Blackouts

[Guest hitt24]

Is there any mandatory requirement to announce a black out or quiet period before a transition? If so, what is the time amount required? I know it is recommended, but I wasn't sure if it is mandatory.

[Guest FREE401k]

After all the Enron publicity I would go above and beyond the call of duty to make sure everyone knew about the black-out period as far in advance as possible, regardless of the requirements. In other words, I would exceed any requirement and do everything possible to make sure every person involved thoroughly understood the black-out period. I would shut the door on anyone being able to say "We didn't know" or "We didn't have enough time to make changes."

[mbozek]

The legislation proposed by the President would require 30 days advance notice before initiating a black out period. This legisation is winding its way through Congress and is expected to pass some time later this year. Employer could follow such guidance before implimenting a blackout period.

[pjkoehler]

Federal pension law does not currently impose an express advance notice period prior to the commencement of a lockdown period. But that said, the decision to impose a lockdown inevitably includes fiduciary acts. The fiduciaries that engaged in these acts, including the threshold decision to impose a lockdown at all, are held to ERISA's fiduciary standards. These include the duty of prudence (holding the fiduciaries to the so-called "prudent expert standard") and the duty of loyalty (holding the fiduciaries to the standard of acting for the "exclusive purpose of ... providing benefits to their participants and their beneficiaries.") It can be argued that the burden on the employer of providing a reasonable amount of advance notice is so slight, when weighed against the potential for harm to the participants' 401(k) account balances, the failure to provide advance notice falls well below either of these two fiduciary standards.

The imposition of the lockdown automatically strips the responsible fiduciaries of any ERISA Sec. 404© protection that, but for the lockdown, may have been available to shelter them from exposure to fiduciary liability for large investment losses. Furthermore, if the purpose of the lockdown is to "map" over and replace the participants' investment choices with comparable investment funds, the transaction involuntarily disinvests the participant of the investment fund option of their choice. This, it may be agued was yet another fiduciary act with respect to which 404© protection would not be available. Investment losses may arise from either the loss of investment control during the lockdown period or the mandatory investment fund transactions or both.

The loss of 404© protection should not deter a fiduciary from going ahead with the lockdown that it can reasonably justify, but s/he should have a clear understanding that lack of advance notice, timing, duration and ultimate investment fund selections are all fiduciary acts that have the potential to create exposure to fiduciary liability for the responsible fiduciaries.

[mbozek]

pj: Last time I looked plan participants did not have a right to any particular investment options in a plan under IRS cutback rules or ERISA Fiduciary rules. Fiduciaries are not liable for changes in the value of an investment due to market conditions which occur during a blackout period since fiducaries are not guarantors of investment performance.

[pjkoehler]

mjb: the mention of the IRC's "anti-cutback rule," or the plan's tax-qualified status in general, is really a nonissue in a discussion of ERISA's fiduciary duties.

As a legal matter, ERISA Section 404© is an affirmative defense to a claim of a breach of one or more fiduciary duties that ERISA provides as a part of its civil enforcement scheme. Since a condition on the fiduciary's use of the defense is the opportunity of a participant to exercise independent control over investment of plan assets held in his account, it's axiomatic that the decision to impose the lockdown would prevent the plan from satisfying this condition for as long as the lockdown period lasts. Therefore, the fiduciaries responsible for the decision would be deprived of the 404© defense. This doesn't mean they would be liable. That is a legal conclusion. It just means they are exposed to fiduciary liability if as a consequence of the lockdown, participants suffer large investment losses. The plaintiffs would still have to show that the lockdown decision was a breach (i.e. fell below the applicable fiduciary standard) and that the breach caused the investment losses, i.e. that but for the lockdown they would have engaged in a investment course of action that would have prevented the losses.

An interesting real life case study of this is presented in the Enron class action brought by 401(k) plan participants against Enron plan fiduciaries, the plan's contract administrator and trustee. You can find this on a website called "FindLaw Legal News." There, the Enron participants suffered a 33% drop in asset values during a very brief 11 trading day blackout period. Maybe the court wont agree with the plaintiffs that the fiduciaries lost their 404© protection, but I wouldn't bet the farm that the fiduciaries will make the case.

