Page 42 - MetalForming July 2009

Irv Blackman, CPA and lawyer, is a retired founding partner of Blackman Kallick Bartelstein, LLP and chairman emeritus of the New Century Bank (both in Chicago). Want to consult? Need a second opinion? Contact Irv:
Blackman, Kallick, Bartelstein 10 S. Riverside Plaza, Ste. 900 Chicago, IL 60606
phone: 847/674-5295
e-mail:
Blackman@EstateTaxSecrets.com www.taxsecretsofthewealthy.com
Do you own all or part of a business that sponsors a 401(k) plan for your employees? If so, this article is must reading. You won’t like the liability position the Supreme Court has hung over your head. But, as is often the case, adverse circumstances bring opportunity.
On February 20, 2008 our top court decided LaRue v. DeWolff. Bet not even one reader in a hundred knows this landmark case exists. Yet it impacts every 401(k) plan that allows employees to choose their own investments.
The facts: LaRue sued his former employer, DeWolff, claiming a “breach of fiduciary duty because his interest in the 401(k) was depleted by approxi- mately $150,000.”
In a long nine-page opinion, the court clearly held that LaRue could sue his employer, stating, “When a partici- pant sustains losses to his account as a result of a fiduciary breach... (the law) permits that participant to recover such losses.”
Simply put, the boss (you or your company) now can be sued by partici- pants in the company 401(k) plan.
A little history will clarify just how important the LaRue case impact is, and over time, will become. Back in the ’60s and ’70s (when the highest income tax rates were in the 50 to 70 percent range) my CPA firm had a bunch of very busy clients, creating new pension and profit-sharing plans. No question about it, back then these plans were the number one strategy for winning the income tax game.
Our firm’s specialty, back then and still today, was closely held family busi- nesses. We always made the owner(s) of the business the plan trustee(s) to save fees.
One problem: the trustee(s) could be sued and nailed for a breach of fiduci- ary duties. However the problem was easily solved: We had our clients hire professional money managers to invest the plan funds and then would monitor their results. We created hundreds of plans...never had a client sued.
In 1974 the Employee Retirement Income Security Act (ERISA) was passed. It made many significant changes to the law. It also gave birth to Section 401(k). It took awhile, but over the years, with the growth of mutual funds and advances in computer technology, the modern 401(k) plan was developed. The technical name for these plans is “self- directed plan” because each employee can direct his investments.
We call these plans “cookie-cutter plans” (CC plans) because the compa- nies that sell them all have the same or similar pitch. They all claim three advantages: 1) low cost to start and maintain (in most cases a myth because of hidden costs); 2) employees have many investment choices (the fact is the typical plan allows only about 12 to 60 choices; and best of all, 3) no fiduci- ary responsibility (the employees cannot sue you.) Today 401(k) plans, particu- larly the CC plan type, dominate the retirement plan market. Nobody (including me) thought the boss or the company could be sued by a participant for a fiduciary breach. Until now!
Once more, let’s look back in time. In December 2007, just two months before LaRue was decided, I wrote an article tilted, “The Great (Inadvertent) 401(k) Ripoff... Are You and Your Employees Victims?” Following are a few goodies from the article:
“The article is based on the answer to
40 METALFORMING / SPECIAL ONLINE-ONLY ISSUE 2009
www.metalformingmagazine.com
BLACKMAN ON TAXES IRVING BLACKMAN
Supreme Court Deals Blow to 401(k) Plans