No. 11-11608-G IN THE UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT WILLIAM B. FISCH, ET AL. v. SUNTRUST BANKS, INC., ET AL. On Appeal From The United States District Court For The Northern District of Georgia Civil Action No. 1:08-CV-3384-RWS BRIEF OF AMICUS CURIAE AARP IN SUPPORT OF APPELLANTS URGING REVERSAL MARY ELLEN SIGNORILLE AARP FOUNDATION LITIGATION MELVIN RADOWITZ AARP 601 E Street, NW Washington, DC 20049 Telephone (202) 434-2060 [email protected]Attorneys for Amicus Curiae AARP
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IN THE UNITED STATES COURT OF APPEALS …. Ind. Regulatory Auth. Investor Educ. Found.: ... Working Paper 2009-216, ... Nat’l Ctr. for Educ. Statistics, Inst. of Educ. Sci., Literacy
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No. 11-11608-G
IN THE UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT
WILLIAM B. FISCH, ET AL. v. SUNTRUST BANKS, INC., ET AL.
On Appeal From The United States District Court
For The Northern District of Georgia
Civil Action No. 1:08-CV-3384-RWS
BRIEF OF AMICUS CURIAE AARP IN SUPPORT OF APPELLANTS URGING REVERSAL
MARY ELLEN SIGNORILLE AARP FOUNDATION LITIGATION MELVIN RADOWITZ AARP 601 E Street, NW Washington, DC 20049 Telephone (202) 434-2060 [email protected] Attorneys for Amicus Curiae AARP
Fisch, et al. v. Suntrust Banks, Inc., et al. Case No. 11-11608-G
c-1
CERTIFICATE OF INTERESTED PERSONS AND CORPORATE DISCLOSURE STATEMENT
Pursuant to Rule 26.1 of the Federal Rules of Appellate Procedure and Rule
26.1-1 of the Rules of the Court of Appeals for the Eleventh Circuit, Amicus
Curiae AARP hereby advises the Court that:
(1) to the best of Amicus’ information and belief, the Certificate of
Interested Persons filed with Appellants’ Opening Brief is complete;
(2) AARP does not have a parent corporation;
(3) AARP does not issue stock; and
(4) The following persons have an interest in the outcome of the above-
captioned matter:
AARP
AARP Foundation
Mary Ellen Signorille, Counsel for AARP
Melvin Radowitz, Counsel for AARP
___________________________ Mary Ellen Signorille
July 14, 2011
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TABLE OF CONTENTS
CERTIFICATE OF INTERESTED PERSONS AND CORPORATE DISCLOSURE STATEMENT ................................................... c-1
TABLE OF AUTHORITIES ................................................................................... v
INTEREST OF AMICUS CURIAE .......................................................................... 1
SUMMARY OF ARGUMENT ............................................................................... 2
Federal Cases Bank of America Nat. Ass'n v. Colonial Bank, 604 F.3d 1239 (11th Cir. 2010) ... 20 Bannistor v. Ullman, 287 F.3d 394 (5th Cir. 2002) ............................................... 25 Donovan v. Cunningham, 716 F.2d 1455 (5th Cir. 1983) ..................................... 21 Eaves v. Penn, 587 F.2d 453 (10th Cir. 1978) ....................................................... 19 LaRue v. DeWolff, Boberg & Assocs., Inc. 552 U.S. 248 (2008) ............................ 3 Mass. Mut. Life Ins. Co. v. Russell, 473 U.S. 134 (1985)...................................... 15 Mertens v. Hewitt Assocs., 508 U.S. 248 (1993) ................................................... 25 United States v. Steele, 147 F.3d 1316 (11th Cir.1998) .................................. 20, 21 Varity Corp. v. Howe, 516 U.S. 489 (1996) .......................................................... 25
Federal Statutes, Rules and Regulations Employee Retirement Income Security Act (ERISA),
29 U.S.C. § 1001 et seq. (2006) .................................................................... 3, 17
Kimberly Lynn Weiss, Directors’ Liability for Corporate Mismanagement of
401(k) Plans: Achieving the Goals of ERISA in Effectuating Retirement
Security, 38 IND. L. REV. 817 (2005) ........................................................... 23
James A. Wooten, THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974: A
POLITICAL HISTORY (2004) .................................................................... 17, 18
1
INTEREST OF AMICUS CURIAE1 AARP is a nonpartisan, nonprofit organization dedicated to representing the
needs and interests of persons aged 50 and older. Nearly half of AARP’s members
are employed full or part-time, with many working for employers which provide
pension and health plans covered by ERISA. One of AARP’s primary objectives
is to foster the economic security of individuals as they age by attempting to ensure
the availability, security, equity, and adequacy of public and private pension,
health, disability, and other employee benefits through educational and advocacy
efforts
Participants in private, employer-sponsored employee benefit plans rely on
ERISA to protect their rights under those plans. In particular, ERISA’s
protections, and plan participants’ opportunities to enforce the statute’s protections,
are of vital concern to workers of all ages and to retirees, since the quality of
workers’ lives in retirement depends heavily on their retirement plan benefits.
