Failure to Deposit Plan Assets in Trust

[BTG]

I was contacted by a client with a clear violation of ERISA's trust requirement... 2-3 years ago, they received checks for mutual fund settlement proceeds. The checks were made payble to the plan f/b/o individual participants . The checks were never cashed/deposited. The vast majority of the affected participants no longer work for the company or have an account in the plan.

Pursuant to FAB 2006-01, these were clearly plan assets when distributed to the plan, and were therefore required to be held in trust by ERISA 403. The issue becomes how to correct this violation, now that the checks are stale and the affected participants are out of the plan. This violation doesn't appear to be within the narrowly prescribed failures correctable under VFCP. Any thoughts on how a solution?

Thanks!

[Guest Sieve]

How about shoe-horning it into Section 7.2(b) of VFCP: a below market loan to a party-in-interest (i.e., the employer sponsoring the Plan)?

[BTG]

I appreciate the creative solution, but I think that might be too much of a stretch, considering that the employer never received any of the money either.

[Peter Gulia]

Beyond one or more fiduciaries' possible breaches of duties to collect the trust's property, to obey the plan's and its trust's terms, and to act prudently, consider that the plan might have a tax-qualification defect (at least if the employer intends that the plan qualify under Internal Revenue Code section 401(a)). Ordinarily, a qualified plan must allocate amounts no less often than once a year. To the extent that the settlement payment was not allocated to the plan trust's reserve for plan-administration expenses, it ought to have been allocated among participants' accounts.

Even if (a few years ago) no document precluded and the plan's fiduciaries acting with impartiality and in prudence could have decided to allocate the entire settlement payment to the plan trust's reserve for plan-administration expenses, the fact that the payment was not collected might call into question whether the fiduciaries made such an allocation decision, and it might be difficult to prove that they made that decision.

In pursuing a restoration and correction now, a fiduciary should consider what series of decisions balances efficiently and effectively among the ERISA 404(a)(1) duties, many of which are in tension one to another. Further, each currently-serving fiduciary should at least consider whether the plan would benefit from decisions made by a separate fiduciary who is independent of every fiduciary who breached a duty to the plan (either directly or by failing to pursue reasonable efforts to remedy another fiduciary's breach). It's easier to make such a decision to engage an independent fiduciary if the appointing fiduciary knows that fiduciary liability insurance or the employer's resources would respond to meet the expenses caused by the fiduciaries' breaches.

If it is obviously not feasible to engage an independent fiduciary, each fiduciary might consider whether getting and following a lawyer's written advice could help a compromised fiduciary manage the self-dealing involved in making decisions that relate to one's previous conduct.

All that theory said, it seems likely that the circumstances BTG describes would result in intense cost-benefit pressure, pushing a fiduciary to make PRACTICAL decisions. A good fiduciary makes those hard decisions, and documents his or her reasons for selecting the solutions used and, perhaps more importantly, rejecting others.