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Who Can I Blame for the Loss in my 401(K) Plan Account? Recent Cases Show Breach of Fiduciary Duty Claims and Litigation Can be Costly

Employee Benefits Law Update J. Paul Jacobson, Robert D. Rothacker, David P. Olson, Amy A. Ciepluch, Sarah M. Linsley

In today's economy, workers are more focused than ever on the value of their 401(k) accounts and the substantial losses many of those accounts have suffered. They are increasingly looking toward their employers and other plan fiduciaries for explanations and, in some cases, restitution for the losses that have occurred. Questions such as, "Why did you offer these investments under the plan when other funds were doing better?" are asked with increasing frequency, and employers and plan fiduciaries need to be prepared to address and answer these questions.

The Employee Retirement Income Security Act ("ERISA") sets forth certain duties for fiduciaries of employee benefit plans; specifically, plan fiduciaries have a duty of loyalty, a duty to use prudence and a duty to comply with the terms of the plan. Plan fiduciaries face personal liability under ERISA for breaches of these fiduciary duties. When these duties are breached, or even just alleged to be breached, the result can be a costly settlement for the company. In 2008 there were several expensive class action settlements, and industry experts predict that ERISA class action lawsuits will increase in 2009 due to economic conditions. Below is a sampling of a few of the larger settlements of 2008:

  • Employees brought suit against General Motors and fiduciaries of several of its retirement plans for breaching their fiduciary duty of prudence and for misrepresentation related to the investment in company stock, along with other claims. The final settlement, reached in 2008, totaled $37.5 million.
  • Dynegy, Inc., a relatively small company (at least in comparison to GM), had several class action lawsuits as a result of accounting improprieties that led to the overvaluation of its company stock. Dynegy had allowed employer stock as an investment choice and also made matching contributions in company stock. One settlement reached in 2008 was $18 million, a sizable sum for a plan with less than 3,000 participants.
  • Class action lawsuits related to investment fees and other expenses have become increasingly common. In 2008, New York Life Insurance Company paid $14 million to settle claims that, in using its proprietary mutual funds in its retirement plans, it had forced participants to incur excessive costs. This litigation lasted eight years, demonstrating that companies can also incur significant litigation costs before a final settlement is reached.

Most plan fiduciaries have relied on company indemnification policies as protection against personal liability, and indemnification policies often provide such valuable protection. However, for companies experiencing financial difficulty, the value of company indemnification policies becomes more tenuous.

Quarles & Brady LLP will be providing a series of updates on how plan fiduciaries can reduce the risk of an ERISA lawsuit. We also will be hosting "Fiduciary University," a seminar on how to minimize your risk of fiduciary liability, on May 19, 2009.

If you have any questions about minimizing your risk, please contact, Paul Jacobson at 414-277-5631 /, Robert Rothacker at 414-277-5643 /, David Olson at 414-277-5671 /, Amy Ciepluch at 414-277-5585 /, Sarah Linsley at 312-715-5075 / or your Quarles & Brady attorney.