If you were wondering how long it would take someone to file suit regarding events related to the COVID-19 pandemic—wonder no more.
In what seems to be the first suit filed against a 401(k) plan post-COVID-19 outbreak, the suit—filed June 8 in the U.S. District Court for the District of Rhode Island—was brought by plaintiffs and former participants Jeffrey Lipshires, Sara Donnelly and Anselmo Toni against the Behan Bros, Inc. Retirement Plan; Behan Bros., Inc., Michael J. Behan Jr. and William P. Behan, both trustees—and themselves participants—of the plan. Behan Brothers is a construction company located in Middletown, RI. The plan all participated in was a profit-sharing 401(k) plan, albeit one without participant direction.
Plan Provisions
The plan provided that accounts are valued at the end of the last day of the plan year (Dec. 31), and also provided that the plan administrator could, at its sole discretion, declare a Special Valuation Date for the portion of the plan that is not daily-valued “…in extraordinary situations to protect the interests of Participants in the Plan or the Participant receiving the distribution”—extraordinary circumstances that included “a significant change in economic conditions or Market Value of the Trust Fund.”
Plaintiff Lipshires terminated employment on May 25, 2018, Toni on Aug. 15, 2018, and Donnelly on Sept. 7, 2018. Each of them, a year later incurred the requisite one-year break in service, at which point, according to the suit, could have requested a lump sum valued as of Dec. 31, 2018.
Indeed, according to the suit, on or about Feb. 28, 2019, Lipshires contacted John Pursche (the plan administrator) of Behan Bros. about rolling over the balance of his 401(k) account, and asked how the termination balance would be computed, and on March 9 of that year Purshe confirmed the one-year break in service date, told Lipshires that based on the plan documents he could receive his distribution from the 401(k) plan based on the annual valuation statement of 12/31/2018, and that that was how all distributions have been handled for all participants that have terminated employment. Pursche also allegedly further advised Lipshires that “If the market is up from 12/31/2018 you also have an option to keep the funds in the Plan and take your distribution at a later date.”
Special Valuation?
A couple of days later, Lipshires emailed inquiring about the possibility of a special valuation, noting that the stock market in March 2019 had been as high as 15% above the Dec. 31, 2018 value and that such market volatility that would support a special valuation to reflect increased values in the 401(k) accounts. To which Pursche represented to Lipshires that a special valuation could not be issued under the terms of the Plan, and that—absent a special valuation, pursuant to the terms of the Plan, the next valuation date for the 401(k) accounts would have been Dec. 31, 2019. And so, “in reliance on the Plan’s representations about the special valuation, Plaintiffs elected not to take their 401(k) account distributions at that time and to wait until the December 31, 2019 valuation.”
And then, “on or about January 3, 2020, Lipshires promptly emailed Pursche and requested that Plaintiffs’ 401(k) account balances be transferred to their current 401(k) plans.” In response, Pursche allegedly told him that as soon as the year end valuation and statements were prepared by the plan’s TPA, he would forward the paperwork and the statements—a process he indicated would “hopefully” be done by mid-March, providing a valuation date of Dec. 31, 2019.
Lipshires followed up on March 3, and was told the valuation hadn’t been completed, and wouldn’t be until March 15, but went ahead and asked for the paperwork necessary to complete the rollover, followed up with that a week later, received notification that Pursche was out on vacation, but on March 12 received email confirmation from Tish Behan (in HR, and married to Michael Behan, and said “we are working on it.”
COVID Crash?
By this time, of course, the full impact of the COVID-19 pandemic was being realized.
The suit notes that “the Plan finally responded to Lipshires’ numerous requests by letter dated March 16, 2020,” but “rather than providing the paperwork for distribution, Michael Behan, Trustee of the Plan, advised in a letter to participants that Behan Bros., at the recommendation of Abacus, the Plan would be implementing a Special Valuation Date as of April 30, 2020.
