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Employees Can Now Sue Over 401(k) Accounts – Is This a Good Thing?
By JLP | February 26, 2008
From Financial Planning Magazine’s website comes this little news story:
Employees can now sue over mismanagement of their 401(k) accounts to recover their losses after the Supreme Court reversed a ruling on Feb. 21 the lower courts made more than 20 years ago.
In the unanimous opinion, Justice John Paul Stevens wrote that the landscape of retirement investing has changed since the earlier ruling and that this decision should give employees the right to sue over administrative problems with their accounts. “Fiduciary misconduct need not threaten the solvency of the entire plan to reduce benefits below the amount that participants would otherwise receive,” Stevens said.
Employment law experts say the ruling, which states that the Employment Retirement Income Security Act allows individual account holders to sue plan administrators for violating their fiduciary duties, leaves important questions unanswered. The court’s opinion did not disclose steps that must be taken prior to taking employers into court, such as appealing to the plan administrator.
I have a feeling that this going to cause lots of problems. For one, I can see it scaring employers away from offering a 401(k) plan in the first place. Second, I can see employee’s choices of funds being limited due to the employer’s fear that the employee may pick the wrong fund or put too much m0ney in one particular fund and end up suing the employer if things don’t work out. I can just hear all the future lawyer advertisments!
Of course there are times when pure neglect on the employer’s part should be addressed. For instance, there was an example in a recent Wall Street Journal article ($) of a guy who sued his employer because they didn’t make the changes that he requested to his account, which he says led to a $150,000 loss. What’s confusing about this is that the employee says he made requests for changes in 2001 and 2002 and the company didn’t follow through. I wonder why the employee didn’t follow up?
Anyway, I agree that companies should offer solid 401(k) plans to their employees and that any and all fees should be transparent so that the employee can see what’s going on with their money. These 401(k) plans should offer low-cost investment choices across all the major asset classes and employees should be required to take an asset allocation class and should also be required to sign an investment policy statement.
So, now it’s your turn to weigh in. What are your thoughts? I bet Jeremy has something to say about this!
Topics: 401(k), Investing, Retirement Planning | 10 Comments »
February 26th, 2008 at 10:52 am
The case was specifically because the 401k administrator never processed the participant’s “sell” order, which was placed at the height of the dot-com boom. The participant lost a lot of money because of the plan’s failure to process his request. The case does NOT open the door to sue for regular old investment losses, unless they were caused by a plan’s error. A participant choosing a bad fund would still be out of luck.
February 26th, 2008 at 10:52 am
Can we sue for mismanagement of FICA funds?
February 26th, 2008 at 10:53 am
Oh you bet I do!
This was a very hot topic at our conference last week, and it has a lot of people concerned. Like you mentioned, if there is true misconduct or illegal actions that are taking part on behalf of the plan provider or administrator, those issues certainly need to be addressed. But we all know that in this litigious society we live in, it won’t stop there.
You’re going to see a lot of people who try to sue just because they lost money and it was by no fault of the 401k itself. You’ll see idiots who put 100% of their account in some aggressive equity fund and come crying a year later when they lost 50% of their money. They will claim that the plan provider shouldn’t offer such risky funds, or that they should have been warned before investing in it, or whatever the case may be.
The law needs to be very clear and concise to make sure these lawsuits don’t get out of hand. If a participant calls in to make a fund transfer and the plan provider fails to make this change, you have a case. If a participant calls the call center and a rep tells them that they should specifically invest in XYZ fund because it is sure to go up and the participant does and loses money, again, you have a case.
But as it stands now, it seems like this is just going to open a can of worms and I think it could have some long-lasting effects in the retirement plan industry.
February 26th, 2008 at 11:28 am
BD,
I only hope it works like you think it will. However, I have a feeling that we will have all sorts of lawyers trying to make a case when there isn’t one.
Stu,
LOL! I wish!
Jeremy,
I just worry that this is going to do more harm than good.
February 26th, 2008 at 11:42 am
I’m very please with the ruling; what part of ‘fiduciary duty’ did the plan administrator not understand? I understand what you’re saying about the plan members responsibility to follow-up on trade requests, but I’m sick to death with the financial services sector pushing investments and then shirking their own responsibilities.
Commenting on your grouping of 401(k) and low-cost. Have you ever administered a 401(k)? The plan administrators charge fees to the employer and the industry average sales charge for the available funds is around 2%. You say it’s low cost because the internal charges are transparent to you(or hidden deep in a perspectus). In reality, the financial services sector that sells these plans are making fat money doing so and at the same time the plan participants have to sue to get them to follow instructions.
February 26th, 2008 at 11:52 am
Ernesto said:
“Commenting on your grouping of 401(k) and low-cost. Have you ever administered a 401(k)? The plan administrators charge fees to the employer and the industry average sales charge for the available funds is around 2%. You say it’s low cost because the internal charges are transparent to you(or hidden deep in a perspectus). In reality, the financial services sector that sells these plans are making fat money doing so and at the same time the plan participants have to sue to get them to follow instructions.”
I didn’t say that the plans are currently low cost. Rather, I’m advocating that the charges (all charges and fees) be transparent so that plan participants can see what they are getting for their money. You’re right, plan administrators can charge whatever they want and most participants will never know the difference.
February 26th, 2008 at 1:01 pm
“If a participant calls in to make a fund transfer and the plan provider fails to make this change, you have a case. If a participant calls the call center and a rep tells them that they should specifically invest in XYZ fund because it is sure to go up and the participant does and loses money, again, you have a case.”
I think Jeremy puts it well. There are definitely cases where the company is culpable. Just like if you pay someone for a hamburger at McDonald’s and they don’t ever give you one. But I agree that there should be limits. These two cases he mentioned are pretty clear-cut. However, I don’t think it should be sued for things like offering bad funds, etc.
February 26th, 2008 at 1:54 pm
I’m a 401k plan trustee so this actually affects me directly. I will need to ponder what measures to take. Maybe periodically review everybody’s investment options and have them confirm in writing the selections they picked, they decided with their own free will.
February 26th, 2008 at 8:40 pm
I second what Jeremy said – my firm isn’t too worried about this because of the scope of this particular suit.
The concern is that we’ll see more suits of this nature, even though losses in 401(k)s are typically the participant’s liability, not the 401(k) admin’s fault. Financial management firms don’t need the costs of defending multiple lawsuits on top of record-breaking losses from poor investments (sub-prime MBS) and a market correction to all align in 2008.
February 28th, 2008 at 6:56 pm
I’ll be more than willing to sign a no-sue waiver if I could invest in any publicly traded entity, rather than the POS choices I have in my 401k (and I work at one of the richest companies in the world).