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U.S. Supreme Court gives green light to 401(k) lawsuit

by on
in Employee Benefits Program,Human Resources

A new U.S. Supreme Court case may strike fear into the hearts of employers with 401(k) plans.

Strategy: Review the safeguards for your retirement plan. An employer may be held liable for personal losses sustained in a 401(k) account, according to the new case. (LaRue v. DeWolff, Boberg & Associates, S. Ct. 06-856, 2/20/08)

The Supreme Court’s decision erases decades of legal precedent.

Facts: An ex-employee alleged that his employer failed to follow instructions to shift mutual fund shares in his 401(k) account to achieve a more conservative mix. The employee subsequently suffered investment losses of $150,000. He sued the employer for violating the Employee Retirement Income Security Act of 1974 (ERISA).

The 4th Circuit Court of Appeals sided with the company. It cited a prior case establishing that an employee can’t pursue this legal remedy for an ERISA-based violation. (Massachusetts Mutual Life Insurance Company v. Russell, 473 U.S. 134, 1985)

But the Supreme Court reversed the lower court. It noted that the previous case involved a defined benefits plan that does not have individual accounts. The Supreme Court unanimously ruled that an employer may be sued under ERISA for investment losses in a defined contribution plan such as a 401(k).

In light of the new decision:
  • Review compliance standards and procedures for following participant directions.
  • Revise policies concerning investment options.
  • Grant participants more access to investment advisors.
  • Document advisory fees relating to administration of the plan.
Tip: Finally, make sure your company has adequate insurance protection to guard against potential liability.

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