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Legal Landmines for Employee Benefit Plan Sponsors During Bad Economic Times

Legal Landmines for Employee Benefit Plan Sponsors During Bad Economic Times

Employee Benefit Plan Review

September 17, 2009

The cash collateral is then supposedly invested in “safe” investments, such as Treasury bills or money market instruments. Under typical securities lending agreements, the return on the invested cash collateral is split among the retirement fund (for the benefit of its participants), the trustee, and the borrower of the securities.

While the gains are usually small in percentage terms (because under applicable Department of Labor exemptive relief allowing participation in such transactions the collateral is required to be invested in low risk investments for short time periods), they can add up to big dollars over time when a large portfolio of securities is involved.

Securities lending programs have not been immune to losses stemming from the recent credit crisis. When supposedly reliable investments drop in market value due to the “flight to quality” and liquidity and liquidity needs, securities lending programs have seen losses for the first time.

The losses are realized when the cash collateral is invested in assets that drop in value, thus creating a deficiency between the book value of the cash collateral and the market value of the collateral investments. It is estimated that billions of dollars of losses have been sustained recently by ERISA regulated plans in securities lending programs.

Similar claims are being brought by 401(k) plan fiduciaries who allege that mutual fund trustees running an index fund, such as an S&P 500 index fund, breached their fiduciary duties by engaging in securities lending.

S&P funds that employ securities lending often lag the S&P index because of securities lending losses due to investments in subprime mortgage backed securities.


Aside from the lawsuits challenging reduction in retiree medical plans, some retirement plan fiduciaries themselves have filed class action complaints against investment funds who invested ERISA plan money with Bernie Madoff.

For example, the Pension Fund for the Hospital and Healthcare Employees of Philadelphia filed a class action ERISA lawsuit against Austin Capital Management on February 12, 2009, alleging that the Austin Capital Management Fund violated ERISA by investing money with Madoff.


In a February 5, 2009, notice, “Duties of Fiduciaries in Light of Recent Events Regarding Bernard L. Madoff Investment Securities LLC,” the Department of Labor alerted plan fiduciaries they might need to sue Bernie Madoff and his “feeder” funds to properly discharge their fiduciary duties.


“I’ll be back,” are probably the three most dreaded words an employer hears at the end of an exit interview.

The bad things that can follow these words can range form wrongful termination lawsuits to a baker’s dozen of discrimination claims. Faced with shrinking revenues, many employers have little choice but to reduce expenses and often the most significant expenses are those associated with the employee benefit programs.

Poll: How do you feel about crying at work?

Poll: How do you feel about crying at work?