[mbozek]

I am not sure of what u are saying. Is your point that a fidcuiary is always vicariously at risk for imposing a blackout period in a 401(k) plan if any participant's investments decline? Or are you saing that a fiduciary cannot impose a blackout period if the stock is on a downtick immediately prior to the start of the blackout? The Enron situation is also a securities law issue as well as a Fiduciary issue because the fiduciary could not call off the blackout period based on inside information that the fiduciary may know about Enron's financial situation. I have never heard of a fiduciary being sued because a blackout being imposed and if your theory is true under what circumstances could a fiduciary ever impose a blackout period to improve plan investments, features and lower costs all of which are part of a fiduciary's duties. What would be the standards to determine if there was a breach? I am not sure that a fid would need the 404© defense in imposing a lockdown. Finally if this is such a problem why not have the sponsor amend the plan to impose the change in investments as a settlor decison not subject to the fiduciary rules.

[pjkoehler]

mjb: The Enron class action I just mentioned is exactly a case of fiduciaries being sued for imposing the lockdown. The lockdown decision required the fiduciaries to exercise the discretion that makes them fiduciaries, i.e. management of plan assets. There is no dispute that the value of Enron stock plummeted during the lockdown period. The complaint specifically argues that the fiduciaries lost 404© protection during the lockdown period because the participants were unable to dispose of their shares in a declining market (i.e. lacked independent control). If the defendant fiduciaries have 404© protection this case will probably be decided on a motion for summary judgment in favor of the fiduciaries. However, if the court finds that the fiduciaries don't have 404© protection regarding the loss of asset value during the lockdown period, the fiduciaries have to defend themselves against the basic claim that the timing of their decision to implement fell below the prudent-expert and the exclusive purpose standards of fiduciary duty. That requires a trial and whole lot more time and attorney fees even if the court determines that they are not liable. The loss of 404© protection means the law suit has much more settlement value and, in all likelihood, the insurance companies that are underwriting the cost of defending the fiduciaries will be compelled to settle with the plaintiffs.

While the allegations in the Enron case are indeed outrageous, the complaint should be required reading for anyone courageous enough to want to be a plan fiduciary.

[Guest FREE401k]

Maybe I'm cranky but it seems we're losing the forest because we're running into all the trees. I would assume the lock-down period has to occur because the Plan Sponsor has made some kind of informed decision that is in the best interest of the participants, such as changing providers. The Sponsor needs to inform everyone of the decision, provide very specific details of the lock-down period, why it has to happen, when it will happen, how long it will last, etc. make every effort to make sure all Plan participants know about it (several notices, an employee meeting, whatever), act in their best interest, don't hide anything, etc. Informed people with good intentions acting in the best interest of the participants and working hard to do everything they should do won't have anything to worry about.

[mbozek]

The settlement value in the Enron case is nada since the company is bankrupt and the employees are either unsecured creditors or equity investors. The only possible source of settlement funds are fiduciary insurance and the personal assets of the fiducaries which is not much considering the $1B in claims. The potential liability for the lockdown is limited to $4 a share for the 57% of plan assets that were invested in Ene stock. Also the employees did not rush to sell the stock after the blackout was lifed which is a strong indication that they would not have sold even if there was no blackout. This case reminds me of the Unisys litigation of 10 years ago after Executive Life went bankrupt. After 4 decisons it was held that there was no breach of fiduciary duty for putting 20% of the assets of a GIC fund into exec life policies.

[pjkoehler]

mjb: If the fiduciaries are liable for a breach, it is the plan (not the employees) that is the judgment creditor. The Enron plan's new trustee will have a fiduciary duty to make reasonable efforts to pursue collection (which would include pre and post-judgment interest and attorney fees) on a joint and several liability theory for the forseeable future. The named defendants currently include Northern Trust Company, Northern Trust Retirement Consulting LLC, (both subs of Northern Trust Corporation, a multi-bank holding company) and Arthur Anderson LLP, as well as multiple individuals, many of whom have recently become rather wealthy through the exercise of Enron stock options and whose bank accounts are frozen. Enron Corporation is not presently a defendant, so its financial condition is irrelevant to this particular litigation. In the event the court imposes liability, the assets exposed are certainly not "nada," otherwise the interest of contingency-fee lawyers in pursuing this case would be "nada" as well.

