When Pensions Change Hands

Integrating 401(k) plans after a merger can raise tricky fiduciary issues.

Nine former employees of Signet Banking Corp. are testing the limits of laws and regulations designed to protect plan sponsors from litigation as fiduciaries. Their class-action lawsuit on behalf of 5,000 former Signet workers was filed in May against First Union Corp. of Charlotte, North Carolina, which acquired Signet Banking in 1997.

As the first prominent court battle since the Department of Labor adopted 404(c) regulations in 1992, the court’s decision may set guidelines for handling pension assets in the wake of mergers and acquisitions. Particulars are confined to First Union and perhaps financial institutions that offer proprietary options in 401(k) plans, but ramifications could set a broader precedent. “It’s an important case,” says Alan Lebowitz, deputy assistant secretary of the Pension and Welfare Benefits Administration. At issue are critical questions about the nature of fiduciary status, the scope of the Employee Retirement Income Security Act (ERISA) regulation, and the trade-off between consolidating pension assets and keeping new workers happy and productive.

The nine plaintiffs charge First Union with violating its fiduciary duty when it liquidated assets in the Signet plan and transferred them to proprietary funds at First Union. At Signet, a big portion of plaintiffs’ 401(k) assets had been invested in Capital One, a high-flying spin-off whose stock price has more than tripled since First Union transferred the stake to its handful of mutual funds. Adding insult to injury, plaintiffs complain, First Union tacked on administrative fees it does not require some of its corporate clients to pay.

When First Union announced its intention to replace former Signet employees’ stake in Capital One with shares of its own stable value fund, the plaintiffs bristled — not least because, after helping to build Capital One’s lucrative credit card business from scratch, they felt they deserved to participate in its roaring success.

“We all got on the phone and tried to learn the reasoning behind the decision,” remembers Sue B. Franklin, one of the plaintiffs. The bank’s alleged reply: “We don’t feel it’s wise for you to have so much invested in a single stock.”

Some ERISA attorneys believe the case may clarify key aspects of pension regulation. It may define the extent to which employers are sheltered from fiduciary liability when they design pension plans, when they are seen to be acting as employers, not fiduciaries. It may also define the extent of an employer’s protection from fiduciary liability under Section 404(c) regulations, which govern participant-directed defined contribution plans.

Two Important Protections

To David Wray, president of the Profit Sharing/401(k) Council of America, the potential seems somewhat more limited. “It is unlikely to clarify any murky areas of the law,” he says. The facts in this case are unique to First Union, he says, and the final ruling likely limited in its impact only to First Union. Its impact on financial institutions, if any, would depend on what the court states in its final opinion, Wray says.


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