Eight years ago, he was like anyone else: He was frustrated when he couldn’t execute a seemingly basic transaction in his 401(k), despite several attempts, and angered when that ended up costing him money.
“I didn’t start out to change policy or change law,” LaRue recalled February 21, the day after the Supreme Court ruled he had the right to sue his former employer over losses in his 401(k) during the 2000-01 tech rout. “I just wanted the situation rectified.”
LaRue’s 401(k) fell by $150,000 when his employer, Dallas-based consultancy DeWolff Boberg & Associates, ignored requests to move some money from equity funds to cash before the stock market tanked.
He didn’t think his fight to recover that amount would end up having ramifications for the estimated 70 million Americans who participate in 401(k) plans, or the thousands of companies that sponsor them. “But now there are trillions of dollars in these kinds of retirement accounts,” he marveled. “There needs to be some accountability when mistakes occur.”
For corporations that sponsor 401(k) plans, that could be the most significant takeaway from the Supreme Court’s decision. Previously, under ERISA, lawsuits against an employer were only permitted if participants’ losses resulted from some mishandling of the overall plan. That’s why LaRue’s case was thrown out by an appellate court last year. But now, if a company makes a mistake in managing an individual’s 401(k) account, that employee has the ability to independently sue his or her employer for any related losses.
“There’s no question that at some level, this ruling makes fiduciaries more vulnerable to damage claims if there's a legitimate error on their part,” said Robert Projansky, a partner in law firm Proskauer Rose’s employee benefits and executive compensation group.
Rather than fret about the number of lawsuits they could be hit with or how much it could cost in settlements and legal fees, industry observers said companies should take the ruling as a reminder of the need to maintain adequate oversight of their retirement plans.
“This is a time that companies should be doubling up on their efforts to ensure that they have all of the proper procedures in place,” said Warren Fusfeld, chairman of the employee benefits practice at law firm Wolf Block Schorr & Solis-Cohen. “There’s no margin for error.”
By and large, the 401(k) system—which now has more than $3 trillion in total assets and has become the primary retirement vehicle for many—is “extremely sound,” said David Wray, president of the Profit Sharing/401K Council of America.
Still, he acknowledged that with tens of millions of individual participants in 401(k)s nationwide, “it would be nearly impossible for the entire system to be error-free.” This makes it critical for companies, along with any third parties involved in running their 401(k)s plans, to provide participants with easy access to their accounts and have a well-established process in place to correct any errors that occur.
In the event a mistake is made to an individual’s 401(k), having clearly defined procedures will make it easier for employers to remedy errors quickly, before any potential losses mount, Wray added. “If a participant requests a change to their account, you need to have the proper oversight to ensure it gets executed. And most companies have that in place.”
That’s ultimately why LaRue said he elected to push the issue all the way to Washington. “Overall, my hope is that there is a strengthening in the process for resolving problems—without having to get the courts involved and without corporations being able to hide behind the law.”
Still, some attorneys predict the ruling will prompt participants who believe their 401(k) accounts were mishandled in any way to at least consider suing their employers, even though most claims would likely be relatively small stuff for the contingency-fee crowd, given that the average 401(k) balance these days is just over $100,000.
“The handwriting is on the wall,” said Jerome Schlichter, an attorney at Schlichter Bogard & Denton, who initiated a number of fee-related lawsuits against companies on behalf of 401(k) participants in 2006. “Fiduciaries need to follow the law and operate in the best interest of plan participants, or there will be consequences.”
While corporations might not be hit with a flood of suits right away, Schlichter said “employers should expect to get some attention” from individuals if there is any true breach of fiduciary duty.
These breaches could vary widely, Fusfeld noted, and their legitimacy would be determined by the lower courts. For example, an employee could file a lawsuit if their payroll deduction took longer than usual to reach the 401(k).
How frequently participants will sue is anyone’s guess.
“One of the main concerns is that individuals will just file a suit any time they suffer a loss and they think that their accounts were mismanaged by their employer,” Projansky said.
LaRue, who’s now an independent business consultant, for his part acknowledged that there will likely be some unintended consequences. But whatever shakes out will be in the best interest of individuals, he insisted.
“People are reliant on 401(k)s for all types of reasons,” he said. “But that money is not the company’s money. It was my money, and it was my savings. I should have had more control over it.”
It sounds simple enough.