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Thursday, July 19, 2012

In Bidwell v. University Medical Center, Inc., the Sixth Circuit ruled that an employer was not liable for resulting financial losses when it transferred assets in participants’ retirement plan accounts from a stable value fund to a Qualified Default Investment Alternative (“QDIA”) even though the participants had previously elected the stable value fund.  For those unfamiliar, QDIAs are funds in which a participant’s account can be invested if the participant fails to give investment direction.  QDIAs are designated by the plan administrator and have greater risk (and thus the potential for greater returns) than stable value or similar conservative funds, which may not keep pace with inflation.  The plan administrator is protected from having to make participants whole for investment losses for amounts invested in QDIAs, provided the procedural rules of the regulations are followed.

In the case, University Medical Center (“UMC”), maintained a 403(b) retirement plan (which is similar to a 401(k) plan for a non-profit employer).  Under the plan, employees who never made an investment election were defaulted into a stable value fund.  Employees could also affirmatively elect to invest in the stable value fund, which both plaintiff employees in this case had done.

Once the Department of Labor issued its final QDIA regulation, UMC selected an acceptable QDIA and prepared to transfer all assets invested in the stable value fund to the QDIA.  As required by the QDIA regulations, UMC sent a letter to all participants whose accounts were going to be transferred asking them to respond if they preferred to stay in the stable value fund.  The plaintiffs claimed they never received that letter. (However, UMC was able to present evidence that it had mailed the notice letters using first class mail to the plaintiffs’ respective addresses.)  The plaintiffs alleged they did not find out that their accounts were moved to a QDIA until they received a quarterly report a few months later.  Unfortunately, their accounts were transferred to the QDIA in 2008 (not a great time to move out of a stable value fund) and lost a combined $100,000 in the less than three months they were invested in the QDIA.  Plaintiffs sued to recover the lost amount, claiming that UMC had breached its fiduciary duty.

The Sixth Circuit said that UMC did not breach its duties to the plaintiffs and that the QDIA regulations shielded UMC from liability for the loss.  The court stated that it was clearly the intent of the DOL to incentivize employers to utilize QDIAs instead of stable value funds and that the regulations protected employers from liability when they made decisions for participants in the face of inaction by those participants.

This decision is notable because the court held that the employees could have their funds reinvested in the QDIA despite their prior affirmative election to invest the stable value fund.  The court concluded that the plaintiffs had to make an election after the plan administrator sends the QDIA notice to avoid having their accounts invested in the QDIA.  However, regardless of the legalities (which should be analyzed fairly closely before implementing such a strategy), employers should also consider the employee relations concerns that can arise with moving funds to a QDIA.  Many employees who did not make an election in the first place are not likely to care, but employees who have made affirmative elections may take exception to the plan administrator “offering” to reinvest their funds unless they “re-elect.”

We thank our Summer Associate, Jess Zimmerman, for his help in preparing this post.

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