The Supreme Court settled the debate over what constitutes “actual knowledge” in the context of an ERISA fiduciary breach claim in a unanimous and simple decision that applied dictionary definitions of the term “actual” to find that the fiduciary breach knowledge requirement means that “the plaintiff must in fact have become aware of that information.” The Intel Investment Policy Committee v. Sulyma decision will have significant practical implications for ERISA plan administrators in how they distribute plan disclosures to participants.
The dispute in Intel centered on whether a participant in Intel’s retirement plans, Sulyma, possessed actual knowledge of changes made to two investment options in the plans: a “2045 Target Date Fund” and a “Global Diversified Fund” that allegedly were imprudent in over allocating assets to alternative investments such as private equity and hedge fund investments.
The case, filed on October 29, 2015, would have been untimely if the Supreme Court found Sulyma possessed actual knowledge of the investment changes before October 29, 2012, because, according to ERISA’s statute of limitations for breaches of fiduciary duty claims (29 U.S.C.A. §1113(2)), an action must be commenced “after the earlier of” either six years after the act or omission constituting the breach, or three years “after the earliest date on which the plaintiff had actual knowledge of the breach.”
Intel claimed the actual knowledge provision was triggered as early as 2010 through several plan disclosures made to Sulyma, including Fund Fact Sheets from 2010, 2011, and 2012, a 2011 Qualified Default Investment Alternative Notice, a 2012 Summary Plan Description, 2012 Annual Disclosures, and several disclosures on Intel’s “NetBenefits” website. Sulyma testified in his deposition that he simply could not remember reviewing any of these disclosures and was not aware of the change in the funds’ asset allocation.
Could Sulyma have “actual knowledge” of the investment changes through receiving disclosures electronically, but supposedly not reviewing them? The first court to answer this question, the Northern District of California, answered in the affirmative. It ruled that Sulyma possessed actual knowledge of the alternative investment exposure and as a result, his claims were barred. But the Ninth Circuit disagreed. The Court of Appeals reasoned that a plaintiff must not just have access to, or received plan disclosures, he must have knowledge of the nature of the alleged fiduciary breach and laid out its actual knowledge test as: the defendant must show that the plaintiff was actually aware of the nature of the alleged breach more than three years before the plaintiff’s action was filed.
The Supreme Court agreed with the Ninth Circuit’s approach with important caveats. The core of the Court’s decision applied layperson and legal dictionaries and ERISA legislative intent to find that: “as presently written, therefore, §1113(2) requires more than evidence of disclosure alone…to meet §1113(2)’s ‘actual knowledge’ requirement, however, the plaintiff must in fact have become aware of that information.”
In footnote 2 of the decision, however, Judge Alito noted that the Court would take no position on the Ninth Circuit’s analysis of the question of what exactly a plaintiff must actually know about a defendant’s conduct and the relevant law in order for §1113(2) to apply. Arguably this was the bigger issue to decide considering the Ninth Circuit’s Intel analysis – that the plaintiff must have sufficient knowledge to be alerted to the particular claim – conflicted with the Sixth Circuit’s decision in Brown v. Owens Corning Inv. Review Committee that a plaintiff must only have actual knowledge of the “relevant facts” of the specific claim. District and Appellate Courts might apply footnote 2 of the Intel decision and continue to wrestle with this issue in the future.
Also, towards the end of his opinion, Justice Alito extended a life raft to plan administrators with practical advice on how to satisfy the actual knowledge requirement. In specifically emphasizing that “nothing in this opinion forecloses any of the ‘usual ways’ to prove actual knowledge,” Justice Alito referred to the importance of electronic records that could show that a plaintiff viewed the relevant disclosures, and other evidence suggesting that the plaintiff took action in response to the information contained in them. Justice Alito made clear that future plaintiffs could not feign knowledge of such disclosures through “willful blindness” or deposition testimony that might not be accurate.
The Intel opinion smartly relayed in plain and practical terms what plan administrators must do to obtain participant knowledge of plan disclosures. Particularly relevant, as more disclosures become digital, is obtaining electronic records that demonstrate a participant has viewed and is aware of the plan disclosure. This evidence could be obtained through a participant clicking to a specific plan disclosure only after indicating that they were aware of the type of disclosure they are viewing and of the information conveyed to them in the disclosure. This aspect of the decision – seemingly recommending plan administrators to employ electronic records to prove actual knowledge – dovetails with the DOL’s 2019 proposed rulemaking that attempts to provide a voluntary safe harbor for plan administrators that elect to provide electronic delivery as the default method of communication.
The proposed DOL rule supports the “notice” and “access” form of electronic delivery that would include: (i) a “notice of internet availability” that includes a brief description of the document being posted online; (ii) a Website address where the document is posted; (iii) instructions for requesting a free paper copy or electing paper delivery in the future; and (iv) a notice of internet availability that would be sent each time a retirement plan disclosure is posted electronically.
While it is unclear as of the present date whether this proposed DOL rule will be adopted, plan sponsors that wish to sidestep any issues with participant knowledge of their disclosures might want to adopt the DOL’s proposed guidance specifically with an eye to obtaining electronic records and other evidence that would satisfy the “usual ways” the Supreme Court suggested actual knowledge could be proven under 29 U. S. C. §1113(2).
Indeed, to ensure plan participants are aware of investment changes and other revisions to the plan, plan administrators should ensure they have prudent procedures in place to relay plan disclosures and, if electronic disclosures are offered, that those disclosures satisfy the DOL’s proposed rule that could become law this year. Such prudent procedures could not only protect against a potential breach of fiduciary claim, they could save plan administrators excessive costs in making mandatory plan disclosures by mail.
To help craft such procedures and respond to the lessons of the Intel case, plan administrators should consult their ERISA counsel.