Given the primacy of Defined Contribution plans in the American workplace
landscape, it is imperative that fiduciaries of ERISA-governed plans be held to a
high standard of duty to manage plans prudently. The resolution of the issues in
this case will have a direct and vital bearing on individuals’ ability to obtain those
1 Pursuant to Fed. R. App. P. 29(c)(5), amicus curiae AARP certifies that the parties have consented to the filing of this brief.
2
benefits which will foster their economic security. AARP, therefore, submits its
brief amicus curiae to facilitate a full consideration by this Court of these issues.
SUMMARY OF ARGUMENT
Because the employer-sponsored retirement plan landscape has shifted
radically from the standard defined benefit plan regime to the defined contribution
plan regime, employees bear an entirely new set of responsibilities for attending to
their retirement security. In the main employees are ill-equipped to make the wide
array of financial decisions that retirement financial planning entails. They are
heavily dependent upon the fiduciaries of their respective defined contribution
retirement plans to steward the plan investment options in a manner that limits the
risk of investment decisions based upon too little information and knowledge.
Employees’ attitudes about holding employer stock in their defined
contribution plans are often founded on misapprehensions about the risk-reward
calculus of doing so, and as a consequence employees frequently make bad
decisions pertaining to holding employer stock in their retirement savings plan
accounts.
ERISA’s duties of prudence and loyalty by which ERISA employee benefit
plan fiduciaries are bound entertain no exception for fiduciaries of employer stock
plans. Rather, the duties of prudence and loyalty take precedence and override the
ERISA provisions permitting plan holdings of employer stock.
3
Vigilance by defined benefit plan fiduciaries in connection with the selection
and monitoring of investments in defined contribution retirement savings plans is
critical to the fulfillment of ERISA’s retirement security provisions for the
generation of employer-sponsored defined contribution plan savers under the new
retirement plan regime. Employer stock plans pose no exception to the vigilance
requirement.
ARGUMENT
I. BECAUSE THE DEFINED CONTRIBUTION RETIREMENT PLAN PARTICIPANT COMMUNITY DEPENDS UPON PLAN INVESTMENTS TO FUND THEIR RETIREMENT, PLAN FIDUCIARIES’ ROLE IN THE INVESTMENT SELECTION PROCESS IS CENTRAL TO PLAN EFFECTIVENESS.
A. Retirement Plan Participants Are Adapting To A New Retirement
Savings Regime.
Private retirement pension benefit programs were established to provide a
stable source of income to employees and their families upon retirement. In the
period since the passage of the Employee Retirement Income Security Act of 1974
(“ERISA”), and particularly in the past two decades, 29 U.S.C. § 1001 et seq.
(2006), there has been a marked shift from defined benefit plans to defined
contribution plans. LaRue v. DeWolff, Boberg & Assocs., Inc. 552 U.S. 248
(2008). Defined contribution plans have so eclipsed defined benefit plans that
“[b]y 2005 . . . roughly 21 million active participants [were] covered by defined
4
benefit plans and approximately 55 million active participants [were covered by]
defined contribution plans.” U.S. GOV’T ACCOUNTABILITY OFFICE, GAO-07-
530T, PRIVATE PENSIONS: INCREASED RELIANCE ON 401(K) PLANS CALLS FOR
BETTER INFORMATION ON FEES 5 (March 2007), available at
&docid=f:47491.wais (describing this transition to defined contribution plans as “a
massive transfer from business enterprises to their employees of both investment
risk (and return) and the longevity risk of retirement funding”).
