ERISA Plan Fiduciaries: Prudence Presumed
Although fallout from the La Rue decision has yet to be fully experienced, there is some good news for fiduciaries of individual account plans. The Fifth Circuit, in Kirschbaum v. Reliant Energy adopted a rebuttable presumption that fiduciaries have acted prudently when they follow the specific terms of the plan.
Factually, Reliant's plan provide for the purchase of company stock through a company stock fund that was an investment alternative option under the plan. The plan mandated that investment into the company stock fund necessitated purchase of company stock. A class of participants sued the company and the investment committee, alleging that the continued purchase of company stock was a breach of fiduciary duty because the value of the stock was artificially inflated and they contended it was not a prudent investment. They contended that the plan should have terminated and liquidated the company stock fund, and certainly should not have made further investment into it.
The Plaintiffs were essentially arguing that, notwithstanding the terms of the plan, the fiduciaries had a duty to amend the investment policy statement of the plan to halt contribution to the company stock fund. They contended that continued investment was a breach of a duty to amend the policy statement when it became clear that the company stock was not a sound investment. The Court disagreed, affirming the lower court grant of summary judgment in favor of the company.
The facts here are not as significant as the ruling. The Court found that ERISA imposes a fiduciary duty to follow the terms of the plan, and this is the overriding and controlling obligation. The Court found that there is a "rebuttable presumption" that plan fiduciaries have acted prudently when they abide by plan terms. To overcome that presumption, the plaintiff would have to prove that the fiduciaries acted unreasonably in their decision to follow the plan terms, a heavy burden indeed. In sum, by following the plan terms, the fiduciaries made the burden of proof for breach of duty more difficult to prove.
I think this decision is important because, in the wake of La Rue, fiduciaries are on edge about their obligations to individual account plan participants. There is no question that plans should have investment policies and should follow those. They should also be updated under any sound fiduciary practice and routinely reviewed to determine their suitability for the plan. But in the end, fiduciaries will ultimately be measured by their adherence to plan terms. So following the plans rules to the letter remains the best course of action.
