Kentucky Employment Law Blog

Fiduciary Communications By ERISA Trustee

ERISA fiduciaries owe a fiduciary duty to tell the truth to plan participants.  This "duty to inform is a constant thread in the relationship between beneficiary and trustee; it entails not only a negative duty not to misinform, but also an affirmative duty to inform when the trustee knows that silence might be harmful."  A fiduciary breaches his duty "by materially misleading plan participants, regardless of whether the fiduciary's statements or omissions were made negligently or intentionally."  

Dudenhofer v. Fifth Third Bancorp presented yet another installment of the floundering mess caused by the foray in this case of Fifth Third Bancorp into the subprime lending field.  The plaintiffs were employees and participants in Fifth Third's profit sharing plan. The participants can direct portions of their pay into the plan, and the bank matched up to 4% of those contributions, the matching contributions being invested initially in Fifth Third stock.  But the subprime mess caused Fifth Third stock to decline 74% from July 2007 to September 2009 costing the plan tens of millions of dollars.  

The plaintiffs sued claiming that the trustees' had breached their fiduciary duties.  One cited example were false or incorrect statements made in filings with the SEC that were expressly incorporated into the Plan's summary plan description (SPD).  The district court ruled that the SEC filings were not fiduciary communications.  

The Sixth Circuit reversed and framed the issue as "whether the express incorporation of SEC filings into an ERISA-mandated SPD is a fiduciary communication."  The SPD is "a document ERISA requires to be sent to plan participants to provide specified information about the plan [and] is unquestionably a fiduciary communication."  Since ERISA plan participants must be told the truth, SEC filings that are incorporated into the SPD must likewise be truthful and accurate:

The SPD is a fiduciary communication to plan participants and selecting the information to convey trough the SPD is a fiduciary activity.  Moreover, whether the fiduciary states information in the SPD itself or incorporates by reference another document containing that information is of no moment.  To hold otherwise would authorize fiduciaries to convey misleading or patently untrue information through documents incorporated by reference, all while safely insulated from ERISA's governing reach.  Such a result is inconsistent with the intent and stated purposes of ERISA -- to impose fiduciary duties 'which are the highest known to the law" -- and would create a loophole in ERISA large enough to devour all its protections.

Robert L. Abell
www.RobertAbellLaw.com

 

Fiduciary Duties of An ERISA Trustee

ERISA is "a comprehensive statute designed to promote the interests of employees and their beneficiaries in employee benefit plans." And so the trustees and administrators of ERISA plans have fiduciary duties. The Sixth Circuit recently in Dudenhofer v. Fifth Third Bancorp described these duties as three parts:

1. A fiduciary owes a duty of loyalty "pursuant to which all decisions regarding an ERISA plan must be made with an eye single to the interests of the participants and beneficiaries." 
   
   
2. ERISA imposes "an unwavering duty to act both as a prudent person would in a similar situation and with single-minded devotion to [the] plan participants and beneficiaries."
   
   
3. ERISA fiduciaries must act for the exclusive purpose of providing benefits to plan beneficiaries.

Robert L. Abell
www.RobertAbellLaw.com 

Does A Corporate Executive Breach His Fiduciary Duty Where He Has An Undisclosed Interest In a Noncompeting Company?

Corporate executives and other high-level corporate employees have fiduciary duties to the corporation. These duties require, among other things, that the interests of the corporation be foremost and put before those of the individual. But there are questions as to how far this duty extends. A recent case, Mazak Corporation v. William King, decided by the Sixth Circuit considered whether a corporate executive breached his fiduciary duty where he had an undisclosed interest in a noncompeting company.

William King was Mazak’s vice president and controller from 1990 to 2005. He was directed to explore options to establish a financing subsidiary that would provide financing for the sale of the company's equipment to customers. Toward that end Mazak and another company, United International, formed Mazak Financial Group, which between 1998 in 2003 successfully financed millions of dollars in Mazak equipment sales.

While he was still employed by Mazak, King acquired ownership interests in both United and a third company, which provided subcontractor services to Mazak. These ventures were very successful as King received $1,510,738 in distributions from United, profit-sharing contributions of $133,537 and distributions from the subcontractor totaling $204,346. One of King’s subordinates at Mazak, Timothy Fisher, received similar distributions from United.

After King left employment at Mazak the company learned of his interests in United and the subcontractor and sued him for fraud and breach of fiduciary duty among other things. The district court entered judgment in Mazak’s favor for $3,472,896, representing the total monies received by King and by Fisher from these other companies.

King appealed the judgment to the Sixth Circuit and argued that his fiduciary duty to Mazak did not require him to disclose his interests in United or the subcontractor since they were not competitors of Mazak’s. The court rejected this argument based on the following points:

• under Kentucky law, when an employee "is aware of the conflict between his private interest in the corporate interests, he owes the duty of good faith and full disclosure of the circumstances to the corporation."
   
