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A Better Partnership


Feb 2008
February 27, 2008

Monitor Retirement and Benefits Providers

Two recent legal developments--a unanimous decision last week by the United States Supreme Court in LaRue v DeWolff, Boberg & Associates and United States Department of Labor (DOL) proposed regulations--emphasize the need for employers to carefully select and monitor their retirement and fringe benefit plan providers.

The facts of the LaRue case are straightforward. LaRue was a participant in the self-administered DeWolff 401(k) plan which permitted participants to direct their investments. LaRue claimed that he directed certain changes in investment in 2001 but DeWolff failed to carry out his directions. As a result, LaRue suffered $150,000 in losses that would not have been incurred had his directions been executed. LaRue did not sue for plan benefits, likely because he was not entitled to a distribution under the plan. Instead, he sued under ERISA provisions that create liability for breaches of fiduciary duty. DeWolff's defense essentially relied on a 1983 Supreme Court decision in Russell v Massachusetts Mutual which denied the plaintiff relief for consequential damages arising from a delay in processing a disability claim. Language in the Russell opinion indicated that a suit for fiduciary breach must seek to benefit the plan as a whole rather than particular participants.

The Court modified the Russell rationale in its majority opinion noting the shift from defined benefit to defined contribution plans and the individual account feature of those plans. The Court reasoned that adhering to a whole plan analysis would allow fiduciaries to escape liability for losses in an individual account. Justices Thomas and Scalia in a concurring opinion reasoned more directly that the assets of individual accounts were plan assets and that a loss to the plan would consist of losses to any constituent, individual account. Justices Roberts and Kennedy concurred in a questionable analysis stating that LaRue had a benefit, not a fiduciary claim.

The December DOL proposed regulations require that service providers (banking, consulting, custodial, insurance, investment advice or management, recordkeeping, brokerage or third-party administration) and professionals (accountants, actuaries, appraisers, auditors or lawyers) directly or indirectly compensated from plan assets enter into written contracts and engage in extensive fee disclosures and commitments with plan sponsors. These requirements will be enforced by broadened fee disclosure on Schedule C of Form 5500, an employer duty to notify the DOL if the requirements are not met, and employer and provider liability for the pyramiding 15% prohibited transaction excise tax.

The case and the regulations reinforce the need for employers to take diligent procedural steps to minimize potential liability for administrative errors, investment selection, and appropriate service and fee disclosures. These steps include:

  1. Assuming that employers' efforts are best directed at operating their businesses, engaging independent expert advisers to assist in selecting and reviewing administrative and investment providers and services.

  2. Requiring and then carefully reviewing the contracts offered by administrative and investment providers. These contracts too often attempt to disclaim fiduciary status and limit liability of the provider to "gross negligence or willful misconduct." An employer that accepts these provisions will find itself paying for the errors of third parties that it paid to perform their duties timely and competently.

  3. Taking advantage of the protections afforded by ERISA 404(c) against liability for individual direction of investment choices, monitoring the performance of third parties in carrying out and recordkeeping investment instructions and by providing the required disclosures which include a detailed ERISA 404(c) disclosure statement and providing mutual fund prospectuses and profile sheets when participants choose or change investments.

  4. Arranging for and analyzing the reasonableness of contractual and Form 5500 fees disclosed by service and investment providers.

  5. Considering engaging legal and investment counsel to conduct a fiduciary and compliance review of the plan.

LaRue should not result in a flood of participant lawsuits because of market-based investment losses. However, litigation will likely occur as a result of the Roberts opinion involving the interaction between benefit claims requirements and fiduciary claims. Fiduciary investment liability under ERISA has been largely limited to instances of genuine misconduct or mishandling of plan investments in employer stock. Employers who carefully attend to investment choices and plan fees and expenses by periodic review of these issues have largely avoided liability. The Courts and the DOL have interpreted ERISA, not as requiring the best results or never incurring fluctuation in investment values, but instead as requiring procedures that involve a prudent and diligent selection and monitoring of plan administration, fees and investments.

If you wish to explore these issues in more depth, please contact any of the following Employee Benefits attorneys.

Anthony J. Kolenic, Jr. 


John H. McKendry, Jr. 


Vernon P. Saper  


Justin W. Stemple 


George L. Whitfield 


Sue O. Conway


Norbert F. Kugele



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