Wednesday, July 9, 2008

Dell Cleared in ERISA Breach of Fiduciary Case

401k_2 NewsDash has this report on a type of ERISA case that is becoming more frequently litigated:

DIRECT "SHUNS."  The U.S. District Court for the Western District of Texas ruled that fiduciaries of the Dell Inc. 401(k) Plan did not violate their duties under the Employee Retirement Income Security Act (ERISA) by allowing more than 50% of the plan's assets to be invested in Dell company stock.  In granting Dell's motion to dismiss the case, the court noted that the Dell plan is an eligible individual account plan (EIAP) and therefore exempt from ERISA's diversification requirements.

The District Court also agreed with Dell that since participants in the plan directed their own investments, the plan cannot create any duty to diversify assets by overriding participant investment choices - and said that if the plan became overinvested in Dell stock, this was the result of participant direction, not Dell or the plan fiduciaries.

The court decision appears correct, but it begs an important question: what role should employers take in providing investment education to their employees? This is a trickier question than it first might appear because although "investment education" is not fiduciary activity, "investment advice" is, and the line between the two can be murky.

Query: should ERISA be amended to require employers to give employees investment education about the dangers of not diversifying and investing too much in company stock?  Or should it be amended to put a limit on the percentage that can be invested in company stock as is currently the case in the defined benefit plan context?

Finally, although the company can permit more than 50% of the plan assets to be in company stock under current law, there is a breach of fiduciary duty under 404(c) and its regulations if the employer does not provide numerous enough, diverse investment vehicles for its employees to invest in.


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I think it would foolish to require employers to make sure participants are making the right asset allocation decsions in their particpant directed 401(k) savings accounts. One arguement for not requiring is: Why stop there? Clearly there are other financial decsions made by employees that could harm their personal balance sheet and aguably more so.

Posted by: mike sladky | Jul 11, 2008 10:11:03 AM

Mike: Not "making the right asset allocation decisions," but giving them the tools to make informed decisions. That's all I'm advocating.

Posted by: Paul | Jul 11, 2008 10:39:29 AM

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