Responding to LaRue
You’ve probably read a lot about the Supreme Court’s LaRue decision—much of it predicting that the case reflects the end of life as we know it. In that decision, the Court said that participants in 401(k) plans have the right to bring a lawsuit against fiduciaries for losses in their individual accounts.
The case arose out the alleged failure of the plan administrator—i.e., the employer—to follow a participant’s directions regarding the investment of his account. As a result, the participant claims that he lost money, presumably on the basis that he would have had a bigger return if his instructions had been followed. What is somewhat unusual about the allegations in the case—which have not yet been proven at a trial—is that in our experience, the plan administrator is almost never involved in the process of implementing participant investment instructions. Rather, this task is left to the plan recordkeeper.
So what does this have to do with service provider agreements? Just this: the plan sponsor needs to consider whether it will accept the ultimate responsibility for participant directions or whether, in the context of the overall services the plan receives, it expects a service provider to accept both the responsibility and accountability for this function. If the latter, then the sponsor needs to make sure that the agreement adequately addresses the issue by specifying that the service provider is responsible for implementing participant instructions. As a part of this, the sponsor may expect the service provider to agree in the contract that it will correct any errors as soon as they are discovered and that it will indemnify the plan sponsor and fiduciaries if the directions are not followed.
If the plan sponsor negotiates to have the service provider accept this responsibility, there is one other provision that should be addressed, but may be overlooked. Often, service provider agreements indicate that unless the plan sponsor or fiduciaries object to a report provided to them by the service provider within a specified period—often within 60 to 90 days—the report is deemed accepted and the service provider is no longer responsible for any errors that may be reflected in the report. In the context of participant investment instructions, the plan sponsor may have little way to find out about a failure to properly implement participant investment instructions unless a participant complains. And the typical participant may not discover the error until he receives his next quarterly statement (assuming he discovers it then). Thus, the plan sponsor would want to object to the deemed approval provision and request that it be removed.
As we have previously written, we do not view LaRue as the end of the world. At the same time, plan sponsors may wish to take steps to protect themselves from the actual participant claim that lead to the decision so that the individual right to sue becomes irrelevant.
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