The argument raises three questions:
- Who is responsible when employer stock investments go south – especially as Burke alleges, when there appears to be some deliberate market manipulation;
- If a retirement plan seeks to contractually shift all fiduciary responsibility to an investment manager, are plan participants’ rights affected by that agreement; and
- If the plan sponsor hides financial information that will likely damage the value of employer stock from the investment manager, can the investment manager be liable for participant losses.
Diving airplanes, dropping stock (and a guilty secret?)
Boeing's 737 Max 8 aircraft were involved in the March 2019 crash of Ethiopian Airlines Flight 302 as well as the October 2018, crash of Lion Air Flight 610. Days later, the company's stock had dropped by $65 a share. Nearly a year after the Lion Air Flight crash, Boeing still faced an on-year 46 percent decline in profit. Among those affected by the decline in stock value were retirement plan participants who had chosen to invest in Boeing stock through the VIP option in their pension plan.
Plans are generally not responsible for guaranteeing against losses that result from normal market fluctuations. However, Burke claims that Boeing knew long before the crashes about structural problems with the 737 MAX series of airplanes. Further, the ERISA lawsuit claims that the company, including individuals who were fiduciaries, hid the bad news from investors, including its own employees. So far, the lawsuit has focused on the plaintiffs’ theory that the plan fiduciaries had a duty to disclose this information because its discovery was inevitable.
The defendants’ newest claim that they were not plan fiduciaries opens up another, entirely different, skirmish in this legal battle. It matters because, only as fiduciaries, can they be sued by participants for plan mismanagement.
Who is a fiduciary and why is it important?
Fiduciary duty is the touchstone that runs through all ERISA plans – 401k plans, defined benefit plans and health plans, alike. It is increasingly the central issue in all varieties of ERISA lawsuits.
Briefly, ERISA requires that plan fiduciaries act prudently to discharge their duties for the exclusive purpose of:
- providing benefits to participants and their beneficiaries; and
- defraying reasonable expenses of administering the plan.
Attorneys, accountants, actuaries, record keepers and others hired by a plan are generally not fiduciaries. Usually, the Trustees, investment advisors or plan management committees have a fiduciary obligation to oversee the way in which those third-parties perform their functions.
In general, because of the heavy obligations of an ERISA fiduciary and the potential for legal liability, including personal financial liability, third party service providers structure their relationship with a plan very carefully to avoid being fiduciaries. If they take on that burden, it is safe to assume that they are compensated for it. It is notable; therefore, that Newport assumed that responsibility.
Boeing’s agreement with Newport
By letter dated October 2018, Newport notified participants in the VIP that, as of October 19, 2017 (the year before), it had assumed the role previously played by Evercore Trust Company and was “the independent fiduciary and investment manager for the Boeing Stock Fund, which is the employee stock ownership plan component of the VIP.” (Interestingly, the investor letter from October 2017 is from Evercore and makes no mention of the change.)
Some paragraphs later, the 2018 Newport letter describes its role as “the sole fiduciary responsibility under the VIP and ERISA for deciding, among other things, whether the Boeing Stock Fund should continue to be offered as an investment fund under the VIP.”
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So many questions ….
Although unusual, it is not unheard of that Newport would agree to expose itself to fiduciary liability. It is even more unusual that Newport would explicitly agree to do so without the benefit of knowledge that might affect the value of Boeing stock. One can only assume that the gamble must have been worth it.
The real issue is whether Boeing and the various plan administrators could shed their own potential liability to participants by means of a contract with Newport. Some basic principles of contract law suggest not, but ERISA-watchers wait for the decision of the Northern District of Illinois. The outcome could affect fiduciary liability litigation in many situations.