Supreme Court Ruling on 401(k) Profit Sharing Plans

Adds Fiduciary Liability to Thousands of Advisors

The Asset Protection Society is all about protecting clients from “all” liabilities (global asset protection) and helping advisors protect themselves when advising clients (an interesting dynamic).

One of the most overlooked and often misunderstood types of liability is that of a 401(k)/Profit Sharing Plan Fiduciary.  In small companies this is typically the business owner and in larger plans it could be an investment manager.

When the new Supreme Court Ruling came out, we thought we needed to make everyone aware of it and the increased liability it would bring to many.

New Supreme Court Ruling

The Supreme Court has just handed down a ruling that relates directly to asset protection and its importance. To download the actual court case for your reading pleasure, please click here.

Most readers should know that 401(k)/profit sharing plan (PSP) fiduciaries have “personal” liability as the plan fiduciary.

The DOL Requires Pension Plan Sponsors to:

“…Prudently select & monitor plan investment options…” [DOL 2550.404c – 1 (f)(8

The above duty is for pension plans that allow for self-directed investments by the employees (self-directed meaning your plan has multiple investment options like mutual funds, and the employees pick their own funds).

DOL duty is impossible to comply with

In my opinion, it is impossible for a plan sponsor to comply with the DOL’s requirement to prudently select and monitor the investment options given to the employees in the plan.  To technically comply, every fiduciary would be required to become stockbrokers who watch the market all day so they can say “in good faith” that they did monitor and select prudent investments.


The duty of the DOL described above is also non-delegable.  A non-delegable duty is a duty that cannot be delegated to a third party.  That means you cannot pay someone a fee to take the liability for you.  Many pension providers say they relieve this burden, but that is not technically accurate.

The First Union case

The First Union case comes to us from a bank in Florida.  The employees of the bank sued the bank (and the individual trustees) for violating their fiduciary duties as they pertained to the bank’s pension plan.  To make a long story short, the investments did not do nearly as well as the prudent investor should have over a period of time; and, the suit settled out of court for $26,000,000, of which the attorneys received $8,000,000.

The Court’s Decision

On February 20, 2008, the Supreme Court unanimously struck down a 4th Circuit ruling from 2006 which stated that, 401(k) plan participants may sue a fiduciary plan administrator to recover losses resulting from a plan administrator’s breach of fiduciary duty; however, the 4th Circuit’s ruling applied only to breaches that harm the plan participants as a whole.

The Supreme Court now states, that defined contribution (401(k)/profit sharing plan “fiduciaries” can be sued for a breach of fiduciary duty that affects the plan participants as a whole or individually.

This is a major headache for the plan fiduciaries as one employee may do poorly in such a plan and sue whereas before, the entire plan as a whole needed to have sub-standard (sub-prudent man) investment returns in order to sue the plan fiduciary for breach of his/her standard of care.

This holding is not intended to give free rein to sue the fiduciary of an ERISA plan just because someone does not like their decisions or because the investments made available to employees are not performing as well as they think they should.  Someone interested in suing must still show that the plan’s Fiduciary breached the “prudent investor” rule.   However, it will be easier to move a case forward as the burden of proving that all the participants as a whole were harmed has been eliminated.

The Court expanded upon ERISA’s original protections and now offers plan participants greater protection.  If the drafters were seeking to protect the plan they were concerned with the protection of participants’ investments as without those investments there would be no plan.  The Court’s allowance for individual suits under ERISA is a logical interpretation.

Ways to Mitigate a Fiduciary’s Liability

The main way to mitigate a fiduciary’s liability is to have what’s known as an Investment Policy Statement (IPS).  The IPS gives formal and written guidelines so that the prudent investor rule can be complied with.  While we do not like to make many “finite” statements, we believe EVERY defined contribution plan should have an IPS; then of course the fiduciary needs to follow the guidelines of the IPS.

One other way to mitigate risk:   One other way to mitigate risk is to hire and pay a professional “Fiduciary Service” to review the investment mix every year to make sure that the mix offered will meet the prudent investor standard.   The cost of such services as a protective measure to review the plan each year will vary in cost ($3,000-$5,000 a year).