The plaintiffs are certainly not assured of prevailing on the merits, i.e. the defendants may yet be able to show that the lockdown decision did not breach their fiduciary duties, or if it did, the breach didn't cause the investment losses. The point of this thread (and the moral of the story) is that the breaching fiduciaries don't get ERISA section 404© protection. The participants would presumably argue that their failure to bailout of Enron stock immediately after the end of the lockdown period is due to the false information and nondisclosures about the company's financial condition to which they had been subjected.

To the extent the fiduciaries misled the participants about the value of Enron stock, this case resembles Varity v. Howe, where the Supreme Court held that corporate executive who are also plan fiduciaries may be liable for breach of fiduciary duty when they communicate false information during discussions about the company's benefit plans and the participants reasonably perceive the executive as both the employer and plan fiduciary.

[pjkoehler]

FREE401k: I dont' know about "cranky," but your views about the prospects of "informed people" with "good intentions" evading fiduciary liability suggests that you may not have read enough employee benefits cases where fiduciary responsibility was at issue. The cases over the last 25 years are full of unsuccessful defendants who fall into that category.

[lkpittman]

hitt24:

There is a good article in the March-April issue of Profit Sharing, published by the PSCA on this very subject. The article provides some good, usable guidance, in light of the fact that there are currently no real guidelines or rules on this. I'm not sure whether this article is on line at www.PSCA.org but you might give that a try.

Good luck.

[mbozek]

I think you are mixing your metaphors. First some of the parties u name as defendants are directed trustees who only followed the directions of the fiducaries. Persons who perform ministerial duties are not liable as fiducaries. AA is broke and anyway participants will have to stand in a long line of general creditors and other investors. It is already known that AA cannot payoff the liabilities of all claimaints even if they can penetrate the LLC veil that AA was organized under. The fiducaries can always declare bankruptcy which as I understand under Texas law is very generious. The individuals who you allege misled the participants will be sued under the securities laws and participants will have to share their meager assets with the other investors after they declare bankruptcy. The liability for the blackout period is still only $4 a share for the stock in the 401(k) plan and the participants will be merelyjudgment creditors in bankruptcy ct. The argument about why employees did not sell is applicable to all investors not just participants since it is a violation of the securities laws to give false or misleading information. Please tell me where the funds are to pay the claims of all the investors. The only possible way to collect would be if Enron was allowed to continue as an ongoing co whose stock would be owned by the investors--- but there are not enough assets to pay off all of the creditors which means that the individual investors will get nothing.

[pjkoehler]

mjb: This would be so much easier if you would read the complaint in Servered Enron Employee Coaliton, et al v. The Northern Trust Company, et al. As you can see, I didn't name the trustee and record-keeper as defendants, the plaintiffs bringing the action did. The complaint acknowledges the trustee was ostensibly a directed trustee under the terms of the plan. Thus, while it was a named fiduciary, it did not have discretionary authority to the extent that it received proper directions from Enron's Administrative Committee (and/or other named fiduciaries). The claim of fiduciary breach against Northern Trust is that Enron's instruction to proceed with the transfer of trustee and record-keeper functions pursuant to the lockdown was NOT proper. Now let me emphasize, so you don't accuse me of making this claim. This is one of the arguments the PLAINTIFFS make. (Frankly, it's a pretty good one. )

Northern Trust knew or should have known that participants holding Enron stock would want and should have had the opportunity to sell their shares following the company's announcement of massive nonrecurring charges in the 3rd quarter of 2001. Now, one of the disagreeable aspects about being a fiduciary, even a measely directed trustee, is that the old "Sargent Schulz" defense is unavailing. There is such a thing as co-fiduciary liability. A fiduciary cannot look the other way when a breaching co-fiduciary is about to make something bad happen to the participants to whom the fiduciary owes a duty of loyalty, and it can, by action or failure to act, prevent it from occurring, even if it means the fiduciary would be subject to a civil action by Enron for breach of contract. I seriously doubt, in hindsight, that Enron would have had the temerity to sue Northern Trust for breach of contract had it summoned up the intestinal fortitude to delay the lockdown so that the participants wouldn't be forced to hold Enron shares in deteriorating market.

So, if the plaintiffs prevail, I'd say, for starters, the corporate assets of Northern Trust and its multi-bank holding company parent, Northern Trust Corporation, look pretty good, not to mention it's fiduciary liability and E&O insurance carriers. Keep in mind this is joint and several liability. The plan doesn't care who bears the burden of restoring the lost earnings. Northern Trust can then have the privilege of squeezing what it can out of Enron, the individual fiduciaries and AA in an action for contribution.

