Employees Sue Employer Over 401(k) Loses

But Free Report Reveals What Employers Should Do Now To Protect Themselves from Claims!

In LaRue v. DeWolff, Boberg & Associates, Inc., the U.S. Supreme Court ruled to allow James LaRue to proceed with a case against his former employer, over $150,000 in losses.

Former employees of Unisys Corp., based in Blue-Bell. PA., alleged that the company did not properly investigate an investment option in the company’s 401(k) retirement plan. The employees also said that they were not informed enough on the risks involved to make a sound decision.

After the stock market collapse in 2008, employees of several large banks sued. The employees had invested in their banks’ stock and suffered sharp losses when the banks’ investments in sub-prime mortgages collapsed.

Significantly, U.S. Solicitor Gen. Donald Verrilli Jr. urged the high court to take a stand on behalf of the employees. He said the 1974 law that governs pensions and benefits “imposes duties of loyalty and prudence” on the sponsors of an employee retirement account. They should be held liable, he said, if they know the company’s stock is “significantly overvalued” and do not alert their employees.

This should serve as a wake-up call to many employers who sponsor 401(k) plans.

The threat of increased litigation by individual plan participants provides a wake-up call to employers to pay attention to the day-to-day operation and administration of their 401(k) plans.

Plan sponsors must realize that they are fiduciaries to their plans. Frederick Reish explains, “like committee members or corporate officers who make plan decisions – have the duty to act prudently and in the best interests of participants when selecting the investment options offered by their plan.”

This requires that employers act with knowledge and experience to select and monitor appropriate investment options. And yet the typical plan sponsor may not have that knowledge and experience. This puts them at risk of a lawsuit for breach of fiduciary duty if the selected investment options perform poorly or result in excessive costs to the plan or its participants.

Often, plan sponsors try to address this fiduciary concern by engaging an investment adviser to assist in selecting and monitoring investment options. However, many of the investment advisers are acting as an ERISA 3(21) fiduciary. An ERISA section 3(21) fiduciary makes only recommendations for which it has no legal responsibility (and therefore no legal liability), because such a fiduciary has no ERISA-defined “discretion.” This does not give plan sponsors cover from fiduciary risk. Such contracts make it very clear that an advisor who is a 3(21), has no legally defined “discretion” to actually make decisions about plan investment options, but only to be helpful to the plan sponsor who continues to retain the significant responsibility and thus the primary “target” for plaintiffs’ attorneys and the Department of Labor.

What Should Employers Do Now to Protect Themselves from Claims?

The first step a plan sponsor can take to increased fiduciary protection is to engage a 3(38) fiduciary investment manager to select and monitor investment options. An ERISA section 3(38) fiduciary must make decisions for which it has legal responsibility (and therefore legal liability), because such a fiduciary is charged with ERISA-defined “discretion.” Under ERISA, if an entity has discretion to make a decision, that entity is responsible for that decision, not the entity that appointed it. This gives a plan sponsor significant cover from fiduciary risk. An ERISA 3(38) fiduciary decides what investment options, such as stand-alone mutual funds or model portfolios, should be placed on a plan’s selection menu, where to remove them from, and if it does remove them, what investment options will replace them. The plan sponsor no longer has any such responsibilities because the sponsor has delegated them to the 3(38) fiduciary.

So, What Does This Mean To Plan Sponsors…



A 3(38) fiduciary takes on the investment fiduciary liability, and the corresponding liability and risk associated with platform performance and management, unlike the 3(21) fiduciaries. The plan sponsor will then be able to delegate what would otherwise be their investment fiduciary liability to the 3(38) fiduciary.

Free Report Reveals What Employers Should Do Now To Protect Themselves from Claims!

Employers can now get a free report titled “Fiduciary Awareness Guide” that shows them how to protect themselves from claims. The report reveals seven costly fiduciary mistakes and eleven fiduciary success strategies.

The report is sent free via first class mail and is offered exclusively to employers who are serious about improving their current 401(k) plan.

To request a copy of the Fiduciary Awareness Guide, click here