The Fourth Circuit has joined other circuit courts in imposing a causation requirement in ERISA breach of fiduciary duty cases based on the failure of a pension plan’s trustees to investigate and to diversify the plan’s investment options.
The defendants, former fiduciaries of the Plasterers’ Local Union pension plan, allegedly failed to periodically evaluate the plan’s investments. From 1995 through 2005, the plan’s assets were invested entirely in certificates of deposit and in one-to-two-year Treasury bills. The defendants testified that their objective had been "to avoid the risk of losing money."
The expert witness for the current trustees, who brought the lawsuit, testified that a "prudent investment strategy" would have been a 50/50 mix of S&P 500 and Barclays Capital Aggregate Bond Index investments. Utilizing such an investment and looking at the period December 31, 2002, to December 31, 2005, would have resulted in an investment value of $432,986 more than the actual value.
The defendants’ expert testified that their strategy was prudent, "given the particular characteristics affecting the Plan, including the declining union membership, that it was a defined contribution plan, the uncertainties of the market in the early and mid-2000s, and the Board’s conservative set of objectives."
The federal district court found that the former trustees had breached the duty to investigate and to review the investment options, as well as the duty of diversification, and entered judgment against the defendants in the amount of $432,986, plus attorney’s fees and costs.
The Fourth Circuit, however, determined that there was a "noticeable gap" in the district court’s analysis between its finding of fiduciary breaches and its conclusion that the defendants were liable in damages for the difference between the plan’s actual performance and its hypothetical performance. "[S]imply finding a failure to investigate or diversify does not automatically equate to causation of loss and therefore liability," the court held.
Specifically, the court elaborated, the finding of fiduciary breaches "did not establish as a matter of law that the actual investments were imprudent and liability can only attach if in fact that is the case." ERISA "requires an independent finding of causation of loss before liability for a breach of a fiduciary duty is incurred," the court continued.
The court also noted that the district court, on remand, would have to determine which party bore the burden of proof with respect to causation. "While the plaintiff bears the burden of at least making a prima facie showing that there was a breach of fiduciary duty and that there was some loss to the Plan, the circuit courts of appeal are split as to which party must demonstrate that the loss resulted from the breach," the court wrote. The Fourth Circuit declined to decide which of these approaches was appropriate.
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