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Litigating over Retirement Savings
The deepening recession. Rising unemployment. Falling financial markets. What else can go wrong for American employers? How about potential litigation explosions ignited by unhappy employees who have seen their stock market-pegged 401(k) accounts plummet in recent months? The conditions, in fact, may be ripe for a "perfect storm," in which disgruntled employees and retirees turn to lawyers to try and recover some of their lost retirement savings -- in essence, blaming plan sponsors for the lost funds. But, while the potential is there, plan fiduciaries can soften the impact of such litigation by following well-established, "prudent" guidelines and investment strategies, documenting those efforts, and keeping the lines of communications open with employees and retirees. In a relatively recent landmark case, LaRue vs. DeWolff Boberg & Associates Inc., a participant in an employer's 401(k) plan claimed the plan failed to execute his investment instructions -- a failure that resulted in a reduced account balance. Earlier this year, the U.S. Supreme Court held that LaRue may sue for relief under the Employee Retirement Income Security Act of 1974. According to Jeff Harris, an investment adviser in the Harrisonburg, Va., office of Raymond James Financial Services Inc., the LaRue decision opens the floodgates for individuals to sue employers/plan sponsors regarding 401(k) accounts. Prior to LaRue, such lawsuits could only be done via class action, he says. "Plaintiff law firms may try to exploit this 'perfect storm' of negative investment returns and business owners' apathy about their fiduciary obligations as plan sponsors," Harris says, adding that it's not too far-fetched to see television ads soliciting potential clients who have suffered losses in their 401(k)s or similar retirement plans. Some employers, Harris says, "think that because 401(k)s are by and large self-administered, they [can] either ignore or take for granted that they are not responsible. They could not be more wrong ... ." Kristen Belz-Ornato, a labor attorney with Thorp Reed & Armstrong, a Pittsburgh law firm, says that while she is not sure the storm will actually reach land, it is a very good idea for all plan fiduciaries to sit down, look at investment strategies and determine if they are following a "prudent" process. "One of key defenses [to a lawsuit] is to show you have acted prudently, so you need a record of what you have done," she says, adding that a plan sponsor should consider seeking the help of independent investment adviser or consult with benefits counsel about the situation. "The key is to take action and record that action," she says. "If you have to go into court, you want to be able to point exactly at what you did as fiduciary to make the best possible decisions." Another possible strategy is to name someone by title to be the fiduciary and purchase a fidelity bond so the entire company is not named in 401(k)-related litigation. "Most of all, make sure a there is a clear structure in place and that you are following it," Belz-Ornato says. "I'm not sure if there is a perfect storm brewing, but there are certainly indicators that economic conditions are right. So you need a fiduciary with a prudent process in place. It's certainly not too late to take action." Communication is also crucial, says Mary Steigerwalt, president of Keane Retirement Services in Wayne, Pa. Plan sponsors must ensure they are communicating on a regular basis with plan participants and make sure all participant data is up to date. "The LaRue decision created a new level of responsibility for plan sponsors," she says. "That case had some very specific outcomes, but the most important is you need to know where participants are and you must communicate with them on a regular basis." If there is an upside to the current situation, fiduciaries can thank the stock market crash in 1987, which resulted in new Department of Labor regulations, dubbed 404c, that provide a "safe harbor" for plan sponsors/employers that follow some very specific guidelines. In short, by following those guidelines, employers can't be held responsible for bad investment choices by plan participants. In today's recession, employees whose retirement plans have taken the 404c path will need to find a new cause of action. But plan sponsors that didn't comply with those guidelines "could be at significant risk," says Lisa Alkon, a Boston-based principal in Towers Perrin's Retirement practice. And, Harris says, there are literally "millions of plans" that have never adopted changes based on the 404c regulations. "With people hoping to retire, they will be looking for any out," Harris says. One other potential area of litigation will be the ongoing dispute over fee transparency. According to a recent study from Stamford, Conn.-based Towers Perrin, an increasing number of organizations are asking company executives and internal plan committee members to appoint plan fiduciaries, as opposed to the board of directors or board-level committees having that responsibility. The study reports that 54 percent of respondents from U.S. companies said selecting a fiduciary is the responsibility of a board member. In 2005, the last time the study occurred, the number was 71 percent -- a significant drop. Under ERISA guidelines, whoever appoints a fiduciary has a duty to monitor the appointee for continued compliance, and faces potential liability in the event that the appointment of the fiduciary is questioned. Alkon says that the wide-ranging and comprehensive responsibilities of a typical board or board committee may result in too little attention being paid to the duty of fiduciary monitoring. That situation, in turn, can increase the potential for liability, and make it possibly more difficult to successfully argue for the suit's dismissal, at least with respect to the organization or the board. "Acting as an ERISA fiduciary carries with it the potential for civil liability," Alkon says. "With the rise of lawsuits and regulatory actions, it is only prudent for directors and their organizations to take certain defensive measures that start with plan governance." Towers Perrin reports that, while 37 percent of respondents say their companies review operational compliance of qualified plans annually, an "astounding" 21 percent note their firms hadn't -- or weren't aware if they had -- performed the review. When it comes to reviewing 401(k) vendor fees, nearly half (47 percent) of the survey respondents say they look at them once per year. Such a high response rate may suggest companies are concerned about lawsuits over 401(k) fees, says Alkon, who also noted that such a response may also indicate a cursory annual review as opposed to a detailed review undertaken because of the fee-transparency controversy. Companies should increase training for fiduciaries and have consistent compliance reviews, she says. Many plans are including governance best practices to avoid legal action, including the development and implementation of systematic training processes for fiduciaries.
January 6, 2009 Copyright 2009© LRP Publications |
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