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THE FIDUCIARY CORNER: Misplaced Enrollment Form Creates ERISA Liability for Sponsor

A small, Oklahoma-based employer recently learned that inattention to 401(k) plan governance can create costly corporate liability. It also learned that retaining the responsibility for collecting plan participants’ investment election forms, and then forwarding them to the plan’s recordkeeper, may not be advisable.

The case (Womack v. Orchids Paper Products Co. 401(k) Savings Plan (N.D. Okla. Feb. 15, 2011)) involved facts that are not unusual for many plan sponsors. Orchids sponsored a 401(k) plan for its 150 employees.  When Orchids decided to change recordkeepers from Principal to Fidelity, employees were asked to submit new investment election and beneficiary designation forms. The accounts of those who failed to affirmatively make new investment elections were invested in the plan’s qualified default investment alternative. Employees were given the option of submitting their new paperwork directly to Fidelity or to the employer’s accounts receivable clerk, who would then forward the investment forms to Fidelity. The company retained the beneficiary designation forms in employee personnel files.

Carolyn Womack elected to submit her investment election and beneficiary designation forms to the company’s accounts receivable clerk.  Unfortunately, however, the clerk noticed only the beneficiary designation form (which was on top of the investment election form). She therefore failed to send Ms. Womack’s investment election form to Fidelity.  The predictable result was that Ms. Womack’s new investment directions were not implemented, and her account suffered approximately $100,000 in losses.  She then sued for breach of fiduciary duty under ERISA. Ultimately, she prevailed, as the court granted her motion for summary judgment.

On a superficial level, one might glean from this Womack decision the lesson that employers should be cautious when retaining certain responsibilities related to plan investments — particularly when those responsibilities can be assigned to others, such as the plan’s recordkeeper. Had Orchids not given its employees the option of returning their investment election forms to its accounts receivable clerk, any liability for failing to implement those elections would have rested with Fidelity. That is certainly valuable information. But to stop there would be to miss an even more important lesson.

In this case, Ms. Womack sued the plan itself, the plan sponsor (Orchids), and two of the sponsor’s senior executives. She sued the executives because the plan document authorized them to carry out certain fiduciary functions on the sponsor’s behalf. Those executives had designated the company’s accounts receivable clerk as the individual to whom participants could return their investment election forms. (Ms. Womack did not sue the accounts receivable clerk who misplaced her investment election form.)  She sued Orchids because the plan document designated Orchids as the plan administrator and named fiduciary. It is in this designation that the most important lesson from Womack lies.

The court dismissed the claim against the plan, because a plan is not a “fiduciary” under ERISA. Considering the claims against the executives, the court determined that, though they were fiduciaries of the plan, they did not breach any of the fiduciary duties they owed to the plan’s participants. Acting as fiduciaries, they had merely delegated certain responsibilities to the accounts receivable clerk. The court found no evidence that their delegation of responsibilities, or their monitoring of the clerk thereafter, was imprudent. Thus, three of the four defendants were absolved of liability.

Orchids itself, however, was found liable for breach of fiduciary duty based on the acts and omissions of its accounts receivable clerk. Even though the clerk was performing what arguably should have been characterized as merely “ministerial” — and not fiduciary — functions (see our May 2007 article concerning ERISA’s ministerial function exception), the court found that she was doing so as an agent of Orchids. And because the plan document named Orchids as a fiduciary, the court attributed fiduciary status to the clerk’s actions: “The Court holds that Orchids — by and through [the clerk] — was functioning in its capacity as a fiduciary when performing the omission giving rise to the alleged breach.”

Although we might question some of the court’s analysis, the outcome almost certainly would have been different had the plan’s governance structure been more carefully considered. We have repeatedly cautioned that giving the employer/plan sponsor a formal “fiduciary” role in the plan document can create unintended fiduciary liability under ERISA. As the Womack court’s analysis demonstrates, when the plan sponsor is a named fiduciary, the acts or omissions of any of the sponsor’s employees — even low-level clerks — can create fiduciary liability. Had the Orchids plan merely named either an administrative committee or the two executives as the plan’s administrator and named fiduciary, Orchids most likely would have avoided liability.

The Womack case therefore holds at least three lessons for employers:

  • Even small employers can be sued for large amounts under ERISA;

     

  • Retaining the responsibility for collecting investment forms can be risky; and

     

  • Thoughtful plan governance can prevent unforeseen corporate liability.