Guest Article

Increase Seen in New Cases Challenging Plan Investments

by Thompson Publishing Group

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Summary: Retirement plan participants are growing more aware of their plan investments, and some investment changes by plan administrators are drawing lawsuits.

(June 20, 2000) - As participants become more and more familiar with investing their account balances in 401(k) plans, profit sharing plans and money purchase plans, there appears to be an increase in the number of cases challenging the plan fiduciaries' investments, particularly where the plan sponsor's own stock or mutual funds are involved and a merger or other corporate event occurs. The plan sponsor was granted summary judgment on several points in the recent First Union Corporation case, in which First Union used its own mutual funds in retirement plans after acquiring Signet Bank, and two more recent cases involve similar fiduciary issues.

Ikon Office Systems Case

In In re Ikon Office Solutions, Inc. Securities Litigation, (86 F.2d Supp. 481 E. Dist. Penn. 2000), participants' matching contributions were invested entirely in company stock. When the company suffered financial difficulties, a group of participants filed a class action alleging that the employer and certain individuals breached their ERISA fiduciary duties by failing to adequately inform participants of the employer's troubled finances. The plaintiffs asserted that the plan sponsor should have permitted the participants to transfer their matching contributions out of employer stock and into one of the other investment funds.

The district court refused to dismiss the plaintiffs' claims, finding that the plaintiffs should have an opportunity to establish that the employer acted in a fiduciary capacity when it communicated about its finances and to establish whether such communications had a material effect on the participants' decisions. However, because it is possible for company officials to act in dual capacities (both on behalf of the company and as plan fiduciaries) and because the Ikon plan was designed -- as a settlor rather than a fiduciary function -- to invest the matching contributions solely in employer stock, it seems unlikely that the participants will ultimately prevail in this action.

SBC Communications Case

A group of current and former employees of SBC Communications, the nation's largest local telephone company (formerly known as Southwestern Bell Corporation), recently filed a class action suit against the company alleging that SBC sold top-performing stock they held in their 401(k) accounts and replaced it with poorly performing SBC stock (Gottlieb v. SBC Communications Inc., C.D. Calif., No. 004139R, complaint filed Apr. 18, 2000). The lawsuit alleges that the change cost 45,000 employees and retirees $1.1 billion.

The case relates to SBC's acquisition of Pacific Telesis Group by SBC in 1998. Pacific Telesis employees had invested heavily in company stock in their 401(k) plan, and when Pacific Telesis spun off its wireless communications subsidiary as AirTouch Communications Inc. in 1994, these workers received substantial blocks of AirTouch stock. After SBC acquired Pacific Telesis in 1997, SBC initially told the workers they could keep their AirTouch stock. A year later, however, SBC decided to merge the Pacific Telesis 401(k) plan into SBC's 401(k) plan. As a result of that merger, SBC liquidated participant's AirTouch stock and invested the proceeds primarily in SBC stock. The AirTouch stock was valued at $635 million at the time of the conversion to SBC stock. However, AirTouch was later acquired by Vodafone PLC for a 39-percent premium, which caused the AirTouch stock to rise to more than $1 billion.

While participants do not have a protected right to a particular investment option, the substitution of investment options must be prudent, and SBC may have a difficult time establishing that it was prudent to force its employees to liquidate a successful investment (which was a competitor) and buy its own less successful stock. Particularly troubling is the lawsuit's allegation that SBC intentionally failed to give participants notice of their rights to avoid the sale of their AirTouch stock (by requesting a withdrawal or rollover) and provided the participants with notices designed to make participants believe, incorrectly, that they had no option other than to watch their AirTouch stock be sold and replaced by SBC stock.

Reprinted with permission from the Pension Plan Fix-It Handbook. Copyright 2000, Thompson Publishing Group, Inc. All rights reserved.

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