Supreme Court Rules Participants Can Sue Employers Over 401(k) Losses
Bob McComas
Bankers HR Advisory
www.bankhr.net
On February 20, 2008, the U.S. Supreme Court ruled unanimously that workers could sue employers to recover losses when their 401(k) accounts were not handled in their best interests. The Supreme Court’s decision in LaRue v.DeWolff, Boberg & Associates, Inc., et al could redefine the rights of participants involved in contribution retirement programs, which includes employee stock ownerships, 401(k) plans, and profit sharing plans. This would cover current and former employees who are plan participants.
This has been a long standing concern for many of the 50 million workers who have more than $3 trillion invested in 401(k) accounts. This could lead to challenges of work related lawsuits, including challenges to the fees that workers are charged to administer their savings plans.
Until now, plan participants could only sue employers over losses in their 401(k) plans through class-action suits. But in its opinion decided on February 20, the Supreme Court said that under the Employee Retirement Income Security Act of 1974 (ERISA), individual employees can sue plan sponsors for losses on behalf of the plan.
Some experts cautioned that the ruling also could lead small employers to abandon 401(k) plans, which have increasingly been used to supplant employer-funded pension plans. Companies also may raise administrative fees in the plans to cover the threat of new litigation, experts said.
The decision was significant because the Supreme Court reversed lower-court rulings that had held employers not liable for losses suffered by their workers, even if accounts had been mismanaged. The court decision was based on the complaint of a Texas man (James LaRue, “petitioner”) who said his instructions to shift money out of stocks and into safer investments were ignored, costing him $150,000.
Individuals involved in the investment decisions of 401(k) plan and who mishandle retirement accounts can causes real losses, and the people who have suffered have a right to be made whole, and this decision reinforces that principle.
Dallas L. Salisbury, president of the Washington, DC-based Employee Benefit Research Institute (www.EBRI.org), said the ruling that individuals could sue — even if the account was generally well run — contradicted the understanding of many 401(k) industry experts.
“You could see a decline in the number of 401(k) plans being made available,” he said, especially among among smaller employers who may already be struggling to offer the plans.”
The actual lower court case from the U.S. Court of Appeals for the Fourth Circuit, James LaRue, Petitioner v. DeWolff, Boberg & Associates, Inc., et al, involved an employee who had asked the administrator of his company-sponsored 401(k) plan to shift money from stock funds into bond funds in September 2000. The money wasn’t moved, and the employee lost $150,000 as his stock funds plunged in value. He sued his employer for the loss.
The Supreme Court’s decision, written by Justice John Paul Stevens, was aimed largely at employers who have important legal or’“fiduciary” responsibilities when they sponsor a 401(k) plan. It potentially also could affect other firms that may play a major role in the operation of a plan and the handling of its assets, such as those that handle trade instructions from a plan administrator.
How do plan sponsors and administrators best manage personal liability of these types of plans? Following a clearly defined investment policy and have an investment committee knowledgeable in ERISA regulations is a good start. In addition, quarterly reviews of investment portfolios and employee communications about the results of the review will greatly aid in the management of the risk.
About the author: Bob McComas, president/CEO of Bank Brokers LLC and its subsidiary Banker HR Advisory, has 30 years of experience in senior level management positions in the area of human capital management.
