DOL: Business owner illegally used ERISA-covered plan to invest in spouse’s troubled bank

Dive Brief:

The owner of a New Jersey design firm and her spouse allegedly breached their fiduciary duty to an employee profit-sharing plan by investing the bulk of the plan’s assets in a bank owned by the spouse, the U.S. Department of Labor alleged in a lawsuit filed Aug. 30 (Walsh v. InterArch, Inc., No. 22-5289 (D.N.J. Aug. 30, 2022)). Their unlawful investments cost the plan more than $17 million after the bank’s shares plummeted, the lawsuit alleged.
Over a three-year period, the owner and her spouse, as plan fiduciaries, invested as much as 70% of the plan’s assets in bank shares, according to the lawsuit. The couple continued to transfer assets to the bank even as its shares steadily declined, the suit alleged. In June 2020, the couple terminated the plan and sold the shares for 96% less than their peak value, DOL alleged.
DOL sued the couple, alleging they violated the Employee Retirement Income Security Act. The agency alleged the couple engaged in prohibited self-dealing by using the plan’s assets to further their own interest in the spouse’s banks. They also allegedly failed to diversify the plan’s investments to minimize risk, the lawsuit said.

Dive Insight:

ERISA requires covered employee benefit and retirement plans to comply with minimum standards to ensure the plans are run solely in the interest of the participants and beneficiaries, according to the DOL.

Relevant here, fiduciaries — the individuals or entities who manage and control a plan’s assets — have to act prudently, diversify plan investments and avoid conflicts of interest, DOL guidance explains. In particular, fiduciaries may not engage in transactions that benefit “parties of interest,” such as themselves, service providers or the plan sponsor.

To compel compliance, sanctions for violating ERISA are intentionally harsh. Fiduciaries who breach their statutory duty can be held personally liable for restoring losses to the plan, and courts can actions including removal of the fiduciaries.

ERISA also allows plan participants to sue fiduciaries, as the plan participants in this case did. In a 2020 class-action lawsuit, they claimed the couple didn’t tell them how the plan’s assets were invested or explain how the investments caused a dramatic decline in the assets. Under ERISA, plans must provide participants with certain information, including how a plan is funded, a DOL FAQ explains. The participants settled their claims in 2021 for $950,000, according to a statement by their lawyers.

A fiduciary’s duty to “act solely in the financial interests of plan participants and adhere to an exacting standard of professional care” DOL’s Employee Benefit Security Administration recently cautioned, speaking about 401(k) investments into cryptocurrency. In a March notice, EBSA said fiduciaries aren’t exempt from responsibility under ERISA just because they don’t select the option to invest in cryptocurrency themselves.

Most HR professionals are not fiduciaries, a former EBSA investigator previously told HR Dive. But the day-to-day tasks of complying with ERISA may fall on HR staff, the former investigator said.

For instance, employees have 30 days to comply with a request for information about a retirement plan. HR is usually responsible for handling the request, and missing the deadline can result in big fines. HR also has a duty to monitor third-party plan administrators to make sure they’re complying with their ERISA obligations, the former investigator added.