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Compliance December 6, 2017
Court Finds Sponsor Cannot Fully Delegate ERISA Fiduciary Responsibilities
A federal district court denied a DB plan sponsor's attempt to pass liability for improper plan termination to its plan provider.
Reported by Rebecca Moore
U.S. Magistrate Judge Candy W. Dale of the U.S. District Court for the District of Idaho has denied Idaho Hyberbarics Inc. (IHI) a motion for leave to file a third-party complaint.
The case concerns a Pension Benefit Guaranty Corporation (PBGC) audit of the termination of IHI’s defined benefit (DB) plan. During the audit, the agency found that full distribution of assets to plan participants was not made in a timely manner and that IHI failed to pay them the full value of their annuity contracts.
The PBGC ordered IHI to: calculate the underpayments due to participants by determining the difference between the amount each participant actually received and the full cash surrender value of that person’s annuity contract, adding a reasonable rate of interest to the additional amount; submit such calculations for PBGC’s review; and pay participants the additional amounts due them. IHI neglected to do these things, so the PBGC filed a lawsuit.
IHI now argues that a third party bears responsibility for any improper administration of the plan, and seeks to file a third-party complaint against CJA & Associates. IHI retained CJA to assist it with establishing and administering the DB plan for IHI’s employees. IHI asserts CJA played a significant role in establishing and administering the plan through a service agreement with IHI, and, therefore, to the extent PBGC’s claims of improper administration against IHI succeed, the resulting liability should transfer to CJA, the party that played the most significant role in administering—and terminating—the plan.
Citing prior case law, Dale noted that the crucial characteristic of a Federal Rule of Civil Procedure 14 claim “is that defendant is attempting to transfer to the third-party defendant the liability asserted against him by the original plaintiff. The mere fact that the alleged third-party claim arises from the same transaction or set of facts as the original claim is not enough.”
Dale found IHI’s arguments unpersuasive. PBGC’s claim against IHI arises under Title IV of the Employee Retirement Income Security Act (ERISA), and liability is based upon IHI’s acts or omissions, not the actions of CJA. Under Title IV, the plan administrator alone, not a third-party adviser, is responsible for proper termination of the plan. “In other words, as PBGC argues, IHI cannot delegate fully its statutory responsibilities under ERISA,” Dale wrote in her opinion.
For its argument, IHI relied upon several cases that cite the general principle that ERISA was enacted to promote and protect the interests of plan participants. IHI also contended that, if the court denied its motion, it likely would file for bankruptcy, which is not in the plan participants’ best interests.
Dale found this argument was misplaced, however, because ERISA concerns itself with proper plan administration and terminations that serve and protect the interest of participants and beneficiaries. “The principal statutory duties imposed on plan trustees relate to the proper management, administration and investment of fund assets, the maintenance of proper records, the disclosure of specified information, and the avoidance of conflicts of interest. IHI’s financial health, which exists independent of the Plan and its administration, is therefore not ERISA’s concern,” she wrote.