Attorneys Argue Plan Disclosures May Not Provide Actual Knowledge of Wrongdoing

U.S. attorneys have filed a brief with the U.S. Supreme Court arguing that just because a retirement plan participant was delivered or had access to investment disclosures does not mean he had actual knowledge of a breach of fiduciary duty.

The Supreme Court has agreed to review the case of Sulyma v. Intel Corporation Investment Policy Committee, et. al. in which a participant in the Intel 401(k) plan claimed that plan fiduciaries’ decision to increase the allocation of alternative investments in the target-date funds offered in the plan violated the Employee Retirement Income Security Act’s (ERISA)’s duty of prudence, and resulted in higher fees and lower investment returns. The participant also alleged that fiduciaries failed to adequately disclose the risks, fees and expenses associated with the alternative investments.

A U.S. District Court agreed with Intel’s argument that the lawsuit was filed after ERISA’s statute of limitations, but the 9th U.S. Circuit Court of Appeals reversed the decision and remanded it back to the lower court. The appellate court held that the plaintiff “must have actual knowledge, rather than constructive knowledge,” and asked the district court to determine whether the plaintiff had the knowledge required to dismiss the case as untimely.

As the 9th Circuit’s decision was in conflict with decisions in other circuits, the Supreme Court was asked to answer whether the provision of plan documents, in itself, creates for participants “actual knowledge” of an alleged fiduciary breach under ERISA.

In their brief, the U.S. attorneys note that ERISA Section 1113 specifies the limitations period for civil actions to redress fiduciary breaches or other violations of Part 4 of Title I of ERISA. In general, the statute provides for a six-year period for bringing suit, running from “(A) the date of the last action which constituted a part of the breach or violation, or (B) in the case of an omission the latest date on which the fiduciary could have cured the breach or violation.” However, they note that the statute also provides two alternative limitations periods. First, no civil action may be brought more than “three years after the earliest date on which the plaintiff had actual knowledge of the breach or violation.” Second, “in the case of fraud or concealment,” the action “may be commenced not later than six years after the date of discovery of such breach or violation.”

The attorneys’ brief points out that the participant admitted he accessed Intel’s NetBenefits website numerous times. He testified, however, that he did not review the fund fact sheets referred to in the summary plan description and posted on the NetBenefits website. The participant also testified that he did not recall receiving or reviewing the summary plan descriptions and that he “was unaware that the monies that [he] had invested through the Intel retirement plans had been invested in hedge funds or private equity” until consulting with counsel before filing suit. He recalled reviewing certain periodic account statements, but those statements said “nothing about investments in private equity or hedge funds.” The participant also testified that, “while he worked at Intel, he had little experience with financial issues, and didn’t know what ‘hedge funds,’ ‘alternative investments,’ and ‘private equity’ were.”

The attorneys agree with the 9th Circuit’s view that “the statutory phrase ‘actual knowledge’ means what it says: knowledge that is actual, not merely a possible inference from ambiguous circumstances.” The appellate court reasoned that reading “actual knowledge” to exclude constructive or imputed knowledge was particularly warranted in light of the statutory history. It explained that, “when Congress first enacted ERISA in 1974, Section 1113 contained two kinds of knowledge requirement[s], actual knowledge and constructive knowledge,” and Congress “repealed the constructive knowledge provision in 1987.” The court viewed those amendments as “strongly suggest[ing] that Congress intended for only an actual knowledge standard to apply.” Thus, the court concluded “that the phrase ‘actual knowledge’ means the plaintiff is actually aware of the facts constituting the breach, not merely that those facts were available to the plaintiff.”

The Intel defendants contend that a plaintiff should be deemed to have “actual knowledge” of the contents of the disclosures that ERISA requires be provided to the plaintiff, even if the plaintiff does not read those disclosures. They liken that approach to the doctrine of willful blindness. But, the attorneys argue that willful blindness is not a form of actual knowledge, and it applies only when a person takes deliberate steps to avoid acquiring knowledge. They say that such a conclusive legal presumption that plan participants actually know all the information in the mandatory disclosures made available to them, no matter what is at best a form of constructive knowledge, which is not enough.

In addition, the attorneys say the defendants’ view threatens to frustrate the enforcement of the statute by other fiduciaries and the Secretary of Labor, all of whom can bring actions that are subject to Section 1113.  “If other fiduciaries or the Secretary were deemed to have actual knowledge of all the mandatory ERISA disclosures they receive or possess, they could regularly have only three years, rather than six years, to investigate potential misconduct and decide whether to bring a civil action,” the brief says.