A Tennessee district court recently ruled that a directed trustee may seek indemnification from a retirement plan’s internal fiduciaries if that trustee is liable for alleged losses in investment funds it recommended. (See FedEx Corp. v. The Northern Trust Co., W.D. Tenn., No. 08-2827-STA-dkv, 1/25/10.)
In FedEx, internal fiduciaries (the Committee) of a FedEx-sponsored pension plan (the Plan) alleged that The Northern Trust Company (the Trustee) recommended two investment funds (the Funds) to the Committee that were against the Plan’s investment policy. The Trustee was also the manager of the Funds. The Committee decided to invest Plan assets in the Funds. FedEx filed a lawsuit against the Trustee to recover alleged Plan losses resulting from investing in the Funds.
The Trustee countered that FedEx would be required to indemnify the Trustee for any amounts the Trustee might be required to restore to the Plan. The Trustee alleged that the Committee (1) is responsible for selecting the Plan’s investments, (2) failed to understand the Funds before investing Plan assets in them, and (3) did not monitor the appropriateness of continued investment by the Plan. If the Trustee were to prevail, FedEx might be required to restore any Plan losses resulting from any fiduciary breach.
The Trustee alleged that it had no discretionary authority to invest in the Funds. Although FedEx alleged that the Trustee’s fiduciary role expanded because the Trustee recommended the Funds, the court rejected this characterization and found that the Trustee acted as a discretionary trustee and not an investment fiduciary. As a result, the court denied FedEx’s motion to dismiss the counterclaim.
While it did not decide the substantive issue, the court’s decision means that FedEx and the Committee could be found to be liable for the Plan losses if such losses were found to have resulted from the failure to understand the nature of the Funds.
This case is a good reminder to plan fiduciaries to (1) fully understand the nature and risks of investments that they approve for the Plan and (2) oversee and monitor the Plan’s investment managers. Elements of these duties can include receiving training and updates on Employee Retirement Income Security Act obligations, developing and applying a meaningful investment policy, using third-party investment consultants and scrutinizing the plan’s investment managers and the investments they choose.
The district court’s opinion can be found here.