Suing for Retirement?
Why you may be liable for your employees’ 401(k) plans.
Do you own all or part of a business that sponsors a 401(k) plan for your employees? If so, this article is a must-read.
You won’t like the liability position the Supreme Court has hung over your head. On February 20, 2008, our top court decided LaRue v. DeWolff. (Tell your professionals to see 128 S. Ct. 1020.) I’ll bet not even one reader in a hundred knows this landmark case exists, yet it directly impacts every 401(k) plan that allows each employee to choose his or her own investments.
The case: LaRue sued his former employer, DeWolff, claiming a “breach of fiduciary duty because his interest in the [401(k)] was depleted by approximately $150,000.” The ruling: In a nine-page opinion full of technical jargon, the court held that LaRue could sue his employer, stating, “when a participant sustains losses to his account as a result of a fiduciary breach…[the law] permits that participant to recover such losses…”
Simply put, you or your company can now be sued by participants in your 401(k) plan.
A little history will clarify just how important the LaRue case is. Back in the ’60s and ’70s my CPA firm was creating new pension and profit-sharing plans. Back then, these plans were the number one strategy for winning the income tax game. Our firm’s specialty was closely held family businesses. We always made the owners of the business the plan trustees to save fees. One problem: The trustees could be sued and nailed for a breach of fiduciary duties. This problem was easily solved. We had our clients hire professional money managers to invest the funds and then would monitor their results. We created hundreds of plans and never had a client sued.
In 1974, the Employee Retirement Income Security Act (ERISA) was passed, making significant changes to the law and giving birth to Section 401(k). Over the years, the modern 401(k) plan was developed—a “self-directed plan” because each employee can direct the investments.
We call these plans “cookie-cutter plans” because the companies that sell them all have a similar pitch, claiming three advantages: 1) low cost to start and maintain (in most cases a myth due to hidden costs); 2) employees have many investment choices (a typical plan allows about 12 to 60 choices) and 3) no fiduciary responsibility (the employees cannot sue you.)
Today, 401(k) plans dominate the retirement plan market. Nobody (including me) thought the the company could be sued by a participant for a fiduciary breach. Until now!
Now, LaRue opens up a two-step opportunity for every business with a cookie-cutter plan: 1) amend the plan to make the business owner the trustee (just like the old days to save fees) and 2) hire a professional money manager to invest the plan funds, thus eliminating the threat of being sued for a fiduciary breach. Typically, the pros will earn about 1–3% per year, on average, better than the Dow and S&P benchmarks.
If you already have a trustee plan, congratulations. But what if you’d like to join the trustee plan club? Here’s what to do: Send a fax to 847-674-5299 on your company letterhead. Include your name, title, phone numbers, number of participants in your 401(k) plan, total amount of plan funds to be invested and amount in your personal plan.