Supreme Court rules that employees can sue 401(k) managers

The 7-to-2 decision gives workers and retirees recourse for the mishandling of individual retirement accounts.

By Warren Richey | Staff writer of The Christian Science Monitor

from the February 21, 2008 edition

Washington - American workers can sue the manager of their 401(k) retirement plan if the manager fails to properly follow investment instructions.

The US Supreme Court on Wednesday ruled in favor of a worker who said his retirement account was deprived of $150,000 in earnings because the manager of his 401(k) plan allegedly ignored his instructions, keeping the money in less lucrative investments.

The Supreme Court said in a 7-to-2 decision that the Employee Retirement Income Security Act of 1974 (ERISA) authorizes retirement account holders such as James LaRue to sue to recover investment losses when retirement plan managers breach their fiduciary duty.

"The principal statutory duties imposed on fiduciaries by [ERISA] relate to the proper management, administration, and investment of fund assets, with an eye toward ensuring that the benefits authorized by the plan are ultimately paid to participants and beneficiaries," Justice John Paul Stevens writes in an eight-page opinion. "The misconduct alleged by [Mr. LaRue] in this case falls squarely within that category."

The decision is important because it helps identify remedies available to retirees and prospective retirees who face fiduciary misconduct related to their 401(k) or other retirement accounts. It comes at a time when most companies have abandoned traditional pension plans in favor of retirement investment accounts.

An estimated 50 million private-sector employees have invested $5.5 trillion in retirement plans regulated by the federal government under ERISA.

The decision stems from a lawsuit filed by LaRue against his former employer, the management consulting firm DeWolff, Boberg & Associates. The suit alleged that the company had breached its fiduciary duty to administer LaRue's 401(k) retirement account in accord with LaRue's instructions.

Under the rules of the company's retirement plan, employees were permitted to select how they wanted the money in their 401(k) invested. LaRue claimed that account managers ignored his instructions. The company responded that LaRue's instructions weren't as specific and clear as he maintains. The company also argued that ERISA did not permit an individual retirement account holder to sue a retirement plan to recover alleged investment losses.

A federal judge and a panel of the Fourth US Circuit Court of Appeals agreed with the company and threw out LaRue's lawsuit.

In reversing the Fourth Circuit decision, Justice Stevens said the appeals court judges misread the appropriate federal statute and misapplied a 1985 high court precedent. That earlier decision related to a dispute involving a traditional pension plan, not a defined contribution plan like a 401(k) account.

Lawyers for LaRue's employer had argued that the 1985 precedent restricted available legal remedies under ERISA to situations in which alleged fiduciary misconduct threatened the solvency of an entire pension plan.

In its ruling on Wednesday, the high court said those restrictions did not limit suits related to 401(k) accounts.

In a concurring opinion, Chief Justice John Roberts said he agreed with the court's conclusion that the appeals court had engaged in flawed analysis. But he said he did not agree with the court's conclusion that ERISA authorizes recovery for alleged fiduciary breaches in cases like LaRue's. Justice Anthony Kennedy joined the concurrence.

Chief Justice Roberts said that, rather than a claim for relief after a breach of fiduciary duty, LaRue's complaint is instead a claim for benefits. Such a claim stems from a different section of ERISA.

Roberts warns that the court's decision might allow some employees to recast a benefits claim as a breach of fiduciary duty claim to circumvent many of the safeguards enacted by Congress to protect retirement plan administrators.

As for LaRue, he can now proceed back to court in an effort to recoup the $150,000.