By Jane Meacham
A plan sponsor’s immunity from financial losses that resulted from its shift of retirement plan participants’ investments into qualified default investment alternatives was upheld by the 6th U.S. Circuit Court of Appeals in its decision in Bidwell v. University Medical Center Inc., Case No. 11-5493 (June 29, 2012).
Facts of the Case
When the Pension Protection Act was enacted in 2006, employers were given so-called safe harbor relief from liability for default investments made on behalf of participants who failed to pick a preferred vehicle. The PPA also paved the way for QDIAs to be used for automatic enrollment of newer employees. These alternative funds were intended to be higher-risk but potentially more rewarding investments that could meet a worker’s long-term retirement needs better than lower-yielding stable value funds that may not keep pace with inflation.
The plaintiffs in this case were two employees of the medical center who participated and contributed in its 403(b) retirement plan. They had chosen to place 100 percent of their retirement investment in a stable value fund that UMC also used as the default investment vehicle for plan participants who failed to elect a preferred investment vehicle after enrollment. The employees filed suit after they lost a total of more than $100,000 in investment value after their accounts were transferred without their knowledge to a more aggressive default investment option.
In line with changes the PPA made, UMC in 2008 changed its default-investment vehicle to a target-date or “lifestyle” fund and transferred existing investments in the prior default fund — a stable value fund — into the new, more aggressively invested one unless participants directed otherwise. The medical center didn’t have records of which participants originally chose to invest in the stable value fund and which were in the fund by default, so it had its administrative partner for the plan send letters by first-class mail informing all participants with 100 percent of their investments in the stable value fund of the impending change. The letters gave participants a chance to opt out of the shift to the lifestyle fund. They did not include return receipt notifications.
The plaintiffs said they never received their notices, even though they were sent to their correct addresses. As a result, they did not respond to UMC about the change, and had their accounts moved over to the lifestyle fund without their knowledge. They learned of the shift upon receipt of their quarterly account statements and contacted UMC to switch back to the stable value fund. However, due to severe global market fluctuations in late 2008, the two already had suffered financial losses before their accounts could be moved back to the stable value fund. They filed suit in the U.S. District Court for the Western District of Kentucky, Louisville Division, against UMC and its partner in plan administration, Lincoln Retirement Services Co., for breach of fiduciary duty under ERISA.
The Courts Weigh In
The district court ruled that Lincoln was not liable to the employees because it was not a fiduciary under the plan, and further that UMC was immune from liability because of the safe harbor protections of PPA.
On appeal, the plaintiffs argued that the district court was wrong in concluding that UMC was shielded by safe harbor regulation. They claimed they were entitled to relief because UMC’s transfer of their investments from the stable value fund to a QDIA was outside the scope of the DOL regulation and violates the terms of their retirement plan. Their appeal said the safe harbor provision applies only to employer-selected investments made on behalf of participants who fail to elect an investment vehicle, which they did not.
Both DOL in its case against the UMC employees and the appellate judges disagreed with this argument, and the 6th Circuit affirmed the original ruling in favor of the plan administrator’s right to shift into a QDIA the retirement assets of participants without receiving instructions from them to do so.
Final Notes
The Bidwell ruling serves as a reminder of the importance of employers, plan administrators and sponsors, and employees of paying close attention to the rules regarding default investments. While it reaffirms that plans can make default investments as they see fit within the parameters the PPA sets, plan sponsors would be wise to remember the importance of informing participants before making such investments and giving them an opportunity to direct how their funds are to be invested.