5500 Preparer's Manual for 2012 Plan Years
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The sponsor of 403(b) plans did not breach its fiduciary duty to properly implement participant investment instructions when it transferred participants' standing investments in stable value accounts into an asset allocation fund, in compliance with Labor Department regulations governing qualified default investment alternatives, the Sixth Circuit Court of Appeals (CA-6) has ruled. The plan sponsor effectuated the transfer only after notifying the participants of the change and providing them with an opportunity to retain their prior investment. The fact that the participants did not actually receive the notice was not determinative.
Investment in stable value fund transferred to time based allocation model
Participants in University Medical Center 403(b) plans affirmatively elected to invest their accounts in stable value funds (SVF) offered under the plans. The stable value funds also served as the plans' qualified default investment alternative (QDIA) for participants who did not choose an investment option when opening an account. However, following the issuance of DOL regulations in 2007 that prohibited stable value funds from being used as a QDIA, the plans changed their default investment vehicle to a life span time based asset allocation model (LSA). Incident to the change in the default investment alternative, the plan's service provider mailed a notice to participants informing them that the funds in the SVF would be reinvested in the LSA, unless the participant made a special election to maintain their present allocation. Two plan participants claimed not to have received the notice and maintained that they would have retained their investment in the SVF. However, because the participants did not contact the plans, the employer, or the service provider during the one-month period after the mailing of the notice, the participants' accounts were transferred to the LSA. Upon subsequently discovering the changes in their investment profiles in quarterly statements received in October 2008, the participants immediately switched their investments back to the SVF. However, they alleged that during the 3-month period their accounts incurred significant losses ($85,000 and $16,900). In order to recover the losses, the participants filed suit against the employer and the service provider, alleging that the defendants had breached their fiduciary duty under ERISA to administer the participants' investments in accordance with their instructions.
Investors by election v. Investors by default
The trial court ruled that the sponsor was shielded from liability by the DOL safe harbor regulations. On appeal, the participants argued that the safe harbor rules were not relevant because they only apply to employer-selected investments made on behalf of participants who have failed to elect an investment vehicle. Because the participants had affirmatively elected to invest in the stable value fund, they maintained that the transfer of their investment from the stable value fund to the QDIA fell outside the scope of the safer harbor. In rejecting the participants’ argument, the Sixth Circuit cited the position of the DOL stated in the Preamble to the safe harbor regulation that "[w]henever a participant or beneficiary has the opportunity to direct the investment of assets in his or her account, but does not direct the investment of such assets, plan fiduciaries may avail themselves of the relief provided by the final regulations, so long as" the other safe harbor requirements are satisfied. In addition, the court noted that the "opportunity to direct investment" includes the situation where the plan administrator requests participants who previously had elected a particular investment vehicle to confirm their intent to retain that investment. Thus, according to the Sixth Circuit’s reading of the safe harbor rules, participants who previously elected an investment vehicle can, upon proper notice, become non-electing plan participants by failing to respond to the notice.
Failure to receive notice
A final issue not raised by the participants, but addressed by the court, was whether the participants’ failure to receive the required notice precluded application of the safe harbor. The court concluded that the sponsor took measures reasonably calculated to ensure actual receipt of the notice by providing the service provider with covered addresses for the distribution of the notice by first class mail and relying on records indicating that the correct number of letters was delivered. Because the sponsor’s actions were reasonably calculated to ensure receipt, the failure of the participants to actually receive the notice did not establish fiduciary breach, the court concluded.
Source: Bidwell v. University Medical Center (CA-6).
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