The U.S. District Court for the Western District of Pennsylvania, Pittsburgh, recently provided much-needed guidance on the largely unexplored duty of ERISA fiduciaries — such as corporate committees handling pensions, investments and retirement assets — to monitor service providers. Pursuant to ERISA, not only must these committees initially select service providers in a prudent manner, but the committees must further observe an ongoing duty to monitor and, if necessary, remove underperforming providers.
In the case, Scalia vs. WPN Corp., et al., the Department of Labor sued a number of parties, including the retirement committee of Severstal Wheeling Inc. and two of the retirement committee's individual members. Severstal Wheeling was a steel manufacturer headquartered in Wheeling, W. Va. According to the Department of Labor, the pension funds under the retirement committee's care, which at one time totaled nearly $50 million, suffered significant losses during the global economic downturn of 2008, when the vast majority of the pension funds' assets remained undiversified for a period of months in a small portfolio of energy stocks.
The retirement committee had hired a professional and nationally renowned investment manager, Ronald Labow and his investment firm WPN Corp., to act as its outside investment manager to invest the pension assets. After years of exceptional performance and returns, however, Mr. Labow made the decision to hold the undiversified energy stocks. Mr. Labow's decision, which cost the pension plans more than $15 million in market losses, was in direct contravention to the retirement committee's request for an appropriately diversified portfolio.
After almost five years of litigation, the District Court entered summary judgment in favor of the retirement committee on the Labor Department's remaining claim, which alleged that the committee failed to prudently monitor Mr. Labow while he served as investment manager. The Labor Department's other claims against the retirement committee, including a failure to invest claim, were previously discarded by the District Court on a motion to dismiss. According to the Labor Department, if the retirement committee monitored Mr. Labow more closely, or fired the investment manager sooner, it could have avoided the many millions of dollars of losses to the pension funds.
The District Court's opinion ultimately set forth at least four key takeaways for committees handling the pension assets, retirement funds or other investment activities for their respective organizations.