Before: Mansmann, Scirica and Nygaard, Circuit Judges.
Appeal from the United States District Court for the Eastern District of Pennsylvania
Argued September 13, 1995
This consolidated class action is brought pursuant to the Employee Retirement Income Security Act of 1974, ("ERISA"), 29 U.S.C. 1001 et seq. (1985 & Supp. 1995), and arises out of the collapse in 1991 of the Executive Life Insurance Company of California. The plaintiffs, participants in individual account pension plans that Unisys Corporation maintained for its employees, alleged, inter alia, that the defendants breached ERISA's fiduciary duties of prudence and diversification by investing plan assets in Executive Life guaranteed investment contracts, as well as ERISA's fiduciary duty of disclosure by providing participants with misleading or incomplete communications regarding these investments and Executive Life's financial condition. In their defense, the defendants raised a question of first impression, asserting that section 1104(c) of the Act, which relieves fiduciaries of liability for losses which result from a plan participant's exercise of control over individual account assets, applies. The plaintiffs appeal the district court's decision to grant the defendants' motion for summary judgment on the plaintiffs' breach of fiduciary duty claims.
We conclude that there are genuine issues of material fact as to whether the defendants breached section 1104(a)'s fiduciary duties and as to whether the defendants are entitled to section 1104(c)'s protection. We will, therefore, vacate the district court's grant of summary judgment in the defendants' favor and will remand the case to the district court for further proceedings.
We begin our analysis by reviewing the evidence of record. In the fall of 1986, Burroughs Corporation and Sperry Corporation merged to form Unisys. Prior to the merger, both Sperry and Burroughs had maintained retirement savings plans for employees known as the Sperry Retirement Program - Part B (the "Sperry Plan") and the Burroughs Employees Savings Thrift Plan (the "BEST Plan"), respectively. Each plan permitted an employee to contribute a percentage of his or her compensation into an individual account and to direct that it be invested in any one or a number of funds that were comprised of different types of investments. One of the funds in both of these plans invested in guaranteed investment contracts ("GICs") issued primarily by insurers. A GIC is a contract under which the issuer is obligated to repay the principal deposit at a designated future date and to pay interest at a specified rate over the duration of the contract.
Following the merger, the Sperry Plan and the BEST Plan were consolidated to form the Unisys Savings Plan, which took effect on April 1, 1988. *fn1 Like its predecessors, the Unisys Savings Plan established an individual account for each participant and offered several fund alternatives into which a participant could direct contributions on a tax-deferred basis: the Diversified Fund, the Indexed Equity Fund, the Active Equity Fund; the Unisys Common Stock Fund; the Short Term Investment Fund, and the Insurance Contract Fund. *fn2
The Insurance Contract Fund invested in GICs. The old Sperry Plan Fixed Income Fund, a vehicle for GICs, continued to exist, but was closed to new contributions. As GICs matured, assets invested in the Fixed Income Fund were reinvested in the new Insurance Contract Fund; assets in the BEST Plan equivalent, the Guaranteed Investment Contract Fund, were likewise reinvested in that Fund, unless a participant specified otherwise. *fn3 Contributions to the Insurance Contract Fund were allocated on a pro rata basis among the various GICs held therein.
The Unisys Savings Plan allowed a participant to transfer assets from one equity fund to another on a monthly basis. Due to transfer limitation terms that were included in the contracts purchased for the GIC Funds, however, asset transfers involving those Funds were restricted. For example, all transfers between any of the GIC Funds and the Short-Term Investment Fund, another low-risk, interest-earning vehicle, were absolutely prohibited. Moreover, if assets were transferred from one of the GIC Funds to the equity or Unisys common stock funds, a year had to pass before any assets could be transferred to the Short-Term Investment Fund; similarly, if assets were transferred from the equity or the Unisys common stock funds to the Short-Term Investment Fund, a year had to transpire before any assets could be transferred out of one of the GIC Funds. *fn4
Because the Plan was designed to make final distribution of a participant's account on retirement, death, disability or employment termination, withdrawals of tax-deferred contributions prior to those events were limited to circumstances of "financial hardship" and were generally taxable as ordinary income, plus 10%.
