Liao v. Fisher Asset Management, LLC

Background

Frank Liao was a former Fisher employee who worked for Fisher from October 18, 2004, through July 14, 2006. As an employment benefit, he participated in Fisher’s 401(k) Plan, a tax-qualified, Employee Retirement Income Security Act (ERISA)-regulated defined-contribution plan.

The plan allowed employees to make pre-tax contributions through payroll withholding and provided employer matching contributions. An employee’s own contributions belonged to the employee, but employer matching contributions became the employee’s property only after vesting. The plan provided that an employee who had not vested could forfeit the unvested employer contributions after the date specified by the plan’s forfeiture provisions. The plan selected the date on which a participant incurred five consecutive breaks in vesting service after leaving employment.

Because Liao worked for Fisher for less than two years, the employer matching contributions in his account had not vested when his employment ended. According to the complaint, the forfeiture occurred on July 14, 2011, when the unvested amount was approximately $26,000. Fisher did not direct the account administrator to liquidate the unvested contributions and their earnings until December 13, 2023. By then, the account balance attributable to those contributions had increased to approximately $245,000.

Liao alleged that removing the earnings accumulated after July 14, 2011 violated the plan and ERISA. He asserted a claim for benefits under 29 U.S.C. § 1132(a)(1)(B), two breach-of-fiduciary-duty theories under §§ 1132(a)(2) and (a)(3), and a prohibited-transaction claim under 29 U.S.C. § 1106.

Judicial Notice and Incorporation by Reference

Fisher asked the court to consider a declaration, the plan document, the plan’s adoption agreement, and the summary plan description. The court ruled that the plan document and adoption agreement could be considered under the incorporation-by-reference doctrine because the complaint referred to them and they formed the basis of Liao’s claims. The court denied Fisher’s request as to the declaration and another exhibit because those materials were not incorporated into the complaint and were not proper subjects of judicial notice.

Analysis

Claim for benefits. The court held that Sections 1.77 and 3.11(a) of the plan did not give Liao a right to the post-2011 earnings on the unvested contributions. The provisions described when a participant lost the right to continue accruing an interest in the unvested portion of the account. For Liao, that date was July 14, 2011, after five consecutive breaks in vesting service. The court found that nothing in the plan created an exception for earnings on forfeited assets. It therefore concluded that Liao had not identified a plan provision or other authority entitling him to those earnings, so his claim for benefits failed.

Breach of fiduciary duty. Liao’s fiduciary-duty claims were based on his allegation that Fisher administered the plan contrary to its governing documents by forfeiting more than the plan allowed. Because the court concluded that Fisher did not violate the plan by forfeiting the earnings on the unvested funds, it held that Liao failed to state a claim for breach of fiduciary duty.

Prohibited transaction. Liao alleged that Fisher’s use of the forfeited funds to pay plan expenses was a prohibited transaction. The court disagreed. It characterized the use as a reallocation of funds within the plan under the plan’s terms, rather than a transaction of the types prohibited by ERISA § 406. The court therefore held that Liao failed to state a claim under 29 U.S.C. § 1106 and dismissed that claim with leave to amend.

Disposition

The court granted Fisher’s motion to dismiss with leave to amend. Liao could file an amended complaint within 21 days, solely to correct the deficiencies identified in the order. If he did not file an amended complaint by that deadline, the claims dismissed in the order would be dismissed with prejudice. The court also vacated the case-management conference scheduled for October 1, 2024.