On September 23rd, 2022, the U.S. Department of Labor (DOL) announced that an international design firm’s fiduciaries would pay $2 million to restore assets to the company retirement plan after investigators found plan asset mismanagement occurred. Investigators from the DOL’s Employee Benefits Security Administration (EBSA) determined that fiduciaries from the InterArch Inc. Profit-Sharing Plan (the fiduciaries) mismanaged the plan’s assets in violation of their duties under the Employee Retirement Income Security Act (ERISA). In an earlier case, Wells Fargo was ordered to pay a $131.8 million settlement after investigators found similar ERISA violations at the financial institution.
Background of the Plan Asset Mismanagement Case
According to the EBSA’s investigation, between August 30th, 2016, and June 30th, 2020, the fiduciaries invested plan assets in an undiversified manner. Furthermore, they invested the assets into companies to which the fiduciaries had significant ties. In the end, the plan’s stock position in one of the companies reached nearly 70%. However, its stock value fell drastically after that. Subsequently, the plan lost millions of dollars. Finally, according to a complaint filed in the U.S. District Court for the District of New Jersey, the fiduciaries engaged in self-dealing, violating their duties under ERISA.
ERISA and Fiduciary Duties
ERISA limits the kinds of securities a plan may invest in. Section 407 of ERISA states that a plan may only invest in qualifying employer securities. Qualifying employer securities include company stocks and other equity securities. Under ERISA, fiduciaries must act prudently and:
- diversify plan investments in order to minimize the risk of significant losses,
- follow the plan’s terms to the extent they are consistent with ERISA, and
- avoid conflicts of interest.
Sections 406(a) and (b) of ERISA bar specific transactions between a plan and a party of interest concerning the plan. Under Section 406(a), a plan trustee may not cause a plan to enter into a transaction if the transaction is an unauthorized transfer or use of any plan assets. Additionally, Section 406(b) states that a fiduciary may not:
- deal with the assets of the plan in their own interest or for their own account,
- act in any transaction involving the plan on behalf of a party (or represent a party) whose interests are adverse to the interests of the plan or the interests of its participants or beneficiaries, or
- receive any consideration for their personal account from any party dealing with such a plan in connection with a transaction involving the plan’s assets.
Settlement in the Plan Asset Mismanagement Case
In its judgment, the district court ordered the fiduciaries to pay plan participants $1,836,853 and $183,685 in penalties. Additionally, the defendants may no longer serve as fiduciaries of any future ERISA benefit plan. To settle a separate private class action lawsuit involving the same case, the fiduciaries will pay an additional $1.1 million to the retirement plan. The private class action suit alleged similar plan asset mismanagement to what EBSA investigators found. In conclusion, employers should remember that such plan asset mismanagement investigations are often aided by proper recordkeeping. This also helps ensure that employee benefits are kept secure. Therefore, ERISA states that employee records containing benefit information must be kept for at least six years after the filing date.