By Pension and Benefits Editorial Staff
A bank that commingled transferred 401(k) plan account assets with pension plan funds in violation of ERISA was not required to disgorge the purported profits under the proportional-share-of-the-whole method, according to the U.S. Court of Appeals in Richmond (CA-4). The trial court did not err in finding that, based on contemporaneous records documenting the investment strategy for the transferred funds and tracing the performance of the funds, the bank did not actually profit from the ERISA violation.
Commingling of 401(k) and pension plan assets. In 1998, Bank of America amended its 401(k) plan to allow eligible employees to transfer their account balances to the bank's pension plan. Once transferred to the plan, beneficiaries could continue to allocate their account balances among various investment options. However, beneficiaries who elected to transfer their accounts to the pension plan would only have notional (hypothetical) accounts. The bank would invest the beneficiaries' account balances. In return, the bank guaranteed that beneficiaries' account balances would not fall below the amount in their accounts at the time of transfer. Under the arrangement, beneficiaries transferred nearly $2 billion in 401(k) account balances to the pension plan.
In 2005, the IRS determined that the transfers violated ERISA's anti-cutback rule, by stripping beneficiaries of the 401(k) plan's separate account feature. Subsequently, in 2008, the IRS reached a closing agreement with the bank, under which the bank would pay a $10 million fine, set up a special purpose 401(k) plan, transfer pension plan assets that were initially transferred from the 401(k) plan to the special purpose 401(k) plan, and make additional payments to certain plan participants whose hypothetical return in their notional account was less than a defined amount.
Current and former employees of the bank brought suit, seeking an equitable accounting for profits accruing to the bank as a result of unlawful transfer. In 2015, the Fourth Circuit ruled that a trial court had erred in dismissing the action and remanded the case for a determination of whether the bank had retained any profits from the transfer and the use of the funds (Pender v. Bank of America, CA-4 (2015), 788 F. 3d 35).
On remand, the trial court rejected the participants' claim that they were entitled to a share of the return on all the commingled funds, in proportion to the share of the commingled fund comprised of the unlawfully obtained assets (Pender v. Bank of America, DC NC (2017), No. 3:05-00238-GCN). Looking at the returns attributable to the bank's investment strategy, the court concluded that the bank did not retain any profit as a result of the transfer, and dismissed the claim for an accounting of profits as moot.
Proportional-share-of-the-whole method not required. On appeal, the participants' argued that the trial court erred in not awarding a proportional share of all profits accruing to the pension plan during the period the funds were commingled. The appeals court initially acknowledged that the proportional-share-of-the-whole method is widely supported in the Restatements, treatises, and case law as a remedy for the unlawful commingling of plan assets. However, explaining that ERISA Sec. 502(a) empowers courts to invoke their equitable authority and determine whether equitable relief is appropriate under the circumstances of the case, the appeals court concluded that the trial court was not required to award relief based on the proportional-share-of-the-whole method.
Disgorgement would penalize bank while providing windfall to participants. The trial court, focusing on the contemporaneously documented investment strategy for the transferred funds, and the fact that the returns for the transferred 401(k) account balance were less than the participants' hypothetical returns, ruled that the proportional-share-of-the-whole method would effectively penalize the bank while creating a windfall for the participants because much of what would have been captured as profit would have been realized regardless of the transfer. Thus, the appeals court reasoned, the extensive contemporaneous evidence provided a “factual basis” for separately identifying the performance of the unlawfully commingled funds which justified the trial court's deviation from the generally applicable proportional share of the whole method.
Dissent highlights bank's lavish profits. A pointed dissent charged that the trial court abused its discretion in permitting the bank to “profit lavishly from its wrongful use of the plaintiffs' money.”
Source: Pender v. Bank of America (CA-4).
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