High court to rule on 401(k)-loss lawsuits

WASHINGTON — The U.S. Supreme Court said Friday that it would decide whether employees who suffer big losses in retirement accounts can sue their company if it encouraged them to invest in the company’s shaky stock.

The justices will try to clarify who is legally responsible for investment losses in an era when most workers manage their own retirement accounts but do it through a plan sponsored by their employer.

Federal law says that administrators of an employee retirement fund have a duty to act as “prudent” trustees. But it has been unclear whether they can be held liable if workers lose much of their money because they invested unwisely. In this particular case, the employer sponsoring the retirement accounts encouraged employees to invest some or most of their money in the company’s stock.

After the stock market collapse in 2008, employees of several large banks sued. The employees had invested in their banks’ stock and suffered sharp losses when the banks’ investments in subprime mortgages collapsed.

In most of these suits, judges ruled employers could not be held responsible. But last year, a federal appeals court in Ohio cleared the way for employees of a Cincinnati-based bank to sue after the bank’s stock lost about three-fourths of its value between late 2007 and early 2009.

In their complaint, they said that Fifth Third Bancorp offered the company’s stock as one of the prime investment options. Even when top officials of the bank knew in 2007 that its investments in subprime mortgages were going sour, these officials hid that danger from their employees, they alleged.

The 6th Circuit Court of Appeals said these allegations, if proved, amount to a “breach of the fiduciary duty” of the employer. If officials knew the stock was risky, the appeals court said, then it was not “reasonable” to keep the employees heavily invested in the company’s stock.

Obama administration lawyers urged the court to take up the case of Fifth Third Bancorp vs. Dudenhoeffer to clarify the law.

Significantly, U.S. Solicitor Gen. Donald Verrilli Jr. urged the high court to take a stand on behalf of the employees. He said the 1974 law that governs pensions and benefits “imposes duties of loyalty and prudence” on the sponsors of an employee retirement account. They should be held liable, he said, if they know the company’s stock is “significantly overvalued” and do not alert their employees.

For their part, the bank’s lawyers argued the court should dismiss the suit and make clear the company cannot be liable because it failed to anticipate the “greatest financial catastrophe since the Great Depression.”

The court will hear the case in March and issue a ruling by summer.

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