Financial advisors who provide services to businesses with 401(k) plans and other arrangements governed by the Employee Retirement Income Security Act (ERISA) have a new reason to review fiduciary practices and double-check professional liability insurance. Earlier this year, the U.S. Supreme Court ruled in the case of LaRue v. DeWolff, Boberg & Associates that James LaRue, who lost approximately $150,000 when the administrator of his 401(k) plan failed to carry out investment instructions he gave, could sue the administrator for a breach of fiduciary duty. The ruling made clear for the first time that an individual plan participant could sue a plan administrator to recover losses that did not affect all or a large number of plan participants.

The case adds to the litigation concerns that threaten to chill growth of advisor-sold 401(k) plans to small- and mid-sized businesses, an increasingly productive area for many financial advisors. At Fidelity alone, total record-kept assets in such plans stood at $21.2 billion at the end of 2007, an increase of 26% from the previous year. Several factors are helping to drive the growth in advisor-sold 401(k) plans, including the Pension Protection Act of 2006, which provided guidelines necessary to encourage plan sponsors to retain qualified fiduciary advisors and to define safe harbor procedures to insulate them from the liability associated with the advice.

The ruling comes as growth in the 401(k) advisory business pulls ahead of awareness or acknowledgement of the fiduciary status that many say is an inherent part of working with ERISA plans. But that is slowly changing as an increasing number of financial institutions acknowledge and in some cases support the fiduciary role. Recently, for example, LPL Financial began requiring that all LPL advisors wishing to offer consulting services to retirement plan sponsors enroll in a Fiduciary 360 training program to receive the Accredited Investment Fiduciary (AIF) designation. At Fidelity, spokesperson Stephen Austin notes "an uptick in registered investment advisors acting as co-fiduciaries since the Pension Protection Act."
The potential fallout from the case for advisors is unclear since LaRue must establish in District Court misconduct on the part of the plan administrator and the extent of the resulting damages. It also involves an administrative misstep, not investment advice or investment results. And lawsuits involving individuals are likely to be less attractive to attorneys than bigger class action cases.

But attorneys appear ready to roll should even a small percentage of the 50 million or so employees of companies that offer 401(k) plans decide to sue financial advisors, employers and other plan fiduciaries for losses in individual plans.

Soon after the Supreme Court announced its ruling, the law firm of Shepherd Smith & Edwards posted a blog titled "U.S. Supreme Court Decides That 401(k) Retirement Participants Can Sue For Losses Under ERISA." After explaining the ruling and its implications for individuals, the blog advises readers, "If you or someone you know may be a victim of misconduct, contact Shepherd Smith and Edwards for a free case evaluation by one of our attorneys."

Andrew Stoltmann, a plaintiff's attorney and partner at Stoltmann Law Offices in Chicago, believes the decision "opens financial advisors to a wave of lawsuits. This is an extraordinarily significant decision that opens the floodgates on litigation, and it will be difficult to close them. With the subprime meltdown it is possible that cases are forming at this point."

Those who work with plan sponsors and advisors are less dramatic, but urge caution nonetheless. "There has been a lot of media attention paid to this case, so many people are going to be aware that they can sue plan sponsors and those associated with them, including financial advisors, for fiduciary breaches," says Ken Raskin, head of the employment law practices group at White & Case in New York City. "I think there will be an initial short-term spike in lawsuits, frivolous or otherwise, from some of the millions of plan participants out there."

The ruling also underscores the contention that even those who do not acknowledge a fiduciary role are not necessarily protected, says Richard Lynch, chief operating officer of, which runs a fiduciary accreditation program. "Advisors who do not acknowledge fiduciary responsibility are just sticking their heads in the sand," he maintains.  

Plaintiffs' attorneys agree. "If someone sues you, it's almost immaterial whether or not you believe you are a fiduciary. The judge will look at your relationship with the plan sponsor and participants as evidence," Stoltmann concurs. "It doesn't matter what you call yourself. When you are handling a 401(k) plan you are a per se fiduciary."  

Lynch observes that many vendors do little or nothing about educating advisors with regard to their role as fiduciaries, and the majority of broker-dealers still do not acknowledge fiduciary status. Despite the uncertainty surrounding the ruling and its potential impact, those who have carved a niche in the 401(k) market say that with careful planning and safeguards, the benefits of acting as advisor to such plans outweigh the risks.

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