A unanimous U.S. Supreme Court has ruled that 401(k) plan fiduciaries may be held responsible to employees for losses to their individual accounts that occur when the fiduciaries fail to execute employees' investment selections. Where things stand: The case has been sent back down for further proceedings, where the employee must prove that his employer breached its fiduciary duty. (LaRue v. DeWolff, Boberg, & Associates, Inc., U.S. Sup.Ct., No. 06–856, 2008)
All For One, One For All?
According to the employee, he directed his employer to make changes to the investments in his 401(k) account, but those directions were never carried out. He sued his employer under ERISA, claiming that the omission was a breach of fiduciary duty. His claimed loss: $150,000, which represented the amount by which his account was depleted as a result of the employer's failure to follow his instructions. ERISA provision at issue: Section 502(a)(2), which allows participants to sue fiduciaries for losses the plan suffers as a whole. A federal appeals court rejected the employee's claim, holding that the plan as a whole didn't suffer any losses, only the employee suffered a loss.
That Was Then, This Is Now
In reversing the appellate court, the U.S. Supreme Court noted that Section 502(a)(2) was written during a time when most employees participated in defined benefit plans. For defined contribution plans, the Court said, fiduciary misconduct need not threaten the solvency of the entire plan for a plan fiduciary to be liable. Court: Although Section 502(a)(2) doesn't provide a remedy for individual injuries distinct from plan injuries, that provision does authorize recovery for fiduciary breaches that impair the value of plan assets in a participant's individual account.
This case is far from over. However, the impact of the Supreme Court's decision is immediate. Fiduciaries must take a hard look at their plans and their personal liability. One way to neutralize responsibility for executing employees' investment decisions is to move the process online and let employees handle the entire transaction themselves. Plan administrators should discuss online applications with their 401(k) vendors.
Finally, although this decision isn't as broad as it appears to be, employees whose 401(k) investments didn't pan out may try to leverage it to hold the plan or fiduciaries responsible for their losses. However, provided employees' investment selections were properly executed, the employees generally won't have a leg to stand on.