U.S. Supreme Court Decides That 401(k) Retirement Participants Can Sue for Losses Under ERISA

WASHINGTON – The Supreme Court ruled unanimously today that individual participants in 401(k) retirement plans can sue to recover their loses under the federal pension protection law.

Over 50 million workers in the U.S. have a total of $2.7 trillion invested into 401(k) retirement plans which are governed by the Employee Retirement Income Security Act (ERISA). Yet, as has recently been the unfortunate fate in court of other investors, judges have ruled against 401(k) participants who seek to recover under the very pension law written to protect them.

James LaRue of Southlake, Texas, filed such a claim stating that the value of his 401(k) plan fell $150,000 when the plan’s administrators failed to follow his instructions to switch to safer investments. Yet, attorneys for the plan administrator claimed the law only allows recovery of losses to the “plan,” not losses of an individual participant in the plan.

Business groups supported LaRue’s employer, arguing that ERISA was written to encourage employers to set up pension plans and only guards against abuses involving the plan as a whole. The 4th U.S. Circuit Court of Appeals in Richmond, Virginia, agreed with the plan administrators and the business groups that Mr. LaRue’s claim was not covered by ERISA.

Justice John Paul Stevens wrote the opinion for the court which reversed the Court of Appeals’ decision. Justice Steven’s opinion held that Mr. LaRue’s claim was allowed under ERISA, stating: “Fiduciary misconduct need not threaten the solvency of the entire plan to reduce benefits below the amount that participants would otherwise receive.”

Unlike those enrolled in traditional pension plans, employees in 401(k) plans choose from a menu of investment options, meaning they make the investment decisions concerning their pension assets. It was thought by many that this would immunize plan administrators from claims of mismanagement. However, today’s Supreme Court decision holds that plan administrators can be held liable, at least for failing to follow instructions of a plan participant.

“Defined contribution plans dominate the retirement plan scene today,” said Justice Stevens, unlike when ERISA was enacted in the mid-1970s. Traditional pension plans, which guarantee a monthly benefit at retirement, have fallen out of favor as most companies – for example the auto manufacturers – seek to eliminate their liability under such plans. 401(k) plans are by far the most popular of the types of defined contribution plans.

The term 401(k) refers to the section in the IRS Code which permits tax-deferred contributions to such plans. Congress enacted ERISA in 1974, after widespread pension fund abuses surfaced. Yet, such abuses continue to surface including, for example, during scandal-ridden collapses of companies such as Enron.

The securities law firm of Shepherd Smith and Edwards has represented thousands of investors nationwide. Our experienced attorneys and staff have assisted investors with losses in their retirement or other accounts. If you or someone you know may be a victim of mis-conduct, contact Shepherd Smith and Edwards for a free case evaluation by one of our attorneys.