Perspective: Wake Up!

The Supreme Court’s recent 401(k) ruling should be a warning.

Ready or not, more defined contribution plan lawsuits are coming our way. Class action suits related to fees or mismanaged funds are nothing new, of course. But the recent Supreme Court ruling allowing individuals to sue plan sponsors for breach of fiduciary responsibility should be a wake-up call, because its ramifications are huge.

The Court’s decision permits employees who lose money in qualified retirement plans to recover losses from their employers, the plan sponsors, as an individual participant rather than on behalf of the whole plan as had been the previous ruling by the Supreme Court. The suit that prompted the ruling involved a Texas man, James LaRue, who sued plan administrators after his account lost $150,000. LaRue, a former employee, claimed his investment instructions had been disregarded.

Another instance took place in late March when Terry Hamby, a former employee of Regions Financial Corporation, filed suit against the company, plan sponsor and administrators. That suit, which seeks-class action status as well as millions of dollars in recovery, alleges fiduciary mismanagement that increased loss exposure.

The increased retirement plan scrutiny is in large part due to the demise of company-sponsored pensions and threatened Social Security, which leaves 401(k) plans as the primary retirement funding vehicles. Industry experts warn several areas are likely to come under fire:

  • Financial relationships that violate ERISA disclosure requirements.
  • Over-investment in company stock, such as what happened with Enron.
  • High fees for underperforming mutual funds.
  • Terminated employees who aren’t allowed to control their own accounts.

In addition, because of today’s high unemployment and 10 to 20 percent average annual turnover, more employees are cashing out – depleting or taking a percentage of – their 401(k) accounts. As these employees arrive at an under-funded retirement, they too may be lawsuit candidates, claiming they weren’t adequately advised about the consequences of withdrawals. Further, limited investment options that lead to reduced plan balances may prompt participants to file suit if they regard restricted choices as fiduciary misconduct.

While this heightened legal threat is certainly cause for concern, it can also be an opportunity to differentiate your plan adviser service by providing additional value to your clients. More than ever, plan sponsors are going to need help if they’re to avoid the potential landmines that await them. Plan managers can improve plan performance and minimize their legal and financial risks by:

  • Implementing automatic rollover processes that move terminated employees off plans as quickly as possible. Plan sponsors have a fiduciary responsibility to provide sufficient plan information to all participants – both current and terminated employees – to enable them to make informed investment decisions. Moving inactive accounts off the plan not only reduces liability, it also keeps administrative costs down.
  • Offering objective investment education and guidance to transition employees, as encouraged by the 2006 Pension Protection Act. Lawsuits have resulted from close relationships between plan sponsors and servicing companies. Neutral servicing erases this potential conflict of interest.
  • Providing an easily accessible, easy-to-use rollover process with telephone and Internet support to facilitate transactions and give participants the ability to take control of their own retirements.
  • Arranging an independent array of quality IRA products that are appropriate investment vehicles.

These steps can help you and your clients stay one step ahead of the lawsuits – and help your plan participants stay invested in retirement.

Previous articles by Spencer Williams, which appear the fourth Thursday of each month, are:

Spencer Williams is President and CEO of RolloverSystems, an independent provider of rollover services. Spencer joined RolloverSystems in 2007. Over his career, Spencer’s experience spans starting, building and leading businesses in the financial services industry. Prior to joining RolloverSystems, Spencer served in numerous roles with MassMutual from 1997 to 2007, including founder and CEO of Persumma Financial, LLC (a MassMutual Financial Group company) and as a leader in creating and building the company’s retirement income and rollover IRA lines of business.

© 2008 RolloverSystems, Inc. This article is protected by copyright law. Any redistribution or commercial use in whole or in part is strictly prohibited without the express written consent of RolloverSystems, Inc. The information provided herein is for educational and informational purposes only and should not be construed with investment advice.