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Exercising Discretion in Funding Plan Does Not Give Employer Fiduciary Status
 

By Emily J. Gelhaus  6/26/2014

Morgan Stanley wasn’t acting as a fiduciary under the Employee Retirement Income Security Act (ERISA) when it decided to fund the company's retirement plans with employer stock rather than cash, according to the 2nd U.S. Circuit Court of Appeals.

Morgan Stanley had established a defined contribution retirement plan for its employees. The company was not the designated plan administrator or fiduciary. In January of 2007 and 2008, Morgan Stanley chose to make its employer contributions to the plan in the form of Morgan Stanley company stock instead of cash. The plan expressly permitted Morgan Stanley to choose between stock or cash payments. Between Dec. 14, 2007 and Feb. 6, 2008, Morgan Stanley’s stock prices plummeted in conjunction with the broader economic downturn.

Five employees brought suit under ERISA against Morgan Stanley to recover the losses suffered as a result of the drop of Morgan Stanley’s stock price. They argued that Morgan Stanley breached its fiduciary duty under ERISA by failing to act with prudence when it opted to change its contributions from cash to stock options. Morgan Stanley argued that it was not a fiduciary because it was not a plan administrator and because it did not exercise discretionary authority over most of the plan. The New York federal district court granted Morgan Stanley’s motion to dismiss. The 2nd Circuit agreed with the dismissal, concluding that Morgan Stanley owed no fiduciary duty to the plaintiffs.

The 2nd Circuit held that mere exercise of discretion about funding a plan does not make an employer a fiduciary under ERISA; rather, the discretion must be exercised with respect to plan management or administration. Because Morgan Stanley only exercised discretion with plan funding–deciding to change from cash to stock contributions–and did not exercise any discretion with plan management or administration, it was not a fiduciary.

Coulter v. Morgan Stanley & Co., 2nd Cir., Nos. 13-2504, 13-2509 (May 29, 2014).

Professional Pointer: Employers need to exercise caution when making decisions about employee retirement plans so they do not unintentionally assume fiduciary status.

Emily J. Gelhaus is an attorney with Denlinger, Rosenthal & Greenberg Co, L.P.A., the Worklaw® Network member firm in Cincinnati, Ohio.  

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