January 11, 1991
TO: PENSION MEMBERS NO. 1-91
INVESTMENT ADVISER MEMBERS NO. 2-91
INVESTMENT ADVISER ASSOCIATE MEMBERS NO. 2-91
RE: COURT FINDS NO ERISA FIDUCIARY VIOLATION RESULTING FROM
1987 MARKET BREAK
__________________________________________________________
The United States Court of Appeals for the Seventh Circuit
recently held that a pension plan investment manager did not
violate its fiduciary duties under ERISA when its balanced mutual
fund suffered losses as a result of the market break in October
1987.
The case involved participants in a plan funded by a group
annuity contract which allowed participants the right to direct
the investment of their retirement account. The participants
directed the investment of their assets in a balanced fund which
was designed to provide high returns while avoiding the
volatility associated with pure equity funds. The participants
claimed the fund was not sufficiently "balanced" and the losses
incurred by the 1987 market break were compensable by the
investment manager under ERISA’s fiduciary provisions.
The court rejected the argument that the balanced fund’s
investment strategy was imprudent and further held that the
plan’s participants received ample disclosure regarding the
composition and investment strategy of the fund. The
prospectuses and plan reports gave the adviser broad discretion
in deciding the mix of investments in the fund. The court also
noted the absence of any evidence that the adviser invested
imprudently in light of prevailing market conditions in 1987 and,
thus, could not be found to have breached its duty of care under
ERISA. The court repeated the axiom that pension plan
investments are not necessarily imprudent merely because the
pension fund loses money.
A copy of the court’s decision is attached. We will keep
you informed of related developments.
W. Richard Mason
Assistant General Counsel
Attachment