In addition to the Unisys Savings Plan, Unisys established the Unisys Retirement Investment Plan ("RIP") and the Unisys Retirement Investment Plan II ("RIP II") for unionized employees, which for all intents and purposes were identical to the Unisys Savings Plan. *fn5 Contributions to the Plans designated for investment in the Fixed Income Fund or the Insurance Contract Fund were invested together.
Unisys was the Plans' administrator; the Administrative Committee, established by the Unisys Board of Directors, carried out the Plans' provisions; and the Investment Committee, also established by the Board, was responsible for the Plans' investments. The Investment Committee delegated day-to-day investment management responsibility for the GIC Funds to two of the Investment Committee's members, defendants David White and Leon Level, and appointed outside managers to manage investments in the Plans' other funds.
From time to time White and certain members of his staff, including William Heller, Robert Rehley and Charles Service, conducted a bid among insurers during which GIC contracts were selected for the appropriate GIC Fund. These selections were subject to Level's approval and reported to the Investment Committee. White and his staff did not have written guidelines for the bidding process or contract selection; they did, however, have informal operating policies and procedures. In particular, they developed a rule that no more than 20% of GIC Fund assets would be invested with any one issuer.
After the merger in 1986, but before the effective date of the Plans in April, 1988, two bids for the Fixed Income Fund were held. The first bid occurred on June 9, 1987, in the offices of Murray Becker of Johnson & Higgins, a consultant which Sperry had used to assist in GIC selections. Prior to bid day, Becker mailed bid specifications on Unisys' behalf to a number of insurers, including the Executive Life Insurance Company of California, inviting them to make a GIC proposal. It was Johnson & Higgins' practice to solicit bids only from insurers with a superior AAA rating as to claims-paying ability from Standard & Poors Corporation. At the time, Standard & Poors had rated Executive Life as a AAA company. Likewise, A. M. Best Company, another rating agency, had assigned Executive Life its highest rating of A. According to Becker, however, the A from A. M. Best was of marginal significance since A. M. Best was overly generous with its ratings.
On the day of the bid, White, his staff and Becker reviewed material that Executive Life provided concerning the insurer's financial condition and interviewed Executive Life representatives about the company's outlook. The group then discussed the Executive Life GIC proposal. As was his custom, Becker noted that the prospect of purchasing Executive Life GICs was "controversial" in light of the "junk bonds" Executive Life held in its portfolio. Junk bonds are non-investment securities which carry an above-average credit risk and return. Taking their cue from Standard & Poors, which was of the view that the risk generated by Executive Life's junk bond investments was offset by other conservative aspects of the insurer's investment strategy, White and his staff were not deterred from investing in Executive Life. Becker warned, however, that the Standard & Poors AAA rating was reliable only as long as Executive Life's junk bond holdings did not exceed 35% of its bond portfolio. Ultimately, Becker recommended that Unisys consider the purchase of a three-year GIC from Executive Life. While White accepted Becker's advice to invest in Executive Life, he rejected Becker's view as to the contract's duration. In order to acquire the highest interest rate that Executive Life offered, 9.45%, White purchased a five-year Executive Life GIC for approximately $30 million. GIC bids from Travelers Insurance Company and Seattle First Bank were also accepted.
Subsequent to the June 9, 1987 bid, White and Level terminated Johnson & Higgins and did not hire a replacement, believing that Unisys personnel could select appropriate GICs without the help of a consultant. A second competitive GIC bid for the Fixed Income Fund took place on December 2, 1987. Relying heavily on Executive Life's ratings, which had not changed since June 9, 1987, White invested just over $135 million into another five-year Executive Life GIC paying 9.75% in interest. Contracts were purchased from Seafirst Bank and Travelers Insurance Company as well, bearing interest rates of 9.25% and 9.15% respectively.
Shortly thereafter, on January 13, 1988, Unisys sponsored a GIC bid for the Insurance Contract Fund. Once again, based on the high marks Executive Life continued to receive from the rating agencies, White invested about $46 million in a third five-year, 9.48% interest-paying Executive Life GIC, bringing the total investment in GICs issued by Executive Life to $213 million.
