SAN JOSE, Calif. — A former employee who has cashed out of his 401(k) plan can still sue the plan’s administrator for mismanaging the plan’s assets, a federal appellate court has ruled in a decision that observers said significantly increases the number of participants who can file suit against their plan sponsors.
SAN JOSE, Calif. — A former employee who has cashed out of his 401(k) plan can still sue the plan’s administrator for mismanaging the plan’s assets, a federal appellate court has ruled in a decision that observers said significantly increases the number of participants who can file suit against their plan sponsors.
The former employee is still considered a participant under the Employee Retirement Income Security Act, which governs the plan, the 3rd U.S. Circuit Court of Appeals in Philadelphia said in its July 31 opinion in Howard Graden v. Conexant Systems Inc. The three-judge panel’s unanimous opinion reverses a lower court decision dismissing the case.
The suit, which seeks class action status, has attracted significant attention, with the Washington-based National Association of Manufacturers submitting an amicus brief supporting Conexant, while briefs supporting the plaintiff were filed by Washington-based AARP and the Department of Labor.
According to the decision, Mr. Graden, who was a Conexant employee until 2002 and a participant in the company’s 401(k) plan until 2004, had directed his money into a fund comprising only stock of the Newport Beach, Calif.-based developer of semiconductor devices for the telecommunications industry.
Between March 2004 and October 2004, when he cashed out, the company’s stock dropped to $1.70, from $7.42, a share. Mr. Graden charged that the drop “was the result of a risky and ultimately failed merger,” according to the opinion. He said Conexant had breached its fiduciary duty by offering the stock fund as an investment option and making false and misleading statements about the merger.
The question presented “is one of statutory standing,” the opinion stated. “ERISA defines a participant as ‘any employee or former employee … who is or may become eligible to receive a benefit of any type from an employee benefit plan.’”
ERISA “entitles individual account plan participants not only to what is in their accounts but also to what should be there given the terms of the plan and ERISA’s fiduciary obligations,” the decision said. “From this, it is not difficult to conclude that Graden has standing as a plan participant. As an account holder in the Conexant plan, he was entitled to the net value of his account as it should have been in the absence of any fiduciary mismanagement.”
The decision notes that NAM’s amicus brief said that finding Mr. Graden to be a participant would require employers to make costly disclosures to people who had cashed out. But the appellate decision said: “Inclusion of ostensibly cashed-out employees derives from the text of the definition” and a 1989 U.S. Supreme Court decision in Firestone Tire & Rubber Co. v. Bruch.
“We cannot imagine holding a plan fiduciary liable for failing to provide information to someone who, as far as the fiduciary knows, is cashed out,” the ruling stated.
“We’re still studying the decision,” said defense attorney Robyn F. Tarnofsky, of New York-based Paul Weiss Rifkind Wharton & Garrison LLP, which represented Conexant.
“It’s obviously a huge decision, because many district courts have been going the other way on this particular issue,” said plaintiff’s attorney Jeffrey M. Norton, of Harwood Feffer LLP in New York.
But Stephen D. Rosenberg of The McCormack Firm LLC of Boston, called the decision “consistent with a trend we’re seeing in deciding how to interpret this language. Many courts are ... giving plaintiffs in these cases standing.”
Attorneys said the decision means that more plaintiffs will file suit against plan administrators. “It means untold numbers of retirees and employees and former employees” who had lacked standing to pursue losses because of fiduciary breaches “now have a cause of action where they didn’t before, where that right was more or less in limbo for the last couple of years,” Mr. Norton said. Even so, he said, he does not think that there will be a significant increase in ERISA litigation.
Mr. Rosenberg said that if there are layoffs, “people are going to cash out,” and these will be people “who aren’t too happy with their former employer and may be more willing to file suit than someone still with the company.”
“And at the same time, you have what’s clearly a developing wave of litigation” over the issue of fiduciary breaches in managing 401(k) assets, he said.
Mr. Rosenberg said the case is also significant because the “first wave of defense in all fiduciary cases is always procedural,” and a court may not have been allowed to proceed to a lawsuit’s merits. A decision like Graden “is saying the court can get to the merits,” he said.
CNS
