises the question:Is there a better way for fiduciaries to protect themselves while employees can maintain a level of trust in security and performance?

The crossroads are upon us; every employee and every employer now needs to analyze their options in light of the developing interpretation of ERISA. We are in an era that requires if you do take the chances, you have to be willing to litigate and withstand everything that comes with litigation; a long, tired, emotional and financial exhaustion. When it is all said and done you will be reflecting, was it worth it? Does anyone want to spend his or her time and money in litigation?

This begs the question of the decade regarding pension plans: Are they worth it? The answers will shock you if you stop to analyze the big picture. While the tried and true government regulated method of funding your retirement with contributions from income in a pretax manner sounds terrific, and more so if you can find a benevolent employer willing to sweeten the pot with matching contributions, the numbers say different.

The case law above clearly shows that the days of simply adding money to a deferred tax vehicle are over. Funding a 401k or an IRA with pretax dollars seems like the right thing to do. In upcoming newsletters we will analyze the good, the bad and in some cases, the awful ideas as ways to fund your retirement account with pretax dollars. When running simple illustrations for a total net retirement income, in many instances, differing tax or simply funding a 401k or an IRA makes no sense at all. As with many things in life, taking matters into your own hands will do much to give you safety and Asset Protection for years to come.

Our advice is not to leave any stones unturned with your assets; they are protected or they are not. All court cases aside, it is that simple!
 
Until next time,
 
John

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