Court Finds Amendment not Adopted per Plan Rules Invalid

A court has found that a defined contribution plan amendment liquidating two investment options was invalid because the sponsor did not follow amendment procedures dictated by the plan.

The Employee Benefits Institute of America (EBIA) reports that the court said the company offered no evidence that the plan’s amendment procedure had been followed. Instead, the company argued that an earlier plan amendment authorized the fund’s liquidation by members of the employee benefits committee (EBC). The court rejected this argument, though, finding that the earlier amendment only authorized freezing the funds—it did not require their liquidation.   

According to EBIA, the court also rejected the company’s alternative argument that the amendment was implicitly ratified by the notices and revised summary plan description (SPD) sent to participants about the funds’ elimination and by subsequent EBC consents and amendments. Ratification was not allowed by the plan’s specific amendment procedures, and even if it was permitted, no ratification had occurred.   

The harmful effect of the amendment was, in the court’s view, an additional sufficient basis to refrain from recognizing any “implied ratification.” Based on its analysis, the court held that the amendment was invalid, leaving in place the earlier version of the plan, which required that the stock funds remain in the plan “in a frozen state.”  

EBIA said the funds – which held shares of stock in a business that was previously part of the same conglomerate – were liquidated at a substantial loss to participants shortly before their value increased dramatically. Because the plan document listed the stock funds as available investment options, a plan amendment was required to authorize their liquidation. The plan’s amendment procedure specified that action by the employee benefits committee (EBC) was required to adopt any plan amendment, and that the EBC could act either by a majority vote or by a written instrument signed by a majority of its members. No EBC meeting was held, however, and only the EBC secretary signed the amendment to eliminate the funds.   

A participant brought a class action lawsuit for fiduciary breach to recover losses suffered by the plan due to liquidation of the funds. The case is Tatum v. R.J. Reynolds Tobacco Co., 2011 WL 2160893 (MDNC 2011).