5500 Preparer's Manual for 2012 Plan Years
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From Spencer's Benefits Reports: Participants who had been cashed out of 401(k) plans still could pursue their claims that the plan sponsors had breached their fiduciary duties under ERISA by imprudently investing in mutual funds. This was the decision of the Fourth Circuit U.S. Court of Appeals in In re Mutual Funds Investment Litigation (No. 06-2003).
The plaintiffs in the case are former employees who had maintained accounts under 401(k) plans sponsored by their employers. Upon their termination of employment, all of the plaintiffs had received lump sum distributions of their vested benefits in their respective 401(k) plan accounts.
In a class action lawsuit filed in the U.S. District Court for the District of Maryland, the plaintiffs alleged that the fiduciaries of their respective 401(k) plans had breached their fiduciary duties under ERISA based on the fiduciaries’ knowledge that the mutual funds offered by the plan allowed investors to practice “market timing.” The plaintiffs sued the fiduciaries under ERISA Secs. 502(a)(2) and 409(a), which permit a derivative action to be brought by a retirement plan “participant” on behalf of the plan to obtain recovery for losses sustained by the plan because of breaches of fiduciary duties. However, the district court dismissed the plaintiffs’ claims, holding that the plaintiffs did not fall within the class of individuals authorized to sue under ERISA Sec. 502(a)(2) because they had been cashed out of the plans and thus were no longer seeking “benefits.” The plaintiffs appealed, and the Fourth Circuit reinstated their claims.
In rendering its decision, the Fourth Circuit initially explained, “Before these employees had been paid the value of their accounts in the defined contribution plans, the plans had invested in various mutual funds that allowed investors to practice a form of arbitrage known as market timing, in which investors move in and out of the funds to take advantage of the temporary differentials between the mutual funds’ daily-calculated net asset value (NAV) and the market price of the component stocks during the course of a day. Not only does market timing favor the market timers at the expense of long-term investors in mutual funds, it also increases the funds’ costs and impairs investment performance. Market timing can harm mutual fund investors by causing mutual funds to manage their portfolios in a manner that is disadvantageous to long-term shareholders.”
According to the Fourth Circuit, “ERISA section 502(a)(2) provides that ‘a participant’ may bring a civil action against fiduciaries for breaches of their duties as articulated in ERISA section 409(a). The ‘participant’ who may so sue is defined to be: any employee or former employee of an employer who is or may become eligible to receive a benefit of any type from an employee benefit plan which covers employees of such employer, or whose beneficiaries may be eligible to receive any such benefit.” (Emphasis in original.) The Fourth Circuit then cited the U.S. Supreme Court’s recent ruling in LaRue v. DeWolff, Boberg & Associates, Inc. (128 S. Ct. 1020), in which the Court held that ERISA authorized a cashed-out former employee to sue his former employer and the employer’s 401(k) plan for a breach of fiduciary duties that caused a loss in his individual plan account.
Quoting from the Supreme Court’s decision in LaRue, the Fourth Circuit concluded, “Misconduct by the administrators of a defined benefit plan will not affect an individual’s entitlement to a defined benefit unless it creates or enhances the risk of default by the entire plan. But in a defined contribution plan, the benefit is the participant’s interest in an individual account, and the misconduct need not threaten the solvency of the entire plan to reduce benefits below the amount that participants would otherwise receive. Although section 502(a)(2) does not provide a remedy for individual injuries distinct from plan injuries, that provision does authorize recovery for fiduciary breaches that impair the value of plan assets in a participant’s individual account. We believe that the holding in LaRue controls the outcome here.” Accordingly, the Fourth Circuit returned the plaintiffs’ ERISA claims to the district court for trial.
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