Court rules 401(k) participants may sue plan administrators

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In a unanimous decision the U.S. Supreme Court ruled in February that individual participants of defined contribution pension plans such as 401(k) plans are protected under section 502(a)(2) of the Employee Retirement Income Security Act (ERISA) and may sue for losses resulting from a breach of fiduciary duties. Earlier rulings on ERISA protection from lower courts held that individuals could sue to recover losses only on behalf of the entire plan, Goodwin Procter LLP says in a Client Alert. Justice Stevens, who wrote the decision, limited the right to sue to participants in defined contribution plans.

The plaintiff, James LaRue of Southlake, TX had sued his former employer, Dewolff Boberg & Associates, Inc., the plan administrator, for breach of fiduciary duties because plan managers did not follow his instructions in 2001 and 2002 to move some assets to low risk investments, causing him to lose approximately $150,000. The Court ruled that LaRue may sue for losses in a lower court, but must prove fiduciary negligence.

In his opinion Justice Stevens noted the changes that have occurred in the country's pension system since 1974 when Congress passed ERISA and most pension plans provided for a defined benefit for all participants, the LA Times reports. The "landscape has changed," he wrote. "Defined contribution plans dominate the retirement plan scene today."

Currently more than 50 million Americans have invested $3 trillion in their 401(k) plans and other similar plans. Many factors can affect the value of individual accounts in addition to investment decisions made by the plan participant, including mismanagement and high management fees. Employees of Lockheed Martin Corp. and Bechtel Group have alleged in lawsuits that their retirement accounts were charged excessive fees, according to the LA Times.

But the Court's decision is not expected to impact suits claiming damages for excessive fees or losses on company stock, the Washington Post says. These cases are typically class action suits.

Martha Priddy Patterson, a director with Human Capital Practice of Deloitte Consulting, told the Washington Post that the court decision would cause employers to take a second look at plan administration. "It will focus plan sponsors on using people who get it right and get it right the first time."

Andrew Stoltmann, a plaintiff's attorney at Stoltmann Law Offices PC in Chicago sees the decision as a call for advisers to focus on their fiduciary responsibility. "I think this decision just further should serve as caution for advisers," he said, according to Investment News.

Investment industry experts are divided about whether the Supreme Court's decision will lead to more lawsuits. Don Trone, president of the Center for Fiduciary Studies in Sewickley, PA told Investment News that it "would not be economically viable for participants with small balances to file for losses.... I don't think we'll see the plaintiff's bar rushing to files cases. We'll certainly see more LaRue-type cases, but I don't think the problems will be pandemic."

But Stoltmann opines that the Court's decision will result in more litigation. "For them to come with a decision like this is huge; I expect to see a wave of lawsuits emanating from this decision."

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