Supreme Court Allows Participant to Sue Employer for Failure to Implement Participant Investment Direction

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03.12.2008

Nancy C. Brower

In the recent case of LaRue v. DeWolff, Boberg & Associates, Inc., the Supreme Court ruled that a plan participant may sue plan fiduciaries to recover losses caused by the fiduciary’s failure to process the participant’s investment election. LaRue was a participant in a 401(k) plan that allowed participants to direct investment of their plan accounts. LaRue alleged that the plan’s fiduciaries failed to implement his investment election changes resulting in LaRue’s account balance being approximately $150,000 lower than it would have been had the investment elections been properly implemented.

The fiduciaries in LaRue argued that ERISA only allows a recovery when the entire plan, not just the account of one participant, has been harmed. The Supreme Court rejected that interpretation of ERISA holding that a participant may sue to recover losses that just affected one participant’s account.

The LaRue decision serves as a reminder that plan sponsors should review the fiduciary duties and risks associated with allowing participant direction of investment. Plan sponsors and their employees who work with retirement plans should consider whether they need to update plan procedures or take other steps to limit their risks.

Plan sponsors should not think that use of a professional third-party administrator (“TPA”) will shield them from LaRue-type liability. Most TPAs take the position that they are not fiduciaries for the plans they administer and that the plan sponsors are the fiduciaries that would be responsible for plan errors. Also, most TPA contracts require the plan sponsor to indemnify and hold the TPA harmless for any loss the TPA suffers in connection with the plan, even if the loss is attributable to the TPA’s negligence.

Plan sponsors hoping to rely on their own insurance protection to cover this type of liability may find that their insurance does not cover ERISA or fiduciary liability or that the policy excludes this type of error.

In the wake of LaRue, plan sponsors and their employees who work with retirement plans may wish to:

evaluate the adequacy of TPA and plan sponsor procedures for investment direction and make appropriate changes to reduce the risk of errors in processing investment elections;
evaluate whether and to what extent fiduciary liability policies will protect them in the event of a LaRue-type claim;
review contracts with TPAs to determine whether they can recover from the TPA for a LaRue claim caused by the TPA’s negligence, or whether the contract requires the plan sponsor to indemnify the TPA even if the TPA is negligent;
if the TPA will have any liability, determine whether the TPA has errors and omission insurance coverage or the assets to cover the liability; and
consider implementing participant communication and plan and investment documentation changes that may be used to limit the risk of fiduciary liability for failure to implement an investment election.

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03.12.2008