LaRue v. DeWolff, Boberg & Associates, Inc.

By: Richard T. Kennedy, Esquire rtk@muslaw.com

James LaRue was a participant in a 401(k) Plan sponsored and administrated by DeWolff, Boberg & Associates, Inc. The DeWolff 401(k) Plan permitted participants to direct the investment of their individual accounts by selecting from a menu of investment options.

In LaRue, the Supreme Court considered LaRue’s claim that DeWolff breached its fiduciary duties under ERISA when it failed to implement LaRue’s investment directions under the 401(k) Plan. LaRue claimed that this breach caused his individual account under the 401(k) Plan to be “depleted” by $150,000.

In a unanimous decision issued on February 20, 2008, the Supreme Court reversed the Fourth Circuit and held that ERISA authorizes an individual participant in a defined contribution plan to bring an ERISA action in federal court for “recovery for fiduciary breaches that impair the value of plan assets in a participant’s individual account.”

By giving a “green light” to an ERISA breach of fiduciary claim for losses in an individual account under a defined contribution plan, LaRue may result in an increased number of lawsuits against defined contribution plans and their fiduciaries. However, a number of litigation issues remain, including whether there is a requirement for a participant to exhaust administrative remedies before proceeding to court and the extent to which a deferential standard of review may apply to a fiduciary’s decision in a court proceeding.

While the courts address these issues, there are precautionary steps that plan fiduciaries can take to minimize the potential liability presented by LaRue. The plan's administrative procedures and potential for administrative errors affecting the participant's account values should be reviewed. This should include the procedures for implementing a participant’s investment directions, and the related terms in the service provider agreements. Also, for investment liability generally, the plan's investment policy statement and the procedures for selecting and monitoring investment options should be reviewed, along with the plan’s compliance with ERISA § 404(c) providing limited fiduciary relief for participant-directed investments and investments in the default investment fund. Fiduciary insurance should be reviewed to confirm coverage for litigation costs.

Prevent 401(k) Lawsuits

By: Joseph A. Vater, Jr., Esquire jav@muslaw.com

When the stock market goes down, so do 401(k) assets.

The result: employees look for someone to blame, and the fiduciaries of their 401(k) plan, which often include the employer, are the target.

While there is no way to make a company's 401(k) plan lawsuit-proof, the United States Department of Labor recommends some basic steps that companies can take to avoid liability when their employee's 401(k) assets go south:

• Review or have a consultant review fund performances periodically and consider replacing underperforming funds.
• Offer an investment education program for employees who participate in the 401(k) plan, but make sure you follow the guidelines set forth in the Pension Protection Act so you don't inadvertently assume fiduciary responsibility for the information provided by the consultants.
• Disclose all direct and indirect fees associated with the 401(k) plan and all investment choices. Most 401(k) plans do not disclose all fees.
• Enable employees to select mutual funds from more than one fund family and make sure low-fee funds are included in the choices.

An employer that selects investments and investment advisers judiciously, following all appropriate regulations, usually will not be held responsible for the investment decisions of those participating in its 401(k) plan.