[mbozek]

Under ERISA section 3(21) a fiduciary must have discretion to act with respect to plan assets. A directed trustee without discretion is not a fiduciary under ERISA. Beddall v. State Street Bank and Trust, 137 F3d 12. Your Sgt Shultz claim was considered and rejected in O'Toole v. Arlington Trust Company, 681 F2d 94 in so far as a directed trustee is concerned. There is no liability under ERISA for a directed trustee who follows instructions of a fiduciary. A directed trustee become liable under ERISA only if the trustee makes discretionary decisions regarding the plan or its assets in violation of its ministerial duties.

[pjkoehler]

mjb: Your reference to a definitional section of ERISA is leading you to confuse the concept of a "plan fiduciary" with the requirement elsewhere in ERISA that plan assets be held in trust by at least one trustee who shall be a "named fiduciary" and must have exclusive authority and discretion to manage and control plan assets, except to the extent that under the terms of the trust, the "trustees are subject to proper directions of [another named fiduciary] which are made in accordance with the terms of the plan and which are not contrary to this Act." ERISA Sec. 403(a)(1).

A trust instrument under which the sole "trustee" can take the position it is exclusively functioning within a ministerial role (and therefore has no fiduciary responsibility to the beneficiaries of the trust) would not satisfy ERISA's trust requirement, not to mention the fact that, logically, this is utterly inconsistent with basic notions of trust law on which ERISA is based. A directed trustee may well avoid exposure to direct fiduciary liability for the breaches of other plan fiduciaries because of the exception noted above. But, notice, as the plaintiffs' attorney has in the Enron litigation, the statute's reference to "proper directions." He argues that a named fiduciary acting as trustee would retain discretionary control and authority to the extent that any direction it received was improper, i.e. the discretionary authority to reject the direction.

Also, notice that the exception to the requirement that the trustee have "exclusive authority and discretion to manage and control plan assests" (indisputably fiduciary functions under the ERISA section 3(21) that you cite), is further conditioned upon such directions being (1) in accordance with the plan documents and (2) not contrary to ERISA's provision. The complaint alleges ample evidence that Enron's instruction to proceed with the lockdown was neither in accordance with the plan documents (because it contained the usual boilerplate anti-self-dealing and anti-prohibited transaction language) as well as the corresponding fiduciary liability provisions of ERISA.

This is the crux of the plaintiffs' argument. Unquestionably, the trust instrument was intended to satisfy ERISA's trust requirement. Northern Trust, as the plan's sole trustee, and, therefore, notwithstanding the directed trust language, it was a "named fiduciary" under the plan. While the directed trust language certainly drastically limited its exposure to fiduciary liability for the actions it undertook in accordance with Enron's directions, it doesn't stretch as far as you suggest, unless you conclude that Enron's lockdown directions were "proper" and consistent with the plan and ERISA. This was not at issue in the cases you cite.

Consider the hypothetical: Enron directs Northern Trust to transfer all plan assets to an Enron corporate account in a Cayman Islands bank. The logical extension of your argument is that Northern Trust would have no exposure to fiduciary liability for blindly completing that transaction. That would be an astonishing oversight by Congress don't you think?

[mbozek]

PJ: You are obviously unwilling to read the cases I cited which dispose of all of your arguments. The courts recognize the difference between a fiduciary who has discretion over plan assets or administration and a non discretionary trustee who has only ministerial responsibility to follow the instruction of the fiduciary. As for the intention of Congress controlling how ERISA applies, 200 years ago John Marshall said " It is the exclusive province of the Judical Branch of Government the determine what the Law is." Marbury v. Madison. The trust documents also contain provisions which allow the trustee to rely on instructions received from a fiduciary as being in accordance with ERISA and the plan and relieve the trustee of the need to get an opinion of counsel when instructions are received.

Finally you seeem to be unaware of the financial operations of pension plans. Every day billions and billions of dollars are transferred to and from ERISA and non ERISA plans by computers at the speed of light using account numbers and activity codes withhout any human intevention or oversisght. You may be surprised to know that pension plan funds are tranferred every day though off shore banking entities in legitimate transactions.

[pjkoehler]

mjb: You are no better reading the cases you cite than reading the replies in this thread. As I made abundantly clear, the arguments I've mentioned are not "my" arguments. They are the arguments of the plaintiffs in the Enron class action.

