Working for Justice

It’s Great You Have a 401(k) – But Who’s Minding the Store?

In recent years, employees have been filing an increasing number of meritorious lawsuits against employers for 401(k) mismanagement.  These claims are in the tens of millions of dollars and range from disloyalty to imprudence to disregarding conflicts of interest.  Some of the more egregious claims come when employers populate 401(k) plans with their own expensive and poorly performing proprietary investment funds, creating a kind of “buy from the company store” arrangement in which they profit at the expense of their employees.  The Employee Retirement Income Security Act of 1974, also known as ERISA, is designed to protect employees from this abuse.

A recent case in California –  Munro vs. University of Southern California – illustrates the alarming lengths to which employers will go to stop their employees from enforcing ERISA.  In this case, the University’s employees brought a class action lawsuit demanding the University make restitution to the retirement plans for losses due to imprudent investments and unreasonable plan expenses.  Instead of trying to determine whether the employees’ position had any merit, the University tried to prohibit employees from bringing the lawsuit because, as a condition of their employment, each had signed an agreement to arbitrate all claims, which also did not authorize them to bring an arbitration collectively as a class action.  Knowing that it is not practical to bring individual ERISA claims, the University’s legal strategy was to prevent any inquiry into its possible misconduct.

Fortunately for employees, the Court of Appeals for the Ninth Circuit rejected the University’s argument.  The Court found that employees had agreed to arbitrate claims to enforce their individual rights only; here employees were bringing claims on behalf of the retirement plan to enforce the rights of the plan under ERISA.  From that finding, the Court reasoned that a claim brought on behalf of the retirement plan fell outside the scope of an agreement that mandated arbitration to enforce only the rights an individual employee.  The Court held that the employees could proceed with the ERISA claim against the University of Southern California on the merits.

It would not surprise us if this case is the start of a trend to forestall employees from pursuing ERISA remedies against employers who ignore their fiduciary duty. Although the Ninth Circuit decided to protect the employees’ ERISA rights, another Federal court sitting in Texas, Ohio, or Florida may reach a different decision.  Eventually, the issue may end up in the United States Supreme Court.

Your retirement savings represent one of your most valuable assets. Protect it. ERISA requires employers to disclose annually important information regarding the plan. So, take the time to study the disclosures so you understand your 401(k)’s investment options, their expenses, and their investment performance.   Don’t let 401(k) mismanagement transform your retirement nest egg into a retirement nightmare.  If you feel your employer is mismanaging your 401(k) or 403(b) plans, please contact one of the Sanford Heisler Sharp employment lawyers in San Diego or New York for a free evaluation of your plan.

Charles Field

Charles Field

Charles H. Field is a partner in the San Diego office of Sanford Heisler Sharp. As Co-Chair of the Firm’s Financial Services practice, Mr. Field leverages his decades of practice focused on commercial transactions and regulation to recover investments that have been mishandled or lost. Learn More

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