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Guest Article
(Reprinted from The 401(k) Handbook, published by Thompson Publishing Group, Inc.)

Disclosure in 401(k) Plans: It's Cheaper to Communicate Than Litigate


by Martha Priddy Patterson

Summary: Recent court cases have shown that disclosure to plan participants can save costly litigation down the road.

The employer's duty to disclose ERISA plan changes and the timing of that duty is a growing area of contention between participants and plan sponsors.

Most of these disputes have involved early retirement supplements for defined benefit plans and certain health plan provisions. Disclosure challenges have not been a major concern for 401(k) plan sponsors in the past, but recent cases - especially those involving changes in the investment options available to 401(k) plan participants, such as the decision Franklin v. First Union Corporation - indicate that disclosure about plan changes could become a major issue in 401(k) plans as well. Anecdotal evidence suggests that class actions challenging plan investment changes are becoming more common. If plan participants are becoming more litigious now - when 401(k) plan investment returns generally are at record levels, as they have been over the last decade - imagine the participant unrest when investment returns decrease.

A look at some of the courts' comments in other disclosure cases and a refresher course in fiduciary duties may save plans many thousands in legal fees and, just as important, may preserve employee goodwill and forestall suits in the first place. One attitude plan sponsors would be wise to discard immediately is, "ERISA doesn't require us to disclose that specific information, so we aren't going to." It is true that disclosures specifically listed under ERISA's Sections 101 through 111 for summary plan descriptions (SPDs), plan documents on request, summary annual reports, notice of amendments and other information are relatively limited. And after a year or two of litigation, the courts may declare you were right under your unique conditions and in certain circumstances. But chances are, your company will have paid a great deal to prove your point - both in attorneys' fees and employee goodwill.

Taking a tough stand on disclosure regarding plan issues can create at least two costly problems. First, the rules of discovery in federal courts are very broad. By refusing to release certain information regarding questions about the plan to its participants, the plan sponsor may encourage the participants to skip the informal questioning and fact-finding process in favor of going straight to court. Once the suit is filed, virtually all information about the plan and about the employer's settlor (nonfiduciary) functions with respect to the plan, as well as its fiduciary functions, will be required to be given to the participants if requested under discovery. As one court explained when an employer had refused to reveal the names of certain plan fiduciaries to plan participants before the participants sued:

"... the affirmative obligation to disclose materials under ERISA, punishable by penalties, extends only to a defined set of documents. If litigation comes along, then ordinary discovery rules under the management of the district court provide the limits on what must be produced. It is possible, of course, that this narrow reading of [ERISA Section 104 requiring SPD disclosures] may create an incentive at the margins for plaintiffs to litigate rather than to rest satisfied with the internal remedies offered by a plan, so that they can find out what else is influencing the administrator's interpretation of a plan. Companies with a more generous view of their own obligations and self-interest may seek to counteract that incentive by disclosing more rather than less in response to employee requests. . . Employers will just have to decide how close they want to come to the brink of suit ..." (Ames v. American National Can Co., 170 F.3rd 751, 7th Cir. 1999)

Fiduciary Duties Go Beyond Narrow ERISA Disclosure

Fiduciary duties under ERISA are generally interpreted by the courts to go well beyond the narrow disclosure of specifically identified documents outlined in ERISA's statutory language. While the court in the First Union case ruled against the plan participants on their claim that they "vested" in certain 401(k) investment choices, the court rejected the plan sponsor's assertion that it satisfied fiduciary disclosure duties by providing the participants information about fund changes within 210 days after the end of the plan year, as required under ERISA's SPD rules. The court found that the defendants' duty to provide notice of the merger, the changes in the investment alternatives and the options available to the participants was broader than the duty imposed by the SPD disclosure rule to provide information within 210 days after the end of the plan year.

In the First Union situation, the governing plan SPD imposed disclosure requirements on the fiduciaries beyond that required by the statute. The individual investment funds were identified in both the plan and the SPD. The SPD stated that in the event the plan administrator adds to or reduces the number of investment funds, "you will be notified." Accordingly, based on the SPD, the plan sponsor had a duty to give the plaintiffs timely and adequate notice of the merger, the changes in the investment alternatives and the available options. In part this duty grows out of the ERISA requirement to discharge fiduciary duties "in accordance with the documents and instruments governing the plan," as long as such documents are not in conflict with the law.

The duty also grows out of the broader ERISA fiduciary responsibility to act "solely in the interests" of participants and beneficiaries "for the exclusive purpose" of providing the promised plan benefits. An employer or plan sponsor is not always acting as a fiduciary, but when that employer conveys information about a plan or changes the plan, the employer as a plan sponsor has a duty to inform plan participants of those changes.

The majority of federal courts interpret this directive as placing an affirmative duty on the fiduciary to inform plan participants of information in a timely way, especially in instances where the participants must take action to preserve rights or make decisions that will have long-term effects. Courts have described this fiduciary duty in a 401(k) plan context as requiring notification "of the changes in the investment funds in such a manner as to prevent any misinformation to and misleading of the plaintiffs regarding their options." Another court noted that the "duty to inform is a constant thread in the relationship between beneficiary and trustee; it entails not only a negative duty not to misinform, but also an affirmative duty to inform when the trustee knows that silence might be harmful." (Krohn v. Huron Memorial Hospital, 173 F.3d 542, 548, 6th Cir. 1999). In a late May appeals court ruling on ERISA disclosure, the 3rd U.S. Circuit Court of Appeals held that a misleading statement or an omission by a fiduciary is a violation of duty if there is a substantial likelihood that it would mislead a reasonable employee in making an adequately informed retirement decision (Harte v. Bethlehem Steel, 2000 U.S. App. LEXIS 12001, 3rd Cir. 2000).

Satisfying ERISA Section 404(c) Participant "Control" Requirements

Also note that if the plan sponsor intends for its 401(k) plan to receive protection against liability for plan participant investment decisions under ERISA Section 404(c), the plan must provide "an opportunity for a participant to exercise control over assets in his individual account." To provide for the participant "control" of his or her account, the section 404(c) regulations include extensive and numerous disclosure requirements which must be both timely and adequate to inform the participants of their investment options.

Sherwin Kaplan - a lawyer formerly with the U.S. Department of Labor, where he specialized in fiduciary breach cases - said at a recent IRS and Society of Actuaries conference, "As a general rule, if it is not too expensive and doesn't hurt you and if you are in doubt, it is a lot safer, and in the long run probably a lot cheaper to disclose, because it may well keep you from becoming a defendant."

Martha Priddy Patterson is director of employee benefits policy analysis with Deloitte & Touche LLP's Human Capital Advisory Services in Washington, D.C. Patterson is the contributing editor of The 401(k) Handbook.
Reprinted with permission from the July 2000 supplement to The 401(k) Handbook, ©Thompson Publishing Group, Inc., 2000. All rights reserved.

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