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A serious stock market correction will likely yield lawsuits against 401(k) plan sponsors by disgruntled plan participants, but the success of such claims is not as certain.
Employer efforts to communicate the riskiness of stock market investments and to avoid offering anything that could be construed as investment advice should protect them from liability, benefit experts and market observers say.
Under Section 404(c) of the Employee Retirement Income Security Act, providing investment advice could put the employer in the position of fiduciary, which could subject the employer to liability exposures in connection with participant-directed investments.
Fiduciaries are subject to personal liability to make good any losses to a plan resulting from a breach of their fiduciary duties.
However, Department of Labor guidelines suggest that if employers restrict their communications to discussing general topics, such as differences between asset classes or historical returns on different sorts of investments, they will steer clear of being deemed fiduciaries (BI, Dec. 18, 1995).
Plan sponsors seeking additional protection will find fiduciary liability insurance coverage widely available at relatively inexpensive rates, said Geoff Fallon, a vp with Johnson & Higgins in Cleveland, who is also an attorney.
"I think such claims will crop up because a lot of people have, in my view, very high expectations that this market will continue, and they have a lot of their wealth tied up in that, and when that goes away, they'll be upset and want to recoup some of that wealth that they've lost," he said.
However, such plaintiffs are unlikely to be successful in pursuing their claims, said Brian Ternoey, a principal with A. Foster Higgins & Co. Inc. in Princeton, N.J. "I think plan sponsors for the most part have been pretty diligent about saying the stock market doesn't have to keep going up so I don't see a whole lot of basis for all the lawsuits there.
"There certainly could be some, but as far as actually losing based on that, I guess I don't see where it would come from," said Mr. Ternoey.
"Case law is developing and it will be very interesting to see what the results of the case law will be," said Robert Sandler, an attorney with Saul, Ewing, Remick & Saul in Philadelphia, who represents plan sponsors in fiduciary liability cases.
"There is debate as to how much of a shield Section 404(c) of ERISA will provide to plan fiduciaries. No one, I believe, claims it's a complete shield from fiduciary liability," said Mr. Sandler.
He added that it is inevitable that as 401(k) account balances grow and more assets are at risk, the plaintiffs bar will try and recover funds when significant amounts of money are lost.
The possibility of being sued "always exists," said Mike Wyatt, portfolio manager-savings plans for the E.I. du Pont de Nemours & Co. in Wilmington, Del.
"We try to educate our employees about the choices that are available to them in our plan, but it's a difficult challenge to get the message across all the time. It's something we have focused our efforts on improving," Mr. Wyatt said.
"We do not give investment advice," said John Milberg, vp at Pacific Mutual Life Insurance Co. in Newport Beach, Calif., which is a stable value product provider, as well as plan sponsor for its own employees.
"Even so," he added, "there's a fine line there that some plan sponsors are probably walking" and there is always the possibility of litigation when investments decline, Mr. Milberg said.
"I think that plan sponsors are always subject to a number of risks," including the risk that the education they provide savings plan participants will be construed as investment advice, he said. If participants act on this and stock values go down, legal action may result.
On the other hand, said Mr. Milberg, if plan sponsors do not provide a good investment education and "fairly aggressive" investment options, they will not be able to attract and maintain good employees.
Donald Butt, manager of trust investments for telecommunications company US West Communications Inc. in Denver, said he believes most plan participants consider their 401(k) assets their money, and the investment choices their own decision. As a result, he predicted, few plan sponsors are likely to find themselves sued in the event of a market downturn.
"I don't think we're going to get sued just because the market went down," he said, noting this did not occur during the October 1987 downturn.
"I don't know that there's a grand potential there (to be sued) as long as you're comfortable in your communications package," said Ed Roche, vp and managing director at NYNEX Asset Management Co. in New York.