By: Ian Morrison
Plan fiduciaries often face difficult decisions when unexpected economic conditions cause significant swings in plan asset values. A recent decision from Judge Charles Breyer of the Northern District of California gives fiduciaries some comfort that if they are called to task about their handling of these situations, reason will prevail. Specifically, Judge Breyer ruled that it was permissible for a pension plan administrator to consider the impact on the plan as a whole when deciding what valuation date to use for purposes of a distribution.
In Wakamatsu v. Oliver, No. C 11-00482 CRB (N.D. Cal. April 9, 2012), a former employee of a dental practice sued the plan administrator of the practice’s profit sharing plan (Dr. Perry) asserting that her benefit should have been determined based upon a December 31, 2007 valuation (which would have yielded a benefit of $195,317) rather than upon a later valuation that reflected the impact of the economic downturn on overall plan assets (resulting in approximately $60,000 less). Under the plan, a participant’s account consisted of “the fair market value” of the participant’s share of the trust assets. The plan normally required distributions to be made using the valuation that immediately precedes the distribution from the plan. The plaintiff requested a distribution in December 2008, at which time the most recent valuation was from December 31, 2007. Dr. Perry, as plan administrator, determined that it would have been a breach of fiduciary duty to the plan’s remaining participants to use the 2007 valuation, given the substantial decline in asset values and instead applied a year-end 2008 valuation.
The court upheld the plan administrator’s decision. Initially, the parties agreed that Dr. Perry had discretion to interpret the plan. Plaintiff nevertheless asserted that Dr. Perry had a conflict of interest because his family members were participants in the plan and granting plaintiff’s claim would have harmed their interests. The court largely rejected this claim, finding that the family members’ interest would have had only a de minimis impact on Dr. Perry’s analysis. The court likewise rejected plaintiff’s claim that Dr. Perry had a conflict because he had acted to avoid fiduciary liability claims from other plan participants, calling that claim “illogical” and noting that because ERISA requires fiduciaries to act in the interest of all fiduciaries, this type of “conflict” would be present in every ERISA plan.
Turning to the merits, the court found that it was reasonable for Dr. Perry to conclude that the 2007 valuation did not accurately reflect the value of the account when the plaintiff sought to take her distribution. The plan had a presumptive March 31 valuation date, but permitted the administrator to use another date “when necessary to avoid prejudice to any participant.” The Court found it reasonable for Dr. Perry to consider how using the 2007 valuation would affect other participants. Fundamentally, the court said that using a later valuation “merely ensured that Plaintiff bore her share of the losses that the Plan suffered . . . .” Noting that many other courts had found that it was permissible for ERISA plan administrators to take similar steps in “anomalous market conditions,” Judge Breyer found it was reasonable to use the year-end 2008 valuation, rather than request a special valuation, because plaintiff’s request for a distribution came only two weeks before the year end and was consistent with past practice.
While the facts of the Wakamatsu case are somewhat unusual in today’s retirement plan world because they do not involve self-directed investments, the decision is noteworthy nonetheless. First, the decision is helpful for ERISA plan administrators because it confirms that they may consider how the treatment of one participant will affect the plan as a whole and because it rejects the notion that doing so is evidence of some kind of conflict of interest. In addition, the decision confirms that ERISA fiduciaries may take reasonable steps to protect plans when unusual economic circumstances arise– which should be encouraging to fiduciaries who must handle plan administration matters in volatile financial markets.