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July 30, 2008
Can Cashed-Out Participants Still Sue?
Four retirees, each of a different employer, sued the managers of their retirement savings plans, charging that the employee plan accounts had been misused, leading to lower payouts than they deserved. They had cashed out, so were they still "plan participants"?

What happened. The four plaintiffs didn't know one another when each sued on his or her individual behalf, and for all the other "similarly situated" participants in their 401(k) plans. But each had the same claim: That their plan managers had allowed mutual funds in which they had invested to participate in what's known as "market timing." Investors in those funds could, as the court opinion put it, "move in and out of the funds to take advantage of the temporary differentials between the mutual funds' daily-calculated 'net asset value' and the market price of the component stocks during the course of the day."

Plaintiffs charged that the practice had reduced the value of their accounts, violating the Employee Retirement Income Security Act. They asked the fiduciaries to make up the difference for them and their fellow plan participants. Maryland judges combined the cases and sent them to a federal district court. The court first ruled that three of the cashed-out plaintiffs could sue but then reversed and denied all four suits. The plaintiffs appealed to the 4th Circuit, which covers Maryland, North Carolina, South Carolina, Virginia, and West Virginia.

What the court said. Two key events moved appellate judges in plaintiffs' favor. First, as early as 2003, the Securities and Exchange Commission found market timing an abusive practice that benefited short-term investors, disadvantaging long-term investors in mutual funds. And, the practice increases funds' costs and hurts investment performance. The mutual fund industry moved to ban market timing, and SEC heavily fined some 20 mutual fund complexes. Hundreds of civil actions followed, including these four.

he second key event was the U.S. Supreme Court's ruling that a participant in a defined-contribution plan, unlike one in a company-funded pension plan, can sue on behalf of his or her own account rather than on behalf of the entire plan (LaRue v. DeWolff Boberg, 2/21/08). Appellate judges ruled that the four plaintiffs' cases can go back to be reconsidered by the district court. Wangberg et al. v. Janus Capital Group, U.S. Court of Appeals for the 4th Circuit, No. 06-2003 (6/16/08).

Point to remember: The LaRue ruling and market-timing sanctions mean that employers should closely query their retirement plan brokers and managers about investment practices for the mutual funds offered.

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