Supreme Court Upholds Individual's Right to Sue Over 401(k)

Southlake, TXYou could forgive James LaRue for being ticked with the administrators alleged to have mis-managed his 401(k) investments after the value of his holdings plunged $150,000. His instructions were to move his portfolio into safer investments.

They didn't. Oops, sorry. And now LaRue is behind $150,000 in his retirement planning. However, the Southlake, Texas investor has been vindicated by a Supreme Court ruling, released yesterday, that clears the way officially for holders of 401(k) plans to sue for losses, due to a breach in fiduciary duty.

Under the language of the current law, lawsuits could be initiated in an effort to recover losses to the Plan itself, but it was unclear as to whether an individual Plan holder could sue as an individual.

The Supreme Court decision, which was based on LaRue v. DeWolff, 06-856 overturns an earlier ruling by the 4th US Circuit Court of Appeals in Richmond, Virginia—paving the way for the right to sue as an individual.

With traditional pension plans going the way of the Dodo bird and more Americans turning to the 401(k) for the building of their retirement nest egg, this decision is welcome news—especially given the spate of losses suffered by thousands, if not hundreds of thousands of investors at the hands of the sub prime mortgage meltdown. As the bubble burst, banks and other lenders—together with anyone tied to the latter's stock performance—have been posting record losses and write downs as 2007 drew to a close.

As their fortunes tumbled, so did the retirement nest eggs of many Americans.

While a corporation overall has the best interest of the corporation at heart, 401(k) Plan managers and administrators have a fiduciary duty under the 1974 Employment Retirement Income Security Act (ERISA) to manage and administer those funds in a prudent fashion which represents the best interests of the investor.

If a Plan manager or administrator allows the assets of the Plan to become exposed to undue risk, invests Plan assets in an imprudent manner or fails to follow the implicit instructions of the investor within whatever framework exists for that investor to instruct, then under ERISA the Plan manager or Administrator has breached his or her fiduciary duty.

The Supreme Court yesterday affirmed the right of the individual to sue, to recover losses—which, if 2007 is any indication and the threat of recession looming, could be substantial.

"Fiduciary misconduct need not threaten the solvency of the entire plan to reduce benefits below the amount that participants would otherwise receive," wrote Justice John Paul Stevens, in his opinion for the court, who added that "defined contribution plans dominate the retirement plan scene today," in deference to when ERISA was first enacted.

He's not kidding. A staggering 50 million workers have $2.7 trillion invested in 401(k) retirement plans.

The Supreme Court decisions affirms that these workers have some legal recourse if their retirement funds are lost, or diminished due to imprudent investment decisions on the part of fund managers.

There is much at stake. Unlike a standard retirement plan that is based on a more conservative and predictable model, the 401(k) is beholden to the market. Managed properly, a 401(k) can achieve greater returns than the standard pension plan, but with that potential comes greater risk.

Hence, the need and importance of good management practices.

The Supreme Court decision upholds an individual's right to sue in the absence of sound management on the part of Plan administrators.

Especially if said imprudent management costs the investor a comfortable retirement.