PHILADELPHIA -- Unisys Corp. did not breach its fiduciary duties when it bought more than $200 million in GICs from Executive Life Insurance Co., a federal district court has ruled.
The Unisys case is important because it's the first to address the scope of fiduciary duties and liabilities of employers offering participant-directed defined contribution plans.
The decision -- which surprised many investment and benefits professionals -- is good news for plan sponsors. Many have worried they could be sued if investment options in employee-directed defined contribution plans should produce poor returns.
"Everyone was surprised there was a blowout victory for Unisys," said Dennis Coleman, principal at the Fort Lee, N.J.-based Kwasha Lipton group of Coopers & Lybrand.
Mr. Coleman was especially surprised because another court had questioned Unisys' prudence in purchasing guaranteed investment contracts from Executive Life.
"One got the impression that Unisys had done something wrong, but the district court totally exonerated Unisys of wrongdoing, based on the facts," he observed.
Unisys, of Blue Bell, Pa., bought three GICs for its 401(k) plan in 1987 and 1988. Los Angeles-based Executive Life was taken over by state regulators in 1991 after its investments in junk bonds soured.
A group of Unisys employees sued the company and its executives in 1991, charging the company breached its fiduciary duty when it purchased the Executive Life GICs. They sought to recover $73.6 million in losses they said the 401(k) plan suffered as a result of the GIC investments.
But Judge Herbert J. Hutton from the U.S. District Court for the Eastern District of Pennsylvania, Philadelphia, found Unisys had been prudent in exercising its fiduciary duties, had sufficiently diversified its retirement plan, and had given participants enough information about the possible risks associated with various investments.
The court ruled that because Unisys' workers had found out about Executive Life's deteriorating financial condition from press accounts, the company was not obliged to pass along information "about which those participants are already aware."
Moreover, Judge Hutton wrote in his opinion that because the workers, and not the company, decided how to invest their retirement dollars, they ultimately were responsible for any resulting losses.
First test for 404(c)
The Unisys case is the first to use Section 404(c) of the Employee Retirement Income Security Act as a defense.
Under 404(c), employers are granted protection from liability for the investment decisions of employees in participant-directed defined contribution plans if they offer employees at least three diversified investment options with different risk and return profiles, allow participants to easily switch among the options, and give them information about how the plan works, as well as information on choosing their options.
Judge Hutton noted even if Unisys had broken the law, it would have been protected by the 404(c) safe harbor.
Unisys had used the 404(c) safe harbor as part of its defense, even though the GICs had been purchased before the Labor Department issued the regulations.
"The funeral for Section (404)c may have been premature," said Brian Ortelere, partner in the Philadelphia law firm of Pepper, Hamilton & Scheetz, who represents Unisys.
The decision, he said, "recognizes that participants have some responsibilities in making investment decisions."
David Wray, president of the Profit Sharing/401(k) Council of America, Chicago, said employers who meet 404(c) requirements can find comfort in the court's ruling.
"The court may have approved a standard that is lower than what the Labor Department regulations called for," he said.
Participants appeal decision
Judge Hutton's decision follows more than two years of court wrangling, which began with a district court throwing out the case in 1995. An appellate court remanded the case back to district court in 1996.
The U.S. Supreme Court last year turned down Unisys' request to hear the case.
Lawyers representing Unisys' 401(k) plan participants in the case filed an appeal last week.
The 3rd U.S. Circuit Court of Appeals in Philadelphia probably will hear the appeal next year, said James R. Malone Jr., partner in the law firm of Chimicles, Jacobsen & Tikellis, Haverford, Pa., the lead attorney for the plaintiffs.
Sources expect the decision will stand because "the facts show Unisys did little or no wrong," said Kwasha's Mr. Coleman.
"It makes it an uphill battle," Mr. Ortelere, Unisys' lawyer, said.
The Labor Department hasn't decided whether to file papers supporting the participants' appeal, said Marc Machiz, associate solicitor at the Labor Department.
Specifically, the lower court ruled Unisys had not breached the prudence standard laid out in ERISA because it had taken "adequate and reasonable steps" before purchasing the Executive Life GICs.
Unisys bought the GICs following a competitive bidding process, and under the supervision of Murray Becker, a recognized GIC specialist.
Mr. Becker relied on the credit rating service of Standard & Poor's Corp. to determine the creditworthiness of an insurance company for inclusion in the bidding process.
Judge Hutton said Unisys was not obliged to tell participants about Executive Life's financial condition as it began to deteriorate or to predict its eventual demise. "ERISA does not impose a 'duty of clairvoyance' on fiduciaries," the judge wrote in his opinion.
Besides, Judge Hutton noted, Unisys had given participants enough information and warnings of the risks associated with various investment options in the plan.
Witnesses representing the group of employees suing Unisys testified they were aware of Executive Life's shaky financial condition through media reports.
Some Unisys employees told the court they hadn't read the documents the company gave them about the plan, and would not have invested their retirement dollars differently if they had received more information about Executive Life's troubles.
As a result, Judge Hutton's opinion stated, "Any claimed non-disclosure could not possibly have caused the participants harm."
The court also said those Unisys employees whose 401(k) assets were invested in the Executive Life GICs had not suffered any financial damages because their investments did indeed outperform their appropriate benchmark comparisons. Each of the Executive Life contracts returned all of the principal invested, and some interest.
Plaintiffs' lawyers calculated the internal rate of return for the three GICs ranged between 3.88% and 5.56%, below the return of 90-day and five-year Treasury securities at the time the GICs were purchased.
Additionally, the court ruled that allowing Unisys' workers to claim damages "would turn the distinction between defined contribution and defined benefit pension plans on its head."
That's because participants, not the employer, bear all of the risks of investment loss in defined contribution plans, whereas the employer bears the risk in defined benefit plans.