In Beddall v. State Street Bank, State Street had appointed an "investment manager." As I am sure you know, the ERISA trust requirement I mentioned specifies two exceptions to the general rule that the trust document designate at least one trustee who has discretionary authority and control over plan assets. ERISA Sec. 403(a). The one you are struggling with is in Sec. 403(a)(1). That is the directed-trustee exception, which is conditioned on the other fiduciary's directions being proper and consistent with the terms of the plan and ERISA.

What was at issue in Beddall, however, was the exception that relates to the conduct of an "investment manager" appointed by the trustee. That exception is set forth in ERISA sec. 403(a)(2). State Street had appointed an "investment manager," and the plaintiffs argued that State Street had fiduciary liability with respect to the conduct of the investment manager. The court reasonably concluded that State Street was not liable under the 403(a)(2) exception. Try to get this: THAT IS NOT WHAT IS AT ISSUE IN THE ENRON CLASS ACTION. THE ENRON PLAINTIFFS ARE NOT TRYING TO HOLD NORTHERN TRUST LIABLE FOR THE ACTIONS OF AN INVESTMENT MANAGER. RATHER, THEY ARGUE THAT NORTHERN TRUST BREACHED ITS FIDUCIARY DUTY BY FAILING TO REJECT AN IMPROPER DIRECTION FROM ENRON TO IMPLEMENT THE LOCKDOWN/TRANSFER TRANSACTION.

The Arlington Trust case you cite is even more inapposite. Arlington Trust was NOT appointed the plan trustee. The plaintiffs in the action were the designated trustee and named fiduciaries under the plan and trust. Arlington Trust (perhaps the name confused you) was merely the depository of some plan assets. Try to get this too: IN THE ENRON CLASS ACTION, NORTHERN TRUST WAS THE SOLE TRUSTEE UNDER THE PLAN AND A NAMED FIDUCIARY, IT WAS NOT MERELY A DEPOSITORY.

Lastly, the volume of financial transactions taking place in ERISA plans obviously implies that investment decisions are being regularly made and the fiduciaries involved are inevitably exposed to fiduciary liability for these decisions in the normal course of their activities. That is the way it's supposed to be. It's only the bad actors and the incompetent fiduciaries who have a signfiicant risk of breaching their fiduciary duties. With regard to the lockdown issue, much of the activity in transferring and mapping investment funds over the last 10 years occurred during up markets. However, in the last year or so, we've started to see investment losses arguably caused by the lockdown itself. That is why fiduciaries and co-fiduciaries should not be lulled into a false sense of security that a lockdown/transfer transaction is not a fiduciary act.

This thread has reached the point where your misrepresentation of legal authority, deliberate or otherwise, is being used to buttress hollow emotional appeals. So, this is where the work-reward relationship of enlightening you has become hopelessly unacceptable. As Yogi Berra said: "You got to be very careful if you don't know where you're going, because you might not get there." Cheerio my good man.

[Guest aladdin]

I'm telling you people, 90 days is WAY more than sufficient. And no, I don't have any more money.

If only you people would calm down and work with me, we could get that stock price back up about $100!

Trust me.

Ken L.

[mbozek]

After watching last night's episode of the West Wing I think it is time for me (Josh) to sign off on this thread.

[Guest FREE401k]

What a lively debate! We follow DB and DC Plan lawsuits carefully and stand by the opinion that the root causes are usually the actions (or lack of actions) of someone who 1) is not well-informed in the subject matter, and/or 2) does not act in the participant's best interest, and/or 3) does not work hard to do all they should do (in other words, they drop the ball and don't follow through even when they are well-informed and have good intentions). If there are cases where someone who was well-informed and acting in the participants' best interest did all they should do in a particular situation and was sued, we'd love to see the case. We are always looking to better inform ourselves.

My bigger point was that we practitioners often get bogged down in the thousands of details of this admittedly very complex business, and we lose the big picture. In this case instead of getting caught up in a debate of which line of which reg says who is a fiduciary when/where/how and why, we would advise the Plan Sponsor to simply know they need to provide notice (which they already know), provide as much notice as they can as soon as they can, explain why they're changing Plans, explain why there has to be a blackout period, follow up with more notices, meetings, whatever. If they do all they can do to make sure every participant knows what is going on, and that the Sponsor is truly acting in their best interest, they'll be fine because nobody will sue them in the first place.

