Elder Law FAX -- August 29, 2005

Retirees May Recover Damages for Retirement Plan Administrator's Alleged Breach of Fiduciary Duty
This is still another case in which retirees of a major corporation sued alleging a breach of fiduciary duty in the administration of their retirement plan.

Jingdong Zhu and Adrian Fields are former employees of Schering-Plough Corporation. During their employment with Schering, the plaintiffs elected to participate in the Schering-Plough Employees' Savings Plan. Under the Savings Plan, a Schering employee agreed to reduce his or her take-home compensation in order to invest that amount in one or more investment funds on a pre-tax basis. The Savings Plan authorized a participant to select from different investment funds.

One of the investment funds was the Schering Plan Company Stock Fund, which consisted of company stock. Under the Savings Plan, a participant was not permitted to invest more than 50% of his or her future contributions in Schering stock. Some of the plaintiffs' deferred compensation included an investment in the Company Stock Fund.

In 2001 the value of Schering stock dropped precipitously. The loss in the value of Schering stock constituted 87% of the drop in value of the Saving Plan's assets, and in 2002 the loss in Schering's stock's value constituted 50% of the Saving Plan's net loss. The loss to the Savings Plan was approximately $138 million. By June of 2003 the price of Schering stock had fallen below $20 per share from a class-period high of better than $60 a share.

The plan participants in this case sued the plan fiduciaries (including, among others, the benefits committee, the investment committee, and several committee members) on behalf of the plan.

Their suit alleged that the fiduciaries breached their fiduciaries duties of prudence, care, and loyalty by continuing to offer company stock as an investment alternative when they knew that Schering stock's price was "unlawfully and artificially inflated."

The federal trial court granted the defendant's motion and dismissed the complaint . The reason: under the Employees Retirement Income Security Act (ERISA), the plaintiffs could not sue for their individual losses, as their complaint alleges; instead, ERISA allows a suit to be filed only on behalf of the Savings Plan itself.

Even if every allegation in the plaintiffs' complaint were true, the trial court said in its ruling, "plaintiffs can point to no set of facts that would demonstrate losses to the plan" as a whole resulting from any alleged breach by the defendants. In other words, the plaintiffs may have suffered losses to their individual retirement plan accounts due to alleged breaches by the defendants, but they must seek relief on behalf of the Savings Plan as a whole, as required by ERISA.

The federal circuit court of appeals reversed and sent the case back to the trial court for further proceedings. The court found that the plan participants' claim for a monetary payment to the plan was based on allegations that there were losses to the plan as a whole and noted that "while the Plan is, indeed, an 'individual account plan,' this does not preclude the Plan from having losses." Furthermore, the court found that the plan's assets were aggregated and held in trust at all times.

Why is this significant? Other federal circuit courts of appeal have followed the reasoning of the trial court in this case and dismissed plan participants' lawsuits that seek redress for fiduciary breaches that damages them individually.

Requiring a plan participant to seek relief on behalf of the Plan as a whole is a much higher hurdle for any plan participant to overcome. That hurdle could discourage plan participants from filing bona fide lawsuits for damages.

In re Schering-Plough Corp. ERISA Litigation, August 19, 2005.

Elder Law FAX Issues Index

Elder Law FAX is published weekly by Timothy L. Takacs, Attorney at Law. 201 Walton Ferry Road, Hendersonville, Tennessee 37077-0364. (615) 824-2571, (615) 824-8772FAX. Copyright 1995-2005 by Timothy L. Takacs. Would you like Elder Law FAX e-mailed to you free every week? To subscribe, please use the Elder Law FAX Subscription Form.