Compliance June 8, 2007
ERISA Legal Standing Remains for Cashed-Out Participants
Although employees retired and took a full defined contribution plan distribution, they did not necessarily give up their rights to file a fiduciary breach suit, according to a first of its kind ruling by a federal appellate court.
Reported by Fred Schneyer
In issuing that opinion, the 7th U.S. Circuit Court of Appeals overturned a decision by U.S. District Chief Judge Larry J. McKinney of the U.S. District Court for the Southern District of Indiana who had thrown out the participant suit against Guidant Corp. for lack of legal standing. The appellate judges sent the case back to McKinney for further proceedings.
Circuit Judge Richard A. Posner, who wrote the 7th Circuit opinion, said two former Guidant employees had standing to pursue their fiduciary breach claims under the Employee Retirement Income Security Act (ERISA), despite having taken a full distribution after filing the lawsuit.
“ERISA defines “participant’ to include former employees who have cashed out their plan benefits, as the named plaintiffs in this case did, if they ‘may become eligible to receive a benefit of any type [from the plan],'” wrote Posner. “So the question comes down to whether, if the plaintiffs win their case by obtaining a money judgment against Guidant, the receipt of that money will constitute the receipt of a plan benefit. It will.”
Posner asserted that ERISA standing should still be in place regardless of whether half of the assets in a participant’s account were stolen or whether alleged fiduciary breaches diminished the account’s value.
“Suppose Guidant had stolen half the money in a plan participant’s retirement account and a suit by the participant resulted in a judgment for that amount; the suit would have established the retiree’s eligibility for the larger benefit,” wrote Posner. “There is no difference if instead of stealing the money from the account, Guidant by imprudent management caused the account to be half as valuable as it would have been under prudent management. The benefit in a defined-contribution pension plan is, to repeat, just 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.”
Posner continued: “Benefits are benefits; in a defined-contribution plan they are the value of the retirement account when the employee retires, and a breach of fiduciary duty that diminishes that value gives rise to a claim for benefits measured by the difference between what the retirement account was worth when the employee retired and cashed it out and what it would have been worth then had it not been for the breach of fiduciary duty.’
Two ex-Guidant workers went to court in July 2005 with allegations the company and various officers and directors breached their fiduciary duties by investing in Guidant stock during a period when Guidant’s stock was inflated due to the company’s concealment of information concerning defects in the company’s implantable defibrillators, which accounted for nearly half of the company’s revenues, the opinion said.
According to the appellate ruling, the Guidant participants had a 401(k) plan funded by their contributions and a company match as well as an Employee Stock Ownership Plan (ESOP) funded by Guidant issuing shares to the ESOP, which usually amounted to 5% of the employee’s monthly salary.
The decision in Harzewski v. Guidant Corp., 7th Cir., No. 06-3752, 6/5/07 is here.