The existence of a fiduciary duty to disclose information pertinent to plan investments, including employer stock, is again in the news. But the lead has been buried in a regulation that focuses attention on information about fees charged by typical 401(k) plan pooled investments.
Last week, by regulation, the Department of Labor imposed specific disclosure obligations on plan administrators of individual account plans. 29 CFR 2550.405a-5. The regulation requires specific disclosures regarding fees, expenses and performance data. These requirements received the most attention from commentators on the regulation, but other disclosures are covered as well. For example, the timing and content of disclosures about the manner and means by which participants can give instructions and exercise rights with regard to selecting alternative investments, voting and tendering shares, and descriptions of brokerage windows are all covered by the regulation. The regulation contains special rules for regular and periodic disclosures pertaining to employer stock, annuities, and fixed income alternatives. It is not my purpose here discuss the details of these rules, but to remark on the legal theory underlying the regulation.
What has come to be known as the Fee Regulation is promulgated pursuant to section 404(a) of ERISA, the general fiduciary obligations, not as an amendment to the regulation under section 404(c). The Department wanted to make sure that its regulation applied whether the plan sponsor sought 404(c) treatment for its plan or not.
So far as one can tell from reading the preamble, the conclusion that section 404 of ERISA imposes affirmative disclosure obligations on fiduciaries that can be defined by the Department of Labor was uncontroversial. This author thinks the Department is correct; this is the logical conclusion to be drawn from Varity v. Howe, 516 U.S. 499, 504, 19 EBC 2761 (1996). In Varity, the Supreme Court rejected the argument that lying about matters of plan administration did not violate section 404 of ERISA. Defendants in Varity had argued that because Congress had imposed specific disclosure obligations in section 104 of ERISA, no obligation going further than section 104 of ERISA could be found in section 404(a)'s general fiduciary duties. The Supreme Court explained that "there is more to plan (or trust) administration than simply complying with the specific duties imposed by the plan documents or statutory regime; it also includes the activities that are "ordinary and natural means" of achieving the "objective" of the plan. Bogert & Bogert, supra, § 551, at 41-52. Indeed, the primary function of the fiduciary duty is to constrain the exercise of discretionary powers which are controlled by no other specific duty imposed by the trust instrument or the legal regime. If the fiduciary duty applied to nothing more than activities already controlled by other specific legal duties, it would serve no purpose." Id. But the Court in Varity stopped short of imposing disclosure duties; to decide the case they needed to hold no more than that misrepresentations in a fiduciary capacity violated ERISA.
The Department's decision to enumerate specific disclosure obligations under section 404 is significant. Seizing on the limits to Varity's holding, defendants in fiduciary litigation have argued that ERISA disclosure obligations are limited to section 104. Faced with lower court case law establishing duties to disclose in a variety of settings pertaining to plan benefits, defendants have nonetheless argued that these cases have no application to the investment of plan assets. The distinction is a false one. In defined contribution plans at least, an individual's accrued benefit is exactly what's in his account, and disclosures about the authority that a participant can and should exercise over that account are as much about benefits as the information about how to perfect a claim for benefits. By specifying many of the disclosure obligations implicit in section 404 the Department has, I hope, put to rest the notion that the disclosure obligations in section 104 are exclusive.
At the same time, the Department has made clear that compliance with its regulation is not the end of the duty to disclose. The regulation addresses those disclosures that must be made "on a regular and periodic basis" to participants and beneficiaries that must make investment decisions about their own accounts. At footnote 17 to the preamble the Department explains that:
...with regard to ERISA's general fiduciary standards, as noted in the preamble to the proposal, 73 FR 43014 at 43018, n.8, it should be noted that there may be extraordinary situations when fiduciaries will have a disclosure obligation beyond those addressed by the final rule. For example, if a fiduciary knew that, due to a fraud, information contained in a public financial report would mislead investors concerning the value of a designated investment alternative, the fiduciary would have an obligation to take appropriate steps to protect the plan's participants, such as disclosing the information or preventing additional investments in that alternative by plan participants until the relevant information is made public.
The words, "for example" in the passage above are no accident. In its amicus briefs, the Department has made clear that fiduciaries have a duty to assure the accuracy of disclosures that they provide to participants. Such disclosures about employer stock often consist of securities filings incorporated by reference in SPDs. These filings, in any event, must be provided under the regulation on request. 29 CFR 2550.405a-5(d)(4), and in its briefs the Department has not drawn the line at circumstances where a fiduciary knew that these disclosures were fraudulent. The Department did not attempt to enumerate in the regulation or its preamble all the circumstances in which there might be a duty to make disclosures beyond those enumerated in the regulation or to take other steps to protect participants and beneficiaries. As before, these duties will require development in the case law.
Importantly, however, the Department did clarify and restate its longstanding position that the selection of designated investment alternatives and managers in 404(c) plans remains a fiduciary function, even in plans qualifying for relief under section 404(c) of ERISA. Section (d)(2)(iv) has been added to the 404(c) regulation to state that:
Paragraph (d)(2)(i) does not serve to relieve a fiduciary from its duty to prudently select and monitor any service provider or designated alternative offered under the plan.
In sum, the Department of Labor has put down its marker. Fiduciaries of individual account plans, whether or not covered by section 404(c) have fiduciary duties to prudently select, monitor and make appropriate disclosures about designated investment alternatives in 401(k) plans. Whether these pronouncements have teeth will depend on the reaction to the regulation in the courts.
-- Marc Machiz
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