PHILADELPHIA -- Workers cannot hold employers responsible for the poor performance of the investments they pick through their company-sponsored retirement plans, a federal appeals court has confirmed.
In a 2-1 decision on March 22, the 3rd U.S. Circuit Court of Appeals upheld a lower court's ruling that Unisys Corp. did not breach its fiduciary duties when it purchased $217 million in Executive Life Insurance Co. guaranteed investment contracts for its 401(k) retirement plan.
But the case might not be over yet. The participants intend to ask the appeals court for a rehearing before the entire bench, said James R. Malone, a partner in the Haverford, Pa., law firm of Chimicles, Jacobsen & Tikellis, a lawyer representing the plaintiffs.
"While taking such a step is not something you do lightly, we think it is appropriate, and we are optimistic about the outcome," Mr. Malone said.
Unisys, of Blue Bell, Pa., bought three GICs for its 401(k) plan in 1987 and 1988. Executive Life, the Los Angeles-based life insurance company, was taken over by state regulators in 1991 after its investments in junk bonds soured.
Shortly after, a group of Unisys employees sued the company and its executives for breach of fiduciary duty, and sought to recover $73.6 million in losses they said the plan suffered as a result of the GIC investments.
Hopes are confirmed
The appellate court's ruling in the case, John P. Meinhardt vs. Unisys Corp., confirms what employers had hoped for all along: As long as they are careful in picking investment providers and administering their retirement plans, they will be considered to have met their obligations under the Employee Retirement Income Security Act, even if the investments perform poorly.
And while the court's ruling broke no new legal ground, experts say it offers reassurance to employers offering employee-directed retirement plans, especially with the expectation that the stock market's bubble might burst soon.
"Participants have some responsibility for their savings plans, which is what Congress intended when it came up with the definition of savings plans under ERISA," noted Brian Ortelere, partner in the Philadelphia law firm of Pepper, Hamilton & Scheetz, who represented Unisys in the case.
Dennis Coleman, a principal at the Teaneck, N.J., employee benefits consulting firm PwC Kwasha described the court's ruling as "a positive signal" for employers.
The appellate court accepted the district court's ruling that Unisys had been "prudent" in picking the three Executive Life GICs because its executives, David White and Leon Level -- who both had suitable qualifications and experience in financial matters -- had followed an acceptable practice in screening the investments (Pensions & Investments, Dec. 22, 1997).
The appeals court ruling noted the lower court "was satisfied and concluded Unisys had made a reasonable and thorough investigation of Executive Life GICs. We will not disturb that holding here."
Moreover, the appeals court ruled that a hypothetical prudent investor would have arrived at the same conclusion as Unisys, and other pension plans that purchased the Executive Life GICs.
The court did not determine whether Unisys had met the diversification requirements under federal pension law because the plaintiffs did not offer evidence of what would have constituted a diversified fund.
And finally, the court ruled the plaintiffs could not seek any reimbursement of losses, even though the 401(k) plan had lost money, because they had failed to show how they had individually lost money. The court also upheld the lower court's ruling that it did not matter how much information the company had given its employees about Executive Life's financial troubles, because employees already were aware of the insurer's situation through media reports, and had decided not to bail out of the GICs.
The chief judge of the appeals court disagreed with the majority on one point -- on refusing to accept the testimony of the key witness presented by the plaintiffs. But pension experts said the dissent was not significant because it did not relate to the substance of the case.
Defense not used
Although Unisys has initially relied on Section 404(c) of ERISA as a defense, the company dropped the use of that protection at the appeals court level because the federal district court had found the company not liable.
Under 404(c) employers are granted immunity from liability for the investment decisions of their employees in participant-directed retirement plans, if they offer 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 to choose options, and how the plan works.
Even though Unisys did not ultimately rely on this defense, the court's ruling suggests companies that broadly observe the principles of 404(c) can still rely on it as a defense, observed David Wray, president of the Chicago-based Profit Sharing/401(k) Council of America.
"It will give comfort to those companies that have participant-directed programs that have chosen to have 404(c)-like programs, but do not necessarily comply completely with the regulations as promulgated by the Labor Department," he said.