Court Moves Forward Claims of Defaulted Participant

A federal court judge has refused to dismiss claims by a 401(k) participant that plan fiduciaries breached their duties when they transferred his accounts into a new default fund.

DLA Piper US LLP and other defendants’ asserted that they had a right to transfer participant Richard Falcone’s accounts to a new default fund per a notice sent to employees about the fund because Falcone had no affirmative investment election on file.

However, U.S. District Judge Richard Seeborg of the U.S. District Court for the District of California said that argument cannot carry weight at this phase of the litigation because Falcone insists he affirmatively elected to invest his account in cash funds when he joined the plan and was not originally defaulted into them.

The law firm selected a new default fund following the Department of Labor’s qualified default investment alternative (QDIA) regulations and sent a notice to participants in the plan’s original default fund that they must make an affirmative investment election or be defaulted into a target-date fund. 

“Falcone has stated a plausible claim that the administrators were obligated to follow his affirmative investment instructions and, when they failed to do so, breached a fiduciary duty,” Seeborg wrote. 

The defendants insisted that the plan imposed no obligation to follow Falcone’s initial affirmative investment instructions as portions of the plan on which Falcone relies indicate that the Committee can, in certain contexts, limit a participant’s ability to direct the investment of his or her account. The plan says participants are entitled to direct the assets of their accounts, subject to “such limitations as may be required by law, imposed by the Firm or the Administrator….”  

The defendants suggested the DoL’s QDIA regulations operated as such a “limitation as may be required by law.” It was to comply with these regulations that the Committee determined to transfer those assets invested by default in cash funds into the new target-date default funds, they asserted. 

However, Seeborg said that while this rationale explains the purpose of the transfer, it is not at all clear that these regulations removed Falcone’s ability, under the plain language of the plan, to direct the investment of his account assets since he contends his assets were not invested in cash funds by default. Even if the QDIA regulations did require that the plan retool its default program, these regulations in no way implicated his assets, Falcone contended. 

Seeborg moved forward claims against the plan committee and the Bank of Oklahoma, as trustee, which implemented the allegedly improper transfer. He also refused to dismiss claims against individual defendants saying they acted as fiduciaries because they were either on the plan committee or were delegated plan committee responsibilities. 

The case is Falcone v. DLA Piper US LLP Profit Sharing Plan and 401(k) Savings Plan Committee, N.D. Cal., No. 09-5555.