Death of the 401(k)?

VA49er · Feb 21, 2008 at 12:35 PM

USSC rules workers can sue plan administrators if they feel the losses were a result of mismanagement. Question is what justifies "mismanagement". How many Tom and Janes are going to try and sue because they lost a little money in the market? Seems a lot of people will try to take advantage.

High court OKs 401(k) suits

CHICAGO (MarketWatch) -- In a decision that could open the floodgates for lawsuits against retirement-plan administrators, the U.S. Supreme Court ruled Wednesday that individuals have a right to attempt to recover losses they believe were caused by fiduciary misconduct.

The unanimous decision covers some 50 million U.S. workers who have invested upwards of $2.7 trillion in 401(k) retirement plans.

In overturning a ruling last year by the 4th U.S. Circuit Court of Appeals in Richmond, Va., the Supreme Court said that James LaRue should be allowed to try to recoup $150,000 he believes was lost from his retirement account when the plan manager failed to follow his directions on how to invest the money.

The ruling marks a turning point in the interpretation of the Employee Retirement Income Security Act and underscores how workers are now making the biggest decisions about their retirement nest eggs, as more companies turn away from traditional pension plans in favor of retirement-investment accounts.

"Defined contribution plans dominate the retirement-plan scene today," Justice John Paul Stevens wrote in his opinion for the court.

While the decision allows individual suits as well as employee-group litigation to be brought against plan administrators under the fiduciary-breach claim, it does not stipulate that relief will be available.

"I do not mean to suggest that these are settled questions," Chief Justice John Roberts Jr. wrote in his opinion. "They are not. Nor are we in a position to answer them."

Traditional plans typically guarantee a fixed monthly benefit, while the value of a 401(k) plan is dependent on how much money is contributed and how the money is invested over a period of time.

LaRue claimed that his plan administrators ignored his instructions on at least two occasions to move portions of his stock-market holdings, resulting in the $150,000 loss.

Stevens said that federal law covers more than just a plan's loss because it does "authorize recovery for fiduciary breaches that impair the value of plan assets in a participant's individual account," according to the opinion.
"For defined-contribution plans, however, fiduciary misconduct need not threaten the entire plan's solvency to reduce benefits below the amount that participants would otherwise receive," Stevens wrote.

The decision means that LaRue can now go back to court to determine whether his claims that plan administrators ignored his change requests merit the reimbursement.

Remedy available
"For individual participants, this is good news," said David Wray, president of Profit Share/401k Council of America, an industry group. "It's clear now that they have a remedy if there is a problem in their defined-contributions plans."
But retirement experts also worry about the ramifications of widespread litigation. "If this leads to a barrage of frivolous lawsuits, that will be a disaster," said Alicia Munnell, director of the Center for Retirement Research at Boston College. "It will be costly to employers and make them less likely to set up plans."

Munnell is fearful that some people may claim, for example, that they urged their plan administrators to include, say, Google Inc. stock in their portfolios years ago but they didn't do it, "and now I'm not a millionaire," she said.
"I think there's a risk here," she added. "We're a very litigious society."

Fred Reisch, a partner at Reisch Luftman Reicher & Cohen, doesn't see a tidal wave of lawsuits on the horizon. "I think that's completely wrong," he said, noting that a number of states have made similar rulings without a deluge.
"We have some evidence that there won't be," he said. "The Supreme Court decision wasn't the first decision to hold that (keeping individuals from suing) wasn't the proper application of the law. The Supreme Court had to straighten it all out."

"Life will go on and we'll go forward and five to 10 years from now it will be like the normal and obvious outcome," he added.
Jennifer Waters is a MarketWatch reporter, based in Chicago.
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Death of the 401(k)?

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