Preview: Watch for the discussion in our next Newsletter of the Seventh Circuit’s recent decisions in Spano v. Boeing Co. and Beesley v. International Paper (consolidated cases), Nos. 09-3001 & 09-3018 (7th Cir. Jan. 21, 2011). In these cases, the Seventh Circuit vacated the certification of two classes of defined-contribution plan participants as to “excessive-fee” breach of fiduciary duty claims under ERISA Section 502(a)(2) and remanded for further proceedings. The Seventh Circuit also rejected the argument that the Supreme Court’s 2008 decision in LaRue v. DeWolff, Boberg & Assoc., 552 U.S. 248 (2008), entirely precludes 401(k) plan participants from bringing class actions.

Pending Sixth Circuit Case Has Implications for Directed Trustees, Participant-Directed Plans[1]

In Tullis v. UMB Bank, N.A.,[2] a federal district court rejected claims that a directed trustee violated ERISA when it executed investment instructions from an investment intermediary that it allegedly knew was engaging in fraud. In doing so, the district court invoked the protections available to plan fiduciaries under ERISA § 404(c), 29 U.S.C. § 1104(c), and embraced, at least implicitly, the fundamental distinctions between the duties of directed trustees and those of other plan fiduciaries.

Plaintiffs have appealed the district court’s ruling. The parties have submitted briefs, and the case awaits oral argument.[3] As suggested by amicus curiae filings by the Department of Labor (DOL) and the American Bankers Association (ABA), the Sixth Circuit’s decision could have far-reaching implications, both for the application of Section 404(c) and for directed trustees providing services to ERISA plans.


Plaintiffs Tullis and Mack were participants in the Toledo Clinic Employees’ 401(k) Profit Sharing Plan (Plan). The Plan afforded participants the opportunity to direct the investment of their retirement accounts through one or more outside investment managers, including Continental Capital Corporation (Capital). In the early 1980s, Tullis and Mack selected Capital as their investment manager, and executed forms appointing William Davis (Davis), a Capital employee, as their account manager.

In 1989, UMB Bank (UMB) became the Plan’s directed trustee. Unlike discretionary trustees, “directed” trustees have significantly limited duties under ERISA, because they are generally obligated to implement directions by participants and plan fiduciaries.[4]

In 1999, the U.S. Securities and Exchange Commission (SEC) brought an enforcement action against Capital, alleging that some of its brokers were defrauding customers.[5] In an unrelated action in 2001, UMB was a plaintiff in a suit against Capital and Davis, alleging that several investments made for Plan participants (other than Tullis and Mack) were improper or fraudulent. According to UMB, its role in the suit was nominal: it did not initiate the suit as a result of its own investigation; rather, a participant had directed it “to join [the suit] as a party-plaintiff as trustee on [the participant’s] behalf.”[6]

The SEC action forced Capital’s closure in 2003. UMB claimed it did not learn of the SEC action before this time. In the ensuing bankruptcy proceedings, plaintiffs learned that Davis had stolen virtually all of the assets in their respective plan accounts.

The Tullis Litigation

Plaintiffs sued Davis, Capital, UMB, and others in state court, but this action was stayed pending completion of the bankruptcy proceedings. Plaintiffs then requested that the plan administrator bring an ERISA action against UMB for failing to disclose the 2001 lawsuit, and for continuing to follow directions from Davis to invest their account assets. The plan administrator declined, citing an indemnification provision in the trust agreement between the Plan and UMB. Plaintiffs then sued UMB directly, asserting that UMB breached its fiduciary duties under ERISA, including a claim that UMB had caused a prohibited transaction under ERISA (i.e., executed fraudulent investment instructions that benefitted Capital and Davis). The district court initially dismissed the action on standing grounds, but the Sixth Circuit reversed and remanded for further proceedings.[7]

On remand, the district court granted summary judgment to UMB, holding that the claimed losses resulted from participant direction, which in turn absolved UMB of liability pursuant to ERISA § 404(c). Section 404(c) of ERISA provides fiduciaries with an affirmative defense against investment losses resulting from participant control over their own investments. The DOL’s interpretive regulations provide that for purposes of Section 404(c), meaningful, independent control exists when a participant may select from a broad range of investment options, the participant can make investment directions with a frequency appropriate to the type of investment, and the participant has sufficient information to make an informed decision.[8] The court reasoned that participants had exercised investment control, because the plan documents conferred on plaintiffs the exclusive power and duty to “establish, monitor and police limitations and restrictions” on their investments.

In so ruling, the court rejected plaintiffs’ contention that UMB had a duty to decline investment instructions from Davis, given UMB’s involvement in the 2001 lawsuit and its alleged corresponding awareness of the potential for fraud by Capital and/or Davis. The district court reasoned:

[A]lthough several prohibited transactions may have occurred, [UMB] simply did not cause the plan to engage in those transactions. As [p]laintiffs’ agent, Mr. Davis caused the plan to engage in transactions used for the benefit of a party-in-interest, Mr. Davis himself. Plaintiffs exercised individualized control over their own assets and selected Mr. Davis as their agent, and therefore . . . [UMB] cannot be held liable for breach that occurs as a result of such individualized control.[9]

The court also noted that the applicable DOL regulation did not require UMB to refuse directions resulting in prohibited transactions; rather, the regulation gave UMB the option to decline to carry out the directions.[10] Accordingly, the court found that UMB did not cause the plan to engage in the transactions at issue and, therefore, Section 404(c) relieved UMB of ERISA liability.

