Plan Trustees Must Act Prudently in Resigning

The Third Circuit has recently ruled that a plan trustee has a fiduciary duty to disclose to plan participants its reasons for resigning if the resignation and appointment of a successor trustee may cause harm to the plan participants or beneficiaries. Ream v. Frey, 1997 WL 61425 (3rd Cir. 1997) In Ream the Company established a section 401(k) plan and appointed a bank as the trustee, and Frey, the Company's sole shareholder as the plan administrator. The bank resigned as trustee after the Company failed to submit matching contributions for two years and the bank learned of the Company's poor financial situation. In accordance with the terms of the plan documents, the bank took repeated steps to urge Frey to assign a successor trustee. When Frey refused, the bank again in accordance with the plan, designated Frey as the successor trustee and forwarded the plan assets to him. Frey used the plan assets for his own benefit. As a consequence, Mr. Ream, a plan participant brought suit against the bank to recover his interest in the plan, alleging that the bank had breached its fiduciary duty by failing to disclose material facts that could detrimentally effect plan participants.

The Court concluded that Frey's failure to respond to the bank's request for the appointment of a successor trustee and failure to make matching contributions, and the bank's knowledge of the poor financial state of the Company, was "sufficient information for a reasonably prudent trustee to recognize that turning the assets over to Frey posed a real threat to the plan assets." Id. Thus, the Court concluded that the bank acted imprudently in resigning and turning the assets over to Frey.

The ruling is limited to its facts, and the Court noted that nothing prevents a trustee from resigning in accordance with the terms of the plan where the trustee turns the plan assets over to a reputable financial institution, or where the trustee discloses the circumstances of its resignation to plan participants. In addition, the bank had the option under ERISA to give the plan assets to a court of appropriate jurisdiction to protect the plan's participants and beneficiaries.