Claim for ESOP Benefits Under State Law Preempted by ERISA

A California court denied a participant’s claim that a state law allows for him to receive shares of a company's non-operational employee stock ownership plan (ESOP), on grounds that the law is preempted by ERISA. 

In Sender v. Franklin Resources, Inc., the U.S. District Court for the Northern District of California found John Sender’s claim for recovery of stock certificates in a prior employer’s ESOP was a claim for the receipt of benefits due under the plan.

The court found that ERISA preempted Sender’s state law claim. The court also found that his right to recovery depended on the existence of an ERISA plan and the required distributions on the plan’s benefits. The stock certificates were the benefits of the plan, so their distribution was a required administrative duty of the ERISA plan. Therefore, there was no legal duty under California state law for Franklin Resources to issue Sender’s ESOP stock certificates. 

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Sender was employed by Franklin Resources Inc. from 1972-1978 and participated in the company’s ESOP. He left his job with the company in 1978,but his benefits remained in Franklin’s ESOP because according to court documents, the ESOP did not permit immediate distributions to participants younger than 55 years old.

In 1981 Franklin terminated the ESOP, and upon termination, the company was to distribute the ESOP assets to the ESOP participants.

Sender claimed when he tried to obtain his ESOP benefits, Franklin contended he had already received the benefits. The company also said it no longer had records showing that Sender received his shares. Therefore, Sender filed a lawsuit in California state court to receive his ESOP benefits under the California Corporations Code. Sender was seeking Franklin to issue and deliver his stock certificates in the amounts accrued by him in the ESOP, or a financial equivalent. Franklin Resources then moved the case to the federal court on the basis that Sender’s state law claims are completely preempted by ERISA.

According to the court opinion, Sender is being allowed to amend his complaint, under an ERISA claim.

The case is Sender v. Franklin Resources, Inc., N.D. Calif., No. 3:11-cv-03828-EMC.

EBSA Aims to Improve Access to Unbiased Advice

The U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) issued a final regulation regarding a new prohibited transaction exemption.

The new regulation implements an exemption that Congress enacted as part of the Pension Protection Act of 2006 (PPA) to improve participant access to fiduciary investment advice, which contains certain safeguards and conditions to prevent investment advisers from providing biased advice that is not in a participant’s best interest.   

To qualify for the exemption in the final regulation, investment advice must be given through the use of a computer model that is certified as unbiased by an independent expert or through an adviser compensated on a “level-fee” basis, meaning that the fees do not vary based on investments selected.  Both types of arrangements must also satisfy several other conditions, including the disclosure of the adviser’s fees and an annual audit of the arrangement for compliance with the regulation.

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“Given the rise in participation in 401(k)-type plans and IRAs, the retirement security of millions of America’s workers increasingly depends on their investment decisions,” said Phyllis Borzi, EBSA Assistant Secretary. “This rule will make high-quality fiduciary investment advice more accessible, while providing important safeguards to minimize potential conflicts of interest.”

On a conference call with the press, Borzi explained that the auditor must be independent from the service provider, but that EBSA did not specify all the criteria for who the auditor should be. Their role will not be to decide the investment policy of a plan (getting into the “active versus passive” debate), but solely to determine if the investment model is unbiased; does it match up with generally accepted investment principles, she said.

The prohibited transaction rules in ERISA and the IRC generally prevent a fiduciary investment adviser from recommending plan investment options if the adviser receives additional fees from the investment providers. Although these rules protect participants from conflicts of interest, ERISA provides exemptions from the rules in appropriate circumstances and permits the department to grant exemptions that have participant-protective conditions.

An EBSA analysis found that investment mistakes are projected to be reduced by $7-$18 billion annually; with a cost between $2-$5 billion, making the net benefit between $5-$13 billion. 

This regulation is separate from and does not affect the Labor Department’s proposed rule on the definition of fiduciary investment advice, which the department recently announced that it will re-propose (see “EBSA to Re-Propose Definition of Fiduciary Rule”). 

The regulation will be published in the Oct. 25 Federal Register and can be viewed at http://s.dol.gov/J4.

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