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Workers Score 401(k) Lawsuit OK From Court

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By CARRIE JOHNSON, The Washington Post

Published: February 21, 2008

WASHINGTON - The Supreme Court handed workers a major victory Wednesday by allowing them to sue over mismanagement of their 401(k) retirement accounts, a ruling that could affect more than 50 million employees with nearly $3 trillion invested in the popular plans.

The unanimous holding reverses a lower court decision that had barred individuals from suing over losses related to mistakes and misconduct and thus had insulated employers from lawsuits even as more U.S. workers rely on the savings accounts to cushion their retirement.

In the opinion, Justice John Paul Stevens recognized that the landscape of retirement investing had been reshaped since the high court's last ruling on related issues more than two decades ago. Since then, individual plans known as 401(k) accounts have mushroomed as employers moved away from defined-benefit plans.

As a result, Stevens wrote, courts should interpret employee benefits law as giving individuals the green light to sue over administrative problems with their accounts, rather than limiting cases to those that affected an employer's "entire" retirement savings plan.

Wednesday's decision will allow James LaRue to proceed with a case against his former employer, DeWolff Boberg & Associates, over $150,000 in losses he claims that he suffered after the Texas management consultancy failed to act on instructions to shift his retirement savings when the stock market hit turbulence more than six years ago.

LaRue, 47, criticized his former company for being "nonresponsive" when he moved to transfer his money from stocks into cash as the Internet bubble burst and the market plunged after the Sept. 11 terrorist attacks. The Labor Department and the Solicitor General, who argues the Bush administration's position before the Supreme Court, threw their weight behind LaRue. Assistant Solicitor General Matt Roberts argued in November that any recovery by the plaintiff would benefit the company's retirement plan as a whole in keeping with the law, known as the Employee Retirement Income Security Act.

"Today's decision supporting our position is a huge victory for workers and retirees," said Labor Secretary Elaine Chao.

Peter Stris, a professor at Whittier Law School who represents La Rue, said the decision protected the savings of everyone with a 401(k). "If the lower court opinion had stood, it would have prevented the Department of Labor from pursuing claims when retirement funds had been stolen or mismanaged," he said.

Business advocates predicted the ruling would unleash a raft of lawsuits by employees, particularly as stock market volatility once again is wreaking havoc with investment accounts.

"Ultimately, employers aren't going to sponsor plans if they're going to be sued every time they make an innocent mistake," said Thomas Gies, a Washington lawyer who defends the consulting firm, which denies any wrongdoing.

Gies added that DeWolff Boberg expected to be "vindicated on the merits" when the case returned to the lower courts.

Employment law experts said the decision leaves unanswered, for now, important questions about other steps that workers must take before they enter the courthouse over retirement savings disputes.

Chief Justice John Roberts agreed that reasoning by the U.S. Court of Appeals for the Fourth Circuit was "flawed."

But he and Justice Anthony Kennedy filed a concurring opinion Wednesday questioning whether LaRue and other employees could recoup their losses if they do not first follow set procedures, such as an appeal to the plan administrator.

In past cases, the Supreme Court gave administrators wide latitude to develop standards for eligibility and other terms, judgments that courts can review only for an abuse of discretion, Roberts wrote.

Such a hurdle could be difficult for employees to surmount, said Karla Grossenbacher, an employment lawyer at Seyfarth Shaw in Washington, D.C., who has no connection to the LaRue case.

Alden Bianci, an employment lawyer at the Mintz Levin law firm in Boston, said business executives greeted Wednesday's ruling with disappointment rather than surprise.

"What it will do is punish dumb mistakes," Bianci said, even as he awaited more lawsuits that could clarify the scope of the court's decision. "When the Supreme Court takes on an ERISA question inevitably the law of unintended consequences starts to work over time."

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