From the April 2008 issue of Investment Advisor • Subscribe!

401(k) Participants Can Sue

As high court rules in favor of workers, will a torrent of similar lawsuits ensue?

Will there be an onslaught of lawsuits now that the Supreme Court has ruled that participants in a 401(k) plan can sue to recover losses to their account when a plan sponsor or other plan fiduciary mishandles their account?

Fred Reish of Reish Luftman Reicher & Cohen in Los Angeles, which specializes in employee benefits law, says it's "inevitable" that other copycat suits will crop up, though he doesn't think the Supreme Court ruling will "unleash a tsunami of litigation."

In LaRue v. De Wolff, Boberg & Associates, Inc., the Supreme Court focused on section 502(a)(2) of ERISA, a provision that allows participants and beneficiaries to sue for "appropriate relief under section 409" of ERISA, according to The Wagner Law Group in Boston. Section 409, Wagner explains, provides that any person who is a fiduciary with respect to a plan and who breaches any of the responsibilities, obligations, or duties imposed on fiduciaries by Title I of ERISA "shall be personally liable to make good to such plan any losses to the plan resulting from each such breach ...."

In the LaRue case, a plan participant sought to use these provisions to recover a loss of $150,000 suffered when the plan administrator failed to properly implement his instructions as to how his account should be invested. The decision, which was written by Justice John Paul Stevens, overturned a ruling by the 4th U.S. Circuit Court of Appeals in Richmond. The ruling only affects participant directed plans like 401(k)s and ERISA-governed 403(b)s, Reish notes.

A recent report by Hewitt Associates found that almost two-thirds of employers (65%) report that their 401(k) plans are the primary retirement savings vehicles for the employees in the plans. Only 35% of employers surveyed 10 years ago reported that the 401(k) plan was their primary program for retirement, the survey found. The Hewitt study also reports that employers are providing earlier access to 401(k) savings, with nearly half of plans (49%) offering immediate eligibility to participate in the plan. This is up from 43% in 2005. On average, 78% of eligible employees participate in their companies' 401(k) plans, the study notes.

Ted Scallet, a partner at Groom Law Group in Washington, which specializes in employee benefits, says the sheer complexity of 401(k) plans as well as more complex demands coming from both participants and plan sponsors could likely spark more lawsuits. However, from what Scallet's seen, "plan sponsors and plan service providers" are making great strides to adhere to their fiduciary obligations.

Courts across the country have been debating the issue of whether a participant in a 401(k) plan can sue the plan sponsor for quite some time, Reish points out. That's precisely why the Supreme Court agreed to hear the LaRue case, because "courts in parts of the country were saying participants could sue, and [courts] in other parts of the country were saying they can't," Reish says.

Advisors should take heed because they, too, can be sued when a disgruntled plan participant sues the plan sponsor. "If there's a bad investment, a participant will sue the plan fiduciaries, who will then turn around and say, 'Wait a second, we did this based on advice from our advisor, and [the plan sponsor] will sue the advisor," Reish warns. The moral to the story, according to Reish? "Do a good job. Don't try to pick the next hot mutual fund--focus on funds that have preservation of capital."

Reprints Discuss this story
This is where the comments go.