Blogging Employee Benefits

April 15, 2006

Implicit Exception for Participant Direction

Filed under: Fiduciary, Investment — Fuguerre @ 7:32 am

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.


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