Communications to participants regarding the GIC Funds, beginning with BEST Plan and Sperry Plan documents, described the Funds as designed to preserve capital and accumulate interest and consistently emphasized that investments in GICs were "guaranteed" by the issuing insurers. BEST Plan materials stated that the goal of the Guaranteed Insurance Contract Fund was "to preserve the amount invested and to guarantee a rate of return", and provided that "[i]n addition to the interest earned, the insurance company guarantees the principal of the fund . . . [and that] your account cannot go down in value; it will always be worth as much as you put in plus your share of the interest earned under the contract." Similarly, with respect to the Fixed Income Fund, Sperry Plan materials declared that "each year's minimum [interest] rate is guaranteed for an entire year." Likewise, the prospectuses for the Plans, distributed in the Spring of 1988, stated that the Insurance Contract Fund was intended "to preserve capital while earning interest income" and described the Fund as "invested in contracts with insurance companies and other financial institutions which guarantee repayment of principal with interest at a fixed or fixed minimum rate for specified periods. . . ." The Unisys Savings Plan prospectus noted, however, that "[Unisys] does not guarantee the repayment of principal or interest." Although the 1988 RIP and RIP II original prospectuses did not include this caveat, it was subsequently included in a 1988 supplement to each. Additionally, the Plans' prospectuses pointed out that assets of the Insurance Contract Fund were invested in contracts issued by, inter alia, Executive Life.
The 1988 Summary Plan Descriptions ("SPD"s) for the Plans provided that the investment objective of the Insurance Contract Fund was to "[p]reserve the amount invested while earning interest income", described the Funds' investment strategy as "[t]ypically contracts of between 3 and 7 years with various insurance companies and other financial institutions which guarantee the principal and a specified rate of return for the life of each contract", and explained that the future performance of any of the funds was not certain:
[b]enefits available are based on your savings plan value at the time of distribution. Your payments from the Plan are subject to the performance of the funds in which your accounts are invested. If the value declines, you may receive less from the Plan than you and the Company contributed.
With respect to the Employee Retirement Income Security Act of 1974, ("ERISA"), 29 U.S.C. Section(s) 1001 et seq. (1985 & Supp. 1995), the 1988 and 1990 prospectuses for the Plans pointed out: the Plan is
subject to some, but not all, of the provisions of the [Act] . . . which [a]mong other things . . . set minimum standards of fiduciary responsibility, establish minimum standards for participation and vesting, and require that each member be furnished with an annual report of financial condition and a comprehensive description of the member's rights under the Plan.
The Plans' SPDs informed the participants:
you are entitled to certain rights and protections under [ERISA] . . . .
In addition to creating rights for Plan participants, ERISA imposes duties upon the people who are responsible for the operation of employee benefit plans. The people who operate the [Unisys Savings Plan, the Unisys Pension Plan, RIP, and RIP II], called `fiduciaries' of the Plans, have a duty to [operate] prudently, in your interest and that of all members and beneficiaries.
After the prospectuses and the SPDs were distributed, the Investment Committee received correspondence in 1988 and 1989 from individual participants, including Henry Zylla, the president of one of Unisys' local unions who wrote on behalf of the union's members, questioning whether Executive Life GICs should have been purchased for the Plans, given the insurer's high risk investments. In responding correspondence, Unisys stated that the Committee did not invite "risky" companies to its GIC bids, that its GIC selection process continuously emphasized "safety" and that all of the contracts it selected for the GIC Funds carried investment-grade credit ratings.
In January of 1990, some two years after Unisys' last Executive Life GIC purchase, Executive Life announced that it had written down $515 million in assets due to losses in its bond portfolio. Following this announcement, Executive Life's credit ratings were lowered from AAA to A by Standard & Poors; from A to A by A. M. Best; and from A1 to BAA2 by a third rating company, Moody's Investors Service.
Concerned that a flood of policy and other contract surrenders would cause a liquidity crisis that it would be unable to overcome, Executive Life began meeting with its investors to discuss its financial condition. When representatives of Executive Life and Unisys met on January 31, 1990, Executive Life articulated reasons for asserting that it would continue to meet its obligations and survive intact the situation it faced.
