EDS--The End of Fiduciary Responsibiilty


 Every week it seems the courts find some new way to cabin participant rights and remedies. In Langbecker v. Electronic Data Systems, 39 EBCases 2352, 2007 U.S. App. LEXIS 1125 (January 18, 2007) the Fifth Circuit, in a split decision found a doozy. Since the DOL issued its 404(c) regulation in 1992, it has been generally understood that section 404(c) did not relieve fiduciaries from liability for limiting or designating investment options in a 404(c) plan. This view was contained in the preeamble to the regulation as a gloss on regulatory language limiting 404(c)s relief to losses which are "the direct and necessary result of that participant's or beneficiary's exercise of control." 29 C.F.R. sec. 2550.404c-1(d)(2)(1). In fairness, this view also informs examples included in the regulation itself. See examples 8 and 9 of the regulation.

The debate over whether the DOL had the authority to adopt the position in the preamble turns on whether the language in the statute and the regulation itself are sufficiently ambiguous to permit the DOL's interpretation. The DOL is entitled to Chevron or Auer deference if there is ambiguity. Ambiguity is in the eye of the beholder, it seems--and this opinion itself cannot seem to make up its mind about the statute, saying in one place that the statutory language leaves the question open, and in another that neither the regulation nor the statute are ambiguous.

But what about common sense. Should plans be able to offer just 3 options or four with employer stock, one or more of which are imprudent, and then argue that 404(c) means there is no liability simply because the participant chose that imprudent option, even without knowledge of its imprudence.

I think the reasoning of EDS is deeply flawed, and consequently the petition for rehearing en banc supported by AARP, NELA, the Pension Rights Center, and the DOL itself has a good chance of being granted. But it is the court's lack of sensitivity to the consequences of its decision that troubles me the most. Assuming the majority felt that it had no choice but to issue the decision that it did, it could have acknowledged rather than denied the extraordinarily harsh results its decision could produce. Instead, the reader is left wondering whether the court is actually pleased by its vision of an Act that provides participants with no protection against the selection of unacceptable investment alternatives. If Congress really meant to have ERISA work this way, Congress should be asked to think again. I prefer to think that Congress was not so foolish, but that's hardly a surprise coming from someone who helped write the 404(c) regulation.