Then by memorandum dated March 25, 2020, Michael Behan provided Plaintiffs with their completed Dec. 31, 2019 valuations, but noted that “[I]t has come to our attention that we will be receiving distribution requests and due to the unprecedented and extraordinary change in the market valuation due to the Coronavirus pandemic, we have issued a Special Valuation Date.”
So, ultimately, the plaintiffs argue that “as a result of the unreasonable delay by the Plan and Behan Bros. in issuing the December 31, 2019 valuations, Plaintiffs were forced to wait until March 2020 to obtain their December 31, 2019 valuations,” and that when those valuations were finally issued, “the Trustees preemptively declared the Special Valuation and deprived Plaintiffs of any opportunity to have their 401(k) accounts distributed at their December 31, 2019 value.”
The plaintiffs appealed the decision to issue the Special Valuation—subsequently denied by Michel Behan—who responded that “a distribution from the Plan is not administratively feasible until year end account valuations have been provided” and that Abacus did not provide those valuations until March 24, 2020. Moreover, the suit claims that Behan said that “the Plan Administrator determined that in the interest of the Plan participants, a Special Valuation Date should be declared in order to recognize the “recent market changes and treat all participants equitably.”
The Impact(s)
Having “exhausted their administrative remedies under the Plan,” the plaintiffs filed suit. As for the impact of the delays:
- By letter dated May 13, 2020, the Plan informed Lipshires that pursuant to the Special Valuation, his 401(k) account distribution would be $269,257.65, though the Dec. 31, 2019 value of his 401(k) account was $293,715.94—a $24,458.29 decrease.
- By letter dated May 13, 2020, the Plan informed Donnelly that pursuant to the Special Valuation, her 401(k) account distribution would be $244,053.47, though the Dec. 31, 2019 value of her 401(k) account was $266,222.32—a $22,168.85 decrease.
- By letter dated May 13, 2020, the Plan informed Toni that pursuant to the Special Valuation, his 401(k) account distribution would be $92,119.01, compared with a Dec. 31, 2019 value of Toni’s 401(k) account of $84,448.09—a $7,670.92 decrease in Toni’s 401(k) account distribution.
They received those distributions “on or about June 3, 2020.”
Charges
The suit charges that “the delay in providing the valuations and the resulting delay in distributing Plaintiffs’ 401(k) accounts was unreasonable, unfair, arbitrary, capricious and in violation of the terms of the Plan,” and that “the Plan and Behan Bros. have unreasonably, arbitrarily and capriciously applied the Special Valuation to Plaintiffs’ distributions in violation of the terms of the Plan.” Moreover, they argue that they are “entitled to the December 31, 2019 value of their 401(k) accounts pursuant to the terms of the Plan.”
The plaintiffs argue that Behan Bros. has an actual conflict of interest in that it adjudicates claims under the Plan and also pays benefits pursuant to the Plan, that it is in Behan Bros.’ financial interest to minimize the amount of Trust assets distributed to Plaintiffs from the pooled Trust Fund, and that “…the Special Valuation was improperly motivated by Behan Bros. financial self-interest.” Moreover they argue that defendant Behan Bros. is “using the coronavirus pandemic as a pretext to reduce Plaintiffs’ distributions and to preserve Trust Fund assets.”
More specifically, the plaintiffs argue that “in declaring the Special Valuation, the Trustees sought to protect the value of their own 401(k) accounts and those of their family members,” and that “in declaring the Special Valuation, the Trustees operated under a direct conflict of interest. It is in their individual financial interests to reduce Plaintiffs’ 401(k) account distributions, to preserve funds in the Trust Funds for themselves, and to minimize the loss in value to their individual accounts.”
The fact pattern here may be a little unusual, and this suit may well be the first to find fault with fiduciary decisions made in the wake of the COVID-19 pandemic—however, it’s not likely to be the last.
NOTE: In litigation there are always (at least) two sides to every story. However factual it may turn out to be, the initial lawsuit in any action is only one side, and one generally crafted toward a particular result. In our coverage you'll see descriptions of events qualified with statements such as "the suit says," or "the plaintiffs allege"—and qualifiers should serve as a reminder of that reality.
