Death, Divorce and LaRue: 401(k) Breach of Fiduciary Duty Claims as Assets In Divorce and Probate Cases

In 2008, the Supreme Court of the United States handed down their landmark decision in LaRue v. DeWolff, Boberg and Associates, Inc.(1) In LaRue, the Court finally recognized the fundamental difference between defined benefit pension plans and defined contribution pension plans. Recognizing that plan participants bear the risk of investment losses in defined contribution plans, the Court ruled that individual participants in defined contribution plans could recover for losses in their accounts that were due to breaches of fiduciary duties by plans and/or plan fiduciaries.

While ERISA lawyers and others involved in the ERISA arena recognized the significance of the LaRue decision, attorneys practicing in other areas of the law have failed to recognize LaRue’s potential impact on their practices, particularly potential malpractice issues. This white paper will discuss the potential implications of LaRue for divorce attorneys, probate attorneys, other ERISA practitioners, and their clients.

Causes of Action As Property
From a legal perspective, “property includes all rights which are of value, including claims against third parties.”(2) A cause of action is a “chose in action,” or claim of one party against another for the rendering of something of value.(3) The Supreme Court and other courts have ruled that causes of action are rights of property.(4)

The Supreme Court’s LaRue decision recognizing the right of individual participants in defined contribution plans to bring an action for individual losses creates a potential cause of action for such plan participants and their beneficiaries. The creation of a cause of action also creates a property right, an asset, for participants and beneficiaries in defined contribution plans.

Compliance Issues in Defined Contribution Plans
ERISA Section 404(a) and the accompanying regulations set out a number of fiduciary duties for plan fiduciaries, including the duty of prudence-the duty to act with the care, skill, prudence and diligence that a prudent man would in a like capacity and familiar with such matters. In meeting the prudent man standard of care, Section 404 states that

a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and-
(A) for the exclusive purpose of:
(i) providing benefits to participants and their beneficiaries; and
(ii) defraying reasonable expenses of administering the plan;
(B) with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims;
(C) by diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so;(5)

Recent ERISA settlements and legal decisions since LaRue suggest that defined contribution plans and fiduciaries are not complying with said 404(a) requirements. (6) Most of the ERISA-based breach of fiduciary duty claims to date have focused on the fees of the investment options available within a plan.

A future basis for ERISA-based breach of fiduciary may be the failure to meet the fiduciary duty to effectively diversify a plan’s investment options. Effective diversification is a two-step process requiring both vertical and horizontal diversification.

Most plans perform vertical diversification, i.e., diversifying among various asset classes. Few plans properly perform horizontal diversification, i.e., diversifying within asset classes. As a result, the plan’s participants are not provided with the ERISA’s required ability to minimize the risk of significant investment losses within their plan accounts.

Some plans believe that they are immune from fiduciary liability under Section 404(a) by virtue of a “safe harbor” known as ERISA Section 404(c). However, experience suggests that few plan and plan fiduciaries actually qualify for the various requirements for Section 404(c) protection.(7) Consequently, the potential for successful ERISA-based breach of fiduciary duty claims may be much higher than many plans and plan fiduciaries believe.

The potential number of successful ERISA-based breach of fiduciary duty claims may also be higher than believed by plans and plan fiduciaries. ERISA does not require small defined contribution plans, defined as plans with less than 100 participants, to conduct annual audits of the plan. As a result, such small plans may not be aware of potential fiduciary liability exposure.

The Department of Labor compiles statistics on defined contribution plans and active participants. The most current statistics, covering plan years ending in 2011, show that

• out of a total of 638,390 plans, 536,069 (88%) had less than 100 participants;
• out of a total of 638,390 plans, 487,795 (76%) had less than 100 participants;
• out of a total of 487,795 plans in which participants direct all investments, 422,072 (86%) had less than 100 participants.(8)

Small plans are less likely to spend the money for expert ERISA advice. Small plans often choose to rely solely on the representations and advice of plan service providers and others parties, who may have no fiduciary duty or other legal obligation to provide a plan or its fiduciaries with complete and accurate ERISA compliance advice.

ERISA-based Breach of Fiduciary Claims and Divorce Actions
The division of marital property is usually a significant issue in divorce actions. In some case, pension plan accounts may be a couple’s major marital asset.

The division of pension plan accounts is usually accomplished by a document known as a qualified domestic relations order (QDRO). The QDRO usually addresses the manner in which a pension plan account will be divided. In most cases, the preferred option is to let the non-owner of the account transfer the money to a separate retirement account, such an individual retirement account (IRA), in order to provide greater flexibility in the management of the funds. However, in some cases the pension plan may impose restrictions on the timing and/or the manner of the non-owner’s payout from the plan.

Under ERISA, the non-owner of the plan account is designated as an “alternate payee” and has the same rights as a plan beneficiary would have. Under ERISA Section 502(b), a beneficiary has standing to sue a plan and plan fiduciaries for breaches of their fiduciary duties. Therefore, the non-owner spouse should be informed of the potential for such ERISA-based breach of fiduciary claims and the possible value of same, in order to calculate the value of marital property and the potential value of individual claims.

