ERISA Concerns When Combining SPD, Prospectus

For convenience with plan administration—as well as consistency—many plan sponsors combine the SPD, required by the Employee Retirement Income Security Act (ERISA), with the prospectus, required by the Securities Act of 1993, according to Howard Levine, partner and chair for Drinker, Biddle & Reath’s Employee Benefits & Executive Compensation Practice Group. As a result, certain SEC filings made by the plan sponsor—such as the plan sponsor’s latest Annual Report filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934—that are required by the securities laws to be incorporated by reference in the prospectus are incorporated by reference in the combined SPD/prospectus. 

Levine cited two recent U.S. appellate court cases that highlight the possible ERISA fiduciary concerns that could arise if incorrect or misleading SEC filings are incorporated into an SPD.   

In the 6th U.S. Circuit Court of Appeals case of Dudenhoefer v. Fifth Third Bancorp, the plaintiffs claimed the defendants breached their fiduciary duty to the participants by failing to provide them with accurate information about the value of the bank’s stock (see “Court Revives Fifth Third Stock Drop Suit”). This alleged breach resulted from the incorporation of misleading SEC filings into the plan’s SPD. 

In overturning the district court’s grant of the defendant’s motion to dismiss, the 6th Circuit stated that the plan administrator had exercised discretion in selecting the information to convey in the SPD, and that incorporation of the SEC filings into the SPD was a fiduciary act. The court therefore ruled that the complaint alleging misleading statements in the incorporated SEC filings was a plausible claim for breach of fiduciary duty under ERISA. 

But in another recent case, based on a similar claim as Dudenhoefer v. Fifth Third Bancorp, the 2nd U.S. Circuit Court of Appeals upheld a lower court’s dismissal.  In In re Glaxosmithkline ERISA Litigation, the 2nd Circuit held that the SEC filings were not made by the employer in its capacity as a plan fiduciary and therefore were not “actionable as misstatements under ERISA.”  The court also found that the incorporation of the SEC filings in the SPD did not give rise to a claim for fiduciary breach in the absence of allegations that the plan administrators intentionally or knowingly made misleading statements by virtue of such incorporation.

Because these two circuits have approached the issue differently, employers may want to consider the location of employees who will receive the communications, Levine suggested. Other circuits will likely address this issue in the coming years, but he is uncertain whether the Supreme Court will address it, he told PLANADVISER.  

For now, employers in the 6th Circuit (Kentucky, Michigan, Ohio and Tennessee) may want to separate their SPD from an employer stock prospectus. Employers in the 2nd Circuit (Connecticut, New York and Vermont) might find it more beneficial to combine the documents, considering the Circuit's higher protections against fiduciary liability, according to Levine.

“Now the question is what about employers in states that are not in either the 6th Circuit or 2nd Circuit,” Levine said. He advises plan sponsors in these states to consult attorneys and consider separating the documents. “There’s really no need to take [a] risk if you’re outside the 2nd Circuit.”

While it may pose more administrative challenges to separate the documents, Levine said it is worth taking the extra time to avoid legal headaches. Instead of making two separate documents, Levine said employers may wish to incorporate the SPD into the prospectus by reference. Many provisions required in the prospectus, like descriptions of plan eligibility requirements and plan distribution provisions, are also required under ERISA to be included in the SPD. 

The potential ERISA fiduciary problem might also be solved by preparing a separate prospectus containing certain required securities law provisions—including the incorporation by reference of potentially problematic SEC filings—that are not required to be included in an SPD.  But if this method is used, Levine said the prospectus must state that the SPD is incorporated by reference in the prospectus, and the SPD must continue to include the legend stating that it constitutes part of a prospectus. 

This approach reduces the risk of potential inconsistencies between the documents, he said, and it also ensures the prospectus contains the provisions required by the securities laws.  Employers should note that regardless of whether the prospectus is combined with the SPD or is separate, it is never necessary to file the prospectus for an employee benefit plan registered on a Form S-8 with the SEC, Levine concluded.