In Bidwell v. University Medical Center, Inc., No. 11-5493 (6th Cir. 6/29/12), the Sixth Circuit held that a plan administrator was not liable for $101,900 in losses to two §403(b) plan participants after it transferred the participants' investments from a stable value fund to a qualified default investment alternative (QDIA) without first receiving investment directions from the participants. Do the quirky facts justify the decision?

The plan participants elected to invest in the stable value fund, which at that time, was also the plan’s QDIA. Then the DOL issued the safe harbor rules, and subsequently, the plan changed the QDIA to a lifestyle fund. Because the plan did not have records of who had elected the stable value fund and who was in that fund by default, the plan sent change notices to all participants whose elections were 100% in the stable value fund. The participants claimed that they did not receive that notification and had no knowledge that their accounts were transferred to the lifestyle fund until they received their quarterly statements. By that time, their accounts had suffered losses, which were locked in when the participants chose to transfer back to the stable value fund.

Affirming the trial court, the Sixth Circuit noted that, in enacting the QDIA fiduciary safe harbor provisions (29 CFR §2550.404c-5(b)(1)), the DOL’s position was that, upon proper notice, participants who previously elected an investment vehicle can become non-electing plan participants by failing to respond. As a result, the plan administrator can direct those participants’ investments in accordance with the plan’s default investment policies and with the benefit of the safe harbor protections. According to the court, the DOL was clear that the opportunity to direct an investment includes the scenario in which a plan administrator requests participants who previously had elected a particular investment vehicle to confirm whether they wish for their funds to remain in that investment vehicle.

Although the Sixth Circuit described it as “troubling” that the participants did not receive notice of the change, the court held that the defendants’ actions in distributing the notice were not deficient under ERISA because, under ERISA, a fiduciary is obligated to take measures “reasonably calculated to ensure actual receipt of the material by plan participants,” citing 29 CFR §2520.104b-1(b)(1). The court concluded that such measures were followed in this case. Should there, however, be more stringent standards on providing notice to plan participants, such as return receipt mail?

--Mark C. Wolf

   Tax Law Analyst (Compensation Planning)