Safe Harbor or Rough Seas for 401(k)

It is not often lately that all nine justices on the Supreme Court agree. It would be hard to imagine a more polarized duo than Justice Stevens and Justice Scalia. But yesterday they agreed and the judgment has potential ramifications many companies and retirement plan participants should pay attention to. Earlier this week I wrote about the impending unwinding of the West Virginia teachers defined contribution retirement plan. This week in a unanimous decision by the highest court, another shot was fired across the bow of sponsors and administrators of 401(k) plans.

Since the inception of 401(k) plans employers have taken refuge from liability and found comfort in the safe harbor aspects of ERISA law. Yesterday the Court ruled that the employer has fiduciary liability not merely at the plan level, but also at the individual participant level.

Previous rulings have taken the position that the concept of fiduciary responsibility was confined to the plan as a whole. The court argued that previous rulings were appropriate and intended in a world of defined benefit pension plans but that the new norm of defined contribution plans turns those rulings on their head. Plan sponsors beware.

The specific case dealt with an administrator’s failure to carry out a change in investments as directed by the participant. The participant sued for opportunity lost and his “depleted” interest in the plan. 401(k) plan sponsors should be reviewing procedures that could impact not only the plans ERISA compliance and tax position, but also keep in mind the possibility of actions taken by individuals who find or even perceive they have a grievance. Even defending and winning a case can be a burdensome legal expense.

Systems and procedures that document intents as well as actions of employee participants can provide the framework to quickly verify that the plan administrator is doing the right thing. Any instructions that the participant gives should have a designated procedure and confirmation process that catches missteps quickly. In the event that a minor does miscue it can be quickly corrected, avoiding the kind of expense of the LaRue v DeWolff et al case. In the case the employer alleged that the administrator did not carry out instructions to change investment strategy in 2001 and 2002. He finally filed the lawsuit in 2004 for damages of $150,000. Obviously time does not heal all wounds.

A consultation with fiduciary analyst and review can help avoid problems easily remedied with the right processes and diligence.

John F. Barnyak AIFA® 2/21/08
President
Stonehouse Asset Management
jbarnyak@stonehouseasset.com