[BFree]

Actually, I think the moral of this discussion is the opposite of FREE401k's post. Despite your best intentions, you too may be sucked into a lawsuit because of things you can't control.

[pjkoehler]

FREE401K: I luv what you're telling me. I always thought that as long as the value of a claim exceeded two times the potential fees of the plaintiff's lawyers, the likelihood that a claim would be brought would be fairly high. When the issue is the plan's lost investment earnings caused by the breach, that number can get pretty big. Of course, the cost of mounting a defense (successful or not) can be prohibitively expensive as well. So your comments comes as good news and great legal advise. Especially, your "bigger point" that predicts the likelihood of a well-intentioned fiduciary successfully defending against claims of breach of fiduciary duty.

Can we assume that your "opinion" is freely offered to fiduciaries and participants to rely upon? Would you mind setting it forth in a written letter over your real signature on your firm letterhead too? If so, are you capitalized and/or have E&O insurance to the tune of say $1 or $2 billion?

P.S. They're probably isn't a law firm in the country that walk out on the limb you're dangling from.

[Guest FREE401k]

Of course we don't formally advise clients that if they are well-intentioned, well-informed and work hard, they will be judgment proof. My point was simply that if most Plan Sponsors really acted that way, there would be very few lawsuits. Enron certainly never would have happened, nor New York Life, nor First Union, etc.

[MoJo]

Not to confuse the issues (which I find fascinating - especially in light of the now (hopefully) defunct Bentsen legislation which would have saddled participants with recordkeepers and trustees who were inferior because no one could take over a plan from such industry losers without an (extensive) "quiet period" to reconcile the irreconcileable records), but....

Any comment on the role of the 404© requirement to only provide for changes in investments with a frequency, which under the circumstances, is appropriate (but not less frequently than quarterly)? Seems to me that it could be argued that the circumstances (of improving the plan in many respects (if that is indeed the case)) may have made the suspension of trading activity justified, and still be within the parameters of 404©. This may, of course, not be applicable in the Enron case, which is fraught with non-fiduciary (read "SEC" issues) which may have made the timing of the quiet period inappropriate in its entirety.

[pjkoehler]

The 404c regs permit a covered plan to impose "reasonable" restrictions on the frequency of investment instructions. However, it specifies that restrictions are NOT "reasonable" unless, "with respect to each investment alternative made available by the plan, it permits participants and beneficiaries to give investment instructions with a frequency which is appropriate in light of the market volatility to which the investment alternative may reasonably be expected to be subject provided that ... [and then the regs specify three design based minimal requirements, including one that says that with respect to an alternative which permits a frequency greater than once every 3 months, the participants are permitted to] direct their investment from such alternative to a [low risk, liquid fund]...." Reg. Sec. 2550.404c-1(B)(2).

Plan's that impose significant restrictions on frequency cannot have 404c protection and carte blanche in selecting the range of investment alternatives. Modernly, 404c plans are daily-valued plans offering investment options of publicly-traded securities, including equity securities with respect to which market volatility is generally unpredictable. Fiduciaries with respect to such plans can only aspire to 404c protection if the plan permits investment changes and inter-fund transfers to take effect (at least with respect to the equity options) as of the next following trading day. Just out of curiosity, what restrictions on frequency do you think would be "reasonable" in a market where one or more of a daily-valued 401(k) plan's equity options (employer stock or otherwise) is tanking? Arguably, any restriction on frequency is "unreasonable" in light of the market volatility of such an option.

The imposition of a lockdown is a supervening event that temporarily suspends the established operating rules of the plan. And it's usually undertaken by parties who wear mulitple hats (fiduciary-employer). That's what makes such a step so perilous. A plan does not afford the fiduciaries 404c protection merely because it has language in it that conforms to the reg. It has to actually operate that way. The lockdown overrides the formal language of the plan in this regard. If large losses are reasonably foreseeable by a "prudent expert" (the standard to which ERISA fiduciaries are held), affording a fiduciary 404c protection because the plan had language in it that was intentionally disregarded in order to achieve the purposes of the lockdown, makes 404c a mere formalistic exercise, rather than the source of transactional relief it was clearly designed to be.

