A unanimous decision handed down by the U.S. Supreme Court means potential trouble for business owners who provide retirement plans for their workers. According to the ruling, participants in a defined-contribution plan such as a 401(k) may sue the plan sponsor if they suffer losses in their personal accounts because the sponsor has breached its fiduciary duty. Considering that there are now about 70 million people holding some $3 trillion in 401(k) accounts, this ruling could lead to a rash of new lawsuits. But businesses can do much to limit their liability.

In the case that prompted the Supreme Court decision, a former employee of a Dallas consulting firm sued the company, alleging that it had failed to follow his directions to switch to a more conservative mix of mutual funds in his 401(k). Subsequently, the employee lost $150,000.

The employee claimed the company breached its fiduciary duty under ERISA, the Employee Security Income Retirement Act of 1974. However, both a U.S. district court and the Fourth Circuit Court of Appeals ruled against the employee. They held that an individual couldn’t pursue a legal remedy for an ERISA-based violation affecting a participant’s individual account. These rulings relied on a 1985 Supreme Court case involving losses by a participant in a traditional defined-benefit pension plan.

Disagreeing with the lower courts, the Supreme Court recognized the inherent differences between traditional defined-benefit plans, which companies manage on behalf of employees as a group, and defined-contribution plans. Old-style pension plans don’t have individual accounts, and payouts don’t depend on plan participants’ investment choices. But in a 401(k), participants do face potential losses in their personal accounts, and the high court ruled a plan sponsor may be held liable for violating its fiduciary responsibility to manage, administer, and invest plan assets on employees’ behalf.

Where does this ruling leave your company? To avoid potential problems, consider these measures:

• Review your plan’s investment policies and its procedures for following participants’ directions on a timely basis
• Impose controls that reduce the potential for error
• Ensure that your plan provider fully educates participants about their investment options
• Elect the §403(b) Safe Harbor and follow all the requirements to ensure compliance
• Make sure your plan has adequate liability insurance coverage

Your plan’s participants need broad investment options, easy, timely access to their accounts, and an understanding of how to make prudent investment choices. We can work with your legal advisors to safeguard your and your workers’ interests.