Ask an Expert - ERISA

Advisors that provide participant-level investment management services are plan fiduciaries and have a duty to render advice that is prudent and unbiased. Advisors, such as the ones you describe, could be liable for imprudent investment recommendations or violation of the prohibited transaction rules. Reaffirming this, the DOL Advisory Opinion 2005-23A states that advice pertaining to the investment of withdrawals from a qualified plan is considered the exercise of fiduciary authority requiring prudent decision making and loyalty to the participant.

You are prescient in thinking that recommending the transfer of plan assets to higher cost investment options without a commensurate increase in potential return, reduced risk or expanded financial planning type services could spark a new round of litigation. In fact, it already has. In a recently decided case, a federal district court allowed class action claims to proceed against a financial services company whose agents had allegedly breached their ERISA fiduciary duties by encouraging participants to roll over their 401(k) assets into IRAs invested in the provider’s proprietary mutual funds. The participants claimed that after terminating employment, they received letters instructing them to call a toll-free number to discuss how changes in their employment status might affect their accounts. The telephone numbers directed the participants to the provider’s sales personnel rather than to pension counselors. The participants were advised to roll over their accounts into IRAs that were restricted to the company’s higher fee investment vehicles, resulting in reduced earnings. The participants’ claims for losses to their 401(k) plan were denied because the plan had not incurred any loss, but the motion to dismiss fiduciary breach claims was denied.

My advice is simple. Investment advisors should be aware of their fiduciary role and any recommendation to transfer assets to investments with higher expenses should be justified by the potential for higher returns, reduced risk or additional services. A discussion of the potential benefits and burdens of such a transfer with the participant would eliminate the basis for the litigation discussed above.

If the loan was secured by the participant’s account,  the answer would be  NO.  However, if the loan was secured by the real estate, such that the plan holds the mortgage on the property, which is highly unusual, but permitted, the answer might be different.

If the authority to amend a 403(b) plan is held by a church convention, the new 403(b) regulations do not apply until the first plan year beginning after December 31, 2009. Church 403(b) plans are not subject to either the nondiscrimination rules or the universal availability rule, but are subject, generally, to all other rules, including documentation rules.

Some feel the La Rue v. DeWolff, Boberg & Associates case is important and one of the reasons why no new loss of earnings cases have been initiated by the plaintiff’s bar, but the Hecker v. Deere & Company case seems far more important.

The La Rue case involves a participant’s claim for reinstatement of losses stemming from the purported fiduciary breach of an administrator’s failure to carryout investment instructions. As with any Supreme Court case involving a sympathetic plaintiff, the case has generated a fair amount of press coverage. Regardless of the outcome, the result may not be far reaching. If the plaintiff loses there could, however, be some legislative remedies.

As noted, the Hecker v. Deere & Company case, currently before the Seventh Court of Appeals, seems far more important. A decision is expected in the spring and it could be a “make or break” type case. The central argument for the defense is that ERISA 404(c) essentially trumps Section 404(a), i.e., there is no fiduciary breach over fees if the plan is 404(c) compliant. If the judge agrees with the defense, it could be the demise of 401(k) litigation.