Implications of the LaRue Vs. DeWolff, Boberg & Associates, Inc. Litigation

Overview

On February 20, 2008, the Supreme Court of the United States ruled on a case that may prove to have ramifications for defined contribution plan sponsors in the future. The Court ruled that an individual participant in a defined contribution plan may sue for losses attributable to his or her own account because the employer failed to follow the participant’s investment instructions. What makes the case so ground-breaking is that an individual plan participant brought civil action against the plan fiduciary for breach of fiduciary duty. In the past there have been numerous class action lawsuits filed for breach of fiduciary duty; however, the basis for those prior lawsuits and litigation was losses that affected the plan as a whole, rather than an individual participant. The case also brings to light the roles and responsibilities of a plan fiduciary, and the possible consequences for fiduciary failures.

Details of the Case Implications for Advisors

Details of the Case
In the case of LaRue v. DeWolff, Boberg & Associates, Inc., the petitioner James LaRue made claim that his employer DeWolff, Boberg & Associates, Inc., did not follow his instruction to make certain changes to his investments in his individual account within a defined contribution plan. LaRue claims his employer did not carry out his investment instructions in 2001 and 2002, resulting in a breach of his employer’s fiduciary responsibility under the Employee Retirement Income Security Act of 1974 (ERISA). The Supreme Court ruled in favor of LaRue, finding that an individual participant in a defined contribution may sue for losses attributable to his account because of the plan fiduciary’s failure to following the participant’s investment instructions.

Implications for Advisors and Plan Fiduciaries
All individuals and/or entities that exercise discretion or control over a plan are fiduciaries of the plan under ERISA. In other words, being a fiduciary is based on the functions performed for a plan rather than a title. Some common examples of plan fiduciaries include the plan sponsor, plan trustee(s), plan administrator, investment advisors, officers, members of the board of directors, and/or administrative committee if they exercise control.

The LaRue case has the following implications for plan fiduciaries.

• It opens the litigation channel for individual plan participants (rather than the plan as a whole) to sue the plan sponsor in certain circumstances.

• We will likely see an increase in claims filed by individual participants against plan fiduciaries.

Lessons Learned and Best Practices
 
The role of a plan fiduciary comes with many challenges and responsibilities. In light of the LaRue case, you, as a financial advisor, have an opportunity to discuss with your clients some of the best practices they may want to consider, including but not limited to the following.

• Identify all plan fiduciaries. After identifying all plan fiduciaries, review their roles and responsibilities. A fiduciary of a plan could be an individual and/or entity. In addition, there could be multiple fiduciaries.

• Review ERISA 404(c) compliance. Implementing ERISA 404(c) will reduce a plan fiduciary’s liability by transferring some responsibility for investment performance to plan participants who make investment elections. While the requirements of ERISA 404(c) are many, generally they relate to allowing participants an opportunity to exercise control over the assets in their own accounts, and to providing a broad range of investment alternatives. If plan sponsors comply with ERISA 404(c), they will be relieved of investment losses that result from participants’ investment decisions. Remember that ERISA 404(c) compliance is not a one-time event; rather, it is a process that should be evaluated and monitored on an ongoing basis.

• Consider Qualified Default Investment Alternatives (QDIAs). Consider using QDIAs to extend ERISA 404(c) protection for plan sponsors in situations where participants do not make investment elections when given the opportunity to do so. Plan fiduciaries are not liable for investment losses if plan assets are placed in QDIAs; however, plan fiduciaries continue to be responsible for the prudent selection and monitoring of QDIAs.

• Consider purchasing fiduciary liability insurance. Plan fiduciaries should consider obtaining fiduciary liability insurance to provide another layer of protection against personal liability. Fiduciary liability insurance is separate from an ERISA fidelity bond, which is required by law, and provides protection to the plan against loss due to fraud or dishonesty by fiduciaries.

• Consider engaging a fiduciary adviser for the plan. Contemplate enrolling a fiduciary adviser for delivery of “safe-harbor” participant investment advice. A person who meets the definition of a fiduciary adviser, and who provides advice under an eligible investment advice arrangement, will reduce the plan sponsor’s liability for the specific investment advice given to plan participants by the fiduciary adviser. While plan sponsors are still responsible for the prudent selection and periodic review of fiduciary advisers, they do not have the responsibility to monitor the specific investment advice given by the fiduciary advisers.

• Consider making in-service distributions an option under the plan. Many defined contribution plans allow participants to receive distributions from the plan while they are still actively employed. These types of distributions are commonly referred to as “in-service distributions.” There may be certain requirements that participants must satisfy, such as attainment of a certain age, completion of an amount of service, and/or accrual of vesting, in order to receive a distribution. If a plan does not currently have an in-service distribution provision, the employer can easily add one by amending the document. An in-service distribution may reduce the number of high-balance participants who would be the most likely candidates to consider legal action to recoup losses.

• Consider eliminating company stock. Consider eliminating company stock as an investment option to increase investment diversification. Plan sponsors need to determine whether company stock is an appropriate investment option for their plans. As a result of the Pension Protection Act of 2006, beginning in 2007, participants with company stock must be given expedited diversification opportunities, and, effective for plan years beginning in 2008, the maximum ERISA bond coverage increases from $500,000 to $1,000,000 for plans that hold employer securities.

Conclusion
The LaRue case now goes back to the trial court to determine whether the plaintiff has a valid claim against his employer. The industry will be watching this case very closely to see to what extent claims made by individual participants will affect defined contribution plans going forward.

The Supreme Court in LaRue v. DeWolff, Boberg & Associates, Inc, No. 06-856 (issued February 20, 2008) http://www.supremecourtus.gov/opinions/07pdf/06-856.pdf

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