401(k) Custodial Contracts Must Be Disclosed, Judge Says

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By Jacklyn Wille

Feb. 8 — Federal law requires a retirement plan to disclose its custodial agreements with a service provider upon the request of a plan participant, a federal judge determined.

Considering an issue of first impression, Judge James Knoll Gardner of the U.S. District Court for the Eastern District of Pennsylvania held that a custodial agreement between a 401(k) plan and Nationwide Trust Co. qualified as a formal document under which the plan was established and operated. Although noting it was a “close question,” Gardner said the custodial agreement was therefore subject to the statutory disclosure requirements of the Employee Retirement Income Security Act.

Gardner's Feb. 5 ruling—which considered the disclosure obligations of a 401(k) plan sponsored by a commercial wall-and-ceiling contractor—is noteworthy for another reason, as well: he relied on a widely criticized decision by the U.S. Court of Appeals for the Ninth Circuit to hold that the plan wasn't required to have a formal written trust agreement separate and apart from the plan document itself.

In so holding, Gardner cited the Ninth Circuit's 2015 ruling in Barboza v. Cal. Ass'n of Prof'l Firefighters, 782 F.3d 1072, 59 EBC 2221 (9th Cir. 2015) . In that case, the Ninth Circuit found that ERISA's requirement that plan assets be held “in trust” doesn't require plan fiduciaries to adopt specific documents using express words of trust.

Custodial Agreement

The instant lawsuit stemmed from a 401(k) plan's attempt to charge a participant $1,800 for copies of the benefit plan documents he requested.

Although the participant sought a wide variety of documents—including trust agreements, periodic benefit statements, financial reports and certain participant notices required by Department of Labor regulations—Gardner found that only the plan's custodial agreement with Nationwide was subject to statutorily required disclosure.

The judge said the custodial agreement qualified as a formal document under which the plan was established and operated, because it dictated “important aspects about the participants' benefits under the 401(k) Plan and who is or is not responsible for the management and investment of plan funds.”

In calling this a “close question,” Gardner emphasized that the documents covered by this statutory disclosure requirement are those that allow individual plan participants to know where they stand with respect to their benefit plans. This agreement qualified, because, “from the perspective of a participant, the Nationwide Trust Company agreement establishes to a substantial extent where and how his or her benefits were going to be invested and who would be managing and administering his benefits account,” Gardner said.

Trust Instrument

With respect to the participant's request for copies of the plan's trust agreement, Gardner concluded that the trust agreement was validly contained in the 401(k) plan document itself, and therefore had already been provided to the participant.

Gardner said that although the 401(k) plan document didn't refer to itself as a trust agreement, it satisfied the requirements of a trust agreement by naming the specific trust property, beneficiaries, trustees and purpose.

In so finding, Gardner called the Ninth Circuit's Barboza decision “persuasive.” According to Gardner, Barboza held that “[a]s long as the trust or plan instrument names a person who will hold property in trust for another,” ERISA's trust requirement is satisfied.

Barboza has come under fire from those in the ERISA community, particularly the Department of Labor, which filed a brief asking the Ninth Circuit to rehear the case . According to the DOL, the Ninth Circuit should have deferred to the department's interpretation of ERISA's “in trust” requirement.

The Ninth Circuit declined to rehear the case, instead issuing an amended decision specifically rejecting the DOL's arguments.

Barboza has been appealed to the U.S. Supreme Court, which hasn't yet decided whether it will hear the dispute.

The participant in the instant dispute was represented by Jennings Sigmond and Law Firm of Davis Bucco. The 401(k) plan was represented by Flamm Walton Heimbach & Lamm PC.

To contact the reporter on this story: Jacklyn Wille in Washington at jwille@bna.com

To contact the editor responsible for this story: Jo-el J. Meyer at jmeyer@bna.com

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