The next day, Thomas Penhale, an employee in Unisys' Human Resources department, sent to defendant Michael Losey, a Vice President of Human Resources, a copy of a newspaper article on Executive Life with a hand-written note, stating: "[defendant] John L[oughlin] got this today. It is not as `comforting' as Exec[utive] Life led us to believe yesterday." In a memorandum to the Investment Committee dated February 2, 1990, however, White, who attended the January 31 meeting with Executive Life, expressed the view that the insurer "appears to be in reasonably good shape to weather the storm." On February 5, 1990, members of the Investment Committee and other interested Unisys personnel met to discuss, inter alia, the questions Unisys had received from participants regarding Executive Life's status and the disclosures the company would make to the Plans' participants about the insurer. After some debate, the group decided that Unisys would disseminate information to all participants regarding Executive Life's condition through an updated prospectus and an accompanying cover letter.
In late March, 1990, Unisys sent to each participant a revised prospectus which stated generally that "an investment in any of the investment funds involves some degree of risk" and that many factors, including the "financial stability of the institutions in which assets are invested, the quality of the investment portfolios of those institutions, and other economic developments will affect . . . the value of a [participant's] investment in those funds." In bold letters, the prospectuses added that "[a]s a result, there is no assurance that at any point in time the value of an investment in any fund will not be lower than the original amount invested." As for the Insurance Contract Fund, the revised prospectus stated that its "objective . . . is to preserve capital while earning interest income", characterized its investments as "contractual obligation[s]" of the issuer, and pointed out that the "repayment of principal and interest is necessarily subject to the [issuer's] ability to pay . . . [such that] a downturn or loss in one or more areas of the [issuer's] investment portfolio could have an adverse effect on the stability of the [issuer]." Like the April 1, 1988 prospectus, the revised prospectus stated that "[Unisys] does not guarantee the repayment of principal or interest"; it also informed participants that the Investment Committee's guidelines required that Unisys purchase GICs from insurers rated "Secure" by Standard & Poors, or "Highest Investment Quality" by Moody's Invest[ors] Service, or "Superior" or "Excellent" by A. M. Best, but that "[c]ontracts issued by an insurance company or other institution whose rating is downgraded subsequent to selection may continue to be held in the fund." Finally, Executive Life was identified as one of the companies from which GICs had been purchased.
With the 1990 prospectus, participants received a letter from defendant Jack A. Blaine, a Vice President of Human Resources, encouraging participants to review the prospectus carefully and reminding them that Unisys would not give advice as to appropriate investment strategy. The letter responded to questions concerning the "troubled `junk bond' market and the effect, if any, that such problems would have on the [GIC Funds]" by pointing out that the repayment of principal and interest under GICs necessarily and entirely depended on the ability of the insurer to meet its obligations; that Unisys did not guarantee the repayment; and that the financial stability of an insurer depended on the success of its own portfolio, such that an investment in junk bonds could have an adverse effect on financial stability. Lastly, the letter provided that only those institutions with a "secure" credit rating at the time of a contract bid would be selected for investment.
Although a draft of Blaine's letter had made specific mention of Executive Life, the letter the participants eventually received did not. The draft's reference to Executive Life's $515 million asset writedown was removed; a statement disclosing the magnitude of the proportion of Fixed Income and Insurance Contract Fund investments in Executive Life was crossed out because it "could cause panic"; and a statement about informative news articles was deleted because it "could cause more concern." A comment on the draft stated: "The overall content and tone do [not] sooth[e] any fears and may in fact stir more interest in this subject than it deserves." Blaine's letter was accompanied by an enclosure that listed all of the GICs held in the GIC Funds at that time, with investment value, maturity dates, and the bid day and current ratings of the issuing insurer. The enclosure revealed that Executive Life GICs had a combined book value of over $200 million, maturity dates of June, 1991, June and September, 1992, and March, June and August, 1993. It also showed the recent decline in ratings that Executive Life had suffered. The 1990 prospectus and the letter from Blaine with the enclosure were the only communications Unisys made to all participants on a systematic basis subsequent to Executive Life's January, 1990 announcement.
