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Monday, July 9, 2012

Qualified plan sponsors and plan fiduciaries should always be well prepared to avoid litigation or at least limit its consequences.  This general rule typically means that it is important to follow ERISA’s fiduciary obligations through prudent action and process.

Once participant fee disclosures are fully disseminated (many may have already been conveyed although the deadline for compliance for most plans is not until August 30, 2012), some participants may have questions about the disclosures.  Although there is not likely to be a huge outbreak of inquiries, it only takes one participant to create a claim of breach of fiduciary duty.

How might that happen? 

The courts have long held that plan fiduciaries have a duty to provide relevant information to plan participants beyond the disclosures that are required by Part 1 of Title I of ERISA.  See, Varity v. Howe, 516 U.S. 489 (1996).  Most cases focusing on whether or not relevant information was provided deal with inquiries from participants about such things as ambiguous language in an SPD.  Sometimes, participants request advice concerning plan benefits.

A participant is entitled to rely on statements made by a plan representative.  Unfortunately, and often due to misunderstanding or simply the complexity of plans, the information provided by the plan representative turns out to be misleading, incomplete, inaccurate or false.  If the participant can demonstrate reliance on bad or incomplete information and that the reliance resulted in some sort of loss, a claim might be brought against the plan fiduciaries.  See, Eddy v. Colonial Life Ins. Co., 919 F.2d 747 (D.C. Cir 1990).

In Eddy, the Court held:

The duty to disclose material information is the core of a fiduciary’s responsibility, animating the common law of trust long before the enactment of ERISA.  At the request of a beneficiary (and in some circumstances upon his own initiative), a fiduciary must convey complete and correct material information to a beneficiary.  * * * A fiduciary’s duty, however, is not discharged simply by the issuance and dissemination of [documents and notices required by stature under Part 1 of Title I or ERISA]. * * * [I]n general, a fiduciary many not materially mislead those to whom the duties of loyalty and prudence are owed.  * * * A beneficiary, about to plunge into a ruinous course of dealing, may be betrayed by silence as well as by the spoken word.  * * * [R]efraining from imparting misinformation is only part of the fiduciary’s duty.  Once Eddy presented his predicament, Colonial Life was required to do more than simply not misinform, Colonial Life also had an affirmative obligation to inform – to provide complete and correct material information on Eddy’s status and options.

This duty to inform is widely recognized by the courts around the country.  However, courts have been reluctant to expand the duty to situations involving personalized counseling or participant advice.  See, Barrs v. Lockheed Martin Corp., 287 F.3d 202 (1st Cir. 2002).

The duty to inform is derived from the general duty of fiduciary prudence under ERISA.  ERISA § 404(a)(1)(B).  It requires a plan administrator to be accurate when responding to participant inquiries.  To be accurate, the response must be complete and may not mislead by omitting material information.  As a result, there is an affirmative duty on the fiduciary to disclose all material facts or other information to the participant in response to the question.  See, e.g., Krohn v. Huron Mem. Hosp., 173 F.3d 542, 547-48 (6th Cir. 1999).  The duty to inform imposes an affirmative duty on the fiduciary to speak up when the fiduciary knows that silence itself might be misleading.  See, Hart v. Bethlehem Steel Corp., 214 F.3d 446, 452 (3rd Cir. 2000).  The duty to inform requires the fiduciary to convey complete, accurate information that is material to the participant’s circumstances, even if the participant has not made a specific inquiry concerning information.  See, Shea v. Esensten, 107 F.3d 625, 629 (8th Cir. 1997).

How does this duty apply with regard to participant fee disclosures?

If a participant has a  question about the new fee disclosures, the fiduciaries have a duty to make certain the question is fully and accurately answered.  Many companies do not have a process in place to be certain that a knowledgeable plan representative is the person answering the questions.  And many do not have a process for getting the right answer to the participant who is asking the question.  Many companies have no process in place to confirm that a question was answered and was answered correctly.

If a participant, now seeing the fees she is paying in the new disclosure format, inquires about those fees and whether or not there are less expensive alternatives to direct her investments, it is going to be incumbent on the plan fiduciaries (unless the questioner is actually seeking investment advice) to give accurate and complete information.  The failure to do so could lead to a claim down the road.  There may be many other types of inquiries that could result from the new disclosures as well.  Plan fiduciaries should be prepared with a sound process to make certain that the duty to inform is not breached.

Prior Post on DoL Fee Disclosure Guidance

Prior Post on 408(b)(2) Service Provider Fee Disclosures

Disclaimer/IRS Circular 230 Notice

 

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