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New Perils in 401(k) Administration for Employers

In a case that will have far-reaching consequences for employers and employees alike, the U.S. Supreme Court ruled on February 20 that the Employee Retirement Income Security Act (ERISA) does allow an employee to sue his employer because of a fiduciary breach that resulted in individual losses to his 401(k) plan. This could also have an effect on the Simple IRA type programs or any retirement program that an employee contributes money to for his/her retirement.

The original decisions that lead up to the February 20th ruling were based on the concept that under ERISA an employee could not sue as an individual for losses to his/her individual plan. The District Court granted respondents judgment on the pleadings, and the Fourth Circuit affirmed. Relying on Massachusetts Mutual Life Ins. Co. v. Russell, 473 U. S. 134, the Circuit held that ERISA §502(a)(2) provides remedies only for entire plans, not for individuals. The case then went to the US Supreme Court

In a highly technical reading of the statute, the Supreme Court disagreed with the lower courts. Generally, Supreme Court ruled that unlike a defined-benefit pension plan, ERISA allows employees to recover for an employer’s breach of fiduciary duties with regard to a 401(k). The key issue was the fiduciary responsibility of the administrator of the plan.

LaRue filed this action in 2004 against his former employer, DeWolff, Boberg & Associates (DeWolff), and the ERISA-regulated 401(k) retirement savings plan administered by DeWolff (Plan). The Plan permits participants to direct the investment of their contributions in accordance with specified procedures and requirements. LaRue alleged that in 2001 and 2002, he directed De-Wolff to make certain changes to the investments in his individual account, but DeWolff never carried out these directions. LaRue claimed that this omission “depleted” his interest in the Plan by approximately $150,000, and amounted to a breach of fiduciary duty under ERISA. The complaint sought “make-whole” or other equitable relief as allowed as well as “such other and further relief as the court deems just and proper.”

DeWolff filed a motion for judgment on the pleadings, arguing that the complaint was essentially a claim for monetary relief that is not recoverable under the regulations. LaRue countered that he did not wish for the court to award him any money, but simply wanted the plan to properly reflect that which would be his interest in the plan, but for the breach of fiduciary duty.”

As an employer what are some of the steps that you can take to protect yourself?

1. You should make sure that any requests for changes to an employee’s 401(k) plan that his/her requests are processed as your plan outlines. This is the central issue in the LaRue case. It would be prudent to provide a notice that the change has taken place.

2. Established a tracking system showing when, where, how and to whom the documents were sent to or processed by.

3. If your plan today allows the employee to make his/her own changes via the internet, make sure they have the opportunity to do so. Have your plan provider conduct training classes on how to setup and access the plan by the internet.

4. If need be, you may want to provide a dedicated computer at work for the employee to use to access his/her account.

5. Be sure that you can show that requests have been processed correctly and on a timely basis.

6. Consult with your 401(k) plan representatives to make sure that you are processing change requests and any other documents on a timely basis, finding solutions and making corrections as necessary.

There are predictions that the Court’s ruling will result in a slew of meritless litigation from employees whose 401(k) plans are not doing as well in a shaky economy. This probably will happen and as an employer, you will be in a position that you will have to prove that you followed the instructions of your employee. Documentation will be paramount to your defense.

Link to the full decision by the US Supreme Court is below.

2/20/08    06-856   

Section 409(a) provides:
“Any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by this title shall be personally liable to make good to such plan any losses to the plan resulting from each such breach, and to restore to such plan any profits of such fiduciary which have been made through use of assets of the plan by the fiduciary, and shall be subject to such other equitable or remedial relief as the court may deem appropriate, including removal of such fiduciary. A fiduciary may also be removed for a violation of section 411 of this Act.” 88 Stat. 886, 29 U. S. C. §1109(a).

Michael A. Holzschu is the managing principal in the firm of Holzschu, Jordan Schiff & Associates specializing in Human Resource Systems, with a special focus on employee handbooks, job descriptions, performance appraisal systems, harassment training, safety and quality issues. He can be contacted at (248) 476-6907 or by email at or The company’s client base is primarily small to medium employers from all types of industries located throughout the United States.

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