JAMES LARUE HAS been in and out of court for the past five years pleading his case of lost retirement dollars to just about anyone who’ll listen. His situation and the questions it presents are so ponderous that recently even members of the Supreme Court gave a listen.
LaRue is suing his former employer, DeWolff, Boberg & Associates, for improper management of his 401(k) plan, which the Dallas consulting firm denies. LaRue says he instructed DeWolff to sell stocks owned within his 401(k) and move to cash during the tech-stock boom. LaRue contends that his former employer failed to do so, and as a result, he lost $150,000 worth of retirement savings.
The decision before the Supreme Court now is whether or not a single plan participant, in this case LaRue, can sue and receive money for a breach of fiduciary duty. According to the Employee Retirement Income Security Act of 1974 (or ERISA), this so-called “fiduciary duty,” which is a legal relationship between two or more parties, requires that the “fiduciary” — typically a business owner or third-party administrator — act in a prudent manner ensuring that a retirement plan provides retirement income for employees.
If the court rules in LaRue’s favor, individuals will be able to bring claims as opposed to only being able to do so when everyone in the plan experienced a loss due to negligence or wrongdoing, which is the current recourse, says Carrie Byrnes McNichols, an attorney at Bryan Cave’s Employee Benefits Group in St. Louis. “That could be potentially very costly to the company sponsoring the plan and will likely lead to increased lawsuits and potentially increased liabilities,” adds McNichols.
The potential of this case, combined with a greater scrutiny of fees and expenses as well as increased transparency that will soon be required of defined-contribution retirement plans like 401(k)s, makes the onus of properly managing employees’ retirement savings all the more important. Here are a few ways to do so and limit your liability in the process:
Unless you own a financial-services firm, it’s probably a good idea to tap a financial advisor specializing in retirement plans for advice when considering offering employees a 401(k) plan, suggests Tim Meehan, president of Tim Meehan & Associates, a business and fiduciary consulting firm in Minneapolis. Devising retirement solutions for employees can be tricky and time consuming, as well as highly regulated. And remember, says Meehan, “even small businesses are treated like the big boys as far as regulatory compliance is concerned.” The same degree of oversight of 401(k) plans is expected at both large and small businesses.
For a review of the different types of retirement plans small businesses can provide, click here.
Share Your Liability
As a plan sponsor, says Fred Reish, head of the ERISA and benefits practice group at Reish Luftman Reicher & Cohen in Los Angeles, even if you hire an advisor you won’t be able to avoid your fiduciary status. However, he adds, it is possible to share your liability. For example, John Hancock Retirement Plan Services, a unit of the Toronto-based Manulife Financial Corp., offers to warrant its investment options while some advisors will act as co-fiduciaries. As per John Hancock’s warranty, all 401(k) plan fiduciaries are assured that available investment options and monitoring processes satisfy the prudence requirement established by ERISA. Further, John Hancock promises to restore plan losses and pay litigation costs related to the suitability of this process or its investment lineup. Similarly, a “co-fiduciary” generally offers to share your liability, should an error regarding investment diversity and other investment selection issues arise.