Compliance June 19, 2009

Common Law Spouse Wins Right to Plan Distributions

Once two 401(k) plan administrators learned a dead participant’s common-law spouse was legally validating her marital status, the plans should have postponed distribution of the participant’s balance until the issue was settled, a federal appellate court has ruled.
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The decision from the 10th U.S. Circuit Court of Appeals came in a case filed by Lilirae Smith who claimed she was the rightful beneficiary of deceased participant Leonard C. Begay Sr.’s balance in the New Mexico Coal 401(k) Personal Savings Plan and USA Retirement Savings Plan. Smith asserted that the plans had mistakenly distributed Begay’s balances to his children.

U.S. District Judge Robert C. Brack ruled for the plans, but the 10th Circuit overturned the decision and sent the case back for additional proceedings.

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Smith claimed she had a common-law marriage with Begay from October 1988 to the date he died in a November 2004 auto accident, according to the appellate court opinion. Even though Begay’s home state, New Mexico, does not recognize common law marriages, the Navajo nation does, so Smith turned to a Navajo court for validation of her relationship to Begay.

The appellate court declared that Smith’s request to a Navajo nation court to affirm her marital status was key to the case because once the plans became aware of the Navajo proceedings, they had no authority under the plan rules to complete a distribution.

The 10th Circuit judges pointed out that plans had authority to rely on information on beneficiary designation forms unless they became aware of “conflicting information.” Despite the fact that one plan had a beneficiary form only mentioning the children and the second had no designation, the plans were obligated to hold off paying out Begay’s balance until they could consider the conflicting information, the court asserted.


Compliance June 19, 2009

Judge Says Motorola Didn’t Breach Fiduciary Duties

The U.S. District Court for the Northern District of Illinois ruled that Motorola Inc. and fiduciaries of its 401(k) plan did not breach their fiduciary duties under the Employee Retirement Income Security Act (ERISA) by continuing to offer company stock as an investment option in the plan.
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Granting summary judgment for the Motorola defendants, Judge Rebecca R. Pallmeyer said they were protected from liability under ERISA Section 404(c). The plaintiffs alleged that the defendants did not disclose in advance that liability would be shifted to them under the 404(c) plan, but Pallmeyer pointed out that a plan prospectus sent to participants clearly stated that the plan was intended to be a 404(c) plan with defendants not liable for participant investment decisions.

The judge also rejected the plaintiffs’ contention that the plan did not adequately describe the investment objectives and the “risk and return” characteristics of the investment options offered. Pallmeyer found that participants were provided with “ample information regarding investment alternatives.” For one, she noted the general benefits pamphlet distributed to Motorola employees includes a chart that lists the nine funds, provides short phrases describing the objectives and investment strategies of each one, and ranks them from lowest to greatest risk.

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The action that led to the lawsuit concerned a loan Motorola made to a Turkish telecommunications company, Telsim. Motorola loaned Telsim nearly $2 billion and in exchange, Telsim pledged 66% of its outstanding shares as collateral for the loan, but it defaulted on its loan payments and refused to honor its pledge. Plaintiffs alleged that the Motorola defendants concealed material information about the Telsim transaction, thereby preventing them from being able to exercise independent control over their funds in the plan.

Pallmeyer said that while there is no dispute that the relevant facts surrounding the Telsim transaction were nonpublic, no genuine issue of material fact exists that any of the defendants concealed material nonpublic facts about the Motorola Stock Fund. The court said that Plaintiffs appear to have exaggerated the strictures of section 404(c) by arguing that defendants would have to show that all material information necessary to make informed investment judgments was disclosed to them. Pallmeyer pointed out that the regulation does not require a fiduciary to guarantee that all material facts are conveyed to participants, but rather it prohibits fiduciaries from concealing such facts.

She went on to say that the plaintiffs’ theory that plan fiduciaries negligently misrepresented the status of the Telsim loan in Motorola’s filings with the Securities and Exchange Commission (SEC) encounters two problems: The 7th Circuit does not recognize merely negligent misrepresentation as a violation of ERISA, and the allegedly negligent statements made in the SEC filings were not made in defendants’ capacity as ERISA fiduciaries.

Finally, the court found that continuing to offer the Motorola stock was not imprudent because there was no evidence that Motorola was on the verge of collapse, or that it had an elderly workforce with a substantial interest in less risky investments.

The case is Lingis v. Motorola Inc., N.D. Ill., No. 03 C 5044.

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