Another Circuit Agrees Cashed-out Participants Have Right to Sue

In reversing the dismissal of the case by a district court, the appellate court noted that other circuits have also found that cashed-out participants have legal standing under ERISA (See Cashed-Out Participants Keep Legal Standing Under ERISA). In its opinion, the court said the full “benefit” to which the participant is entitled by a defined contribution plan is “the value of [her] account unencumbered by any fiduciary impropriety” or “whatever is in the retirement account when the employee retires or whatever would have been there had the plan honored the employee’s entitlement, which includes an entitlement to prudent management.”

Since the plaintiffs seek only the amount that should have been in their accounts but for the defendants’ “fiduciary impropriety,” they have standing to sue as “participants” under ERISA § 502(a)(2), the court concluded.

Keri Evans and Timothy Whipps are former employees of W.R. Grace & Co. and participated in the W.R. Grace & Co. Savings and Investment Plan. Evans and Whipps received lump-sum distributions of the balance of their plan accounts shortly after leaving the company.

Evans and Whipps filed a putative class action suit against various plan fiduciaries, alleging that they breached their fiduciary duties by continuing to offer Grace common stock as a plan investment option for participant contributions; utilizing Grace securities for employer contributions to the plan; and maintaining the plan’s pre-existing heavy investment in Grace securities when the stock was no longer a prudent investment.”

The district court dismissed the action, concluding that Evans and Whipps were asserting claims for compensatory damages, rather than for additional plan benefits, and thus had failed to meet the statutory definition of participants entitled to bring suit.

W.R. Grace’s Decision to Divest

Keri Evans and Timothy Whipps are former employees of W.R. Grace & Co. and participated in the W.R. Grace & Co. Savings and Investment Plan. Evans and Whipps received lump-sum distributions of the balance of their plan accounts shortly after leaving the company.

The plan offered as one choice on the menu of investment options available to participants the Grace Common Stock Fund, and Grace automatically invested all employer contributions in the fund. Employees were not permitted to move those contributions out of Grace stock and into other investments until they reached age 50. However, on January 1, 2001, with Grace stock becoming an increasingly risky investment due to mounting financial pressures from asbestos-related product-liability litigation, the plan stopped investing employer contributions in the fund and began allocating them instead in accordance with participants’ investment elections. It also permitted, but did not advise or require, participants to move past matching contributions out of the fund and into other plan investments.

Grace and its subsidiaries filed for bankruptcy protection on April 2, 2001. Two years later, the Grace stock fund ceased accepting any new contributions, but past contributions were not transferred to other funds unless a participant expressly changed her investment options. In February 2004, plan fiduciaries announced that investment in Grace stock was “clearly imprudent,” and the fund’s investment manager, State Street Bank & Trust Company, subsequently embarked on a program to sell the Grace stock and dissolve the Fund. The fund ceased to exist on April 19, 2004.

The U.S. District Court for the District of Massachusetts recently held that Grace and State Street did not breach their fiduciary duties when making the decision to divest Grace’s 401(k) plan of the Grace Stock Fund (See Company Stock Price Not Only Factor in ERISA Prudence).

The opinion in Evans v. Akers can be accessed through the Web site of the 1st U.S. Circuit Court of Appeals at http://www.ca1.uscourts.gov/.