A Tale of Two Funds

Before reading the actual decision in Jenkins v. Yager & Mid America Motorworks, Inc., No. 04-4258 (7th Cir. April 16, 2006), I thought it was an unmixed positive case. Write-ups came to the conclusion like "the Seventh Circuit affirmed the decision in favor of the plan trustee." On actually reading the case, it turns out that this is not quite true. In a nutshell, the plan, which looks like a National Auto Dealers Association plan, had a profit sharing feature without directed investments and a 401(k) feature with directed investments. The decision affirmed dismissal with respect to the directed investment portion of the plan and remanded for trial on the undirected profit sharing portion.

As to the directed investment portion, the court found that ERISA 404(c) was not the only route to avoiding fiduciary claims where participants can control their own accounts. To do this, the court felt it had to find an "implied exception", which certainly doesn't jump off the page, in ERISA 403(a). However, the fundamental logic, which is that (1) if ERISA 404(c) is a safe harbor, there should be other ways that aren't as safe, and (2) the DOL Regulations specifically contemplate other routes to compliance. (See DOL Regs. 2550.404c-1(a)(2): "The standards set forth in this section are applicable solely for the purpose of determining whether a plan is an ERISA section 404(c) plan and whether a particular transaction engaged in by a participant or beneficiary of such plan is afforded relief by 404(c). Such standards, therefore, are not intended to be applied in determining whether, or to what extent, a plan which does not meet the requirements for an ERISA Section 404(c) plan or a fiduciary with respect to such a plan satisfies the fiduciary responsibility or other provisions of Title I of the Act." The real meat of the decision on this point, however, is in the recitation of how conservative the funds were, the extensive conversation with a Raymond James RIA, the ready availability to employees of investment-related materials, and the fact that the sponsor had annual meetings with employees at which the RIA made a presentation. Given that record of attention and thoroughness, the court reasonably concluded that there was no breach of duties.

So far, so good. At this point, it looks like the case is an example of what I have always called the "I have always relied on the kindness of strangers" defense. It certainly stands for the notion that if you are intelligent and attentive, and hire the right advisers, you can forget about some of the ticky-tacky stuff in the DOL regulations (e.g., statement that the plan is intended to qualify under ERISA 404(c), name address and phone number of plan fiduciary, arguably the prospectus for the investments where ordinary investors don't read it (which is pretty much every prospectus for every investment a plan would even think about making available), voting rights materials (again, where real folks don't look at them), minimum quarterly investment direction), and the standards for the array of investments and their relationships). It also makes no distinction between participants who have acted on their choices and those who have not. If there are employer securities involved, it is probably a good idea to jump through all the hoops for ERISA 404(c) compliance, because employer securities make courts justifiably nervous.

The profit sharing portion of the plan presented a very different picture. The court started citing the employer's deposition, which contained a lot of I dunno answers. The same funds were used as investments, but the employer couldn't answer questions about the mix initially set up, changes to the mix or rebalancing. The Seventh Circuit remanded for further proceedings as to the profit sharing fund.

This means two things. First, I am going to have to start distinguishing between defenses that permit or require real reliance ("I have always relied..."), such as penalty cases under the Code, and fiduciary reliance on advisers, which should be described as "I have always listened to the advice of strangers and made my own informed decisions." (Since the second one is not very snappy, I'll probably have to come up with two brand new names.) Second, always get your advisers to cover all the bases for you.

If, because the exciting issues were under the directed investment part of the plan, both parties' lawyers paid less attention to the profit sharing fund, Defendant's lawyers will probably try to get better answers from the Raymond James RIA. Then, whether they can get those better results will likely determine the outcome of the case.

One last note. Somehow or other, the DOL has decided it disagrees with the decision. It's hard to reconcile that with the language for DOL Regs. 2550.404c-1(a)(2) cited above I have no idea. Given the content of the regulations cited and the fact that thus decision is now on the books, it would seem to be too late for DOL to close this particular barn door.