LaRue Case, IRS Form 5500 Changes, Benefits of Participating in an ESOP

The December 3, 2007 Employee Ownership Update is online and discusses the following

• Supreme Court Hears Case on Standing of Individual Plan Participants
  
• DOL Drops Schedule E Filing Requirement for Form 5500
  
• Retirement Plan Participation Falls
  
• Churchill on Employee Ownership
  

Supreme Court Case

The Update discusses how the Supreme Court has started hearing arguments in No. 06-856, LaRue v. DeWolff, Boberg & Associates. The Oyez Project has identified the facts in the case:

"James LaRue participated in a 401(k) retirement savings plan administered by his employer, the management consulting firm DeWolff, Boberg & Associates. Employee benefit plans are regulated under a federal law, the Employee Retirement Income Security Act of 1974 (ERISA). LaRue sought to exercise his option to make certain changes in his investment plan, but DeWolff neglected to make the changes. LaRue claimed that DeWolff's omission had cost him $150,000, and he sued the firm for breach of fiduciary duty, seeking to recover the money. In response, DeWolff argued that ERISA does not provide for the type of individual monetary award sought by LaRue.

Section 502(a)(2) allows plan participants to sue plan administrators for breach of fiduciary duty in order to "make good to such plan any losses to the plan resulting from each such breach." DeWolff argued that LaRue's suit was not of the type contemplated by the text of ERISA because LaRue sued to recover losses caused to his own personal retirement plan rather than suing to vindicate the interests of the plan as a whole. LaRue also invoked Section 502(a)(3), which allows plan participants to sue to obtain "other appropriate equitable relief."

The U.S. District Court held that LaRue was not entitled to relief under ERISA, and the U.S. Court of Appeals for the Fourth Circuit affirmed. The Fourth Circuit ruled that Section 502(a)(2) was concerned with protecting entire plans from misuse of plan assets and not with providing recovery for losses suffered by individual accounts. The court also rejected LaRue's Section 502(a)(3) claim. It ruled that the phrase "equitable relief" rarely includes relief in the form of a monetary award and only when the money has been unjustly possessed by the defendant."

This is an important case because participants have historically been required to sue on behalf of the plan as a whole. The Fourth Circuit Court of Appeals found that LaRue could not sue for individual benefits (No. 05-1756, June 19, 2006). The Supreme Court case presents two questions:

"(1) whether, pursuant to Section 502(a)(2) of ERISA, a participant in a defined contribution pension plan may sue to recover losses to the plan caused by a breach of fiduciary duty, even when those losses affected only the participant's individual account; and

(2) whether an action by a plan participant against a fiduciary to recover losses caused by a breach of duty seeks "equitable relief" for purposes of ERISA Section 502(a)(3)."

The Update asserts how the case could influence future ESOP litigation:

"The decision could make it much easier for employees to sue about decisions affecting employer stock as well, especially in 401(k) plans, but potentially also in ESOPs, although the typical cause of action in an ESOP--the improper valuation of shares--would apply to all participants and thus already be covered."

2009 IRS Form 5500 Changes

Last month the Department of Labor announced changes for the 2009 IRS Form 5500 by releasing Final Rule – Annual Reporting and Disclosure and Notice – Revision of Annual Information Return/Reports:

"The U.S. Department of Labor's Employee Benefits Security Administration (EBSA), the Internal Revenue Service and the Pension Benefit Guaranty Corp. (PBGC) today announced the publication of revisions to the Form 5500 annual return/report for plan year 2009, including a deferral for one year of the move to the wholly electronic filing system.

Plans and service providers now will have additional time to comply with changes to the 2009 Form 5500 and the change to the wholly electronic filing system. Plans and service providers will not be required to comply with these changes until the due date for the plan's 2009 Form 5500.

The revised Form 5500 annual report will be the primary source of information about the operations, funding and investments of about 800,000 pension and welfare benefit plans. The department estimates that the form revisions and move to electronic filing together will save plans up to about $100 million per year.

"Today's action completes the first component of our fee transparency initiative for employee benefit plans," said Bradford P. Campbell, assistant secretary of labor for EBSA. "The expanded reporting of compensation received by service providers will make it easier for plan officials to understand and monitor investment fees charged to plan accounts and revenue sharing arrangements that compensate brokers, pension consultants and other investment service providers."

The Update highlights the elimination of the Schedule E filing requirement:

"Three questions on that schedule, however, will be added to Schedule R. The change is effective for plan years in 2009 and later. The three questions are:

1. Whether any unallocated employer securities or proceeds from the sale of unallocated securities were used to repay any exempt loan;
   
2. Whether the ESOP holds any preferred stock, and if so, whether the ESOP has an exempt loan with the employer as lender that is part of a "back-to-back" loan (the repayment terms of the employer loan to the ESOP are substantially similar to the repayment terms of a loan to the employer from a commercial lender); and
   
3. Whether the ESOP holds any stock that is not readily tradable on an established securities market."
   

Benefits of Participating in an ESOP

The Employee Benefit Research Institute recently released the following report: Employment-Based Retirement Plan Participation: Geographic Differences and Trends, 2006. The Update discusses the participation numbers and uses them to emphasize some of the benefits of ESOPs:

"The numbers emphasize a sometimes unappreciated point about ESOPs, particularly when people worry over their lack of diversification. Employees who do work for an ESOP company at least have one retirement plan available, and usually a second one as well. Moreover, in an ESOP, generally all employees meeting minimum service requirements participate, whereas in 401(k) plans, employees have to make contributions to participate. Finally, ESOPs do not base employer contributions on employee deferrals, which tends to skew benefits upwards, but on relative pay or more level formulas."