Alert October 18, 2012

Sixth Circuit Affirms Dismissal of Challenge to Investment in Qualified Default Investment Alternative (QDIA)

The U.S. Court of Appeals for the Sixth Circuit affirmed a district court decision dismissing claims brought by a participant in a defined contribution plan against his employer for losses incurred when his plan account was transferred from a stable value fund to a life cycle fund that qualified as a QDIA. The case is Bidwell v. University Medical Center, Inc., 685 F.3d 613 (6th Cir. June 29, 2012).

In Bidwell, the plan allowed participants to allocate their plan accounts among various investment funds made available under the plan, including a stable value fund. The plaintiff elected to allocate 100% of his plan account to the stable value fund. At the time of the plaintiff’s election, the stable value fund also served as the plan’s “default” fund – i.e., if a participant failed to make an investment election the entirety of his account would be invested in the stable value fund.

In 2008, the employer maintaining the plan decided to change the plan’s default fund from the stable value fund to a life cycle fund. This decision was made in light of regulations adopted by the DOL in 2008 under ERISA Section 404(c)(5), 29 U.S.C. § 1104(c)(5). Those regulations provide a safe harbor from potential ERISA fiduciary liability (the “Safe Harbor”) in specified circumstances: if certain conditions are met, a fiduciary of a plan that provides for participant direction of investments is not liable for any loss that is the direct and necessary result of investing all or part of a participant’s account in a QDIA. A “QDIA” is defined to include (among other things) a life cycle fund that satisfies certain requirements. In general, the Safe Harbor protection applies if (i) the participant’s account is invested in a QDIA; (ii) the participant has an opportunity to provide investment direction, but does not; (iii) the participant receives specified notices and materials relating to the QDIA; and (iv) the participant has the ability to direct investment out of the QDIA as frequently as from other plan investments.

In establishing the life cycle fund as the QDIA under its plan, the employer in Bidwell decided that all amounts invested in the prior default fund – the stable value fund – would be transferred to the new QDIA unless the participant specifically directed that his plan account should remain in the stable value fund. The employer mailed the notices required by the QDIA regulations, specifically noting the deadline for participants to direct that their plan accounts should continue in the stable value fund. However, the plaintiff maintained that he never received this notice. Because the plaintiff did not direct otherwise, his account was transferred from the stable value fund to the QDIA. When he discovered this, the plaintiff immediately transferred his account back to the stable value fund, but his account had lost $85,000 during the time it was invested in the QDIA.

The plaintiff filed a claim under the plan’s administrative claims procedure, but that claim was denied. He then sued the employer in federal district court alleging that the transfer was a violation of the employer’s ERISA fiduciary duties. The district court dismissed the claim as a matter of law (based on the administrative record), holding that the employer was entitled to protection from liability under the QDIA Safe Harbor.

On appeal, the Sixth Circuit affirmed. First, the Court of Appeals rejected the plaintiff’s argument that the QDIA Safe Harbor applies only in situations where a participant has never made an investment election with regard to the funds invested in the QDIA, and should not protect a fiduciary in a case where the participant had originally provided an investment direction (as the plaintiff had in directing investment in the stable value fund). Based on the language of the regulation and DOL’s explanation in the regulation’s preamble, the court concluded that the Safe Harbor is available whenever a participant has the opportunity to direct investment and fails to do so.

Second, the Sixth Circuit disagreed with the plaintiff’s assertion that the employer’s transfer of accounts from the stable value fund to the QDIA was not governed by the Safe Harbor and constituted an independent breach of the plan document. The court determined that the transfer fell within the plain words of the regulation’s Safe Harbor language. Further, the court found that authority of the employer under the plan document to establish rules for plan administration and to direct investment of a participant’s account where no election is made reasonably included the power to require participants to confirm their investment direction or have their account transferred to a new investment fund such as the QDIA.