The court also rejected plaintiffs’ assertion that UMB’s knowledge of the SEC action and UMB’s earlier lawsuit gave rise to an affirmative duty for UMB to warn plaintiffs about Davis and Capital. After reviewing authorities recognizing a plan fiduciary’s duties of disclosure, the court concluded that a duty to disclose material, nonpublic facts would arise only upon inquiry by plaintiffs. Finding no evidence of any such inquiry, the court held that UMB’s failure to warn plaintiffs about the litigation involving Davis and Capital did not prevent application of Section 404(c). It also rejected plaintiffs’ alternative contention that Section 404(c) protections did not apply because UMB had concealed material, nonpublic information about Davis and Capital, finding that the alleged conduct did not amount to active concealment.

The Pending Appeal

Plaintiffs appealed to the Sixth Circuit in October 2009. Relying on the DOL regulations, plaintiffs claim in their appeal that Section 404(c) should not absolve a fiduciary of liability where the underlying action involves either the selection of investment managers available to participants, or the ongoing determination that the managers are suitable for appointment as participant investment managers. Plaintiffs also re-assert that UMB had an affirmative duty to alert them regarding fraudulent activity by Capital and Davis, or at least to investigate the directions received from Davis and Capital.

Noting that it did not become the Plan’s trustee until several years after plaintiffs had selected Davis as their investment manager, UMB spends little time arguing whether Section 404(c) applied to the alleged breaches involving selection and monitoring. UMB focuses instead on the disclosure issues, arguing that applicable regulations did not mandate disclosures regarding Capital or Davis, but merely prohibited UMB from actively concealing such information.[11] Noting that its duties run to the Plan as a whole, UMB also argues that disclosure of a single participant’s unproven allegations regarding his own account to other participants might lead the other participants to take ill-advised action based on information that is later proven false or incomplete.

Amicus Filings

In an amicus brief, the DOL expresses an interest in ensuring that 404(c) was interpreted in accordance with its regulation. Noting that Section 404(c) protections are limited to situations where a participant has all material information, the DOL brief argues that UMB should have warned participants that: (1) Davis defrauded other plan participants, (2) the SEC obtained injunctive relief against Capital and (3) UMB had participated in a lawsuit against Davis and Capital. The DOL contends that, because UMB did not alert plaintiffs about the prior misconduct by Davis and Capital, plaintiffs’ losses were sustained as a result of UMB’s breach, not as a result of the participants’ independent investment choices. The DOL brief posits: “[a]llowing a fiduciary to engage in such conduct that directly contributed to the participants’ losses renders hollow ERISA’s fiduciary provision in Section 404(a) and reads the causation limitation implicit in the ‘results from’ language in Section 404(c) out of the Act.”[12]

The ABA has taken the opposite view, relying on the express language of the statute: “[N]o person who is otherwise a fiduciary shall be liable under this part for any loss, or by reason of any breach, which results from such participant’s or beneficiary’s exercise of control.”[13] The ABA characterizes the DOL’s position as creating an “activity-based exception” to the otherwise-broad reach of Section 404(c), and notes that the DOL’s position has been rejected by the Third, Fifth, and Seventh Circuits.[14] Noting the limited capacity of a directed trustee, the ABA also contends that ERISA does not impose on directed trustees a duty to oversee and monitor an investment adviser chosen by a participant, because trustees have little or no basis upon which to evaluate the actions of a participant’s investment adviser.

Proskauer’s Perspective

The Sixth Circuit’s decision in Tullis is potentially important in several respects. First, the Tullis case represents the first case in the Sixth Circuit where the scope of Section 404(c) is squarely at issue. At present, the federal circuits have taken diverging views of the scope of protection afforded under that provision. The Third and Fifth Circuits have recognized that if a plan has complied with the terms of Section 404(c), a fiduciary can be relieved of liability for the selection and/or monitoring of investment options. This is consistent with the plain language of the statute insofar as it applies to “any loss” from “any breach.” The Fourth Circuit has rejected this interpretation, and embraced the view that Section 404(c) will not absolve fiduciaries of liability for imprudent selection of investment options.[15] This is consistent with the position advanced by the DOL in such cases.

Until recently, the Seventh Circuit’s approach, as stated in Hecker v. Deere & Co.,[16] appeared to be consistent with the position in the Third and Fifth Circuits. However, in its recent decision in Howell v. Motorola Inc., a different Seventh Circuit panel explicitly adopted the DOL view that Section 404(c) does not apply to the selection of investment options.[17] The DOL’s view was confirmed in its final amendments to implementing regulations on Section 404(c) in October 2010, which state explicitly that Section 404(c) does not relieve an ERISA fiduciary from its duty to prudently select and monitor service providers or designated investment alternatives offered under the plan.

Second, if the Sixth Circuit affirms the district court’s ruling, it could effectively extend Section 404(c)’s protection against liability for “any breach” to conduct that is arguably actionable as a prohibited transaction under ERISA Section 406. Although it is unclear from the record the extent to which plaintiffs rely on Section 406, UMB could face some colorable ERISA exposure for facilitating a prohibited transaction, unless the Sixth Circuit affirms the district court’s ruling.

Aside from the Section 404(c) issues, the Tullis case also presents an opportunity to clarify the scope of a directed trustee’s “significantly limited” duties – specifically, when a directed trustee has a duty to warn participants, or to investigate facially valid investment directions, based on an alleged awareness of unproven allegations of misconduct by the directing authority. While a minority of courts have required directed trustees to investigate or disregard facially valid directions,[18] a ruling for plaintiffs would represent a shift away from established law that a directed trustees’ duties are “significantly narrower” than those imposed on other fiduciaries.[19]

Given the multiplicity of cutting-edge issues that the Sixth Circuit will be confronting, we can expect that once rendered, the decision will provoke considerable commentary and speculation as to its implications. Stay tuned for a reaction in this column.