U.S. Supreme Court Says 401(k) Plan Participants Can Sue

Overview

On February 20, 2008, the U.S. Supreme Court issued its decision in LaRue v. DeWolff, Boberg & Associates, Inc., et al., which clarifies that individual participants in 401(k) and other retirement plans subject to federal pension laws (known as ERISA) can sue plan fiduciaries to recover investment losses from their accounts. The participant in LaRue alleged that the plan fiduciaries failed to follow his investment directions, which resulted in a decrease in his account balance of approximately $150,000. The Court overturned prior case law that had limited individuals from recovering for losses that did not affect the entire plan as a whole. As a result of this decision, we anticipate a significant increase in lawsuits filed on behalf of participants in 401(k) plans alleging breaches of fiduciary duties and the seeking recovery of investment losses. The case further emphasizes the need of plan administrators to carefully administer participant investment elections.

How Can Plan Fiduciaries Protect Themselves?

Although the LaRue decision does not change the obligations of fiduciaries in the selection and monitoring of investments offered by 401(k) plans, it does increase the likelihood that plans will be sued by individual plan participants seeking to recoup investment losses. Plan fiduciaries can further reduce their potential liability by taking the following actions:

• Administer the plan in compliance with its terms.

• Hire an independent investment advisor to assist the plan fiduciaries with selecting and monitoring the investment funds made available under the plan.

• Adopt an investment policy statement to document the investment decisions and the criteria and benchmarks by which the investments will be monitored over time.

• Make every effort to comply with ERISA Section 404(c) (which could relieve fiduciaries from certain liabilities stemming from participant-directed investments).

• Carefully consider the risks and benefits of adding or retaining employer stock as an investment option under the plan.

• When acting as a fiduciary on behalf of the plan participants and beneficiaries, always act in the best interest of these important individuals.

• Obtain appropriate fiduciary insurance and/or indemnification provisions to protect individual fiduciaries.

• Consider hiring legal counsel to perform a mock fiduciary compliance audit.

Ice Miller's Take on the Decision

"As a result of the LaRue decision, we believe that plan sponsors and related fiduciaries will face a greater threat of lawsuits from individual participants, particularly during downturns in the economy and markets," says Craig C. Burke, a partner in the Ice Miller Employee Benefits Group. Plan fiduciaries and administrators should take their roles seriously, seek expert advice in the selection and monitoring of investment funds available under the plan, and document the decisions made.

Want More Information?

If you have questions regarding the LaRue decision or fiduciary compliance steps that should be taken to reduce fiduciary risks associated with 401(k) plans, please contact Craig Burke, James Kemper, Melissa Proffitt Reese, Marc Sciscoe or any other member of the Ice Miller Employee Benefits team.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice.  The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.