B. Plan Fiduciaries’ Investment Selections Must Be Considerate Of Participants’ Limited Opportunity To Make Suitable Investment Decisions In Their Plans.
For the majority of individuals now saving for retirement through 401(k)
plans, the amount contributed and accumulated is critically important, as it is often
their only source of private retirement income. “[M]ore than 60 percent of workers
with pension coverage in 2003 had only a 401(k) plan or other defined contribution
plan, which suggests that worker reliance on defined contribution plans has
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increased considerably since 1981.” AARP, 401(k) Participants’ Awareness and
Understanding of Fees 2 (July 2007), available at http://assets
.aarp.org/rgcenter/econ/401k_fees.pdf .
Moreover, most 401(k) account balances are not high to start with: “While
some participants have account balances of greater than $100,000, most have
smaller balances. Based on industry estimates for 2005, 37 percent of participants
had balances of less than $10,000, while 16 percent had balances greater than
$100,000.” GAO REPORT: PRIVATE PENSIONS: INCREASED RELIANCE ON 401(K)
PLANS, supra, at 9-10. In this environment, a fiduciary’s duty of selecting prudent
investments rises to critical significance because participants’ investment
selections are limited by the plan fiduciary’s selection of available fund options.
Research indicates that participants are not confident of their abilities to
select prudently from among the investment options available to them, which
emphasizes the significance of a plan fiduciary’s role to prudently select funds.
For example, a survey of stock owners age 50 to 70 indicates that:
close to three in four respondents (72-76%) have more confidence in the abilities of mutual fund managers or stock brokers to conduct transactions for them than they have in their own abilities to conduct transactions. In contrast, only one in three (33%) are confident in their ability to buy and sell individual stocks without the assistance of stock brokers.
7
AARP, Investor Perceptions and Preferences Toward Selected Stock Market
Conditions and Practices: An AARP Survey of Stock Owners Ages 50 and Older
(Mar. 2004), available at http://assets.aarp.org/rgcenter/econ/investor.pdf. The
rapid growth and primacy of such plans to fund retirement makes it vital that
defined contribution retirement plan participants be protected.
II. BECAUSE EMPLOYEES BEAR ALL OF THE RISKS IN CONNECTION WITH FUNDING THEIR RETIREMENT, PLAN FIDUCIARIES MUST ABIDE BY THE STATUTORY REQUIREMENTS OF PRUDENCE AND LOYALTY TO SELECT AND MONITOR RETIREMENT PLAN INVESTMENT OPTIONS.
A. Because Defined Contribution Retirement Plans Are A Central
Component Of Employees’ Compensation, Fiduciaries’ Failure To Act In The Best Interests Of Plan Participants Deprives Employees Of Critical Elements of Their Earned Compensation.
A simple equation exists in the workplace: an employer is able to operate its
business with the benefit of an employee’s labor in exchange for paying that
employee a salary and other benefits. See generally Anne Marie Lofaso, Toward a
Foundational Theory of Workers’ Rights: The Autonomous Dignified Worker, 76
UMKC L. Rev. 1 (2007). The benefits exchanged for the employee’s labor often
includes pension and other employee benefits.2 See ERISA § 2(b), 29 U.S.C.
2 One of the primary factors motivating employers to offer retirement savings plans is the need to attract, and retain desirable workers and maintain productivity in a high quality workforce with competitive compensation packages. Investment Company Inst., The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 19(5) RES. FUNDAMENTALS at 2 (Sept. 2010), available at
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§ 1001(b) ([benefit plans] “have become an important factor affecting the stability
of employment ….”); Employee Retirement Income Security Act, Pub. L. No. 93-
406, reprinted in SUBCOMM. ON LABOR OF THE COMM. ON LABOR AND PUBLIC
WELFARE, 93rd CONG., Legislative History of the Employee Retirement Income
Security Act of 1974, Vol. III, at 4751 (1976).
