The US Court of Appeals for the Seventh Circuit upheld a district court decision in a case reported in our August 2009 Employee Benefits Developments. In the lower court, the participants in a 401(k) plan alleged that plan fiduciaries had breached their responsibilities by selecting and continuing to offer a company stock fund as an investment choice in the 401(k) plan. The case arose after some unsuccessful business decisions had resulted in significant drops in the value of the company stock.
The participants also alleged that plan fiduciaries and company executives had been negligent or intentional in misrepresenting or failing to disclose the scope and effect of corporate decisions and that competent fiduciaries had not been placed on the company’s administrative committee. The district court issued a summary judgment in favor of the defendants, ruling that not only had no duty been breached, but also that the defendants were entitled to rely on the “shield” of the ERISA Section 404(c) safe harbor. Section 404(c) is used, or is attempted to be used, by virtually all individual account plans that permit participant investment direction. If the Section 404(c) protection applies, a plan fiduciary is not liable for any loss that results from a participant’s exercise of investment direction over his or her account in the plan. In order to have the protection of Section 404(c), the plan must offer sufficient investment choices to allow participants to diversify their account investments and the plan must provide adequate disclosures and information about the investment choices as described in regulations. The appellate court carefully went through the requirements of Section 404(c) and the general fiduciary obligations of the plan and its fiduciaries, and it fully upheld the district court decision in favor of the defendants. At the same time, however, the court emphasized that Section 404(c) provides no protection to plan fiduciaries in connection with the choice of investment vehicles that are made available in an individual account plan. Accordingly, 401(k) plan fiduciaries must be prudent and mindful of the investment selections provided and the disclosures given to participants about those selections in order to fulfill their duties and to avail themselves of the Section 404(c) protection. (Howell v. Motorola, Inc., 7th Cir. 2011)