At about the same time, Unisys distributed to its benefits administration personnel a copy of a February 23, 1990 letter from Fred Carr, Executive Life's Chairman and President, which portrayed the company as "healthy", "financially strong", and "capable of providing all the benefits promised", and written responses to specific questions about Executive Life for use in addressing concerns that individual participants directed their way. According to Losey's deposition testimony, individual participants who asked employees in the Human Resources department "[w]ell, gee, how many people ever lost their money in this kind of thing[?]" would be told, "I don't remember one time they even halfway defaulted." In March, 1990, Unisys also met with union employees and responded to participants' inquiries about Executive Life's financial status.
Unisys did not, however, disclose two decisions it had reached: one involving its chairman's retirement annuity and the second, an Investment Committee resolution. With respect to the first, a few months after sending the revised prospectus to participants, Unisys replaced a $500,000 retirement annuity issued by Executive Life for Unisys' then Chairman, Michael Blumenthal, with an annuity from another insurer at some expense to the company. The second matter occurred at an Investment Committee meeting on August 10, 1990, during which was discussed, inter alia, the course of action the Plans would take in the event of a Executive Life default. The Committee ultimately resolved "that in the event of a default in any of the guaranteed investment contracts . . . distribution to plan participants will be reduced by that portion of the participant's account held in the defaulted contract." Seeking to reduce the waiting period for asset transfers between "non-competing" funds and the GIC Funds from twelve months to six, Unisys contacted the issuers from whom GICs had been purchased and asked that they agree to appropriate contract modifications. In exchange for Executive Life's consent to a waiting period reduction in the contracts it had issued to the Plans, Unisys executed a letter agreement on October 17, 1990 which provided in pertinent part:
Unisys Corporation hereby further agrees that neither it nor its affiliates, employees, agents or other representatives will communicate with Plan participants regarding the financial condition or prospects of Executive Life nor issue any other communication regarding Executive Life which could be reasonably viewed as attempting to influence the investment choices of Plan participants without first obtaining Executive Life's written approval of such communication. In the event such prior written approval is not obtained, Executive Life may elect to not honor employee requests for withdrawals or reallocations provided that Executive Life reasonably believes that such requests were the direct result of such communication.
During this time, Executive Life's condition was widely reported in the financial press. Eventually, on April 11, 1991, the California Commissioner of Insurance seized Executive Life, placing it in conservatorship, and on April 12, 1991, issued a moratorium on all payments from the insurer. As a result, Unisys isolated and froze the balance in any participant account invested in Executive Life by way of the Fixed Income and/or Insurance Contract Funds. At this time, 30% of the Fixed Income Fund and 7% of the Insurance Contract Fund were invested with the insurer. On December 6, 1991, the Superior Court of California declared Executive Life insolvent.
In 1991, several classes composed of Unisys employees who participate in one of the Plans and have account balances invested in Executive Life and the unions which represent Unisys employees commenced twelve separate actions against Unisys, the Investment and Administrative Committees of the Unisys Board of Directors and individuals who allegedly had served on one or both of the Committees.
By Pretrial Order dated November 4, 1991, the twelve cases were consolidated for all purposes, except trial. Pursuant to this Order, on November 25, 1991, the plaintiffs filed a three count second amended consolidated class action complaint against the above-named defendants. *fn6 In Count I, all of the plaintiffs assert under sections 1045, 1104, 1105, 1109 and 1132 of ERISA, that Unisys breached fiduciary duties: by investing in Executive Life GICs; by failing to monitor the investments and divest them from the Plans; *fn7 by failing to diversify the GIC Funds' assets; and by failing to provide adequate disclosures to participants regarding "the composition of the portfolios" of the Fixed Income and Insurance Contract Funds and the "status of Executive Life's financial condition and the effect of [the insurer's] insolvency on their investment. . . ." In Count II, they assert that Unisys violated ERISA's reporting and disclosure requirements set forth in sections 1021(a), 1022(a)(1),(b) and 1023(b) by not furnishing an adequate summary plan description and an annual or other periodic report which would have apprised the plaintiffs that investments in the Fixed Income and Insurance Contract Funds were in jeopardy due to Executive Life's financial condition. In Count ...