Employees who participate in defined contribution plans contribute a portion
of their salaries to those plans and may receive matching contributions from their
employers as part of their compensation package. U.S. DEP’T OF LABOR,
EMPLOYEE BENEFITS SECURITY ADMIN., What You Should Know About Your
Retirement at 3 (Nov. 2006), http://www.dol.gov/ebsa/publications/wyskapr.html.
They participate based on the assumption that “someone is minding the store,” that
is, fiduciaries are administering the plans prudently and solely in the best interests
of plan participants. ERISA § 404(a)(1), 29 U.S.C. § 1104(a)(1). A holding that
plan fiduciaries are not liable for fiduciary breaches that cause losses to
participants’ accounts and the plan as a whole threatens to seriously undermine the
confidence employees have in these plans to provide for their retirement security.
Such a holding undermines the assumptions and understandings underlying the
http://www.ici.org/pdf/fm-v15n7.pdf. Accord, MetLife, Eighth Annual Study of Employee Benefits Trends: Findings from the National Survey of Employers and Employees at 8, 18 (2010).
9
employer-employee relationship, not to mention the language and purpose of
ERISA.
B. Because Participants Often Lack Financial Literacy, They Rely On Fiduciaries To Select And Monitor Plan Investment Choices.
1. Even though most Americans graduate high school,
a large number have poor literacy skills.
Although 84.6% of adults over age 25 had a high school or higher degree in
2003, U.S. Dep’t of Educ., Nat’l Ctr. for Educ. Statistics, Digest of Education
Statistics, 2009 at Table 8 (Apr. 2010), http://nces.ed.gov/programs/digest/d09
/tables/dt09 _008. asp?referrer =list, 43% of adults fell into the Basic or Below
Basic literacy level, signifying difficulty in reading, comprehension, computation,
communication, writing, and problem solving.3 See U.S. Dep’t of Educ., Nat’l
Ctr. for Educ. Statistics, Inst. of Educ. Sci., Literacy in Everyday Life: Results
From the 2003 National Assessment of Adult Literacy at 13 (Apr. 2007),
http://nces.ed.gov/naal/kf_demographics.asp.
Some experts estimate that literacy levels can lag behind educational
attainment by at least four years so that high school graduates effectively have the
3 A person who has proficient literacy would be able to explain the difference between two types of employee benefit plans, use a table to determine a pattern in oil exports across years, and using information in a news article, calculate the amount of money that should go to raising a child. U.S. Dep’t of Educ., Nat’l Ctr. for Educ. Statistics, National Adult Literacy Survey at 10-11 (1992), http://www.nces.ed.gov/pubs93/93275.pdf.
10
literacy skills of ninth-graders. See D. Baker, R. Parker, M. Williams, S. Clark,
and J. Nurss, The Relationship of Patient Reading Ability to Self-Reported Health
and Use of Health Services, 87(6) AM. J. PUB. HEALTH 1027-30 (1997).
2. Americans’ financial literacy skills are even lower than their general literacy skills.
As 401(k) plans became more predominant in the workplace, scholars began
looking at the impact of financial literacy on participants’ saving and investing
behavior. What they found was sobering. Early research warned of the lack of
financial literacy among savers and investors and the implications for individuals’
economic security. See Annamaria Lusardi, NBER Working Paper No. 13824,
Household Saving Behavior: The Role of Financial Literacy, Information and
Financial Education Programs at 7 (Feb. 2008), http://www.nber.org/papers
/w13824. In response to these findings, financial education programs were
developed and promoted. Matthew Martin, Literature Review on the Effectiveness
of Financial Education 3 (June 2007), Fed. Reserve Bank of Richmond Working
Paper No. 07-3, http://www.richmondfed.org/publications/research/working
_papers/2007/wp_07-3.cfm; Financial Literacy, supra at 10. Even after significant
attempts to promote financial education, financial literacy is still frighteningly low.
Id. at 21; see Fin. Ind. Regulatory Auth. Investor Educ. Found., Financial
Capability in the United States: Initial Report of Research Findings from the 2009
11
National Survey (Dec. 2009), http://www.finrafoundation.org/web
4. Because participants are not confident of their investment abilities they rely on plan fiduciaries to chose and manage Investment options prudently, loyally, and in their best interests.
