News
Category: Court Rulings
An update to a retiree health care case we featured last year: on March 24, 2008 the U.S. Supreme Court declined to review a 2007 federal appeals court ruling, upholding a final rule from the Equal Employment Opportunity Commission (EEOC) that allows an employer to coordinate retiree health benefits with Medicare or a similar state health benefits program without being subject to the Age Discrimination in Employment Act (ADEA). The effect of the ruling is that employers are allowed to provide a two-tier system of retiree heath care coverage, with younger retirees receiving richer benefits than Medicare-eligible retirees. The final ruling ends an eight year court battle, often referred to as the "Erie County" case.
Jim Bartoszewicz was featured in a Pittsburgh Business Times article from the March 21 -27, 2008 issue:
A recent ruling by the U.S. Supreme Court is being called a victory for millions of workers and a reminder for employers to exercise the utmost fiscal responsibility regarding their 401(k) plans.
The court ruled on Feb. 20 that individual participants in 401(k) retirement plans can sue to recover losses caused by the mismanagement of funds, reversing a decision made earlier by the 4th U.S. Circuit Court of Appeals in Richmond, Va., in the case of LaRue v. DeWolff, Boberg & Associates.
Jim Bartoszewicz, president and CEO of Cowden Advisers Inc., a Downtown investment advisory firm, said companies can take action to guard against lawsuits.
"By creating Sound practices for governing their retirement plans, sponsors will reduce the number of legitimate claims, while putting themselves in a better position to defend the frivolous suits," he said.
The full article requires a subscription.
On February 20, 2008 the Supreme Court ruled that a participant in a 401(k) plan can sue the plan sponsor for mismanaging his account. That seems pretty logical, but until that decision, any suit brought against a 401(k) plan sponsor had to be on behalf of the plan (i.e. ALL the participants).
In this instance, (LaRue v. DeWolff), only one participant was harmed when the plan sponsor did not follow his investment instructions. Under the old law, the “plan” was not materially harmed so there would not have been an event to cause a lawsuit. The Supreme Court said what most of us would have said, “This man lost $150,000 and should be allowed to sue for restitution.”
Plan Sponsors Beware: the door is now open for many lawsuits against the plan and the plan fiduciaries. The LaRue case was one example of negligence, but this ruling could allow any of the following scenarios:
On Wednesday, February 20, 2008, the U.S. Supreme Court issued a ruling that overturned the Fourth Circuit Court of Appeals' decision that a participant in a 401(k) plan is prohibited from using provisions of ERISA to recover losses allegedly caused by their employer's failure to carry out investment instructions (LaRue v. DeWolff, Boberg & Associates, Inc., No. 06-856, U.S. Supreme Court [February 20, 2008]). Effectively, the ruling allows James LaRue to try to recover $150,000 the he believes was lost when the plan manager failed to respond to his investment directions, but has the potential to open a floodgate of litigation on defined contribution plan sponsors.
PLANSPONSOR.com reports on a key 401(k) fiduciary breach case (free registration required) that is scheduled for Supreme Court Session beginning October, 2007. The case (LaRue v. DeWolff, Boberg & Associates, U.S., No. 06-856) will determine if 401(k) participants can sue to restore their account balance when a fiduciary breach results in lost money. Lower courts ruled that recovering those funds falls outside of the scope of "equitable relief" authorized by ERISA.
If overturned, plan sponsors could be facing significant liability without strict fiduciary controls and a well defined and carefully followed Investment Policy Statement.
Let’s look at the key points:
- The U. S. Supreme Court “will decide” whether participants can sue to restore their account balances when a “fiduciary breach” caused them to lose money. Think ENRON!
- The U. S. Solicitor General stated in legal briefs filed with the court that: “It makes little sense that plans and their participants should be left with no relief when plan assets are lost through fiduciary mismanagement.” This puts all fiduciaries and co-fiduciaries on notice that they will, if the court rules in favor, have to “put their money where their investments are.”
A series of breached-fiduciary complaints filed against several high-profile Fortune 500 companies could shake the foundation on which 401(k) plans operate if a favorable ruling or cash settlement is scored by the plaintiffs...
"...I can see them making these points. [401(k) plans] are the biggest asset many people have, and they're going to pay attention," states Jere Cowden, CEO of Cowden Associates, a benefits consulting firm based in Pittsburgh.