AGAIN: Let's be clear - losing 404c protection doesn't mean the fiduciary is liable. It just means he or she may have to prove to unhappy participants that the acts that made them fiduciaries in implementing the lockdown square with ERISA's fiduciary standards despite investment losses.

[mbozek]

PJ -you got any authority for the statement that the fid has to prove he acted prudently in order to avoid liability? I thought that the plaintiff/employee has the burden of proof under ERISA to prove that the fid acted imprudently by a preponderance of the evidence?? Fid can rebut the P's proof. Isnt this why most claims against fids for investment selection fail (Unisys) because it is really a battle of the experts and Ps experts are no better than D experts.

[pjkoehler]

As a procedural matter, if the defendant believes the plaintiffs have no case and the facts are not in dispute, they will make a pre-trial motion for summary judgement, which usually comes after the motion to dismiss for failure to state a claim and a blizzard of other motions all designed to get the court to boot the claim before it reaches the merits of the plaintiffs' case. If the court denies these defense motions and, of course, also doesn't otherwise grant plaintiffs' motions that favorably dispose of the case before going to trial, then the defendant fiduciaries will face the burden-shifting gauntlet of rebutting plaintiffs' prima facia case and/or proving up their affirmative defenses (like, for example, 404c protection). Ergo, my use of the term "may."

Of course, as you suggest, the defendant fiduciaries could chose to make no arguments and offer no evidence in the belief that the court will agree that the plaintiff failed to meet the burden of making its prima facia case. Procedurally, that usually comes about in the form of a motion just after the plaintiffs rest their case in chief. It's a lot less risky than not putting on defendants' case in chief and just hoping the court agrees with you in rendering it's verdict.

As a practical matter, if the court denies defendants' motion and finds that they do not have a 404c defense, the defendants had better present the court with ample proof (evidence and arguments, if you prefer) to rebut plaintiffs' evidence and arguments, which I'm sure you realize, depending on the facts, may include theories in addition to breach of the duty of prudence, e.g. the duty of loyalty (exclusive purpose); the duty to comply with the governing instruments of the plan and even the duty to diversify plan assets (where applicable).

[mbozek]

So plaintiff does has burden of pleading and proving its claims of imprudence by a preponderance of the evidence before a judge not a jury. The P still has the burden of proving that a Fid acted imprudently, instead of the fid having to prove that he/she acted acted prudently under the circumstances.

[pjkoehler]

Attention mjb: overexposure to "West Wing" episodes has been known to cause delusions of certainty about complex bodies of law. Take for example, the Federal Rules of Evidence and the Federal Rules of Civil Procedure, which long ago replaced the term burden of proof in favor of using its components: (1) burden of persuasion and (2) burden of production, also referred to as "presumptions." The rules allocate them among the adverse parties depending a myriad of factors. Now, law shools devote multiple semester courses to explaining these concepts, but anyone for whom Martin Sheen is a guiding light shouldn't have to undergo such exposure to utter unqualified opinions into the public domain.

To help you out, here is a portion of the Conference Committee Minutes regarding the last time Rule 301 of the Federal Rules of Evidence was amended.

"Under the Senate amendment, a presumption is sufficient to get a party past an adverse party's motion to dismiss made at the end of his case-in-chief. If the adverse party offers no evidence contradicting the presumed fact, the court will instruct the jury that if it finds the basic facts, it may presume the existence of the presumed fact. If the adverse party does offer evidence bproof of the basic facts. The court may, however, instruct the jury that it may infer the existence of the presumed fact from proof of the basic facts. bbThe Conference adopts the Senate amendment."

May be you should switch to "Law & Order" during commercial breaks to brush up on some of these more technical issues.

[mbozek]

PJ: U seem to be spending too much time infront of the tube instead of backing up your statements with ct precedents, not just committee reports. See De Bruyne v. Equitable Life, 920 F2d 457 for an example of the difficulty of pleading and proving a claim for breach of fiduciary duty because of investment losses in a pension plan. You should also review the sanctions under Rule 11 that can be levied on plaintiffs and their counsel who file frivilous motions and claims.