It is not surprising, then, that research indicates participants lack confidence
in their abilities to select from among the investment options available to them.
For example, a survey of stock owners age 50 to 70 indicates that -
close to three in four respondents (72-76%) have more confidence in the abilities of mutual fund managers or stock brokers to conduct transactions for them than they have in their own abilities to conduct transactions. In contrast, only one in three (33%) are confident in their ability to buy and sell individual stocks without the assistance of stock brokers.
AARP, Investor Perceptions and Preferences Toward Selected Stock Market
Conditions and Practices: An AARP Survey of Stock Owners Ages 50 and Older 4
15
(2004), http://assets.aarp.org/rgcenter/econ/investor.pdf. In the same manner as
stockholders outside of plans feel that they must rely on investment professionals
to assist them in their investment selection, to an even greater extent are retirement
plan participants captive to the investment selection process that rests in the hands
of defined contribution plan administrators because of the far reaching control the
plan administrator has in defining the universe of investment options available to
plan participants. Therefore, it is important that fiduciaries are held accountable for
their selection and retention of options from which participants may choose to
1104(a)(1)(A), 1132(a); cf. Mass. Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 140-
43 & n.8 (1985) (ERISA was passed to prevent the misuse and mismanagement of
plan assets).
Given these studies, Congress appeared prescient when it enacted ERISA
and refused to provide exemptions to ERISA’s overarching fiduciary demands of
prudence and loyalty.
16
III. CONGRESS ENACTED ERISA’S FIDUCIARY STANDARDS TO PROTECT EMPLOYEE BENEFIT PLAN ASSETS AND THEREBY PROTECT PARTICIPANTS’ RETIREMENT SECURITY.
A. ERISA Was Enacted To Prevent Mismanagement Of Plan Assets, Not To Promote Employee Ownership Of Employer Stock.
After assembling a record that showed a history and pattern of employees
failing to receive their promised employee benefits, a lack of disclosure and
transparency, and varied and numerous financial abuses, Congress enacted ERISA.
By “establishing standards of conduct, responsibility, and obligation for
fiduciaries” and “by providing for appropriate remedies [and] sanctions” for
violations of those fiduciary standards, ERISA § 2(b), 29 U.S.C. § 1001(b),
Congress sought to protect “the interests of employees and their beneficiaries in
employee benefit plans.” Id.
Citing the extensive legislative history from the Congressional Record, the
Supreme Court recognized in Massachusetts Mutual Life Insurance Co. v. Russell,
that “[t]he floor debate also reveals that the crucible of congressional concern was
misuse and mismanagement of plan assets by plan administrators and that ERISA
was designed to prevent these abuses in the future.” 473 U.S. 134, 140 (1985).
The Court’s recognition of congressional concern was not surprising given
the history leading up to ERISA’s enactment. Among the events that precipitated
Congress to regulate retirement plans were the failure of Studebaker and the
17
termination of its pension plan, the trial of Jimmy Hoffa alleging (and later finding
him guilty of) fraud of the Central States Pension Fund, and instances of other
trustees embezzling or using pension funds for their own benefit. See, e.g., James
A. Wooten, THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974: A
POLITICAL HISTORY at 8-10, 51-80, 112-113, 118 (2004).
Because employer stock was not at the forefront of congressional concern, it
is not surprising that ERISA’s legislative findings do not mention the goal of
promotion of “employee ownership of employer stock.”4 Accordingly, promoting
employee ownership of company stock is merely ancillary to the Act’s stated
policies – the principal of which is the “Protection of Employee Benefit Rights” as
stated at the beginning of Title I of ERISA. See ERISA § 2, 29 U.S.C. § 1001
(reviewing the need to protect participants and beneficiaries).
4 A review of ERISA’s legislative history shows little discussion concerning the importance of employee ownership of employer stock. Instead, the legislative history shows discussions concerning the percentage of employer stock that defined benefit plans should be permitted to hold. See Employee Retirement Income Security Act, Pub. L. No. 93-406, reprinted in SUBCOMM. ON LABOR OF THE COMM. ON LABOR AND PUBLIC WELFARE, 93rd CONG., Legislative History of the Employee Retirement Income Security Act of 1974, Vol. II at 1665, Vol. III at 3774, 4743 (1976).
