The Department of Labor's Employee Benefits Security Administration has expanded and streamlined its Voluntary Fiduciary Correction Program. [News Release 06-689-NAT; 71 FR 20261] Concurrently, EBSA has revised and extended PTE 2002-51 relating to certain transactions identified in the VFC Program. [71 FR 20135]
Both the VFC Program changes and the PTE 2002-51 amendments are effective May 19, 2006. During the month prior to that effective date, relief remains available under the original VFC Program or the April 2005 VFC Program, both of which will be superseded by the final VFC Program when it takes effect. The final VFC Program will not foreclose resolution of fiduciary violation by other means, such as settlement agreements with the Department of Labor.
The final VFC Program will retain the fundamentals of the original program, as revised in April 2005. New changes include -
- Covered Transactions -
- Illiquid Assets – Divestment will be permitted in the case of acquisition of an asset from a party in interest to which a statutory or administrative exemption applied.
- Participant Loans – Corrections can include transactions for violations involving level amortization or default loans. Correction under the VFC Program will only require correction under the IRS' forthcoming EPCRS (still pending), followed by submission to EBSA of the EPCRS compliance statement and proof of payment of any required payments.
- Settlor Expenses – Violations involving use of plan assets to pay certain expenses that should have been paid by the plan sponsor may be corrected under the VFC Program. Correction requires restoration of the principal amount plus the greater of lost earnings or restoration of profits.
- Program Calculations – Multiple Recovery Dates – Corrections involving multiple transactions with different time periods may be corrected by performing the necessary calculations in steps using different recovery dates, using either the Online Calculator or a manual calculation.
- Correction Methodology – Cash Settlement – A plan will be permitted to retain an asset purchased from a party in interest, settling the correction amount in cash, provided an independent fiduciary determines that the plan will realize a greater benefit from the cash settlement than through resale of the asset.
The ERISA §403 requirement that plan trustees exercise exclusive control over plan assets has an "implied exception" permitting participant investment direction for an individual account plan, according to a 7th Circuit decision affirming the district court. [Jenkins v. Yager, 04-4258] A plan participant had contended that a 401(k) plan's individual direction provision violated the ERISA by delegating trustee duties. Although the 401(k) plan did not meet the special conditions for participant-directed accounts under ERISA §404(c), since individual investment changes could only be made once annually instead of quarterly, the court recognized §404(c) as only a safe harbor, not the exclusive authorization for participant-directed accounts.
If a participant-directed plan does not meet the conditions set forth in 29 C.F.R. §2550.404c-1(b), the plan trustee and fiduciaries simply do not receive the benefits of section 404(c), and they are not shielded from liability for losses or breaches of duty which result from the plan participant's exercise of control. It does not necessarily mean that such a plan violates ERISA; instead, the actions of the plan trustee, when delegating decision-making authority to plan participants, must be evaluated to see if they violate the trustee's fiduciary duty.
In the case of the 401(k) plan involved in this case, the court then found that the trustee had not breached fiduciary duties in initial selection of available investments, in monitoring of the investments, or in the information provided to plan participants regarding investment choices. Although three of the four available investment alternatives suffered losses during 2000-2002, that in and of itself was insufficient to demonstrate a fiduciary violation.
However, the appellate court reversed the judgment of the district court favoring the trustee with respect to the profit-sharing portion of the plan, where the trustee retained authority to make the plan investments. Noting that the district court had not specifically addressed that particular claim, and finding sufficient evidence to suggest neglect, the case was remanded for further proceedings on that issue.
Rehearing en banc a district court dismissal previously affirmed by the appellate court, the 5th Circuit Court of Appeals has vacated and remanded the dismissal, reopening a class action ERISA fiduciary breach lawsuit. [Milofsky v. American Airlines Inc., CA5, 03-11087]
When their former employer was acquired, employees were notified of blackout periods that would occur during transfer of their defined contribution plan account balances to their new employer’s 401(k) plan. The employees allege that the company and its benefits consultant, which sent the notices, violated fiduciary duties by misrepresenting how and when the accounts would be transferred. The employees also allege that failure to effect the transfers in a timely and prudent manner caused losses in account values, and request that damages be allocated among individual accounts proportionately to losses arising from the alleged breach.
The district court dismissed the lawsuit, finding that the employees lacked standing to sue under ERISA §502(a)(2) to recover losses under §409 unless all plan participants would benefit from the litigation. The court also ruled that the employees had failed to exhaust administrative remedies. Finally, the district court found that the employees had not alleged specific facts that would establish the benefits consultant as an ERISA fiduciary. Reviewing the district court decision de novo, a divided 3-judge panel of the 5th Circuit originally affirmed dismissal. [CA5, 03-11087, 3/16/2005] The appellate court subsequently vacated that decision and granted en banc review of the case.
The full appellate court’s new decision is brief, almost too brief. “Measured by the principles of notice pleading and the standards controlling dismissal under FED. R. CIV. P. 12(b)(6), the district court erred in dismissing these claims,” the court stated without elaboration, essentially allowing a §502(a)(2) claim to be brought by a subset of plan participants. The full appellate court then as briefly disagreed with the district court’s characterization of the action as “disguised benefit claims requiring exhaustion of administrative remedies,” rather asserted fiduciary breach claims that could be litigated.
Although not directly addressed, the decision appears to also reactivate the claim against the benefits consultant.