GuidePost - Vol. 4, Issue 2 2008

The GRABot BAG
by Sherrie E. Grabot, CEO

February 2008
Court reaches verdict: everyone wins

The Supreme Court weighed in last week on an important question about retirement plans: can 401(k) participants sue when the plan makes a mistake that affects the value of their portfolios?

The decision (LaRue v. DeWolff, 06-856) was a unanimous “yea.” In this case, a Texas participant claimed that his plan cost him $150,000 in losses because the administrator failed to implement his instructions to move into less risky investments before the stock market went south.

As dated as disco
According to the wire story, the key issue was whether ERISA “permits an individual account holder to sue plan administrators for breaching their fiduciary duties.” The tricky part was that the law refers only to “losses to the plan,” rather than the individual. The plaintiff argued that while this language may have made sense back in the 1970’s when defined contribution plans were new, the individual participant is now much more in charge – and faces more individualized risks – in managing his or her own retirement savings.

Note that the decision did not affect the outcome of the suit, only the right to have it heard. According to the New York Times, the case is “unlikely to open any floodgates” for 401(k)-related actions, even in the wake of the markets’ recent declines. It simply “removes an unfair and very technical barrier” to an otherwise legitimate claim.

Reality check
Stepping out of the legal arena for a reality check, the decision certainly seems to make sense. If a hospital gives the wrong medication, or an airline forgets to top off the fuel tanks, the grounds for a lawsuit (if not its outcome) are pretty clear. So while employers and providers might not be too excited about the ruling, they can’t really complain. They’re merely being held to the same standard as any other entity that takes on significant responsibility for other people’s well-being. (And after all, somebody did make a rather substantial mistake.)

Actually, I shouldn’t have lumped plan sponsors and providers together. The defendant in the suit was in fact the plan administrator, not the plan sponsor. This also seems quite reasonable. It can even be seen as good news for employers: the more the responsibilities of plan administrators and providers are reinforced, the less burden remains with the plan sponsor.

Our business, our responsibility
If you extend that logic, managed accounts can offer even more protection for employers. As a provider plays a greater role in defining and pursuing an active investment strategy, the plan sponsor’s responsibility is reduced even further. Which is to the good, I think. After all, employers aren’t experts in retirement investing. Neither are participants. We are. As long as our expertise and systems are up to par, we should have as much control over investing as each individual participant will allow us – and bear the responsibility that goes with it.

The Times also pointed out that, remarkably, a conservative Supreme Court overturned a ruling of the nation’s most conservative federal appeals court to rule for an employee against a business. Lawyers for the Bush administration even argued in support of the participant. So even though the decision went against a financial provider, the case somewhat paradoxically offers recognition of the long-term shift in responsibility from the employer to the individual.

Ultimately, the employer’s role will continue to evolve away from what Justice Stevens called “the former landscape of employee retirement plans”, and toward an environment that could be described as “choose prudently, monitor appropriately, and back away slowly.” It’s a consumer-driven world out there. The employer’s job should be to offer access to quality tax-deferred retirement accounts, share in funding them, and get out of the way.

~~ Sherrie