18
B. Legislative History Confirms That ERISA Contains No Exception To The Duties Of Loyalty And Prudence.
Significantly, both the 1974 House and Senate bills created similar general
standards for fiduciaries – the duties of prudence and loyalty. However, a major
difference between the two bills was the provision concerning self-dealing
transactions. The provision in the two bills was a mirror image. The House
version generally permitted party-in-interest transactions prohibiting only
extraordinary transactions. In contrast, the Senate bill banned all self-dealing, but
exempted certain common transactions. Because the Senate bill hampered
employee stock ownership plans, Senator Russell Long -- a big supporter of
ESOPs -- favored the House bill. However, after Senator Jacob Javits circulated a
list of various abuses that the House bill would not regulate, the Senate version was
endorsed. This resulted in stronger fiduciary requirements concerning ESOPs, by
categorically banning self-dealing and not providing ESOPs with any exception to
the general fiduciary requirements. See Wooten, supra, at 257-58.
Additional legislative history confirms that this understanding of the statute
is correct. The pertinent statutory provisions all have their origins in ERISA’s first
progenitor, H.R. REP. NO. 90-1867, at 7-8 (1968). The Committee Report
accompanying the original House legislation explained the interaction of these
provisions, categorically rejecting the reading adopted by the district court:
19
…. this proviso [exempting the diversification requirement for employer stock] is not intended to insulate such plans from other applications of the prudent man rule. Thus, if investment by a profit sharing plan in the employer is completely unsound the prudent man rule should operate to preclude such investment. All that the proviso says is that if investment in the employer is sound, no profit sharing or similar plan shall be precluded by virtue of a diversification requirement from investing part or all of the plan funds in the stock or securities of the employer to the extent the plan so requires. (emphasis added).
Id. at 7-8 (emphasis added).
The legislative history closer in time to ERISA’s enactment is equally
definitive. Eaves v. Penn, 587 F.2d 453, 460 (10th Cir. 1978) (“It is emphasized,
however, that even with respect to the transactions [involving employer stock]
expressly allowed, the fiduciaries’ conduct must be consistent with the prudent
man standard.”) (quoting Senate Report 93-127, at 93 Cong., 1st Sess., reprinted in
1974 U.S.C.C.A.N 4838, 4867). Nowhere in the statutory language or legislative
history did Congress indicate an exception to the prudence rules. E.g., H.R. CONF.
REP. NO. 93-1280, at 305 (1974), reprinted in 1974 U.S.C.C.A.N. 5038, 5086
(“[A]ll plan fiduciaries must act, with respect to the plan, in accordance with a
‘prudent man’ rule.”); Eaves, 587 F.2d at 460 (“the legislative history combined
with a natural and clear reading of § 404, lead to the inexorable conclusion that
ESOP fiduciaries are subject to the same fiduciary standards as any other fiduciary
except to the extent that the standards require diversification of investments.”).
20
There is simply nothing in ERISA or its legislative history to show that Congress
intended to exclude investments in employer stock, even those required by the
plan, from the duty of prudence. The holding that congressional intent to
encourage employee stock ownership requires courts to permit the imprudent
acquisition or retention of employer stock cannot be squared with the statutory
language and legislative history of ERISA. Nor does it follow that Congress’s
specific and cabined willingness to tolerate a lack of diversification in employer
stock investments suggests a willingness to tolerate imprudent investments
mandated by the plan document. If anything, Congress showed particular concern
for plans which used employer securities by indicating that it barred the use of
section 404(c) as a defense to fiduciary breaches.5 H.R. CONF. REP. NO. 93-1280, at
305 (1974), reprinted in 1974 U.S.C.C.A.N. 5038, 5086.