[pjkoehler]

mjb: burning the midnight oil at the local law library again! If you had actually read De Bruyne carefully you'd see that the Second Circuit affirmed the trial court's grant of the defendant-fiduciary's pre-trial motion for summary judgment (which came after its motion for discovery). There was no trial. Not because the plaintiff didn't carry its "burden of proof," but because he didn't produce enough evidence of a factual dispute to require a trial in the first place. Even still, the court could not grant defendant's motion unless it determined that it carried the requisite burden of persuasion. Here's a quote from Sec. 56.11 of Moore's Federal Practice:

"[A] summary judgment motion entails a degree of burden shifting between movant and respondent. Before a court will consider granting summary judgment, the movant (the defendant-fiduciary in De Bruyne) must make a prima facie showing that the standard for obtaining summary judgment has been satisfied....Courts frequently use the term ''prima facie'' term as a shorthand referring to the requisite showing a party must make to obtain or defeat summary judgment."

A more instructive and more recent case on point is Bussian v. RJR Nabisco, Inc., 223 F.3d 286 (5th Cir. 2000). There, the Fifth Circuit reversed the district court's grant of the defendant-fiduciary's motion for summary judgement. The court cited Rule 56© of the Fed. Rules Civ. Proc., to wit: in considering a motion for summary judgment (in this case kicking the plaintiffs out of court) it was obligated to "view all evidence in the light most favorable to the party opposing the motion (the plaintiffs) and draw all reasonable inferences in that party's favor. " The court held that a trier of fact could conclude that RJR had breached multiple fiduciary duties by funding plan termination benefit committments with Executive Life Insurance Company annuity contracts and threw the fiduciaries right back into the ring with the unhappy plan participants. Still think the defendant-fiduciary who cannot obtain summary judgment has no burden to carry? (That's a rhetorical question.)

[KJohnson]

Obviously the burdens at summary judgment and the burdens at trial are quite different.

Where I think there is a split in the Circuits is the issue of where plaintiffs have established a fiduciary breach and where plaintiffs have established a loss to the plan, it becomes the defendant's burden to prove that his breach did not cause the loss. I think the 5th and 8th Circuits have adopted this.

McDonald v. Provident Indem. Life Ins. Co., 60 F.3d 234 (5th Cir. 1995), cert. denied 516 U.S. 1174 (1996); Roth v. Sawyer-Cleator Lumber Co., 16 F.3d 915, 919-920 (8th Cir. 1994) citing Martin v. Feilen, 965 F.2d 660, 671 (8th Cir. 1992).

My recolleciton is the Second has rejected it but I don't have a cite handy.

[pjkoehler]

The difficulty we're having here stems from a failure to distinguish between a burden of production (the obligation of a party to present some evidence to support its claims) and the burden of persuasion (the obligation of convincing the trier of fact as the validity of claims). This thread evolved only to debunk the dangerously naive notion that defendant-fiduciaries in ERISA civil litigation (1) have a burden of production only if the plaintiff first persuades the court as to the validity of its claims in its case in chief and (2) that they have no burden of persuasion as their own affirmative defenses or their motions for summary judgment, directed verdict, etc. As anyone whose had any experience with civil litigation knows, civil defendants do not benefit from something akin to a presumption of innocence applicable to criminal defendants that exclusively assigns these burdens to the government. In civil litigation, the burdens of production as to the plaintiff's case in chief shift and the plaintiff is entitled to a presumption that facts are as it pleaded them if the defendant chooses to ignore its burden. That would be disasterous for the defendants and grounds for a malpractice claim against the attorney who so advised the fiduciary.

[KJohnson]

PJK I don't disagree with anything you have said. Of course you have the burden of persuason for affirmative defenses. I can't imagine that you would disagree that a plaintiff has the burden of persuasion in establishing a fiduciary breach.

I think the interesting aspects of fiduciary litigaiton is burden shifting where it would ordinarily not occur in "typical" civil litigation. The example I gave in my prior post is one such instance. Another example that I beleive has been adopted in all Circuits is the burden shifting on calcualation of damages. Put in your terms, once a Plaintiff has met its burden of production regarding calcualtion of damages, not only does the Defendant have a burden of production, but the actual burden of persuasion switches to the Defendant to disprove the plaintiff's estimatin of damages.

On the blackout issue, it may turn out that Plaintiffs need only establish that a blackout was a fiduciary breach and that the plans lost money (which is self-evident). Then the burden of persuasion would shift to the Defendants to prove that the blackout was not a causal link to the loss and that the plaintiffs calculation of damages is unreasonable.

Thus, defendants bear the burden of persuasio in two areas ordinarily borne by plaintiffs--the causal link between the breach and the damages and the amount of damages.