Opinion ID: 2999002
Heading Depth: 2
Heading Rank: 1

Heading: The “Implied Exception” to ERISA Sections 403

Text: and 405 Ms. Jenkins submits that the Mid America plan, which allows plan participants to direct their 401(k) funds, violates ERISA provisions that forbid the delegation of trustee duties.
In evaluating Ms. Jenkins’ submission, we begin with section 403(a) of ERISA. It states: Except as provided in subsection (b) of this section, all assets of an employee benefit plan shall be held in trust by one or more trustees. Such trustee or trustees shall be either named in the trust instrument or in the plan instrument described in section 1102(a) of this title or appointed by a person who is a named fiduciary, and upon acceptance of being named or appointed, the trustee or trustees shall have exclusive authority and discretion to manage and control the assets of the plan. . . . 29 U.S.C. § 1103(a) (emphasis added). Section 403(a) has two explicit exceptions that are found in 29 U.S.C. § 1103(a). As the statutory text makes clear, neither of these exceptions are pertinent to our present inquiry. More precisely, that section provides: (1) the plan expressly provides that the trustee or trustees are subject to the direction of a named fiduciary who is not a trustee, in which case the trustees shall be subject to proper directions of such fiduciary which are made in accordance with the terms of the plan and which are not contrary to this chapter, or No. 04-4258 9 (2) authority to manage, acquire, or dispose of assets of the plan is delegated to one or more investment managers pursuant to section 1102(c)(3) of this title. Id. § 1103(b). Because these exceptions are not applicable, we must determine whether any other provisions of ERISA provide authorization for the arrangement found in the plan under review. We therefore must determine whether other provisions of the statute are pertinent to our inquiry.
In undertaking this inquiry, we turn first to ERISA section 405(c) to determine the responsibilities of the trustee under the plan before us. That subsection provides that a plan instrument may allocate “fiduciary responsibilities (other than trustee responsibilities)” among named fiduciaries and to other persons designated by named fiduciaries. 29 U.S.C. § 1105(c)(1). Section 405(c) further defines “trustee responsibilities” as “any responsibility provided in the plan’s trust instrument (if any) to manage or control the assets of the plan.” Id. § 1105(c)(3). Mid America’s plan instrument, labeled “Employee Savings and Profit Sharing Plan,” sets forth the responsibilities of the trustee.4 R.25, Ex.8 at 1. The trustee’s powers 4 29 U.S.C. § 1105(c)(3) defines trustee responsibilities as “any responsibility provided in the plan’s trust instrument (if any) to manage or control the assets of the plan.” The Mid America plan did not have a trust instrument, only a plan instrument. However, it appears that the plan instrument subsumed the trust instrument and the one document serves as both. ERISA section (continued...) 10 No. 04-4258 are “to invest, manage, and control” the plan assets consistent with the “funding policy and method” as determined by Mid America. Id. at 87. More specifically, the Trustee is to “invest and reinvest the Trust Fund to keep the Trust Fund invested . . . in such securities or property, real or personal, wherever situated, as the Trustee shall deem advisable. . . .” Id. The plan instrument also describes the “funding policy and method” that should be established by Mid America by stating that Mid America “shall determine whether the Plan has a short run need for liquidity (e.g., to pay benefits) or whether liquidity is a long run goal and investment growth (and stability of same) is a more current need.” Id. at 23. The “Trust Fund” is defined as “the assets of the Plan and Trust as the same shall exist from time to time.” Id. at 17. The plan instrument also states, for the 401(k) funds, that “[e]ach Participant shall be given the opportunity to direct the Trustee as to the investment of such Participant’s account value,” with such designations to be “made not more frequently than once in any Plan Year.” Id. at 62, 66. In 4 (...continued) 402(a)(1) states that “[e]very employee benefit plan shall be established and maintained pursuant to a written instrument.” 29 U.S.C. § 1102(a)(1). Additionally, ERISA section 403(a) states that trustee(s) “shall either be named in the trust instrument or in the plan instrument described in section 402(a) or appointed by a person who is a named fiduciary.” See id. § 1103(a). Therefore, ERISA does not mandate a separate written trust agreement. In this case, the plan instrument defines the Trust and sets forth trustee responsibilities. R.25, Ex.8 at 17, 87-95. It also refers to itself as “[t]his Plan and Trust.” Id. at 98. Therefore, the trustee responsibilities laid out in the plan instrument are the trustee responsibilities at issue in 29 U.S.C. § 1105(c)(3). No. 04-4258 11 addition, a separate “Directed Investment Account” shall be made for each participant, and such account “shall not share in Trust Fund earnings, but it shall be charged or credited as appropriate with the net earnings, gains, losses and expenses as well as any appreciation or depreciation in market value during each Plan Year attributable to such account.” Id. at 67. As established by the plan, the duty to invest the plan assets was a “trustee responsibility” under section 405(c)(3); authority to delegate that duty cannot be found in section 403(c)(1). Since section 405 does not provide an exception to section 403(a), we must look elsewhere in ERISA to find authorization for the plan’s participant-directed investments.
