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Justices to Mull if People Have to Actually Read 401(k) Memos

Dec. 3, 2019, 10:07 AM

If 401(k) participants were provided with plan information but didn’t read it, do they still have more than three years to file a lawsuit challenging how their investments were handled?

Intel Corp’s retirement committee thinks disclosing plan information online or by mail is enough to trigger the three-year deadline for claims that a plan fiduciary breached their duties under the Employee Retirement Income Security Act. But the law, which governs employee benefit plans, only shortens the default six-year window for litigation to three years when the person suing has “actual knowledge” of the breach.

The Supreme Court is now being asked when the clock starts ticking for that three-year window. It’s a dispute that could test the ideals of conservative justices on the court and help more ERISA claims advance to trial.

Attorneys say the case the court it set to hear Dec. 4 hinges on the plain meaning of “actual knowledge” in ERISA.

It’s up to the court to decide if giving participants plan information that would allow them to identify a fiduciary breach is enough to limit claims to three years or if a plan participant actually has to read that information.

The question could pose a conundrum for court conservatives. Following the statute’s language could mean a win for the plan participants and not the large corporations conservatives are known to favor.

“You’ve got some conservative justices, ironically, on the court who will interpret statutes very narrowly and say, ‘This says actual knowledge, it doesn’t say constructive knowledge, and therefore, we’re going to go with the plain meaning of the terms and you actually have to know,’” said William Delany, a partner in Holland & Knight’s Philadelphia office. “It really could go either way.”

“I would say to watch Justice [Neil] Gorsuch on this one because he has surprised folks,” said Jaime Santos, a partner at Goodwin Procter LLP.

“I think there’s often this sense that the conservative justices will lean more in favor of large corporations or will lean more in favor of defendants generally, and I think he sometimes does so and sometimes not,” Santos said.

‘Actually Aware’

The case stems from a proposed class action former Intel engineer Christopher Sulyma and another plan participant filed in 2015 against the company’s retirement plans committee. They allege the committee over-allocated retirement savings to hedge funds and private equity investments between 2010 and 2012 and failed to properly notify participants.

The retirement committee argued the three-year window for Sulyma to sue had passed. Because plan documents detailing the investments were posted online and participants were sent targeted email notifications with a link to the website, all the relevant information had been disclosed to Sulyma prior to 2015, the committee said.

The district court agreed that Sulyma had “actual knowledge” of the investments by way of the disclosures, but the U.S. Court of Appeals for the Ninth Circuit reversed that decision on appeal. The appeals court held that the statutory text requires the plaintiff to be “actually aware of the facts constituting the breach.”

The court said Sulyma did not recall seeing any documents while he was working for Intel that would have alerted him to the fact that his retirement savings were being heavily invested in hedge funds or private equity investments. And because there was dispute over whether Sulyma had actual knowledge, the court sent the case back to the district court.

The decision marks a split from the U.S. Court of Appeals from the Sixth Circuit, which said “‘actual knowledge’ does not require proof that the participant actually saw or read the documents that disclosed the information relevant to their ERISA claim.”

If the Supreme Court agrees with the Ninth Circuit’s decision, attorneys say participants could easily claim they did not read, or do not recall having read, the disclosures that ERISA explicitly requires in order to advance their claims to trial. The whole point of a disclosure, Santos said “is to give participants information so they will know what’s happening in their plans and they will have the information they need to vindicate their rights under the statute.”

“If it’s really true that we’re making plans spend millions of dollars a year providing these mandatory disclosures and then participants can just ignore them and make it through to trial, that seems really problematic,” she said.

Congressional Intent

But supporters of the Ninth Circuit ruling say it’s problematic to cut the statute of limitation for claims in half.

If Intel’s retirement plans committee gets its way, “it essentially means people have to hopefully find out that something went wrong much sooner than Congress intended them to,” said Dara Smith, a senior attorney with the AARP Foundation, AARP’s charitable affiliate. Both groups filed a friend-of-the-court brief in support of Sulyma.

“To me, this is such an easy issue of statutory interpretation,” she said.

But one attorney told Bloomberg Law it may be difficult for the court to determine where to draw the line.

“Requiring a participant to know there was an actual violation or wrongdoing, which seems to be what the Ninth Circuit held, seems like a high threshold,” said Kimberly Jones, a partner at Drinker Biddle & Reath LLP, who co-chairs the firm’s ERISA litigation group.

“It could make it very difficult to ever invoke the three-year limitations period if you’re asking for a participant or a lay person to understand there’s been some wrongdoing.”

The case is Intel Corp. Investment Policy Comm. v. Sulyma, U.S., No. 18-1116, 12/4/19.

To contact the reporter on this story: Lydia Wheeler in Washington at lwheeler@bloomberglaw.com

To contact the editors responsible for this story: Fawn Johnson at fjohnson@bloomberglaw.com; Andrew Childers at achilders@bloomberglaw.com

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