Precautionary Steps to Avoid 401(k) Mismanagement Lawsuits

By McDermott, Will & Emery Mar 2, 2008

On Feb. 20, 2008, the U.S. Supreme Court issued a long-awaited decision affecting remedie​s available under the Employee Retirement Income Security Act (ERISA) for individual plan participants in 401(k) plans. In LaRue v. DeWolff, Boberg & Associates, the Supreme Court clarified that an individual plan participant may recover damages as a result of an ERISA fiduciary’s breach of duty even if that breach affected only that individual’s 401(k) plan account.

The case involved a plan participant who alleged that the value of his 401(k) account fell $150,000 when administrators at his retirement plan didn't follow his instructions and switch his funds to the investments he chose. That case will now be tried on its merits in a lower court.

Prior to LaRue, courts had generally taken the view that ERISA Section 502(a)(2) provided a remedy for fiduciary breach claims only for relief sought for the plan as a whole.

Although the Supreme Court’s holding was unanimous, Chief Justice John Roberts and Justice Anthony Kennedy suggested in a concurring opinion that ERISA Section 502(a)(2) may not be the correct remedial provision for the LaRue plaintiff’s claims. Rather, Roberts suggested that LaRue’s claim properly lies only under ERISA Section 502(a)(1)(B), a provision that allows for garden-variety claims for benefits and is separate and apart from ERISA’s fiduciary breach provisions.

Assuming LaRue had an ERISA Section 502(a)(1)(B) claim, Roberts explained that LaRue would not have a proper ERISA Section 502(a)(2) claim under established court precedent that bars claims that are essentially benefits claims from being recast as fiduciary breach claims.

Steps for Plan Fiduciaries and Employers

The LaRue decision will likely result in an increased number of lawsuits against employers, 401(k) plans and plan fiduciaries, which will likely be fashioned as fiduciary breach claims under ERISA Section 502(a)(2). These new lawsuits may be based on issues similar to those raised in LaRue—alleged administration or investment errors—or on issues raised in the so-called “stock drop” cases, where claims based on a drop in value of employer stock held in a 401(k) or similar defined contribution plan affect individual participant accounts.

Expect an increase in lawsuits fashioned as
fiduciary breach claims under ERISA.

Plan fiduciaries and administrators can take several precautionary steps in an attempt to ward off new lawsuits based on LaRue and to provide potential defenses if new litigation is filed. Fiduciaries should:

    • Review current plan administration and account investment processes to ensure that all steps are being taken to avoid administrative errorsaffecting plan participants’ accounts. Proper and diligent administration is generally the best defense against potential litigation.

    • Treat any challenges to administrative or investment errors as claims for benefits under the plan.Even with the best procedures in place, administrative mistakes do occur. If fiduciaries learn of investment errors or other administrative claims involving individual benefit decisions, administrators may attempt to rely on Chief Justice Roberts’ concurring opinion.

    By treating these issues as garden-variety benefit claims, the plan administrator can require the participant to first exhaust administrative remedies, giving the plan the opportunity to determine whether any errors have occurred before litigation is filed.

    If the claims are denied, the plan administrator can argue in litigation that the decision and any interpretations of plan terms should be reviewed under a deferential standard of review.

    • Grant the benefit claim during the administrative review, if a claim is viable, which can save litigation defense costs and avoid payment of attorneys’ fees to the participant’s lawyer if litigation is commenced.

    • Review their existing fiduciary insurance coverage to determine whether it is sufficient if the amount of ERISA fiduciary breach litigation increases, or consider purchasing fiduciary coverage if none is in place. Any increase in fiduciary litigation could become very costly for employers, and fiduciary insurance policies may have limits that could be quickly reached if the number of lawsuits against any plan increases greatly.

This article is adapted and reposted with permission from the law firm McDermott Will & Emery LLP, where Paul M. Hamburger, P.C., is a partner in the firm's Washington, D.C., office, Nancy G. Ross and Michael T. Graham are partners in the Chicago office, and John A. Litwinski is an associate in the Chicago office.


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