HOUSTON - The SPARK Institute and the American Bankers Association filed friend-of-the-court briefs in the Enron retirement plan case last week, challenging what the industry perceives as back-door regulation by the U.S. Department of Labor.
The row created by the briefs has taken the case of Tittle vs. Enron Corp. beyond whether Enron's defined contribution participants will recoup lost account assets to definitions of fiduciary liability that are broader than what is currently in practice.
Industry watchers say the Labor Department is using the high-profile case as a forum for clarifying its position on who among the myriad service providers to defined contribution plans bears fiduciary responsibility for decisions made on behalf of these plans.
Record keepers and others who work for plan trustees should be held responsible for their actions, Assistant Secretary of Labor Ann L. Combs said in a speech last month.
"A non-fiduciary service provider may be liable for equitable relief if it knowingly participated in the fiduciary breaches of others," she told attendees of the Profit Sharing/401(k) Council of America's annual meeting in Chicago.
Contrary to practice
The SPARK Institute, the Washington-based lobbying arm of the Society of Professional Administrators and Recordkeepers, argues the DOL's effort is contrary to 25 years of practice, according to Stephen M. Saxon, principal of Groom Law Group, the Washington firm representing the institute.
The American Bankers Association contends in its brief that a directed trustee - an administrator that merely does what the sponsor tells it to do - is not a fiduciary. Both briefs were filed in the Tittle case, which is pending before the U.S. District Court for the Southern District of Texas, Houston.
"We worked hard to make a clear statement of the department's views," Ms. Combs said of the Department of Labor's brief filed Aug. 30.
"We don't think they (the Department of Labor) understand the issue," said Robert G. Wuelfing, president of SPARK, an industry trade association with 270 corporate members.
"I think if the Department of Labor is correct, the consequences would be far-reaching and bad for the industry," Mr. Wuelfing said.
Legal experts say the Labor Department's brief is a significant analysis of the Employee Retirement Income Security Act, because it is the first time the department has indicated who is a plan fiduciary for defined contribution plans.
"I think that certainly this is the first time the department has said what it thinks about important legal issues under ERISA, and they chose to do it in an amicus brief," said William A. Schmidt, partner in the law firm of Kirkpatrick & Lockhart LLP, Washington. "I suppose Enron is such a visible case that they felt they had to make their views known."
Under current practices, "most directed trustees are relieved of liability unless there is a red flag," Mr. Schmidt said.
But the Department of Labor's brief appears to say if a record keeper or other directed trustee notices anything fishy, then it has an obligation to act.
Under the Department of Labor's amicus brief, a directed trustee must ensure any direction is proper, in accord with the terms of the plan and not contrary to the terms of ERISA, he said.
If the Labor Department's position is upheld, fees could rise, because record keepers would charge more since their liabilities would increase.
Moreover, the Labor Department's amicus brief draws the circle of fiduciary liability wider than what is currently believed, said Richard L. Menson, partner in the employee benefits group of McGuire Woods LLP, a Chicago law firm.
Fallout from ruling
If the court adopts the Labor Department's position, Mr. Menson said, sponsors will re-examine how they run their plans and who they choose to be fiduciaries. One fallout could be sponsors may not want corporate executives with insider knowledge to serve on committees overseeing the plans, and the executives themselves could be loathe to serve.
"The amicus brief is the best illustration for arguing against additional ERISA rules and regulations," said Ed Ferrigno, vice president and lobbyist for the Profit Sharing/401(k) Council of America, Chicago. "The existing framework gives more than enough ammunition to proceed against all the parties."
While the PSCA has not taken a position on the issue and does not intend to file its own brief, Mr. Ferrigno said, "some would claim that they are not doing anything except to follow the directions of the plan."
"The real issue is: Does the directed trustee have any responsibility regarding the investment options in the plan? Does the directed trustee have the obligation to ensure investment decisions are prudent under ERISA?"
Neither the ABA nor SPARK Institute's brief touches that issue.
Still, another element of the debate is whether a directed trustee needs only to follow the plan document or comply with ERISA as well.
"I agree with the Department of Labor standard: Even directed trustees should be liable if they know or should have known that the instructions they are given, if carried out, will result in fiduciary breaches," said Eli Gottesdiener, principal of The Gottesdiener Law Firm, Washington, one of the firms representing Enron plan participants.
Plaintiff attorneys intend to challenge both the ABA and SPARK Institute briefs, he said.
But Mr. Saxon, representing the SPARK Institute, said the Department of Labor is regulating by court brief and is going too far.
"We felt compelled to file the brief when we saw what the Department of Labor was saying," Mr. Saxon said. "We would probably not have commented (on this case)on the district court level, but we were so offended. What was so offensive to us, in this industry, is that a record keeper - which is a huge part of 401(k) business - ordinarily performs under a separate contract and is a separate entity from the (plan) trustee."
In the Enron case, Northern Trust Retirement Consulting, Chicago, was the separate entity that performed the record-keeping work for Enron. Standard record-keeping contracts generally provide that the record keeper is not a fiduciary, he said. Moreover, plaintiffs argue that Northern Trust as the record keeper became a fiduciary because it failed to postpone the blackout period, during which participants were barred from selling company stock, at a time when the stock price was plummeting, he explained. (Enron imposed a blackout period while it switched to Hewitt Associates LLC, Lincolnshire, Ill., as record keeper from Northern Trust. Enron stock lost value during that period, and plan participants were unable to sell any shares because of the blackout.)
"The essence of this issue is a record-keeping activity, but they (Department of Labor) have labeled it as a trustee activity," said Mr. Saxon, who represents the group made up of 20 of SPARK's largest members, including new member Northern Trust.