Last month, the Sixth Circuit affirmed the decision of a trial court that a trustee could rely on the ERISA Section 404(c) safe harbor to shield itself from fiduciary liability. The main issue in the case was whether 401(k) participants seeking to recover damages were prevented from exercising “independent control” over their accounts as a result of a failure of the trustee to disclose material nonpublic information.
Prior to this case, it was clear that the participants’ investment advisor had breached his fiduciary duty. As the court states in the opening of its opinion, the participants “lost substantial amounts of money from their pension accounts because their investment advisor … was a crook.” However, because the investment advisor was insolvent, the participants sought to recover their losses from the trustee by claiming that the trustee knew of the investment advisor’s fraudulent conduct and failed to disclose it to the participants.
The trustee claimed it was shielded from liability by ERISA Section 404(c). The participants argued, however, that all but one of the prerequisites to the safe harbor were met. In particular, the participants claimed that the requirement that they exercise independent control with respect to the investment of assets in their individual accounts had not been met due to the trustee’s failure to disclose what it knew about the investment advisor’s misdeeds.
In support of the participants, the DOL filed an amicus brief arguing that the 404(c) safe harbor should not apply because the participants’ losses were not “the direct and necessary result” of their control of their investments. The DOL’s brief asserted that the losses resulted from the alleged cover-up of the investment advisor’s fraud, which was a breach of the trustee’s duties of prudence and loyalty.
The court, however, was not persuaded by the participants' or DOL’s brief and argued that both failed to provide sufficient evidence or citations to back up allegations of a cover-up. Moreover, the court noted that public information about lawsuits and an SEC order involving the investment advisor was available and the trustee would not have had a duty to disclose this information to the participants. Thus, the ERISA Section 404(c) safe harbor served as an effective defense for the trustee. As the court concluded, the participants chose their advisor, gave him a blank check to invest their money, and directed the trustee to value their investments a certain way, without investigation. According to the court, it was the participants’ own decisions and conduct that caused their losses, and the trustee’s conduct fell within the ERISA Section 404(c) safe harbor.
This case appears to serve as a cautionary tale for participants to choose and monitor their investment advisors more carefully given the protections that the 404(c) safe harbor provides for plan fiduciaries. A closer look at the trial court’s decision sheds light on this as the trial court specifically notes that while a plan fiduciary cannot conceal material nonpublic facts from plan participants, ERISA does not require a fiduciary to guarantee that all material facts are shared with participants. The fiduciary’s duty, rather, is not to conceal facts and to speak truthfully when it chooses to speak. Moreover, under previous case law, the fiduciary is only required to disclose material nonpublic information when it receives an inquiry from a participant. Because the participants made no inquiry of the trustee in this case, the trustee did not have a duty to share information with the participants and was able to shield itself from liability under the 404(c) safe harbor.
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