Court Rules On Criteria For "Participant-Directed" Plans

From 2000-2002, the plan, including Jenkins’s account, sustained significant investment losses. Jenkins sued, asserting that because the plan did not satisfy ERISA Section 404(c), it did not qualify for “participant-directed” status that would reduce the responsibilities of plan fiduciaries. She argued that Yager should have prudently reviewed and overridden participant investment decisions, and that he was liable for the investment losses suffered by her plan account. The federal district court that heard the case ruled for Yager, and Jenkins appealed.

The court of appeals held that although the Mid America plan did not satisfy ERISA Section 404(c), the plan could nevertheless qualify as “participant-directed,” thereby relieving Yager and other plan fiduciaries from the duty of managing the investments for participant accounts. In its analysis, the appeals court viewed ERISA Section 404(c) as a “safe harbor,” reflecting a general intent by Congress to permit the delegation of investment authority to participants. A plan that satisfies the Section 404(c) requirements will qualify as a participant-directed plan.

However, according to the court, if a plan that allows participants to make investment elections does not satisfy the conditions of Section 404(c), the actions of plan fiduciaries in delegating decision-making authority to plan participants should be reviewed to determine whether it is appropriate to treat the plan as participant-directed and limit fiduciary responsibility.

The court focused on whether Yager acted prudently in selecting and monitoring the investment funds made available under the plan and in providing information about those investments to plan participants. Notably, the appeals court held that fiduciaries of participant-directed plans are not required to review each participant’s investment decisions to ensure that they are appropriate for that participant.

To date, Jenkins v. Yager is the only appeals court decision to adopt this broader understanding of the range of plans that may qualify as “participant-directed.” Further, this decision appears to be inconsistent with the views of the Labor Department.

Consequently, sponsors and fiduciaries of plans that provide for investment elections by participants will likely continue to undertake to comply with the provisions of ERISA Section 404(c), to obtain some greater certainty that their plans will be considered participant-directed, and their fiduciary responsibilities will be limited.