Last week's U.S. Supreme Court decision to allow individual participants to sue 401(k) plan administrators will put further pressure on financial advisers to ensure that they are adhering to their fiduciary status, industry observers say.
Some expect the ruling to lead to a flood of new 401(k) lawsuits.
The decision affects an estimated 70 million workers with $3 trillion invested in 401(k) plans.
The case involves James LaRue of Southlake, Texas, who filed suit in 2004 against his employer, Dallas-based Dewolff Boberg & Associates Inc., claiming that the value of his stock holdings fell $150,000 when administrators at his retirement plan didn't follow his instructions to switch his assets to safer investments in 2001 and 2002.
At issue for the Supreme Court was whether the Employee Retirement Income Security Act of 1974 allows an individual account holder to sue plan administrators alleged to have breached their fiduciary duties. Prior to the decision, individual participants weren't allowed to file suit.
The language of the law refers to recovering money for the plan rather than for an individual. This raised the question of whether a participant could sue.
The high court's ruling should cause more advisers to recognize their fiduciary status and become more aware of the requirements of that status, said Fred Barstein, chief executive of 401kExchange Inc. in Lake Worth, Fla.
"What we're seeing generally is, the industry has sort of been in denial about the fiduciary liabilities," he said. "What's wrong with acting like we're fiduciaries and doing the right thing?"
Others agree.
"I think this decision just further should serve as caution for advisers," said Andrew Stoltmann, a plaintiff's attorney and partner at Stoltmann Law Offices PC in Chicago.
"Ignorance is not bliss when it comes to their belief on whether they're a fiduciary or not. The, 'Gee, I'm just a dumb broker,' defense doesn't work," he said.
"Our take is this is just another example of the stakes going up for advisers and a reminder of how serious this business is," said Fielding Miller, chief executive of Raleigh, N.C.-based Captrust Financial Advisors Inc., which manages about $20 billion in assets. "If a participant can go after a plan administrator for not following instructions, they certainly can go after an adviser."
Meanwhile, the decision was clearly a victory for investors, which was surprising as many of this court's recent decisions have gone against individual investors, Mr. Stoltmann said.
"The Supreme Court has repeatedly come down against the individual investors," he said. "For them to come with a decision like this is huge; I expect to see a wave of lawsuits emanating from this decision."
There is no question that there will be more lawsuits, said Louis S. Harvey, chief executive of Dalbar Inc., a financial services research firm in Boston. In the past, the law was viewed as holding that only the plan could sue a fiduciary.
'OPEN SEASON'
"If I'm a trial attorney, I'm going to go looking for anybody who has lost money in a 401(k) plan and then go back and look for a fiduciary breach," Mr. Harvey said.
"It's open season," he said. "The bottom line is you better have fiduciary insurance."
However, some industry insiders, such as Don Trone, president of the Center for Fiduciary Studies in Sewickley, Pa., don't think the court's ruling will lead to more lawsuits. It won't be economically viable for participants with small balances, Mr. Trone wrote in an e-mail.
"I don't think we'll see the plaintiff's bar rushing to file cases. We'll certainly see more LaRue-type cases, but I don't think the problems will be pandemic," he wrote.
Others, such as Fred Reish, a lawyer and managing director of the Los Angeles law firm Reish Luftman Reicher & Cohen, which helped draft a brief on behalf of Mr. LaRue, don't expect a large number of lawsuits as a result of the ruling.
But Mr. Reish does think that the case demonstrates the importance of experienced advisers.
"Plan sponsors will more than ever want to know that they're doing things properly," he said. "So, if they pick an expert, non-conflicted adviser, then they're going to have a higher degree of comfort that they're doing things properly, and therefore there won't be litigation."
The decision is certainly great news for participants, said Rick Meigs, president and founder of 401khelpcenter.com LLC in Portland, Ore. But the ruling will have a big impact on record-keeping firms, he said.
"Certainly, all of the record-keeping firms and people who do the administrative aspects have got to be concerned," Mr. Meigs said.
Mr. LaRue's case was sent back to a lower court. The Supreme Court has given him the green light to file suit, but he still needs to prove that the fiduciary was negligent.
"All this does is allow them to sue," Mr. Meigs said. "They've still got to prove it."
But the ability to file suit is still significant, said Larry Schultz, president of the Public Investors Arbitration Bar Association of Norman, Okla., and a partner at Driggers Schultz & Herbst PC in Troy, Mich.
"To allow individual investors to pursue claims in their 401(k) plans is going to give the investment people great concern," he said. "Now, you're talking about thousands of people who will have potential claims that have been barred from pursuing them in the past."
"It's a huge decision for workers across the country," said Tom Mason, a plaintiff's attorney in Tucson, Ariz.
He has argued several cases related to employees' 401(k) stock holdings and said that defense attorneys always cited the ERISA provision as their key defense against the cases.
"Now it's clear that argument will never come up," he said.
Lisa Shidler can be reached at lshidler@crain.com.
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