WASHINGTON - The U.S. Supreme Court last month expanded the scope of situations under which employers might be considered retirement plan fiduciaries.
Some federal pension law experts worry the decision could leave corporations vulnerable to lawsuits from employees on information they give regarding retirement plan investment choices, especially company stock funds.
The Supreme Court decision in Varity Corp. vs. Howe could prompt companies to review every piece of information they give employees about retirement plans. It also could lead some companies to turn to outside trustees and administrators to run stock ownership plans they offer employees as an investment choice in retirement plans.
And while employers cannot give more information to employees buying company stock for their retirement plan accounts than they can give other investors, some lawyers suggest the high court's ruling could pit employers' duties as fiduciaries against their obligations to not divulge business information that could be construed as insider information under securities rules.
Handing over management of employee stock plans to outsiders, they say, could thus protect companies against those liabilities. Companies generally use inside executives as trustees of their employee stock ownership plans.
Ian Kopelman, the head of the employee benefits group at the Chicago law firm of Shefsky Froelich & Devine, called the Supreme Court's decision "unsettling."
The ruling, he said, "makes it very difficult for counsel to suggest clients should use in-house trustees or plan administrators instead of outsourcing" for an ESOP.
Bringing in outside ESOP trustees or plan trustees "is a rational response" to the Supreme Court's decision, said Robert Gallagher, partner at Groom & Nordberg, a Washington employee benefits law firm, and a former Labor Department counsel for ERISA litigation.
Mr. Kopelman suggested the decision gives the Labor Department "an opportunity to create new law by using this case to sue under authority where it wouldn't earlier." The Labor Department had filed legal papers with the Supreme Court supporting Varity's former employees.
The dispute arose out of whether Varity's subsidiary Massey-Ferguson Inc. breached its fiduciary duty when it told employees about the rosy prospects for Massey Combines - a new subsidiary that it set up to hold its money-losing operations - in order to persuade them to switch to that division.
In fact, a lower court found Massey Combines was insolvent from the time it was set up and hid the fact that its liabilities exceeded its assets by $46 million. Within two years of its creation, Massey Combines ended up in receivership; 1,500 employees who had accepted the firm's assurances of rosy prospects had lost their health care and other non-pension benefits.
The court's decision gave individuals the right to sue companies on their own behalf to recover pensions and other job-related benefits employers might have misled them into giving up.
"Lying is inconsistent with the duty of loyalty owed by all fiduciaries and codified in section 404(a)(1) of ERISA," Justice Stephen Breyer wrote for the majority.
The decision also settled the debate over whether the Employee Retirement Income Security Act of 1974 lets employees sue only on behalf of the benefit plan itself.
The court did not directly address the issue of whether corporations must give employees information beyond what the law requires them to give. "We need not reach the question of whether ERISA fiduciaries have any fiduciary duty to disclose truthful information on their own initiative, or in response to employee inquiries," Mr. Breyer wrote for the majority.
But at the same time, Mr. Breyer acknowledged "administrators, as part of their administrative responsibilities, frequently offer beneficiaries more than the minimum information that the statue requires."
What's more, because two federal courts already have ruled that fiduciaries must, of their own accord, give additional information to plan participants if it will help them make important choices about their benefits, some lawyers now say the high court's ruling suggests employers would be better off using outside trustees or administrators for ESOPs.
"It kicks open the door for liability for what the employee thought the employer said," noted Mark Ugoretz, head of the ERISA Industry Committee, a Washington-based lobbying organization representing large corporations.
And in order to squelch such lawsuits, employers might become circumspect about the kind of investment education they offer their workers, he said.
More worrisome is how much information corporate executives must share with employees - if the information could alter their retirement plan investments, said David A. Hildebrandt, legislative counsel to the Profit Sharing Council of America and senior partner at the Washington law firm of Dow, Lohnes & Albertson.
"There's a distinct possibility that lower courts, in trying to interpret (Mr.) Breyer's decision of what constitutes fiduciary duty, may take the position that corporate activity which has a material effect on benefits may give rise to fiduciary duties to disclose," said Evan Miller, a partner at Hogan & Hartson, Washington, who filed legal documents on behalf of the U.S. Chamber of Commerce supporting Varity in the case.
Mr. Hildebrandt offered an example where such a conflict might arise: a company that offers employees a choice of coverage under its traditional pension plan, or a matching contribution - based on the company's profits - to a 401(k) retirement plan. But if executives know the company is unlikely to make any profits for several years, it is unclear if they are duty-bound to disclose that information to their employees.
But other experts say the Varity decision does not mean employers face liability if they give employees insufficient information about retirement plan investment choices.
One of them is Susan Katz Hoffman, partner at the Philadelphia law firm of Pepper, Hamilton & Scheetz, which is representing Unisys Corp. in a dispute over whether the Unisys violated its fiduciary duties when it picked Executive Life Insurance Co. to run $200 million in guaranteed investment contracts for its retirement plan. Unisys employees invested in Executive Life GICs lost their money when the insurance company failed in 1991 (Pensions & Investments, Jan. 22).
Ms. Hoffman believes that when companies fail to give employees enough information about a retirement plan's investment choices not because they stood to make money out of it, but because they "didn't do a great job," the Supreme Court's decision doesn't automatically hand participants a victory. (The ruling applies only to cases where the employer intentionally misleads employees.)
Lynn Dudley, director of retirement policy at the Association of Private Pension and Welfare Plans, Washington, said the high court's ruling does not press employers with company stock plans to give employees information about the prospects for the company's stock price.
If employers give employees just the basic information ERISA requires, the Supreme Court's decision does not impose a higher burden on employers to provide additional information, she said.
