Lawsuit Says Plan Participants Shorted on Distributions During Coronavirus

A special valuation was processed before three terminated participants were given distributions of their 401(k) plan accounts.

A lawsuit has been filed against a company and its 401(k) plan alleging plan fiduciaries, for the benefit of themselves, implemented a special valuation of the plan to avoid paying terminated participants what their account values would have been on December 31, 2019.

Under the provisions of the Behan Bros. 401(k) Profit Sharing Plan, distributions may be made at the participant’s election as soon as administratively feasible after the participant has incurred a one-year break in service. The plan does not allow participant direction of investments, and, according to the summary plan description (SPD), accounts are valued as of the last day of the plan year.

The lawsuit notes that the SPD also says the plan administrator may, in its sole discretion, declare a special valuation date for that portion of the plan that is not daily valued in extraordinary situations to protect the interests of participants in the plan or the participant receiving a distribution. It states that extraordinary circumstances include a significant change in economic conditions or market value of the trust fund in which participants’ assets are held.

Three participants in the plan who had terminated employment with Behan Bros. in 2018 filed the lawsuit. One of them was notified that his one-year break in service would be in May 2019 and at that time he could receive his distribution from the plan based on the annual valuation statement of December 31, 2018. The notice further stated, “This is how all distributions have been handled for all participants that have terminated employment.” It also advised, “If the market is up from December 31, 2018, you also have an option to keep the funds in the plan and take your distribution at a later date.”

The participant responded by email specifically inquiring about the possibility of a special valuation. He noted that the stock market in March 2019 had been as high as 15% above the December 31, 2018, value and that such market volatility would support a special valuation to reflect increased values in the 401(k) accounts. But he was told that a special valuation could not be issued under the terms of the plan.

The lawsuit notes that absent a special valuation, per the terms of the plan, the next valuation date for the plan would have been December 31, 2019. Based on the company’s response about the special valuation, the three plaintiffs elected not to take their account distributions at that time and to wait until the December 31, 2019, valuation was completed.

In early January 2020, the plaintiffs requested that their account balances be rolled over to their 401(k) plans at their current employers. They were told that as soon as the year-end valuation and participant statements were prepared by the plan’s third-party administrator (TPA), they would be sent their statements and paperwork to implement the rollovers. The email said, “This hopefully will be done by mid-March.”

Prior to mid-March, the effects of the COVID-19 pandemic caused a sudden drop in the stock market. In a letter dated March 16, rather than providing the paperwork for distribution, Michael Behan, trustee of the plan, advised in a letter to participants that Behan Bros., at the recommendation of its TPA, would be would be performing a special valuation as of April 30. In a memo dated March 25, Behan provided the plaintiffs with their completed December 31, 2019, valuations, but the memo noted, “It has come to our attention that we will be receiving distribution requests and due to the unprecedented and extraordinary change in the market valuation due to the coronavirus pandemic, we have issued a special valuation date.”

The plaintiffs were denied an opportunity to have their 401(k) accounts distributed at their December 31, 2019, value, and their appeal was denied.

The lawsuit notes that as of April 30, the Dow Jones Industrial Average had dropped 14% while the S&P 500 had dropped 9%. The plaintiffs each received letters on May 13 providing the amount that would be distributed to them. According to the lawsuit, the special valuation decreased the amount of distribution to one plaintiff by $24,458.29, and to another by $22,168.85. The lawsuit states that the special valuation decreased the amount of distribution to the third plaintiff by $7,670.92; however, amounts given for the December 31, 2019, value of that plaintiff’s account and the amount of the distribution creates some confusion on that point.

The plaintiffs content that it was administratively feasible for the plan and Behan Bros. to issue the December 31, 2019, valuations within 30 days of year-end, as they were able to issue the special valuation within 13 days of April 30. However, the year-end valuations “for some inexplicable reason took almost three months to be issued.”

The lawsuit accuses the plan and Behan Bros. of “unreasonably, arbitrarily and capriciously” applying the special valuation to the plaintiffs’ distributions in violation of the terms of the plan. It further states that the “plan and Behan Bros. have unreasonably, arbitrarily and capriciously prevented plaintiffs from obtaining the full value of their December 31, 2019, 401(k) account distributions in violation of the terms of the plan.” The lawsuit also claims these actions were a violation of the company’s fiduciary duties under the Employee Retirement Income Security Act (ERISA).

The complaint says Behan Bros. has an actual conflict of interest in that it adjudicates claims under the plan and also pays benefits pursuant to the plan. It notes that at least seven members of the Behan family are participants in the plan.

According to the compliant, the plaintiffs’ 401(k) accounts represent a substantial portion of the assets of the trust fund for the plan, so it is in the company’s financial interest to minimize the amount of trust assets distributed to the plaintiffs.

“In March 2019, when the market was up 15% over December 31, 2018, the trustees did not issue a special valuation, presumably because it did not serve the trustees’ financial interests to distribute a higher value of trust assets to plaintiffs,” the complaint states. It contends it is in the trustees’ individual financial interests to reduce the plaintiffs’ distributions to preserve funds in the trust funds for themselves and to minimize the loss in value to their individual accounts.