The Employee Ownership Update
March 3, 2008
Supreme Court Says Individuals Can Sue Retirement Plan Fiduciaries; Implications for ESOPs UnclearSince a seminal case in 1985 (Massachusetts Mutual Life Insurance Company v. Russell, 473 U.S. 134), courts have largely, if not unanimously, concluded that individuals could not sue ERISA plan fiduciaries for individual losses to the plan. The argument was that monetary damages could be provided only for the plan as a whole, so employees could sue only on behalf of the plan, not themselves. But in a defined contribution plan, losses to individuals represent a more difficult problem. Under Internal Revenue Code Section 502(a)(3), which allows participants to sue on behalf of a plan, a typical decision (as has happened in a number of "stock drop" suits) has been for the plan to be changed so that assets become more diversified. Assets in the plan overall might also be restored, such as by making an additional corporate contribution and adding benefits to a class of former employees affected by the fiduciary breach. But what if the problem concerns not all the participants, but just one or a few? If they cannot sue for monetary damages individually, but only on behalf of the plan, what good would that do them? How could their losses be restored, especially if they no longer worked for the company?
On February 20, 2008, in LaRue v. DeWolff, Boberg & Associates (No 06-856), the Supreme Court unanimously concluded that individuals do have the right to sue for individual monetary damages under Section 502(a)(2), although a concurring opinion in the case written by Chief Justice Roberts argued individuals have to exhaust administrative remedies first.
So what does this mean for ESOPs? Generally, ESOP experts believe it will have much more impact on 401(k) plans, particularly with respect to fiduciary errors and omissions and to excessive plan charges. The large majority of ESOPs are funded by the company with no individual choices or directions, so losses to one participant's account are likely to be mirrored in accounts of other participants. ESOP lawsuits, in other words, could already usually proceed under Section 502(a)(2). Of course, that does not mean some aggressive attorneys will not try this tack anyway or that there could not be situations where there are specific individual issues, particularly regarding errors and omissions for individual accounts (failing to offer a diversification election, for instance).
Survey of Multinational Companies Shows Changes in Equity PracticesThe 2007 Global Equity Incentives Survey from PriceWaterhouseCoopers looked at equity practices among 152 multinational companies. The survey shows that options still are the most popular practice, but companies are only half as likely to offer them as they were in 2003. Restricted stock and restricted stock units are now almost as popular. ESPPs, which were used by 70% of the companies in 2003 fell to 40% in 2006, and grew slightly in 2007. Companies are cutting back on option grants, but, contrary to popular wisdom, the reduction is at all levels, not just broader staff levels.
New NCEO Board Members ElectedCongratulations to the new NCEO board members. In a record turnout with a very tightly contested race, the winners were:
- Rich Armstrong, SRC Holdings (an ESOP company) and the Great Game of Business (coaching and information services on open-book management)
- Cindy Prodoehl, Principal Financial Group (ESOP plan design and administration)
- Kevin Ruble, Marquette Rail (an ESOP company)
- James Steiker, SES Advisors and Steiker, Fischer, Edwards, & Greenapple (employee ownership law and advisory services)
- Cecil Ursprung, Reflexite Corporation (an ESOP company)
- Karen Needham, UBS Financial Services (equity plan services)
- Mark Clem, Charles Schwab Corporate Services (equity plan services)