Bidwell v. University Medical Center
The Sixth Circuit Court of Appeals has issued ruling that has enhanced protections for fiduciaries under the Qualified Default Investment Alternative (QDIA) regulations. The plan in this case had historically used a stable value fund as the "default" investment for non-electing participants. Although stable value funds are designed to protect principal, investment returns are modest. Following the issuance of the QDIA rules, the plan administrator decided to abandon the stable value fund as its default investment and instead rely on a fund that qualified as a QDIA in order to provide a more prudent long-term investment strategy. The plan administrator then transferred all "default" investments from the stable value fund into the QDIA.
The question in this case was which participants in the stable value fund were "default" investors and which had affirmatively elected that fund. The QDIA regulations protect an administrator from fiduciary liability but only with respect to participants who do not make an affirmative investment election. The third-party administrator for the plan could not distinguish between affirmative and default elections in the fund. Essentially all participants in the stable value fund were transferred to the new QDIA. Unfortunately, the QDIA fund experienced an investment loss after the change while the stable value fund retained its value for the same period.
The plaintiffs claimed the plan administrator was not entitled to the protection of the QDIA safe harbor because they had affirmatively elected the stable value fund. The employer had attempted to cure the situation by notifying all participants of the change in the default investment fund and provided a 30-day window for participants to elect to stay in stable value. The participants who brought the suit claimed they did not receive the 30 day notice and the employer had no evidence of receipt. Nonetheless, the court ruled that the QDIA regulations provided fiduciary protection to the plan administrator. Even if the plaintiffs had initially elected the stable value fund, the court ruled that the failure to respond to the 30-day notice changed their status to non-electing.
The result seems friendly to employers and plan sponsors. It seemed to help the administrator that the plaintiffs first brought a claim for benefits under the plan's administrative claims procedures. The court gave significant deference to the administrator's finding that the participants had received the notice.
It is often very difficult to determine which participants have affirmatively elected certain investments and which have not. Many participants will initially direct investments but seldom if ever change that initial investment strategy. This decision offers some good news when fiduciaries determine it is prudent to make investment changes on behalf of participants after a long period of inactivity. However, it would also seem prudent to employ a more robust notification procedure that tracks delivery to participants and responses.
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