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Employers Can Be Held Liable For 401(k) Plans
This past February, the U.S. Supreme Court overturned a Circuit Court of Appeals
decision and allowed an individual in a 401(k) plan to sue their employer for
financial losses in their retirement account. The decision is significant in many
areas, but most importantly it reinforces an increasingly popular theme in the
retirement plan arena…..Employers can be held liable for decisions made regarding
their 401(k).
Background
The case in question, LaRue vs. Dewolff involves employee James LaRue, who had
participated in the Dewolff, Boberg & Associates 401k plan since 1993. LaRue argued
that his account had a shortfall of $150,000 as a result of losses that took place in
2001 and 2002. Mr. LaRue alleged he requested that changes be made in his account to
more conservative investments, and these changes were not carried out by his employer.
The claim was rejected by the Virginia Circuit Court of Appeals on the grounds that
an employer could only be sued for breach of fiduciary duty on behalf of the entire
plan (i.e. – a class action suit), and not by an individual account holder. The U.S.
Supreme Court later overturned this verdict and ruled in favor of the plaintiff,
stating that LaRue’s rights as an individual fall under the umbrella of ERISA.
Significance
The ruling is significant to business owners and fiduciaries for a number of reasons.
First, the hurdle of magnitude has been significantly lowered. Where previously a
class action suit was required in order for the threat of litigation to be realized,
now an individual (and their attorney) may file suit at will. Second, the case sets
precedent for future lawsuits claiming retribution for losses in retirement accounts.
Losses may be defined in many ways (excess fees or sub-par performance to name a few),
and this ruling opens the door for the lower courts to interpret the definition of “losses”
for which the employer may be responsible. Perhaps most importantly, this case is another
stone in the rucksack of responsibility that an employer carries when sponsoring a
retirement plan. I believe we will continue to see litigation in this area increasing
– both in quantity and breadth.
Closing
While the risk associated with litigation as a result of breach of fiduciary duty has
always existed, many had believed that the “big fish” (Deere & Associates, Lockheed Martin,
Bechtel Group) were at greatest risk because of the sheer size of assets involved. The
LaRue case has lowered the burden for individuals to seek retribution on drastically
reduced dollar amounts. Employers of all sizes need to understand the risk associated with
sponsoring a qualified plan and implement processes and safeguards to protect themselves.
For additional information, please feel free to contact a member of your service team or
coheninfo@cohencpa.com.
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