Duty to monitor investment alternatives

[Guest ly]

What is the judicial standard and the circumstances that must be present in order to determine whether an investment is no longer an appropriate investment alternative in a 401(K). In this case, the investment is the company stock that has decreased in value.

[mbozek]

Ther are several issues regarding the suitability of er stock in a 401(k) plan. First is the question of whether the stock investment is mandated by the plan document or the stock is an investment selected by the plan fid. In the former case the selection of the stock is a settlor decision and there is no fiduciary responsibiliity to monitor the investment performance since the fiduciary cannot remove the stock as an investment option. Second is the question of what constitutes poor investment performance of a stock. Most publicaly traded companies have suffered declines in stock price over the last 2 years and a mere decline in stock price because of systemic risk in the market does not make the stock a bad investment. Indeed in retirement plans which have a long term outlook, a decline in the stock price is an advantage if the stock dividends/ and contributions are being reinvested because the current shares are being purchased at a cheaper price. When the stock appreciates in the future the shares will have a greater value which will reduce the overall cost of the shares purchased. This is called dollar cost averaging and is a recognized investment technique for long term investors. However in some industries, e.g., telecom and airlines, the stock is unlikely to increase in value and the company may go into bankruptcy resulting in a loss of all equity for shareholders. Third making a decision to suspend purchases of er stock is bad for employee morale -- it is an indication that the company is going down and HR directors are loath to take this option. Fourth, if company stock appreciates after trading is suspended the employees will have a valid claim for a breach of fiduciary duty that they were denied the opportunity to invest in co stock when it was cheap and the fiduciary is personnally liable for the loss. In a 404© plan the employees should be given all pertinent financial information regarding the company. I am not aware of any cases involving fiduciary liability for not terminating er stock as an option in a 401(k) plan although there are many cases on this issue in ESOPS.

[MGB]

mbozek,

If you read the DOL's amicus brief on the Enron case, they argue that employer stock investments mandated by the plan are not exempt from fiduciary liability. They make absurd suggestions such as disqualifying the plan by selling off the stock when it is not performing well. They imply fiduciary breaches are a higher priority than both qualification and breaching insider-trading rules from acting on non-public information.

[mbozek]

So -- a brief is supposed to be argumantative. The DOL like the IRS is always looking to expand the reach of the law. I think the issue was resolved by the US supreme ct in Spink v. Lockeed-- plan design is a settlor decision not a fiduciary decision.

Clearly the exclusive benefit rule does not authorze the plan fids to take any action such as selling off or suspending purchases of the stock because of material non public information because it would violate the securites laws which are not preempted by ERISA. The DOL has some absurd policy issues it litigates such as suing fids if more than 25% plan assets are invested in one type of security. Most of the case are decided for the fids if the fids followed ERISA procedures for selecting plan investments. My understanding of Enron plan administration is that the fids not only did not follow the plan's investment policy, they did not have correct policies in place. I also understand that any fid liability under ERISA will be derivative from violations of the securities laws not from ERISA violations per se. There is still a valid issue of whether enron employees who invested in Co stock are investors entitled to relief under the securities law along with all the other investors.l

[Guest ly]

mbozek,

What authority can you cite that says the securities laws have been preempted by ERISA?

[Guest ly]

Originally posted by ly

mbozek,

What authority can you cite that says the securities laws have been preempted by ERISA?

Sorry, you said the securities law have not been preempted by ERISA.

[Kirk Maldonado]

ERISA Section 514 says no preemption of other federal laws, including securities laws.

[mbozek]

My point (although turgidly written) was that a plan fiduciary cannot use the fiduciary provisions of ERISA as authority to take action regarding plan assets which would require the violation of another federal law, e.g., securities law. If the basis for suspending/selling the investments in Co stock is derived from material non public information, the plan fidicuary cannot take action to protect only the plan participants. The fiduciary must either make the information public for all investors or refrain from acting on the information. If the fid is making such a decision based only on public information, e. g. the decline in co stock, future earnings guidance, projected sales, etc., then the fid is risking a lawsuit if the price of the stock increases after the suspension on the grounds that the fid deprived the participants of the right to make their own decisions to continue to invest in the stock as they have a right to do under 404©. Even if the stock goes down the tubes after the fid suspends trading/ sells it based only on public information there will be a lawsuit by participants for not making the decison sooner.