ERISA section 404, which sets forth the standard of care for a fiduciary, provides that no fiduciary shall be liable for any loss which results from a plan participant or beneficiary’s exercise of control in participant-directed plans. See 29 U.S.C. § 1104(c). However, in order to qualify as a participant-directed plan eligible for the liability shield of section 404(c), a plan must meet a number of conditions; prominent among them is that it must provide at least three investment options and it must permit the participants to give instructions to the plan with respect to those options at least once every three months. 29 C.F.R. § 2550.404c- 1(b)(2)(c). It is undisputed that the Mid America plan does not qualify under section 404(c) because there is no opportunity to change investments once every three months. Therefore, we must determine whether compliance with section 404(c) is the exclusive method of creating a participant-directed exception to sections 403 and 405. 12 No. 04-4258 Although section 404(c) and its accompanying regulation, 29 C.F.R. § 2550.404c-1, create a safe harbor for a trustee, we see no evidence that these provisions necessarily are the only possible means by which a trustee can escape liability for participant-directed plans. As 29 C.F.R. § 2550.404c-1(a)(2) states: The standards set forth in this section are applicable solely for the purpose of determining whether a plan is an ERISA section 404(c) plan and whether a particular transaction engaged in by a participant or beneficiary of such plan is afforded relief by section 404(c). Such standards, therefore, are not intended to be applied in determining whether, or to what extent, a plan which does not meet the requirements for an ERISA section 404(c) plan or a fiduciary with respect to such a plan satisfies the fiduciary responsibility or other provisions of Title I of the Act. (emphasis added). The Department of Labor also has stated that, for plans that do not meet the regulatory definition of a section 404(c) participant-directed plan, “noncomplying plans do not necessarily violate ERISA; noncompliance merely results in the plan not being accorded the statutory relief described in section 404(c).” Final Regulation Regarding Participant Directed Individual Account Plans (ERISA Section 404(c) Plans), 57 Fed. Reg. 46,906, 46,907 (Oct. 13, 1992). Therefore, we agree with the district court and believe that the statute, when read as a whole along with the accompanying regulations, permits a plan trustee to delegate decisions regarding the investment of funds to plan participants even if the plan does not meet the requirements for the section 404(c) safe harbor. Therefore, there is an “implied exception” to sections 403 and 405 for participantdirected plans, allowing plan participants to direct the No. 04-4258 13 investment of their own plan funds. If a participant-directed plan does not meet the conditions set forth in 29 C.F.R. § 2550.404c-1(b), the plan trustee and fiduciaries simply do not receive the benefits of section 404(c), and they are not shielded from liability for losses or breaches of duty which result from the plan participant’s exercise of control. It does not necessarily mean that such a plan violates ERISA; instead, the actions of the plan trustee, when delegating decision-making authority to plan participants, must be evaluated to see if they violate the trustee’s fiduciary duty.