401k Ability to sue Admin.

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MISS JONES's picture
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Joined: 2007-08-28

I have heard bits on this subject.. Does someone have EXPERT insight to how this might affect us.
 
"Yesterday’s U.S. Supreme Court ruling allowing individual 401(k) account holders to sue plan administrators may cause some angst among advisors.

At issue in the case was whether individuals (as opposed to a particular 401(k) plans’ account holders as a class) could sue plan administrators for mismanagement of their accounts. Two lower courts had previously ruled that plan participant James LaRue, the plaintiff in the case, could not do sue his plan administrator even though the plan administrator had breached its fiduciary duty. But yesterday, the U.S. Supreme Court gave LaRue (and by extension, some 50 million U.S. workers who have invested upwards of $2.7 trillion in 401(k) retirement plans) the right to do so."

Thanks, Miss J

MISS JONES's picture
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Joined: 2007-08-28

I have just discussed this with one of my TPA's they stated that this should read plan sponsors not admin. If I understand him correctly, that would be the way I have always interpreted it to be.. The trustees, not the TPA and not the Advisor.
 
Any feedback.. Comments?
 
**you guys have more comments on Jones bashing than on something of REAL subject headline. Times like this I wish I hadn't asked ferris to delete my account over at his other website.. I would have had a comment or few already.. (With substance)
 
Miss J

Borker Boy's picture
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Joined: 2006-12-09

The reson for the lawsuit--based on my interpretation from listening to approximately 30 seconds of the story on FOX News--is that the plaintiff is suing because he instructed the plan sponsor to make specific changes to his asset allocation to make his portfolio "less risky" some time ago, but the plan sponsor didn't make the changes and the plaintiff lost a substantial amount of money ($150k?) when the market began its decline.
 
It appears this is not an issue of giving bad advice, but rather failing to follow instructions.

Spaceman Spiff's picture
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Joined: 2006-08-08

According to the LA Times article (first one on Google) Mr. LaRue told his plan sponsor to move money from stock funds to bond funds in Sept 2000.  He says that his instructions were ignored. 
 
Since we don't have all the details I think it's difficult to determine who was actually at fault and why.  But evidently the Supreme Court figures that if the 401K sponsor screwed up, he should be able to sue. 
 
One article I read made a comment about when people get sue happy they sue everyone they can think of.  So, maybe they don't have a legal leg to stand on if they sue you, but they can still sue you and make your life and your reputation miserable.  The last thing any advisor needs is for his/her name to hit the newspapers because they are getting sued.  In the press you are guilty until proven innocent. 
 
One thought on cases like this.  At what point does the individual investor have any responsibility?  With this guy, he says in Sept 2000, move my money to bonds.  It didn't happen.  Did he call and tell them to do it again?  Did he not look at his statement for the next 2 years?  Yes, the company should have followed his instructions.  But, doesn't he have some responsibility to watch his own money?  Can we really be sued for someone else's stupidity.  Evidently the Supreme Court says yes. 
 
BTW, he would have had to have had $3.2 mil in equities to lose that kind of money between Sept and Dec of 2002.  I wish we had more details. Here's a link to the LA Times article:
http://www.latimes.com/news/nationworld/politics/scotus/la-fi-nupension21feb21,1,6611391.story

Borker Boy's picture
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Joined: 2006-12-09

Spaceman Spiff wrote:
One thought on cases like this.  At what point does the individual investor have any responsibility?  With this guy, he says in Sept 2000, move my money to bonds.  It didn't happen.  Did he call and tell them to do it again?  Did he not look at his statement for the next 2 years?  Yes, the company should have followed his instructions.  But, doesn't he have some responsibility to watch his own money?  Can we really be sued for someone else's stupidity.  Evidently the Supreme Court says yes. 

 
 
I believe the investor has absolutely zero responsibility to call back and confirm that his initial instructions were followed. If the facts of the case are exactly as I've interepreted them to be, I don't believe the investor has any requirement to "watch" his own money for the purpose of making sure the folks who have custody of it have done what he told them to do. 
 
Also, it's irrelevant whether he ever looked at his statement again after giving the instructions.  If it can be proved that he gave the sponsor orders to re-allocate his funds, and they didn't do it, then shame on their a$$es.
 
