Principal IRA Rollover Suit Could Blaze New Territory

A lawsuit by former 401(k) participants against the Principal Financial Group over allegations that the company duped participants into IRA rollovers into Principal’s proprietary mutual funds appears poised to make new law.

In refusing Principal’s request to throw out the case, Chief Judge Robert W. Pratt of the U.S. District Court for the Southern District of Iowa noted that the facts of the claims by plaintiffs Jerri E. Young and Patricia A. Walsh presented for the first time the issue of whether former participants can pursue individual fiduciary breach claims after cashing out a workplace retirement savings program. (See Principal Hit with IRA Rollover Suits) Pratt acknowledged that the recent LaRue case from the U.S. Supreme Court provided a legal remedy for those alleging certain individual retirement plan claims but asserted that the decision was silent on whether the ability to pursue individual plan claims also extends to former participants. (See Supreme Court Allows Individuals ERISA Suits in Landmark Ruling)

Pratt ultimately found that LaRue’s expansion of remedies under the Employee Retirement Income Security Act (ERISA) Section 502(a)(2) would not extend to situations where the alleged harm occurred to private investment accounts separate from the original ERISA plan.

The court went on to say, however, that while Young and Walsh did not have standing under ERISA Section 502(a)(2), they did have standing to pursue equitable remedies under ERISA Section 502(a)(3). To win on a Section 502(a)(3) claim, Pratt said Young and Walsh will need to prove the defendants were fiduciaries that breached their duties or violated the terms of a plan and that the breach caused them to leave the plan.

“To find that Plaintiffs have standing under § 1132(a)(2) on this factual scenario would require the Court to expand ERISA protection to include ‘former’ plan assets,” Pratt wrote in the opinion. “The Court does not believe that ERISA or LaRue supports such an extension. The Court recognizes the potential unfairness that may result from its refusal to extend LaRue. Assuming Plaintiffs’ allegations are true, denying them standing under § 1132(a)(2) will essentially reward Defendants for their misdeeds. To grant standing, however, would unduly and inappropriately expand ERISA, potentially opening the door to lawsuits against anyone who offered investment advice for, or exercised authority over, assets that had once been part of an ERISA plan. This is not the intent of the law, and the Court cannot rewrite the statute to provide a remedy where none exists.”

Post-Rollover Allegations

According to the ruling, after Young and Walsh terminated their employment with the plan sponsors, they each received letters from Principal instructing that they call a 1-800 number to discuss with “financial professionals” how the changes to their employment status might impact their plan accounts. While the two ex-participants said they were under the impression the people they spoke to would render unbiased advice, the calls actually went to Principal’s “Principal Connection” sales call center where the plaintiffs said they were pressed into rollovers into an IRA with funds that included Principal’s J-Shares.

As a result, the two plaintiffs claimed, they ultimately earned less and paid more in fees than if they had simply left their assets in their employer’s plan.

In his latest ruling, Pratt noted that, depending on the strength of their evidence presented in future proceedings, the plaintiffs might be able to justify having their assets transferred back out of their IRAs into their workplace plan and/or a court order forcing Principal to give up any profits made as a result of the business practices described in the suit.

Pratt’s latest ruling in Young v. Principal Financial Group Inc., S.D. Iowa, No. 4:07-cv-00386, 4/21/08, is here.