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Restoring retirement nest eggs: managers of 401(k) retirement plans owe a fiduciary duty of care, loyalty, and prudence to plan participants. When fiduciaries breach these duties, participants can recover their losses through an ERISA class action.

Article Excerpt
When 401(k) plans were introduced in the late 1970s, they were heralded as providing an additional source of pension benefits to employees. History has shown, however, that 401(k) plans ushered in a sea change in the world of employer-sponsored retirement plans--and that change has not necessarily been favorable to employees. (1)

In 1980, 84 percent of employees working at medium and large private companies were covered by a traditional, or "defined benefit," pension plan, in which the employer agrees to pay a specified amount of benefits to an employee upon retirement. (2) By 2007, only 32 percent of such workers were covered by a traditional pension plan while 53 percent were covered by a defined contribution plan, such as a 401(k) plan. (3)

The reason for the shift is that once a company makes a "defined contribution" to a worker's 401(k) account, it has no further responsibility to ensure that the funds in the plan are sufficient to provide for an adequate retirement. Under the new regime, individual employee participants must assume the responsibility for investment decisions and bear the risk if returns on the investments are insufficient to provide for their retirement needs. (4) The consequences of this shift of risk were illuminated during 2008 by the massive losses suffered by 401(k) participants due to unprecedented declines in the stock market.

Every 401(k) plan, like every employee benefit plan, must provide for fiduciaries charged with the authority to control and manage the operation and administer the plan. (5) The Employee Retirement Income Security Act of 1974 (ERISA), as amended, governs the standard of care these managing fiduciaries owe to plan participants in all non-government and non-church-related pension plans, including 401(k) plans. (6) Where plan fiduciaries responsible for investment of plan assets breach their duties, plan participants may sue them to restore profits or recover losses. (7)

The number of lawsuits brought by plan participants has steadily risen over the last dozen years. (8) Early ERISA fiduciary litigation, including the Enron and WorldCom cases, involved well-publicized allegations of securities fraud affecting the plans' investments in employer stock. These types of cases increased in 2008 as employees and retirees of many financial institutions suffered total or near-total losses of their company's stock holdings within their 401(k) plans.

In addition, over the last few years, the scope of claims alleged in these cases has expanded to include challenges to revenue-sharing by fund managers and plan sponsors, the assessment of excessive fees charged by fund managers, and the conflicted selection by plan fiduciaries of the company's own proprietary mutual funds even where those funds were shown to have significantly under-performed or had substantially higher fees than their peers.

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Breach-of-fiduciary-duty class actions may be rewarding to prosecute, but they are complicated and fraught with technical difficulties. (9) Former Secretary of Labor Robert Reich has described ERISA as "the single most complicated piece of legislation ever to be enacted." (10) Here are things to look out for as you consider whether to plunge into the emerging field of ERISA fiduciary litigation.

Fiduciary duties

ERISA applies a functional test as to whether someone is a fiduciary. A person is a plan fiduciary to the extent that he or she "exercises any discretionary authority or discretionary control respecting management of such plan," "renders investment advice for a fee or other compensation ... with respect to any moneys or other property of such plan, or has any authority or responsibility to do so," or "has any discretionary authority or discretionary responsibility in the administration of such plan." (11)

ERISA imposes upon fiduciaries a duty of loyalty--that is, a fiduciary has the duty to "discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries." (12) The duty of loyalty includes a duty to avoid conflicts of interest and to resolve them promptly when they occur.

A fiduciary must administer a plan with an "eye single to the interests of the participants and beneficiaries," (13) regardless of the interests of the fiduciaries themselves...