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The United States Supreme Court recently issued a ruling that is likely to have a big impact on owners of privately held businesses sponsoring retirement plans. This unanimous 9-0 decision increases liability risks for employers who offer 401(k)s and similar retirement or profit-sharing plans.
Most of our clients pay little attention to the details of their 401(k) plan administration, instead relying on third-party administrators to take care of everything. You can no longer afford to ignore this critical compliance issue. Contact your Bulletproof Veil representative for more information on how to assess if you have a retirement plan compliance problem.
The Supreme Court Just Made Your Retirement Plan More Risky
Retirement Plan Basics
Generally, a retirement plan is any structure that allows employees of a business to set aside a portion of their earnings into a special retirement account. The most common type is a 401(k) plan, named after the U.S. Internal Revenue Code section that created it.
In the U.S., approximately 50 million workers have invested over 3.2 trillion dollars in company-sponsored 401(k) and similar retirement plans.
401(k) plans must be sponsored by employers. This creates a potential liability for business owners, as the regulation of these plans becomes increasingly strict.
The Studebaker Pension Plan Debacle
Today’s tight regulation of retirement plans springs from spectacular failures a generation ago of some large pension plans. Perhaps the most famous of these was the closing of the Studebaker automobile plant in South Bend, Indiana.
In late 1963, the Studebaker-Packard Corporation was suffering intense financial difficulties. The company was forced to close its South Bend production facility and lay off thousands of workers. What’s more, the pension plan for hourly workers did not have enough assets to meet its obligations.
Retirees and retirement eligible employees aged sixty and older received their full pension, but the plan defaulted on its obligations to younger employees. Some received a lump-sum payment worth a fraction of the pension they expected, and others got nothing.
Congress Takes Action with ERISA
The failure of the Studebaker pension plan was a rallying point for the U.S. Congress. Lawmakers decided U.S. employees needed stronger and more uniform protection of their retirement plans.
In 1974, Congress passed the Employee Retirement Income Security Act (ERISA). ERISA provided a comprehensive set of federal regulations governing employee retirement plans.
ERISA set strict administrative requirements for retirement plans. One of ERISAs primary objectives is to prevent employee benefit plan money from being separated from its intended beneficiaries. This principle was put to the test in a recent case before the United States Supreme Court.
James LaRue participated in a 401(k) retirement savings plan administered by his employer, the consulting firm DeWolff, Boberg & Associates.
The DeWolff retirement plan allowed employees to select investments for their 401(k) plan funds. As the Internet bubble burst and the stock market crashed following the September 11, 2001 terrorist attacks, LaRue gave his employer instructions to switch his retirement plan holdings from stocks into bonds and cash. Through some error, DeWolff neglected to make the changes LaRue requested.
LaRue claimed that DeWolff's omission cost him $150,000 in lost market value of his plan holdings, and he sued the firm for breach of fiduciary duty, seeking to recover the money. In response, DeWolff argued that ERISA law does not provide for the type of individual lawsuit brought by LaRue.
The LaRue case began in U.S. District Court, was appealed to the 4th U.S. Circuit Court, and eventually was brought before the U.S. Supreme Court.
Interpreting ERISA Rules for Employer Liability
The central question in the LaRue case was whether ERISA allows an individual employee like James LaRue to sue 401(k) plan administrators for breaching their fiduciary duties.
Think back to the Studebaker disaster. There, the entire pension plan failed and defaulted on obligations to thousands of employees. In the LaRue case, the 401(k) plan remained viable, but LaRue’s individual account dropped in value.
Prior to LaRue, the conventional wisdom was that lawsuits could only be brought on behalf of a retirement plan as a whole. Business groups supporting DeWolff, Boberg & Associates argued that ERISA is aimed at guarding against administrative abuses involving the plan as a whole, not at individual account performance.
The US Supreme Court thought otherwise.
The US Supreme Court Opinion
In the court opinion, Justice John Paul Stevens wrote that the landscape of retirement investing had changed. 401(k) plans have mushroomed as employers moved away from “defined-benefit” pension plans.
As a result, Stevens wrote, courts should interpret employee benefits law as giving individuals the green light to sue over administrative problems with their accounts, rather than limiting cases to those that affected an employer's "entire" retirement savings plan.
Summary & Conclusion
Opponents of the LaRue v. DeWolff decision argue that the ruling will unleash a wave of employee lawsuits, as stock market volatility continues to create ups and downs in investment account values.
"Employers aren't going to sponsor plans if they're going to be sued every time they make an innocent mistake," said Thomas Gies, a lawyer who defended DeWolff, Boberg & Associates.
"What it will do is punish dumb mistakes," says Alden Bianchi, an employment lawyer. "When the Supreme Court takes on an ERISA question, inevitably the law of unintended consequences starts to work over time."
What does this mean for you, the business owner? Plan on being held to a higher liability standard when it comes to administering your company 401(k) plan. Don’t kid yourself that you can leave all the responsibility to a 3rd party plan administrator. If you are sued, you will be the responsible party.
Bulletproof Veil can help you understand your fiduciary responsibilities as a retirement plan administrator. Contact your Bulletproof Veil Representative today for more information.
Material discussed is meant for illustration and/or informational purposes only and it is not to be construed as tax or legal advice. Although the information has been gathered from sources believed to be reliable, note that individual situations can vary.
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