•  "If dual interests are to be served, the disclosure to be effective must lay bare the truth, without ambiguity or reservation, and all of its stark significance."

• A corporate executive's failure to disclose the nature and extent of his involvement with an independent contractor violates his fiduciary duties

• Actual damage to the corporation is not required to recover for breach of fiduciary duties.

• An employee who obtains a secret profit "will be required to account to his employer or principal for any benefit received by him in violation of his duty though it does not appear that the principal has suffered any actual loss by fraud or otherwise."

Robert L. Abell
www.RobertAbellLaw.com 

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Breach of Fiduciary Duty Suit Arising From Medical Insurance Overcharges Settled

Hospital employees, who were charged higher fees by a group health plan it owned than it charged employees of other client companies, have settled a lawsuit alleging that the overcharges violated the employer's fiduciary duties under ERISA reports the Winston-Salem Journal, "Baptist Hospital Settles Suit On Health Plan."

The lawsuit claims that the hospital, North Carolina Baptist Hospital (NCBH) charged its employees higher fees for services rendered at the hospital through a group health plan, MedCost, which was owned by the hospital, than those charged to employees of other corporate clients. The hospital employees also had higher co-pays and lower discounts.  The report is:

"NCBH selected its subsidiary, MedCost, as the network provider for the plan knowing that MedCost would include NCBH in its provider network at substantially inflated reimbursement rates," according to the lawsuit. "The selection was made not on the basis of quality or cost from a fiduciary standpoint, but rather was based on NCBH's own economic interests."

The settlement will allow employees to recover damages for their overpayments going back to 2002 and will limit their charges in the future.  

Robert L. Abell
www.RobertAbellLaw.com

Retirement Plan Stock Losses Are Basis For Employees' Suit Against The Hartford

Employees, who have seen the value of their retirement accounts plummet as the stock value of their employer, The Hartford, has nosedived, have filed suit alleging mismanagement of their 401(k) retirement plans and failure to fairly and truly disclose the company's financial condition reports the Hartford Courant, "Employees Sue The Hartford Over Retirement-Plan Stock Losses."  At the end of 2007, the company's stock was valued at $87.19 and 21.4% of the employees' retirement plan holdings were invested in the company stock.  This year the stock has dropped to $10.46 per share amid continuing disclosures of poor investments by the company.  As a consequence, the value of the employees' retirement accounts has also dropped.

The suit claims that the company failed to prudently manage the plan as required by ERISA, the Employee Retirement Income Security Act, which governs the management of employee retirement accounts. 

Robert L. Abell
www.RobertAbellLaw.com 

Failure To Fully Pay Life Insurance Benefits Breached UNUM's Fiduciary Duty Under ERISA

Beneficiaries of group life insurance policies must be fully paid the policy benefits upon proof of their claim, the First Circuit has ruled in Mogel v. UNUM Life Ins. Co., No. 08-1334 (November 6, 2008).  UNUM issued group insurance policies to employees at a number of companies.  Plaintiffs were beneficiaries of those policies and presented proof substantiating their benefits claims.  However, instead of paying the policy benefits, UNUM sent the beneficiaries a checkbook and a letter advising them that (1) their benefits had been deposited in a "UNUM Security Account"; (2) checks from $250.00 up to the balance of the account could be written; and, (3) interest on the account would be paid at a varying rate.

The court ruled that UNUM breached its fiduciary duty by retaining control and use of the beneficiaries' money in what the court referred to as a "euphemistically named 'Security Account.'"  Sending the beneficiaries a checkbook "was no more than an IOU which did not transfer the funds to which the beneficiaries were entitled" and constituted a breach of UNUM's fiduciary duties under ERISA.

Robert L. Abell

www.RobertAbellLaw.com

Retirement Plan Manager Breached Fiduciary Duty By Secretly Increasing Retirees' Medical Insurance Premiums

A retirement plan manager breached its fiduciary duty under ERISA by increasing without notice to the plan's participants their medical insurance premiums, the United States Court of Appeals ruled in Orth v. Wisconsin State Employees Union, No. 07-2778 (7th Cir. October 22, 2008).  When the plaintiff, Orth, retired a collective bargaining agreement provision required the plan to apply the monetary value of his accrued and unused sick leave toward his portion (10%) of his medical insurance premium.  However, the plan manager without notifying Orth or other retirees increased his premium portion to 100%, a practice that Orth learned of when the plan manager told him to send more money to pay his medical insurance premium.  This court ruled that this change breached the plan manager's fiduciary duty because ERISA required the plan manager to notify the retirees of any changes to their plan.  Also, the court noted that ERISA requires that "a plan's participants and beneficiaries must be notified in writing of all modifications to the plan."  Therefore, the court concluded that the change was "doubly unlawful -- as unwritten and as secret."  

