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Supreme Court Rules Employees Can Sue Over 401(k) Misconduct

By Carrie Johnson
Washington Post Staff Writer
Thursday, February 21, 2008

The Supreme Court handed workers a major victory yesterday by allowing them to sue over mismanagement of their 401(k) retirement accounts, in which more than 50 million employees have invested nearly $3 trillion.

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 came to rely on the savings accounts to help fund their retirements.

In the opinion, Justice John Paul Stevens recognized that the landscape of retirement investing had been reshaped since the high court's prior 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, or pensions.

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.

Yesterday'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 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.

In a telephone interview, LaRue, 47, criticized his former company for being "nonresponsive" when he asked to transfer his money from stocks into cash as the Internet bubble burst and the market plunged after the Sept. 11, 2001, terror attacks. LaRue, now a self-employed consultant to manufacturing and telecommunications companies, said his former colleagues at DeWolff Boberg were "hiding under the law."

"There is a principle involved," LaRue said. "Somebody stepped on my toe, and it's wrong."

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 Matthew D. 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 L. Chao.

Peter K. Stris, a professor at Whittier Law School in Los Angeles who represents LaRue, 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 causing 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 defended the consulting firm, which denies any wrongdoing.

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

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

Chief Justice John G. Roberts Jr. agreed that reasoning by the U.S. Court of Appeals for the 4th Circuit was "flawed." But in a concurring opinion, he and Justice Anthony M. Kennedy questioned 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 the District who has no connection to this case.

Alden Bianchi, an employment lawyer at Mintz Levin in Boston, said business executives greeted the ruling with disappointment rather than surprise.

"What it will do is punish dumb mistakes," Bianchi said, while more lawsuits 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."

The case is LaRue v. DeWolff, Boberg & Associates Inc.

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