Divorce attorneys should determine whether there are possible ERISA-based breach of fiduciary duty claims before finalizing property settlements. The evaluation of such potential claims should be considered not only in determining the total value of the marital property to ensure a fair and appropriate property settlement for their clients, but also to avoid potential malpractice claims

ERISA-based Breach of Fiduciary Claims and Probate Proceedings
The proceeds in a defined contribution plan are usually distributed in accordance with the decedent’s beneficiary form. The Supreme Court has ruled that the beneficiary form, not a decedent’s will, controls the distribution of pension plan accounts.(9)

An executor or administrator has a legal duty to gather all of the decedent’s assets. As mentioned previously, LaRue established a defined contribution plan participant’s legal right to file ERISA-based breach of fiduciary claims, and thus established such claims as property rights and assets.

Consequently, it can be argued that executors and administrators have a fiduciary duty to determine whether the participant’s estate has a potential ERISA-based breach of fiduciary duty claim. Given the high rate of suspected non-compliance by defined contribution plans, this duty to evaluate becomes even more important to protect against a possible breach of fiduciary duty action against the executor or administrator themselves.

Practical Considerations Going Forward
While the ERISA world immediately realized the implications of the LaRue decision, attorneys practicing in other areas of the law, as well as non-attorneys in the ERISA arena, may not have considered the full implications of LaRue for their practices.

Evidence from recent cases support the widely-held belief that many plans are not ERISA compliant in terms of both ERISA Section 404(a) and 404(c). Therefore, it is important for both divorce attorneys and probate attorneys to evaluate their cases for the possibility of an ERISA-based breach of fiduciary claim and the potential value of same. The most likely bases for ERISA-based breaches of fiduciary duty claims include excessive fees issues and issues regarding the improper selection, monitoring and/or diversification of a plan’s investment options.

At a minimum, it is suggested that an attorney involved in divorce or probate proceedings should discuss the possibility of such claims with their clients, leaving the ultimate decision to pursue any such action to the client. While such claims should not be cost prohibitive in most cases, the size of the potential recovery and/or the time element may be an important factor for a client.

401(k) plans are receiving an increasing amount of attention the issue of fees and other fundamental issues. With the number of multi-million dollars settlements and high profile ERISA-based breach of fiduciary actions pending, e.g., Tussey v. ABB, Inc.,(10), with the expectation of more to follow, it is important for attorneys and other ERISA experts to understand the impact of the LaRue decision and its progeny. While employees may be reluctant to file breach of fiduciary duty claims against their employers, ex-spouses and heirs may not be so reluctant, especially when potentially significant amounts of money involved.

This article is not designed or intended to provide legal, investment, or other professional advice since such advice always requires consideration of individual circumstances. If legal, investment, or other professional assistance is needed, the services of an attorney or other professional advisor should be sought.

1. Larue v. DeWolff, Boberg and Associates, 552 U.S. 248 (2008)
2. Ray Andrews and Walter B. Raushenbush, “The Law of Personal Property,” 3d ed., (Callaghan & Co., Chicago. IL 1975)
3. Logan v. Zimmerman Brush Co., 455 U.S. 422, 428 (1982)
4. Logan
5. 29 U.S.C. § 1104(a)
6. Recent notable settlements include Bechtel ($18.5 million), Caterpillar ($16.5 million), General Dynamics ($15 million), Wal-mart ($13.5 million) and Kraft ($9.5 million). The Braden-Tibble-Trilogy provide a good overview of the LaRue progeny of cases – Braden v. Wal-Mart Stores, Inc., 588 F.3d 585 (8th Cir. 2009); Tibble v. Edison Int’l, 711 F.3d 1061 (9th Cir. 2013); and Tussey v. ABB, Inc., (8th Cir. 2014)(not reported)(available online at 201457323903537409&hl=en&as_sdt=6&as_vis=1&oi=scholarr.
7. Fred Reish, “The New Take on 404(c): Confusion in the Federal Courts,” available online at Year=&Practice=0&Attorney=0
7. Department of Labor, “Private Pension Plan Bulletin:Abstract 8f 2011 Form 5500 Annual Reports,” Table 6, available online at 2011pension planbulletin.pdf
9. Kennedy v. Plan Adm. For DuPont Sav. And Inv. Plan, 129 S.Ct. 865 (2009)
10. Tussey

About jwatkins

I am a securities and ERISA attorney. I am a CFP Board Emeritus™ member and an Accredited Wealth Management Advisor™. I am a 1977 graduate of Georgia State University and a 1981 graduate of the University of Notre Dame Law School. I am the author of "CommonSense InvestSense: The Power of the Informed Investor" and " The 401(k)/403(b) Investment Manual: What Plan Sponsors and Plan Participants REALLY Need To Know. " As a former compliance director, I have extensive experience in evaluating the legal prudence of various types of investments, including mutual funds and annuities. My goal is to combine my legal and compliance experience in order to help educate investors on sound, proven investment strategies that will help them protect their financial security.
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