The court also ruled that Orth was properly awarded restoration of his accrued sick leave benefits.  In addition, the court upheld an award of attorneys' fees to Orth, asserting that the "use of deceptive conduct toward the retired employees as a basis for trying to duck liability was shabby."  And the court added that "one purpose of allowing an award of attorneys' fees to a prevailing plaintiff is to disable defendants from inflicting with impunity small losses on the people whom they wrong." 

Robert L. Abell
www.RobertAbellLaw.com

Former Employees Who Have Received Their Retirement Benefits May Sue For The Reduced Value Of The Benefits

Employees who have received their lump-sum retirement benefits may sue for breaches of fiduciary duty that reduced value of those benefits, the First Circuit ruled recently in Evans v Akers (No. 07-1140).   The key issue, the court explained, was whether a former employee, despite having already received pay-out of their benefits, was a "participant" of the retirement plan within the federal ERISA law.  A "participant" in an ERISA plan includes a former employee that has colorable claim that she will prevail in a suit for benefits under Supreme Court precedent.  A right to benefits, the court continued, includes an entitlement to prudent management.  Because the plaintiffs were participants in the plan when its value was reduced by imprudent management, they could sue to recover the reduced amount of their benefits.  

Robert L. Abell
www.RobertAbellLaw.com

Retirement Funds In Defined Contribution 401(k) ERISA Plan Lost Due to Investment Manager's Failure to Follow Directions or Failure to Notify May Be Recovered

Two recent court decisions, one by the United States Supreme Court and the other by the United States Court of Appeals for the Sixth Circuit, which covers Kentucky, offer and allow badly-needed avenues for relief to employees whose retirement accounts have suffered losses or diminution in value due to the negligence or wrongdoing to those responsible for managing the accounts.

First, the Supreme Court ruled in LaRue v. DeWolff, Boberg and Associates, Inc., (decided by the Supreme Court on February 20, 2008), that an employee who claimed that the value of his retirement account had been diminished by approximately $150,000 because of a failure to follow his investment directions could sue to recover this diminution in value. The employee participated in an ERISA-covered defined contribution 401(k) retirement savings plan, which allowed him to direct the investments of his contributions. In accordance plan-specified procedures and requirements, he directed certain changes to the investment in his individual account be made but his directions were never followed and, as a result, the value of his account was diminished by approximately $150,000. In an attempt to recover this loss, he filed suit under ERISA claiming that the failure to follow his directions constituted a breach of fiduciary duty.

The employee’s lawsuit was thrown out first by the district court and that ruling was affirmed by the United States Court of Appeals for the Fourth Circuit. Both relied on an earlier Supreme Court decision, Massachusetts Mutual Life Ins. Co. v. Russell, claiming it established that individuals could not sue under ERISA to recover money for themselves and that only the entire ERISA plan itself could bring a suit to recover its lost assets. 

The Supreme Court distinguished Russell by reasoning that an individual bringing suit to recover losses to his account in the ERISA plan was still bringing suit to recover losses for the plan. The court, therefore, concluded that ERISA does “authorize recovery for fiduciary breaches that impair the value of plan assets in a participant’s individual account.”

Some weeks prior to the Supreme Court’s decision in LaRue, the United States Court of Appeals for the Sixth Circuit, in commendable anticipation of the Supreme Court’s subsequent decision on LaRue, ruled in Tullis v. UMB Bank that two physicians could sue to recover losses from a bank that allegedly failed to notify them of fraudulent activities affecting their ERISA-governed pension plans. The doctors were participants in a defined contribution pension plan, more specifically a 401(k) profit sharing plan available to them through the clinic where they were employed. They claimed that the defendant bank, which served as the trustee for the plan, knew of fraudulent activities engaged in by the plan’s investment advisor and failed to inform them. Consequently, the doctors alleged, their investment accounts had suffered losses exceeding $500,000 and $1 million, respectively. They alleged that the bank had breached its fiduciary duty to them by failing to inform them of the investment advisor’s fraudulent activities.

The Sixth Circuit used the same reasoning later in LaRue, observing that “although the number of affected participants differs, the nature of the relief – the payment of money to the plan – is the same regardless of the number of participants to whom the recovered assets are allocated.” Therefore, the court reinstated the lawsuit.

LaRue and Tullis represent a substantial evolution in ERISA law by granting employees a means to obtain redress when persons charged with managing their retirement accounts breach their duties. These decisions serve the overriding purpose of ERISA: the preservation of retirement account funds. Employees who suffer losses from breaches of fiduciary duties, whether because of a failure to follow their directions or a failure to notify them of wrongdoing, may now seek and hopefully obtain full recovery of their vital retirement accounts.

---Robert L. Abell
---www.RobertAbellLaw.com

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