401(k) plan participants allowed to pursue claim for disgorgement following transfer of account assets to pension plan

Participants in a 401(k) plan had standing to pursue the restoration of profits by their employer following the transfer of their individual account assets to a defined benefit plan, according to the U.S. Court of Appeals in Richmond VA (CA-4). The fact that the participants did not incur a financial loss following the transfer did not prevent them from pursuing their ERISA claims for disgorgement.

401(k) transfers to pension plan

In 1998, a bank amended its 401(k) plan to afford eligible participants a one-time opportunity to transfer their individual account balances to a defined benefit plan sponsored by the bank. The pension plan offered participants who transferred their accounts the same menu of investment options that were available under the plan. In addition, the pension plan was amended to guarantee that participants who elected to make the transfer would receive, at a minimum, the value of the original balance of their 401(k) plan accounts (i.e., the “Transfer Guarantee”).
The Transfer Guarantee may have disguised the opportunity afforded to the bank to make money off the transfers. Specifically, in the event the bank’s actual investments provided a higher rate of return than the pension plan participants’ hypothetical investments, the resultant spread was retained by the bank.

Following publicity in mainstream media of such retirement plan transfers, the IRS audited the plans maintained by the bank. In 2005, the IRS issued a Technical Advice Memorandum in which it concluded that the transfers effectively eliminated the separate account feature of the 401(k) plan by no longer allowing participants to be credited with the actual gains and losses generated by funds contributed on their behalf.

In May 2008, the bank entered into a closing agreement with the IRS which required it to: (1) pay a fee, (2) set up a special purpose 401(k) plan, and (3) transfer pension plan assets that were initially transferred from the 401(k) plan to the special purpose 401(k) plan. The bank also agreed to make an additional payment to participants who had elected to transfer assets if the cumulative total return of the hypothetical investments was less than a certain amount.
Participants who had elected to transfer account balances had filed suit in federal court in Illinois in 2004, alleging ERISA violations. Following a motion for a change of venue by the bank the case was transferred to a federal court in North Carolina. In 2012, the court dismissed three of the four counts contained in the complaint.

At trial on the remaining claim, participants alleged that the transfer violated the anti-cutback rules of ERISA §204(g), by improperly decreasing the accrued benefit of the separate account feature in the 401(k) plan. The participants sued, under ERISA §502(a), to recover the profits retained by the bank after the pension plan accounts were transferred to the special purpose 401(k) plan.

The bank argued that the closing agreement with the IRS deprived the participants of Article III standing because it restored the separate account feature. The participants countered that (1) they were entitled to any spread between what they were paid and the actual investment gains of the assets that were originally in the 401(k) plan and (2) the agreement between the bank and the IRS did not extinguish the participants’ ERISA claims. The trial court, however, in a 2013 ruling, rejected the participants’ arguments, and dismissed the case for lack of standing.

Standing at issue on appeal

On appeal, the participants maintained that they were entitled to the full value of the investment gains realized by the bank using the assets transferred to the pension plan. However, in order for such a claim to be asserted under ERISA, the participants had to possess statutory and Article III standing.

Statutory standing under ERISA’s equitable relief provision. The court determined that the participants could assert a claim under ERISA §502(a)(3) for appropriate equitable relief to redress a violation of ERISA’s anti-cutback rule. Under ERISA §204(g), a plan amendment may not decrease a participant’s accrued benefit. The separate account feature of an employee’s benefit under a defined contribution plan is recognized by the IRS under Reg. §1.411(d)-4, Q/A-3(a)(2) as a protected benefit. The Transfer Guarantee assured that participants would receive no less than the monetary value of their 401(k) plan accounts at the time of the transfer. However, the court explained, the bank’s promise that the value of the transferred funds would not decrease below a certain threshold was not the same as actually not decreasing the account balances. The transfers still resulted in a loss of the separate account feature, and accordingly, violated ERISA §204(g)(1).

The ERISA §204(g) violation, however, would not be sufficient to confer statutory standing absent a legitimate claim for appropriate equitable relief. The participants sought the profits the bank made using their assets. This “accounting for profits” is an equitable remedy, the court noted. Thus, the participants had statutory standing under ERISA §502(a)(3) to bring their claim.

Article III standing does not require financial loss. The bank, alternatively, maintained that the participants lacked Article III standing because the transfers from the plan to the special purpose 401(k) plan mooted any injury. In order to establish Article III standing, plan participants must have sustained an “injury in fact.” The bank argued that the participants suffered no “financial loss,” and thus no injury sufficient to establish standing.
However, the Fourth Circuit, agreeing with the Third Circuit (and rejecting the position of the Second Circuit) stressed that financial loss is not a prerequisite for Article III standing to bring a disgorgement claim under ERISA. The court then concluded that the participants experienced an invasion of a legally protected interest because they suffered a loss, measured as the spread or difference between the profit the bank earned by investing the retained assets and the amount it paid to the participants.

Closing agreement did not moot claims

The court finally, ruled that the restoration of the special account feature did not moot the participants’ claims. The participants charged that the bank retained a profit even after it restored the separate account and paid a $10 million fine to the IRS. The court conceded that, if an accounting indicated that the bank did not retain a profit, the case could be moot. However, as long as the parties had a concrete interest, no matter how small, in the outcome of the litigation, the case was not moot.

Source: Pender v. Bank of America (CA-4).

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