Plan Fiduciaries Put Under Pressure

May 05, 2008

On February 20, 2008, the U. S. Supreme Court opened the door for participants in 401(k) and similar plans to sue responsible fiduciaries who breach their responsibilities.

Under ERISA, Congress intended to provide remedies for plan participants, without subjecting plan fiduciaries to undue burdens and liability. Though ERISA was enacted in 1974, questions have persisted about the scope of participant rights to sue plan fiduciaries.

James LaRue of Southlake, Texas filed suit in 2004 against his employer, Dewoff Boberg and Associates, Inc. claiming that the value of stock holdings fell $150,000 when his plan administrators failed to act on his instructions to switch his assets to safer investments on two occasions. LaRue then sued Dewolff, in its capacity as a plan fiduciary, for a breach of fiduciary responsibility.

Historically, federal courts have held that ERISA does not permit a plan participant to sue a fiduciary for individual losses, but instead would be required to sue, if at all, for losses to the plan as a whole. The lower federal courts each held that LaRue lacked standing to make a claim relating only to his individual account, as that was not a loss to the plan as a whole. The Supreme Court recognized that ERISA does “authorize recovery for fiduciary breaches that impair the value of plan assets in a participant’s individual account.” Under ERISA, the fiduciary is then personally liable.

THE IMPACT

The scope and import of this decision will likely develop for years. However, it is clear that the Supreme Court has at least opened the door for individual suits by plan participants against plan administrators, trustees, investment managers or others acting in a fiduciary capacity.

Noted retirement plan attorney Fred Reish, managing director of the Los Angeles law firm Reish Luftman Reichter and Cohen helped draft the brief for Mr. Cohen and comments. “Plan sponsors will more than ever want to know that they’re doing things properly. So, if they pick an expert, non-conflicted adviser, they’re going to have a higher degree of comfort that they’re doing things properly, and therefore there won’t be litigation.” (1)

The decision will likely result in greater reluctance to serve in any fiduciary capacity, at least in the absence of adequate protections from the employer against resulting liability. It may also result in a deluge of suits in 401(k) and similar plans. Broad Street Capital Advisors, LLC serves as co-fiduciary with its corporate retirement plan clients. For more information on how we can help you, contact us. (1) Investment News, February 25, 2008