A 401(k) plan and its administrators are defending the administrator’s decision to require a special valuation of former employees’ account values, given extraordinary market changes due to the COVID-19 pandemic.  Under the terms of the plan at issue, when a former employee seeks a distribution of his or her plan account, the account is typically valued as of December 31 of the prior year.  The plan invests in a pooled investment account so the money paid in distributions lessens the funds available to pay the remaining participants.  Plaintiffs are former employees who were eligible for a full distribution of their accounts in 2019 but, because the market was rising in 2019, delayed their distribution requests until January 2020, after the December 31, 2019 valuation.  While the 2019 valuation occurred, the plan administrator set a special valuation date of April  30, 2020, given the extraordinary market volatility in the first quarter of 2020.

Plaintiffs filed an ERISA claim for benefits and breach of fiduciary duties arguing that the administrator’s decision improperly locked them into the market’s 2020 losses.  The plan and administrator are defending their decision arguing that the suit should be dismissed because the plan provides discretion to set a special valuation date under extraordinary circumstances such as a major change in economic conditions and because allowing plaintiffs to rely on a pre-pandemic valuation would cause a windfall for plaintiffs at the expense of current participants.  The case is Lipshires, et al. v. Behan Bros., et al., No. 20-cv-252 (D.R.I.).

Implications

This is necessarily a new type of case with case-specific facts.  That said, many plan administrators – and not just 401(k) administrators – may face similar issues as the pandemic persists and the market reacts.  It is too soon to know whether defendants will succeed in having the case dismissed on the pleadings but this case shines a light on some best practices for a fiduciary considering an interim valuation to reflect subsequent material adverse events like the COVID-19 pandemic, including: (1) working with the plan sponsor and plan counsel to make sure the plan documents permit this or are revised to permit this, before proceeding, and (2) considering whether not setting a special valuation increases the risk of loss for the plan trust so failing to conduct interim valuations could be a fiduciary breach in itself.

We are available to advise plan administrators about the implications of this case on their plans.