Pension Protection Act Blog

When is comes to litigating over alleged fiduciary breaches, when is a terminated employee no longer a participant. If you think the answer should be as soon as the terminated employee receives a lump sum distribution of their entire account balance, you would be incorrect according to the 1st Circuit Court of Appeals.

In Evans v. Akers, No. 07-1140 (CA1, July 18, 2008), the Court of Appeals for the 1st Circuit applied the U.S. Supreme Court’s recent holding in LaRue when it addressed whether former employees who have received lump-sum distributions of the entire balance of their employer’s defined contribution plan are still participants under ERISA who may sue on behalf of the plan. The 1st Circuit found that they are, and held that former employees who allege that fiduciary breaches reduced their lump-sum distribution from a defined contribution plan have standing to sue as “participants” under the ERISA statute.

The former employees who received lump sum distributions in this case were former employees of W.R. Grace & Co. who participated in the W.R. Grace & Co. Savings and Investment Plan. One of the investment options offered by the plan was the Grace Common Stock Fund, a fund invested primarily in W.R. Grace & Co. stock. All employer contributions made to the plan were automatically invested in the Grace Common Stock Fund, and participants were not permitted to move those contributions out of W.R. Grace stock until they reached age 50.

On January 1, 2001, the plan stopped investing employer contributions in the Grace Common Stock Fund due to mounting financial pressure on the company and began allocating them according to participants’ investment elections. The plan also began permitting participants to move past matching contributions out of the Grace Common Stock Fund and into other investmentsbut did not advise or require participants to do so. The Grace Common Stock Fund was available to participants as an investment option until April 2, 2001, when W.R. Grace and its subsidiaries filed for bankruptcy.

Timothy Whipps terminated his employment with W.R. Grace on April 27, 2001. Keri Evans terminated his employment with W.R. Grace on August 30, 2002.

On April 17, 2003, the Grace Common Stock Fund stopped accepting new contributions but did not transfer past contributions to other investments unless a participant expressly changed their investment options. On February 27, 2004, plan fiduciaries announced their conclusion that investment in Grace stock was “clearly imprudent” and the Fund’s investment manager embarked on a program to sell the Grace stock and dissolve the fund. The Grace Common Stock Fund ceased to exist on April 19, 2004.

Two lawsuits were brought against W.R.Grace - one by Keri Evans and one by Timothy Whipps. On December 6, 2006, the district court denied the motions for class certification filed in both lawsuits. The district court also dismissed the lawsuit brought by Keri Evans, finding that both Whipps and Evans lacked standing because they failed to meet the statutory definition of “participant”, and as a result, the district court lacked subject matter jurisdiction over the lawsuit.

The 1st Circuit reversed, vacating the district court’s order dismissing the Evans action and remanded the case for further proceedings. In rendering that decision, the Court discusses the difference between awards for shareholder derivative lawsuits and awards due to breaches of the fiduciaries’ duty to act in the interest of the participants under ERISA. The court stated:

“Unlike shareholder derivative suits, where recovery for a fiduciary breach goes into the coffers of the corporation and is not generally paid out to the shareholders, recover made on behalf of a defined contribution plan must be allocated to the individual accounts injured by the breach. See Graden, 496 F.3d at 296 n.6. Although there may be certain circumstances where the transaction costs of allocating additional benefits to individual plan accounts or to those who ahve cashed out of the plan would exceed the amount of the recovery itself, we have no reason to think that such circumstances would be present in this case. Instead, if the plaintiffs are ultimately successful in this suit, the fiduciaries should, in accordance with their statutory duty of care, strive to allocate any recovery to the affected participants in relation to the impact the fiduciary breaches had on their particular accounts. Thus, the plaintiff’s allegation of fduciary mismanagement, which at this stage in the proceedings we assume to be true, identifies a concrete injury that is redressable by a court and falls within the scope of Article III standing.”

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