Supreme Court Rules Individual Retirement Plan Participants Can Sue Employers Over 401(k) Losses

The Supreme Court has ruled that individual participants in a 401(k) plan can sue their employers over losses, a move that many observers say could result in a deluge of lawsuits for plan sponsors.

Until now, plan participants could only sue employers over losses in their 401(k) plans through class-action suits. But in its opinion Wednesday, February 20, the Supreme Court said that under the Employee Retirement Income Security Act, individual employees can sue plan sponsors for losses on behalf of the plan.

“This should be a wakeup call to employers,” says Don Stone, president of Plan Sponsor Advisors, a Chicago-based 401(k) consultant. “They need to recognize that as fiduciaries, they have responsibilities and there is going to be a spotlight shined on them.”

In the complaint, James LaRue of Southlake, Texas, said that his 401(k) plan administrator failed to follow his instructions to move his investment from stocks to cash. As a result, he says he lost $150,000. Since LaRue’s former employer, DeWolff Boberg & Associates, was the fiduciary for the plan, the employer was named as the defendant in the case.

Wednesday’s unanimous decision by the Supreme Court, while not a surprise to industry watchers, is still “groundbreaking” because of its implications for all 401(k) plan sponsors, says Doug Hinson, a partner at the law firm of Alston & Bird.

“We are going to see a lot of small, individual negligence-based claims against employers based on this decision and that is going to have an unfortunate effect,” Hinson says.

Particularly with all of the controversy around the fees associated with 401(k) plans, this decision could really affect 401(k) plan sponsors, says Robert McAree, the retirement practice leader with Sibson Consulting in New York.

“This puts greater emphasis on plan sponsors to make sure they have reviewed all of the fee arrangements and made sure that they have provided the appropriate level of disclosure to employees,” he says.

Employers that find themselves to be targets of these claims may want to think again before they push them into litigation, no matter how great their defense is, Hinson says.

“A lot of these claims are going to be for a few hundred dollars,” he says. “Employers will have to decide if it’s really worth denying the claim or if they would be better off paying the smaller amount.”