Maybe alaskota or EDJ4now could chime in and give us a more accurate legal perspective.
 
 

Morphius's picture
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Joined: 2007-07-21

I am not an attorney, but my understanding is that the issue was whether ERISA
allows an individual account holder to sue plan administrators who have
allegedly breached their fiduciary duties.  The language of the law refers to recovering money for the "plan" rather than for an individual.  This raised the question of whether an individual participant could sue. The justices determined that lawsuits are allowed by individual participants.

Akkula's picture
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Joined: 2008-02-17

Borker Boy wrote:
I believe the investor has absolutely zero responsibility to call back and confirm that his initial instructions were followed. If the facts of the case are exactly as I've interepreted them to be, I don't believe the investor has any requirement to "watch" his own money for the purpose of making sure the folks who have custody of it have done what he told them to do. 
 
Also, it's irrelevant whether he ever looked at his statement again after giving the instructions.  If it can be proved that he gave the sponsor orders to re-allocate his funds, and they didn't do it, then shame on their a$$es.
 
Maybe alaskota or EDJ4now could chime in and give us a more accurate legal perspective.
  
 
I would also like some legal perspective.  I can tell you that most 401k recordkeepers have some language on the statement saying that they will correct mistakes and credit the participant with losses that were made on the account as long it is brought to their attention in a reasonable amount of time.  If you have a company that processes hundreds of transactions per day, there is bound to be an error at some point in time. 
 
I wonder if the crux of this lawsuit is that participant accounts were supposed to be participant directed but the plan willfully neglected his instructions and thus made participant account plan sponsor directed.  If the money wasn't participant directed, the plan fiduciaries would not have protection under 404(c) and the participant may have the ability to sue if he lost value in his account. 
 
or
 
I wonder if the suit involves a clerical error where the plan sponsor didn't willfully ignore the instructions but a mistake was made and the trade never happened. 
 
If the plan willfully ignored the participant trade, I think the participant may have a good case to sue. 
 
If the plan made the clerical error and the participant neglected his responsibility to periodically review the statements that are sent to him, the participant should share responsibility for the situation.  Had he reviewed the statements like a prudent person would do, he would have been able to mitigate the damages to his portfolio.  I think this situation is tantamount to having someone damage your house which should have been noticed as a prudent homeonwer, like a broken window.  Instead of noticing the window was broken and taking corrective action, rain, snow, cold, etc., causes much more damage than would have been caused had the homeowner fulfilled his duty to know the condition of his house.   Perhaps you should be able to recover damages for a certain period of time but I don't think you should be able to wait three years to notice you had a broken window.   Perhaps you could argue a few weeks worth of damages, but not a few years. 
 
Anyhow I would be interested to see how this one turns out.  The reference to defined benefit plans makes me think the issue may be more of a 404(c) participant vs plan directed situation. 
 
Does anyone know what the official FINRA/Legal liability is for firms and reps for clerical errors when a trade is not made correctly?  I know how I have seen these situations handled but I would like to know how liability is limited for companies in this situation because the losses associated with a bad trade could be potentially unlimited if no time frame was ever associated with the shareholder bringing the error forward. 

Akkula's picture
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Joined: 2008-02-17

http://www.bloomberg.com/apps/news?pid=20601087&sid=aEsDdf5Iuev4&refer=home
 
Looks like the losing attorney thinks this applies to simple mistakes.  Scary. 
 
I hope there is some kind of legislation out there that puts some kind of liability on participants to monitor their acconts or a statute to bring claims against a fiduciary.  Since the court is clearly saying that some of the older rulings were not applicable due to the fact that defined benefit plans had a set benefit at retirement, participants monitoring their investments options becomes an even more important issue now that defined contribution plans are more popular and they provide variable retirement benefits.  It is not as important for participants to monitor their statements in DB plans, but it is important for them to do so in DC plans.  
 
One word of advise.  NEVER take any allocation/transfer/rebalancer instructions from a participant for their 401k plan.  They need to contact the recordkeeper directly even if you are on the phone with them.  That will give the liability to the recordkeeper if the trade isn't made.

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