401(k) Participants Can Sue

A recent report by Hewitt Associates found that almost two-thirds of employers (65%) report that their 401(k) plans are the primary retirement savings vehicles for the employees in the plans. Only 35% of employers surveyed 10 years ago reported that the 401(k) plan was their primary program for retirement, the survey found. The Hewitt study also reports that employers are providing earlier access to 401(k) savings, with nearly half of plans (49%) offering immediate eligibility to participate in the plan. This is up from 43% in 2005. On average, 78% of eligible employees participate in their companies' 401(k) plans, the study notes.

Ted Scallet, a partner at Groom Law Group in Washington, which specializes in employee benefits, says the sheer complexity of 401(k) plans as well as more complex demands coming from both participants and plan sponsors could likely spark more lawsuits. However, from what Scallet's seen, "plan sponsors and plan service providers" are making great strides to adhere to their fiduciary obligations.

Courts across the country have been debating the issue of whether a participant in a 401(k) plan can sue the plan sponsor for quite some time, Reish points out. That's precisely why the Supreme Court agreed to hear the LaRue case, because "courts in parts of the country were saying participants could sue, and [courts] in other parts of the country were saying they can't," Reish says.

Advisors should take heed because they, too, can be sued when a disgruntled plan participant sues the plan sponsor. "If there's a bad investment, a participant will sue the plan fiduciaries, who will then turn around and say, 'Wait a second, we did this based on advice from our advisor, and [the plan sponsor] will sue the advisor," Reish warns. The moral to the story, according to Reish? "Do a good job. Don't try to pick the next hot mutual fund–focus on funds that have preservation of capital."