News Briefings - Pension & Benefits

The following article was taken from the 5/5/08 issue of Pension & Benefits Week.

5/12/08 -- Former 401(k) plan participants were not entitled under ERISA to recover investment losses occurring after cashing out their plan accounts

A CLAIM for compensatory damages under ERISA brought by former 401(k) plan participants who lost money after cashing out their plan accounts was dismissed, where the losses occurred while the money was invested in accounts that were not a part of their original 401(k) plans. The participants may, however, be entitled to transfer their money back to their 401(k) plans, if they can show that they were deceived into transferring their money as a result of a fiduciary breach. (Young v. Principal Financial Group, Inc. (2008, S.D. Iowa), 2008 WL 1776590)

Jerri E. Young and Patricia A. Walsh were former participants in their respective employers' 401(k) plans, which were administered by Principal Financial Group.

Around the time the participants retired, each received a letter from Principal, stating that immediate action was requested and that the participants' change in employment required an adjustment to their retirement account status. The letter also provided an 800 number for the participants to discuss the changes and impacts on their respective accounts.

Unbeknownst to the participants, the phone number in the letter directed them to sales counselors at Principal Connection, a call center established by Principal. The counselors provided IRA rollover and investment advice to plan participants for Principal's benefit, selling exclusively a restricted list of Principal's proprietary investment and annuity products to participants in retirement plans that Principal serviced. The counselors persuaded the participants to roll over their plan assets into "Principal J-Shares," a mutual fund.

According to the participants, the counselors failed to say that they were not fiduciaries, and did not mention that they earned rewards for convincing retirees to roll their retirement accounts into Principal's proprietary products. Nor did the counselors note that as sales personnel they were required, as part of their job, to encourage retirees to purchase J-Shares, Principal's proprietary product that had the highest internal expense, or that they exclusively sold Principal's proprietary products. As a result of this deception, participants claimed that they were manipulated into moving their retirement savings into the J-Shares, and ultimately paid more in fees and earned less than if they had left their money in the plans.

The participants filed suit against Principal in a district court alleging that, in its capacity as fiduciary, Principal violated ERISA § 409(a) and that this failure caused the participants to lose money when they transferred their plan accounts into Principal's financial products.

In order to pursue a claim under ERISA § 409(a), plan participants need a private right of action. The participants invoked ERISA § 502(a)(2) and ERISA § 502(a)(3) which enable suits to be brought by DOL or by a participant, beneficiary or fiduciary for appropriate relief.

Principal moved to dismiss the participants' claims for lack of standing.

The district court found that the Supreme Court's decision in LaRue v. DeWolff, Boberg & Assoc., Inc., 128 S.Ct. 1020 (2008, S.Ct.), 2008 WL 440748 (see Pension & Benefits Week, 4/14/2008) to be controlling. LaRue held that a plan participant may bring suit under ERISA § 502(a)(2) to redress harms for fiduciary breaches that impair the value of plan assets in a participant's individual plan account.

Whether the precedent in LaRue extended to provide former participants a remedy for losses that occurred, as was alleged here, after a participant closed her individual plan account, was a matter of first impression. Here, participants' claim that, "but for" Principal's deception and correspondent breach of fiduciary duty, they would not have removed their money from their plans and, thus, their individual accounts would now be worth more than their investments in Principal's alternative products. The harm that the participants alleged was one step removed from the harm in LaRue, i.e., the participants did not allege a specific harm to an ERISA account, but rather, they alleged harm to private investment accounts separate from the original ERISA plan.

The Supreme Court in LaRue had noted that it was not providing a remedy for individual injuries distinct from plan injuries. Here, participants did not allege that Principal's breach or deception directly caused harm to either an employee benefit plan or to an individual ERISA benefit account while the assets were invested in an ERISA plan. Nor did the participants claim that Principal's breach reduced the amount of money the participants received when they cashed out of their plans. Instead, participants alleged that after they removed their money from their employers' ERISA plans, their investments had performed poorly, and the fees that Principal had charged caused their current investments to be substantially less valuable than they would have been had the participants remained in their plans, the court noted.

To find that participants had standing under ERISA § 502(a)(2) on this factual scenario would require an undue and inappropriate expansion of ERISA, the court said, potentially opening the door to lawsuits against anyone who offered investment advice for, or exercised authority over, assets that had once been part of an ERISA plan. The court did not believe that ERISA or LaRue supported such an extension. Accordingly, the court concluded that participants lacked standing under ERISA § 502(a)(2) to recover compensatory damages.

However, the court also said that the determination that the participants lacked standing under ERISA § 502(a)(2) did not defeat their claim if the participants could establish standing under ERISA § 502(a)(3), instead, which entitles plan participants to equitable remedies (like restitutionary, but not compensatory, damages) for breach of fiduciary duty. Thus, the court concluded, if the participants can show that Principal had breached a fiduciary duty owed to them (e.g., by deceiving them into leaving their 401(k) plans), and causing them harm, then the participants may be entitled to an equitable remedy, like the right to transfer their savings back to their respective employers' retirement plan.

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