As this Court has acknowledged, “we must presume that Congress said what
it meant and meant what it said.” Bank of America Nat. Ass'n v. Colonial Bank,
604 F.3d 1239, 1244 (11th Cir. 2010), quoting United States v. Steele, 147 F.3d
1316, 1318 (11th Cir.1998) (en banc). Consequently, a court should not disregard
the plain language of a statute unless a literal application of the statutory language 5 Moreover, section 404(c), exempting fiduciaries from liability for losses caused by participants' exercise of control over assets in their individual accounts, would be superfluous if a plan sponsor could simply relieve fiduciaries from any liability for losses in an individual account. 29 U.S.C. § 1104(c); see also 29 C.F.R. § 2550.404c-1 (2007).
21
“would lead to absurd results . . . or would thwart the obvious purpose of the
statute.” Id. Here, literal application of ERISA’s language clearly furthers
ERISA’s purpose of protecting participants and beneficiaries and the financial
integrity and stability of retirement plans. See ERISA § 2, 29 U.S.C. § 1001.
Indeed, to hold otherwise would create a perverse incentive for plan sponsors to
disregard ERISA fiduciary responsibilities so as to avoid ERISA’s pervasive reach
and thwart its requirements. These principles and ERISA’s plain language, applied
to the facts as alleged in the Complaint, make unmistakably clear that nothing in
the statute exempts fiduciaries of plans investing in company stock, or any other
investment for that matter, from ERISA § 404(a)’s requirements of loyalty and
prudence. See Donovan v. Cunningham, 716 F.2d 1455, 1467 (5th Cir. 1983)
(“ESOP fiduciaries remain subject to the general requirements of Section 404”).
C. Employers Receive Significant Advantages, Including Tax And Cost Savings, From Using Employer Stock For Matching Contributions.
To be sure, ERISA allows employers to offer employer stock as a plan
investment option. But the reasons companies choose to do so is hardly altruistic
and has little to do with enhancing the security of participants’ retirement savings.
On the contrary, employers receive significant advantages from providing the
employer matching contribution in employer stock, not the least of which is that
matching in company stock is far less expensive that matching in cash, IRC
22
§§ 162, 212, 404(a)(9), provides tax benefits for companies that pay dividends,
IRC § 404(k), and puts a block of the stock in employer friendly hands, IRC
§ 409(e), which can help thwart takeovers. See generally Steven J. Sacher, et al.,
Regulation of Qualified Income Plans at 245-50, EMPLOYEE BENEFITS LAW (2d ed.
2000); J.R. Brown, 401(K) Contributions in Company Stock: Costs and Benefits
for Firms and Workers, 90 J. PUB. ECON. 1315, 1319-21 (2006).
Because the reasons for allowing plan investment in employer securities has
little if anything to do with the promotion of ERISA’s primary purpose –
protecting retirement savings, and, indeed, often undermines this purpose, it is
incumbent on this and other courts to ensure that the employers’ interests in
promoting company stock is properly constrained. The district court erred by
elevating this ancillary purpose above the primary objective of Congress when
enacting ERISA. ERISA’s permissiveness with respect to investments in employer
stock is a subset of the fiduciary principles applicable to ERISA fiduciary status,
and strictly subject to those principles. The trial court erred in interpreting
ERISA’s employer stock provisions as trumping the statute’s entire fiduciary
scheme. There is simply no basis upon which to conclude that Congress intended
ERISA § 404(a)(2) to swallow § 404(a)(1) whole.
23
IV. IN ORDER TO PROTECT PLAN ASSETS AND PARTICIPANTS’ RETIREMENT SECURITY, ERISA REQUIRES THAT THERE BE A PLAN FIDUCIARY WITH RESPONSIBILITY FOR PLAN ASSETS AND INVESTMENTS. Under ERISA, fiduciary status may be conferred in one of two ways. The
first is that an individual or entity may be named a fiduciary directly in the
governing plan documents or pursuant to a procedure specified in those
documents. The second is by meeting the statute’s functional definition of a
fiduciary. See generally Kimberly Lynn Weiss, Directors’ Liability for Corporate
Mismanagement of 401(k) Plans: Achieving the Goals of ERISA in Effectuating
Retirement Security, 38 IND. L. REV. 817, 826 (2005).
Congress required a plan to identify a named fiduciary in the plan instrument
so that responsibility to control and manage the operation and administration of the
plan and liability for its mismanagement would be established with a degree of