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In a landmark decision that will help millions of workers who participate in 401(k) plans at work, the Supreme Court ruled yesterday that participants could sue 401(k) administrators if they believe the administrators of their 401(k) did not follow instructions and that lack of action resulted in loss of funds. More than 50 million workers invest their retirement savings through 401(k) funds and the total amount invested is $2.7 trillion. I'm glad the Supreme Court realized workers needed protection from administrators who don't follow instructions.
The case was brought by James LaRue of Southlake, Texas. His suit contends that he lost $150,000 in his 401(k) because the administrators of his plan did not move his holdings into safer investments as he instructed. The Supreme Court had to decide whether or not the Employee Retirement Income Security Act (ERISA) allows individual account holders to sue plan administrators for breaching their fiduciary duties. The law specifically allows recovery to the "plan" rather than the individual. Justice John Paul Stevens said in his opinion for the court, "Fiduciary misconduct need not threaten the solvency of the entire plan to reduce benefits below the amount that participants would otherwise receive."
ERISA was written in the 1970s when most people had defined benefit plans, which meant the retiree was guaranteed a specific benefit at retirement for the rest of his or her life. At that time, it made sense to focus on the impact on the "plan" if administrators erred. Today, most employees are in defined contribution plans (such as 401(k)s or 403(b)s), which do not promise a specific benefit, but instead a lump sum when one retires. These new plan designs require a change in how this law is interpreted. The justices decided an individual's holdings should be protected from administrators who do not fulfill their fiduciary responsibilities.
The Bush administration supported the workers. Business groups supported LaRue's employer. Luckily, the business groups lost and we'll all be better protected by the Supreme Court's ruling in favor of the worker's 401(k) protection rights.
Lita Epstein has written more than 20 books including Working After Retirement for Dummies.
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