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Justices' ERISA Ruling Puts Firms on Spot

Supreme Court stokes employers' worries by giving individual 401(k) participants the OK to sue their plan administrators.

February 2008
by Sarah Johnson/CFO Magazine

The U.S. Supreme Court has given an employee the right to sue his former company for not properly administering his 401(k) account.

The justices' unanimous ruling on Wednesday, stoking the fears of many employers, seems sure to broaden the reach of the Employee Retirement Income Security Act (ERISA) and the liability of defined contribution plans' fiduciaries.

The question before the court was whether individuals could seek a remedy on their own behalf. ERISA has been traditionally interpreted to be applicable only for litigants to fault fiduciaries for not working on behalf of a defined plan as a whole, thus limiting them to recoup losses for the entire plan, not just themselves.

In this case, James LaRue had sued his former employer — management consultancy DeWolff, Boberg & Associates — after he lost $150,000 in his 401(k) plan. He claimed that DeWolff failed to respond to his two requests to make investment changes to his account. As a result, his interest in the plan "depleted" by thousands of dollars. He subsequently accused the firm of breaching its fiduciary duty, but his case was denied by two lower courts.

In one case, the U.S. Court of Appeals for the Fourth Circuit turned down LaRue's lawsuit claim based on the assumption that ERISA protects only the entire 401(k) plan and does not extend to an individual.

However, "whether a fiduciary breach diminishes plan assets payable to all participants or only to particular individuals, it creates the kind of harms that concerned [ERISA's] draftsmen," wrote Associate Justice John Paul Stevens in the Supreme Court's majority opinion.

Wednesday's ruling serves as a warning for 401(k) managers that they can't be careless or dishonest with their handling of employees' investments, according to Brendan Maher, principal of Stris & Maher LLP, which represented LaRue. "It affects the administrators of every 401(k)," he told CFO.com.

Indeed, DeWolff believes the court's decision will result in a signficant increase in ERISA claims. "The employer community can expect a variety of claims brought by 401(k) plan participants who seek to recover alleged losses to their individual accounts, even in cases involving simple mistakes made by those involved in plan administration, at least in cases where the money can be funneled through the plan," according to a company statement provided to CFO.com from Thomas Gies of Crowell & Moring LLP, which represented DeWolff.

The justices' broader read of ERISA could also have a damper effect on 401(k) plans, according to the U.S. Chamber of Commerce. In its "friend of the court" brief filed with the Supreme Court last year, the Chamber predicted that a ruling in favor of LaRue would lead to higher costs of administering the plans and likely lead to reduced benefits.

Taking another tack, the Bush administration encouraged the Supreme Court to apply ERISA on an individual level. Otherwise, "at a minimum, fiduciaries of defined contribution plans would be immunized from liability for breaches of duty, no matter how egregious, if they primarily affected the plan account of only a single participant," wrote U.S. Solicitor General Paul Clement in his amicus brief to the court.

The justices did not weigh in on whether DeWolff was in fact lax in its fiduciary duties; that's up to a lower court to decide. LaRue no longer participates in its 401(k) plan.

Sarah Johnson is an assistant editor at CFO Magazine.

© CFO Publishing Corporation 2008. All rights reserved.