The Supreme Court has ruled that 401(k) retirement account holders can sue plan administrators for mismanaging their money. The court unanimously ruled yesterday that a Texas man, James LaRue, could take his former employer to court over $150,000 he says he lost when his investment instructions were not followed. The decision doesn't guarantee that account holders will win their money back, but it clarified their right to try. U.S. News spoke with Mary Ellen Signorille, senior attorney for AARP's litigation unit, about what account holders need to know. Excerpts:
What does this ruling mean for 401(k) holders?
Most people, if you had asked them before this case came out, would have assumed they could sue to recover their plan assets if the plan trustees did something wrong and their account balance went down. Unfortunately, the lower courts had not taken that view. The takeaway from this [ruling] is now there is a way to sue your plan fiduciary if you believe they have done something wrong that negatively affects your account balance.
What if you just don't like the plan options offered?
You won't have the right to sue over that unless you can show a breach in fiduciary duty, which means they didn't look at a variety of plan options or picked the most expensive. It would have to be something that was a breach of fiduciary duty, not just "I wanted this, and they didn't put it in."
So what would be enough to justify suing?
If you give investment instructions and they are not followed, that is clearly a situation where if there is a loss, you can sue to recover it. Let's assume that your plan has employer stock, like in Enron and WorldCom, where plan fiduciaries didn't look to see whether that is still a prudent investment. That would be something. Or if they don't look at the fees and the mutual funds are the most expensive that they could pick, that would be grounds for a lawsuit. It is a bigger-picture thing where there could be a breach of fiduciary duty if trustees don't prudently do due diligence, or they don't have procedures in place to make sure your investment instructions are followed.
Could you sue if your fund performed badly?
That gets into a gray area. I would say that in itself, without anything more, it is probably not enough, but, for example, assume your plan puts [money] in various investment options and then doesn't monitor it for five years. That may be enough for a lawsuit. There is a duty of your plan fiduciaries to monitor how your plan options are doing over time.... If they don't do any review, they've got a problem.
Will this lawsuit cause plan managers to be more careful about how they are running 401(k)'s?
I think fiduciaries always try to be careful. It made a lot of fiduciaries go back and look at the procedures and processes that they have to make sure they are working and to make sure individuals know what they are supposed to do. It's a matter of disclosure and notice. So it probably has a positive effect.