End of LaRue Case: a 'Simple Matter of Economics'

The Texas management consultant whose name has been attached to a landmark U.S. Supreme Court ruling on participants’ legal rights to pursue fiduciary breach claims has no regrets.

Despite the momentous beginning with his name now permanently attached to an important piece of ERISA case law, James LaRue said he ended court proceedings against former employer DeWolff, Boberg & Associates after considering how expensive such a full-scale legal battle was likely to be.

“It’s a simple matter of economics,” LaRue told PLANSPONSOR.com. “It was not going to be a good risk and return so I withdrew the case. We’re were successful in changing the law and having the court look at our case and we were thankful for that.”

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Case Progress

In an order signed last week by Chief U.S. District Judge David C. Norton of the U.S. District Court for the District of South Carolina, the court said LaRue “decided that it is not financially feasible to continue to pursue his claim” (see LaRue Bows Out of Legal Fight). Still, LaRue said, it was worth the sleepless nights to have the case go up to the nation’s highest court.

The Supreme Court ruling hinged on a procedural issue, whether a participant could bring suit on behalf of their own individual account, rather than the “entire plan.”

The latter position had been the law of the land since its 1985 ruling in Massachusetts Mutual Life Ins. Co. v. Russell, but in the LaRue case, the Supreme Court’s majority held that that standard was in need of reconsideration in view of the changing “landscape” of retirement plans from defined benefit to defined contribution, and that, in this new environment, “fiduciary misconduct need not threaten the solvency of the entire plan to reduce benefits below the amount that participants would otherwise receive” (see Supreme Court Allows Individual ERISA Suits in Landmark Ruling).

With the procedural issue decided, the case was returned to a federal trial court to give LaRue an opportunity to prove the merits of his claims.

Little but Still Important

The LaRue finding became the basis of a series of related court cases in the following months (see Court Says LaRue Ruling Doesn’t Apply to ESOP Challenge).

LaRue originally went to court to regain $150,000 that he charged was lost from his 401(k) account because the plan administrators twice disregarded his order to move funds to different investment options and that those events constituted an Employee Retirement Income Security Act (ERISA) breach.

“I don’t regret it at all. I’m proud of what we did,” LaRue said in a phone interview. “The Supreme Court saw things from my point of view and (participants) were allowed access to the courts (for ERISA breach claims).”

The Supreme Court declaration that participants had a right to pursue individual claims could prove particularly significant in a down market for participants who allege potential fiduciary wrongdoing in connection with their losses, LaRue maintained.

“My case was a little one,” LaRue said, “but it was still important.”

If You Match It, They Will Save, Study Says

In a new report, Charles Schwab says there is a strong connection between a plan sponsor’s company match contribution formula and participant savings rates.

From 2004 to 2007, employees at companies with retirement plans serviced by Schwab were most likely to choose the plan’s “match ceiling” (the amount of salary employees need to defer into their plan in order to receive the maximum employer matching contribution) as their deferral level in order to maximize the employer contributions they can receive. As an example, Schwab said that among plans it services in which employers offer a 6% matching contribution, 20% of employees selected 6% as their deferral rate, which is the most concentrated deferral level and more than double the next largest participant contribution percentage in these plans.

The link causes sponsors to consider carefully their match formulas to help employees boost savings, according to the report. Considering two formulas—a 100% match up to 3% of an employee’s compensation and a 50% match up to 6% of an employee’s compensation—the second formula would encourage an employee to defer an additional 3% into the plan to receive the maximum employer match, while the maximum cost of the match to the employer remains the same, Schwab points out.

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“Employers who are focused on increasing their employees’ savings rates should consider adjusting their match formula, because we know that the employer match amount is one of the most important factors in driving an employee’s savings rate,” said Dean Kohmann, vice president of Charles Schwab retirement plan services, in a press release.

The most common employer match formula according to Schwab data is 50% of an employee’s deferred salary up to 6% of compensation. Thirty-six percent of Schwab’s plan sponsor clients have adopted a 6% match ceiling for their plan

From 2004 to 2007, Schwab saw a steady increase in the number of employers instituting a matching feature in their plans, especially among larger employers, according to the press release. In plans with more than 2,500 participants, the number of employers providing a match has jumped from 78% in 2004 to 88% in 2007.

The Schwab data also indicate that employer match levels increased in small and mid-sized plans. Across all sizes of plans included in the report, the level of employer match increased just over 1% from 3.15% in 2004 to 4.19% in 2007.

More information is available at www.schwab.com.

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