I’ve read about the new 401(k) Supreme Court case. How far back can employees sue us if they claim we mishandled their retirement accounts? And how can we protect ourselves now for something that might have already happened? — Anonymous
The U.S. Supreme Court’s recent unanimous ruling in LaRue v. DeWolff means that when fiduciary misconduct diminishes the value of an individual account in a defined contribution plan, such as a 401(k), the harmed employee can sue for damages.1 James LaRue sued his employer, DeWolff, Boberg & Associates, Inc., claiming that DeWolff didn’t follow his investment instructions, which caused a $150,000 loss to his account.
The federal Employee Retirement Income Security Act (ERISA) governs this case. Generally speaking, the statute of limitations—the time period for suing—for an ERISA claim grounded in breach of fiduciary duty is six years from the date of the last action that is alleged to be a breach, or six years from the latest date the fiduciary—the person or entity managing the plan—could have remedied a breach based on an omission. If an employee has been on notice or has had actual knowledge of a breach, however, a three-year statute of limitations applies that begins to run on the date the employee discovered facts sufficient to put him or her on notice.
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Claims based on fraud are a bit different. While they too are subject to the above-referenced discovery rule—meaning that the clock does not start running until the harmed party discovers or reasonably should have discovered that a problem exists—the statute of limitations is extended to six years from the discovery date.
Depending on the circumstances, employees can also bring claims under applicable state laws for both breach and fraud; these limitations periods vary from state to state and from claim to claim.
Steps You Can Take to Protect Yourself
If your company offers an employer-sponsored 401(k) plan, as LaRue’s did, you can take a number of steps to lessen and/or transfer the risk of being sued for investment losses in a participant’s account.
Most ERISA claims arise from either investment-related activities or the lack of prudent administrative processes and procedures. Although many investment-related functions can be effectively delegated to third parties, the plan sponsor (here, the employer) remains liable for the prudent selection and monitoring of these service providers. So it is crucial that you carefully document both why you chose a certain service provider and how you monitor it.
In many recently filed cases alleging excessive fees, employees claimed that the plan fiduciaries didn’t adequately investigate fee arrangements and alternatives. Given that ERISA does not require that the plan negotiate the lowest-cost arrangement, documents showing negotiations between the plan and its service providers would generally suffice to show that the arrangement was prudently selected. The plan sponsor should also continuously monitor these arrangements to identify “hidden fees” and determine whether fees are reasonable considering the services provided. Again, you should carefully document this on a regular basis.
The U.S. Department of Labor (DOL) has produced two guides for fiduciaries to better understand their obligations with respect to fees charged by service providers. The guides are available through the DOL’s website at www.dol.gov/ebsa/publications/fiduciaryresponsibility.html and www.dol.gov/ebsa/pdf/401kfefm.pdf.
As discussed above, plan sponsors can delegate investment-related decisions to professionals, and the plan remains liable only for the prudent selection and monitoring of those individuals. You can work with an investment advisor to select the investments that are offered to participants and to monitor the performance of those investments. Also, ERISA provides for the appointment of an investment manager to actively manage plan assets with discretion.
2 Safe Harbors
The Pension Protection Act of 2006 provides two safe harbors by which plan sponsors can insulate themselves from investment-related claims brought by plan participants: 1) the “qualified default investment alternative” (QDIA); and 2) fiduciary advisors.
The QDIA safe harbor protects plan sponsors from liability by shifting a participant’s account to a more diversified investment plan when the participant doesn’t provide investment directions to the plan sponsor. I recommend contacting an investment advisor to help select a suitable QDIA.
A plan sponsor is also insulated from liability for investment losses in a participant’s account when it retains a fiduciary advisor to provide specific investment recommendations.
What About Claims That May Already Be Out There?
If you suspect that a breach may have already occurred, I recommend undertaking a comprehensive risk assessment that examines your plan as a whole.
A risk assessment program looks for procedural prudence as it relates to investments and administrative functions, and it works to detect fiduciary breaches before they result in claims. Because fiduciary exposure—and a lawsuit—often begins with complaints in the form of phone calls or letters from participants, I recommend retaining an attorney experienced in ERISA and investment matters to assist with drafting responses to such inquiries and documenting the issues that relate to a denial of the remedy sought by the participant.
Examine your plan to ensure that you consistently take proper steps, including responding to participant questions and documenting plan-related matters. Courts do not review fiduciary decisions with 20/20 hindsight, so the proper response and documentation throughout will go a long way in establishing that the plan sponsor’s actions were prudent and appropriate at the time they occurred.
Jason Roberts, Esq., is a senior associate at the Hermosa Beach and New York offices of the law firm Edgerton & Weaver, LLP.
1LaRue v. DeWolff, Boberg & Associates, Inc., U.S. Supreme Court No. 06-856, 2008