Supreme Court: Pension Plans Can Sue Non-Fiduciaries

June 12, 2000 (PLANSPONSOR.com) - In a unanimous decision Monday, the Supreme Court ruled that employee benefit plans can sue parties in interest, even if they are not fiduciaries.

The decision means Ameritech and its pension plan trustee, Harris Trust and Savings Bank , can continue to try to recoup $21 million lost in a late 1980s real estate deal with Salomon Brothers Smith Barney (SSB).

The pension plan made the investments at the direction of investment manager (and fiduciary of the Ameritech plan) National Investment Services of America (NISA), which allegedly caused the plan to engage in a prohibited transaction with SSB. That transaction involved SSB’s sale of interests in two motel chains to the pension plan, interests that were wiped out after the motel chains failed.

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Motel “Deep-Sixed”
 
Ameritech and Harris had sued SSB, alleging that the sale had been a prohibited transaction under ERISA.  They sued seeking a return of the purchase price with interest, and a disgorgement of profits made by SSB as part of the transaction. 

SSB contended that it could not be sued under ERISA, claiming that since the law did not expressly impose a duty on a nonfiduciary party-in-interest, it could not be sued by the Ameritech plan.  The 7th US Circuit Court agreed, and dismissed the case.

Not Who, But What

However, the Supreme Court held that the focus of the law was not on the parties that could be sued, but on the actions that violate ERISA.  Further, that the “plain implication” is that an action could be brought against an “other person who knowingly participates in a fiduciary’s violation…”.  In sum, while ERISA only imposes the affirmative duty on a fiduciary, an involved party can still be sued.

The case is Harris Trust and Savings Bank vs. Salomon Smith Barney, 99-579 . (You need Adobe Acrobat to read this file).

Doctor Treatments Not Fiduciary Acts

In another unanimous decision today, the Supreme Court has ruled that patients cannot sue health maintenance organizations (HMOs) under ERISA when they give doctors financial bonuses to cut costs that result in improper medical treatment.
 
In a major victory for the Justice Department and the health care industry, the Court held that treatment decisions were not fiduciary acts within the meaning of ERISA, noting that state rather than the federal law governed this relationship. The Court said that an inducement to ration care was the very point of any HMO scheme, and rationing necessarily raises some risks while reducing others.

The case is Pegram vs. Herdrich, 98-1949. (You need Adobe Acrobat to read the case).

– Nevin Adams           editors@plansponsor.com

State, Local Funds Grab Larger Share of Equity Market

December 5, 2000 (PLANSPONSOR.com) - US institutional investor assets have nearly tripled over the past decade to $18.6 trillion, and control nearly half (49.6%) of the US equity market according to a new report.

At the end of 1998 US institutions had $16.3 trillion in assets, compared with just $6.3 trillion in 1990 the Conference Board noted in its Institutional Investment Report.

“Block” Buster

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Pension funds still represent the largest block of US institutional assets (47.5%), while open ended mutual funds account for 21.9% of the total, up from 14.5% a decade ago.

Insurance companies constitute 15.2% of the total, down from 21% in 1990.  Bank and trust companies represent 12.2%, roughly the same as the 12% a decade earlier.  Foundations now make up 2.4% of the total versus 2.3% in 1990.

Private trustee funds are 26.9% of the total, compared with 6.1% for private insured and 14.5% for state and local plans.

State Rises, Private Slips

Those state and local pension funds devote more than two-thirds (69.3%) of their total assets to equities, up from 36.1% in 1990.  These programs are “overwhelmingly the most activist institutional investors with regard to corporate governance matters,” according to the press release. 

Corporate pension funds actually lost ground as a percentage of total equity ownership, dropping from 16.8% of total equities in 1990 to 13.2% by the end of last year.

According to the Conference Board, possible reasons for the declining institutional share of the equity market could be the result of:

  • Trend by institutional investors to invest in hedge funds and other “private market” equities
  • A strong increase in individual shareholdings prompted by strong markets and easier trading access
  • New initial public offerings (IPOs), which are less attractive to institutional investors
  • Massive restructurings and stock repurchase programs by large companies generally held by institutions

Institutional investor assets experienced phenomenal growth over the past three years, rising

18.7% from 1996 – 1997
15.1% from 1997 – 1998
14.0% from 1998 – 1999

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