2008 Lane Reports

Court Should Side with Victim of 401(k) Mishandling

Friday, February 1, 2008
by Marc J. Lane


James LaRue's nest egg is at risk not only because his retirement plan's administrator was apparently careless, but also because two courts strained the plain meaning of the federal law protecting plan participants to bar him from asserting a claim for restitution.

Along with tens of millions of private-sector employees, Mr. LaRue made regular contributions to the self-directed 401(k) plan his Dallas-based employer sponsored, and counted on the plan to supplement his income after retirement. He was careful and deliberate.

So back in 2000, when the Nasdaq was soaring, he prudently decided to re-balance his portfolio and instructed his plan's administrator to unload some gravity-defying tech holdings and move the proceeds into risk-free government bonds.

But the firm that managed Mr. LaRue's 401(k) plan failed to respond to his request — twice. The market tanked, and he was out $150,000 in lost profits.

Mr. LaRue sued the plan's fiduciaries, alleging a breach of duty. But the twisted logic of a federal trial court and, later, an appellate panel led both to the stunning conclusion that the pension law that protects retirement plan participants only authorizes claims to recover losses suffered by a plan as a whole and wasn't intended to vindicate legitimate interests of individual accountholders like Mr. LaRue.

The U.S. Supreme Court is hearing his case because other appellate courts, Chicago's own Seventh Circuit Court of Appeals among them, have rendered decisions at odds with the financial gibberish which so far has denied Mr. LaRue any relief.

The plan's fiduciaries are fighting hard to maintain their unbroken record. They echo the lower courts' contorted reading of the law that only plan-wide damages are recoverable and that Mr. LaRue's personal losses are not. They argue that the law was intended to safeguard retirement money from misappropriation, not mishandling. And they insist that Congress purposely limited lawsuits against employers and plan administrators to encourage companies to make retirement benefits available to workers.

But the money Mr. LaRue lost was a plan asset and, for that reason, a loss to the plan, too. It simply makes no sense to deny plan participants a remedy when managers bungle their jobs. After all, the law's stated purpose is to protect workers and their retirement funds, not employers or fiduciaries who mismanage retirement plans.

Forcing fiduciaries to account to participants for their wrongdoing won't slow the growth of 401(k) plans. Competitive pressures force employers to keep up with their peers in affording employees the opportunity to save for a comfortable retirement. And a new pension reform act now allows companies to put retirement savings to work without liability should investments go bad.

But as the high court is urged to rule, fiduciaries shouldn't skate if they mishandle James LaRue's account, or yours or mine.

This month's Lane Report is adapted from a guest editorial published in Crain's Chicago Business on January 21, 2008.


Marc J. Lane is the President of The Law Offices of Marc J. Lane, a Professional Corporation, and of its financial-services affiliates. He is a business and tax attorney, a Master Registered Financial Planner, and an Adjunct Professor of Law at Northwestern University School of Law.

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The Lane Report is a publication of The Law Offices of Marc J. Lane, a Professional Corporation. We attempt to highlight and discuss areas of general interest that may result in planning opportunities. Nothing contained in The Lane Report should be construed as legal advice or a legal opinion. Consultation with a professional is recommended before implementing any of the ideas discussed herein. Copyright © 2008 by The Law Offices of Marc J. Lane, A Professional Corporation. Reproduction, in whole or in part, is forbidden without prior written permission.

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