Business owners who offer their employees a 401(k) plan have always faced potential liability for actions they take—or fail to take—in connection with the plan. On February 20, 2008, the U.S. Supreme Court issued a decision that may have far-reaching implications in defining the breadth of this responsibility. In LaRue v. DeWolff, Boberg & Assoc., Inc., 128 S.Ct. 1020 (2008), the Court ruled unanimously that an individual participant in a 401(k) plan may maintain a breach of fiduciary duty claim under the Employee Retirement Income Security Act of 1974 (ERISA)—the landmark law that contains pension plan requirements—even though the alleged breach affected only the value of one’s own individual account.
The LaRue decision involved a defined contribution plan, the most common form of retirement plan offered by employers today. A defined contribution plan promises the participant the value of an individual account at retirement, which is an accumulation of the amounts contributed to that account and the investment performance of those contributions. Section 409 of ERISA provides that any person who is a fiduciary with respect to a plan who breaches the responsibilities imposed upon fiduciaries shall, in addition to other equitable or remedial relief, be personally liable to make good to such plan any losses to the plan resulting from such breach and to restore to such plan any profits of such fiduciary which have been made through use of assets of the plan by the fiduciary. In LaRue, the petitioner relied on Sections 502(a)(2) and 502(a)(3) of ERISA, which allow plan participants to bring an action for relief under Section 409 and to obtain equitable relief.
Petitioner alleged that the value of the holdings in his 401(k) account had decreased by $150,000 as a result of his former employer’s failure to follow his instructions to move his money to different investments. While the former employer argued that petitioner’s claim was essentially one for monetary relief, and therefore not recoverable under Section 502(a)(3), petitioner countered that he was not seeking money damages, but rather “wanted the plan to properly reflect that which would be his interest in the plan, but for the breach of the fiduciary duty.”
Much of the discussion in LaRue focused on an earlier decision in which the Court had rejected a claim for consequential damages brought by a participant in a disability plan that paid a fixed level of monthly benefits which were not part of an individual accumulation account. The Court held that Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 105 S.Ct. 3085 (1985), was distinguishable from the present case due to the nature of the relief sought. The Court discussed the changing landscape of retirement plans, and it appears that this influenced the Court’s decision.
The Court in Russell determined that fiduciary misconduct must threaten the solvency of the entire plan, rather than an individual beneficiary, in order to be actionable. However, the Court determined in LaRue that the “entire plan” language from Russell did not apply to defined contribution plans. Misconduct by the administrators of a fixed benefit plan will not affect an individual’s entitlement to a defined benefit unless it creates or enhances the risk of default by the entire plan. Conversely, for defined contribution plans, fiduciary misconduct need not threaten the solvency of the entire plan to reduce benefits below the amount individual participants would otherwise receive.
The question arises as to what the LaRue decision means for any employer who offers a 401(k) plan as a benefit to employees. ERISA refers to a “fiduciary” as an administrator, officer, trustee or custodian of an employee benefit plan. Employers, as plan sponsors, have the responsibility to select and monitor the investment and other advisors who help design and maintain their company’s retirement programs. Particularly in light of the present state of the economy and the uncertainty in the stock market, business owners/plan fiduciaries should consider the following suggestions to protect themselves from potential claims by individual plan participants:
- Administer the plan in accordance with its terms.
- Review and follow investment policies and procedures as prescribed by the terms of the written investment policy statement.
- Consider hiring and monitoring an independent investment advisor (if not already provided) to assist with the selection and routine analysis of investments available under the plan. This includes replacing or expanding investments as warranted.
- Review fiduciary insurance coverage and maintain adequate coverage.
- Carefully monitor the performance of any administrator/record keeper/pension consultant retained to administer the terms of the plan.
- Analyze fees charged by investment funds and all service providers.
- Consider the risks and benefits associated with offering or retaining company stock as an investment option under the plan.
- Consider having legal counsel perform a mock audit to confirm that plan fiduciaries are meeting their obligations.
While no blanket protection exists to prevent a lawsuit by a plan participant, the foregoing suggestions will help to shield business owners or plan fiduciaries from such claims and should help to limit liability in the event of a claim. IBI
