Sure, the money eventually made its way into the participants’ 401(k) accounts. But as every lawyer should know, playing with “other people’s money” is the kind of game that catches up with you sooner or later.
Hardly hurting for money
Husch Blackwell had more than $708,000,000 in gross revenue last year and more than $1 million in profits per partner – the kind of law firm sometimes referred to as “Biglaw.” The Plan held nearly $659.2 million in assets with 2,011 participants in 2024, according to its most recent DOL annual report.
The Plan is a defined contribution plan as described in Section 401(k) of the Internal Revenue Code. It was funded with both employer and employee contributions. Husch Blackwell is the “named fiduciary” of the Plan, with authority to control and manage its operation and administration. The law firm was in charge but, as a fiduciary, it was bound by a strict code of conduct set forth in Section 404 of ERISA.
Betrayal of trust
The lawsuit alleges that, according to Plan documents, Husch deducted a certain (participant- approved) amount from each participant’s wages to be contributed to that worker’s individual 401(k) account. Under the Department of Labor regulations that implement ERISA, “in no event may the employer deposit an employee’s contribution to the retirement plan later than the 15th business day of the month following the month in which the employer withheld such contribution from the employee.”
Once deposited in the trust fund associated with the Plan, the contributed money would become “plan assets,” untouchable for any purpose other than paying benefits or related expenses.
But that’s not what happened.
Rather than sending the money to the Plan’s trust fund, the firm deposited the authorized contributions, which amounted to millions of dollars, into its general operating account. Husch allegedly held on to it – sometimes for months – and used it to pay firm expenses.
The net effect was to create a big pot of money available to the employer, but not to participants and beneficiaries. During those months, participants could not access that money, and they received no investment returns on it. Those, presumably, also went to Husch.
At the outset, this looks like a giant, involuntary loan from Plan participants to the boss. More details of the scheme can be expected to emerge during the discovery process, which will follow.
Rules for managing other people’s money
From an academic point of view, the Employee Retirement Income Security Act is something of a curiosity. ERISA is a modern amalgam of tax law, labor law and centuries-old principles of trust law.
Trust law sets out the basic rules that trustees (or fiduciaries) must follow when managing other people’s money. Without confidence that those basic rules were being generally observed, the modern global economy would grind to a halt. Money stuffed in mattresses would be the least of it.
Drawing on this heritage, ERISA imposes strict obligations on the plan fiduciaries. These include a duty of prudence and loyalty. Further, those who have been trusted to manage other people’s money must act “with an eye single to the interests of the participants and beneficiaries.”
Assets of a plan may never inure to the benefit of the employer and must be held for the exclusive purposes of providing benefits to participants in the plan and their beneficiaries and defraying reasonable expenses of administering the plan. Fiduciaries must refrain from self-dealing, which ERISA defines as “prohibited transactions.”
READ MORE ERISA VIOLATION LEGAL NEWS
Prohibited transactions may include:
- lending of money or otherwise extending credit between the plan and a fiduciary; or
- transferring or using assets of the plan for the benefit of a party in interest..
From early reporting, the situation seems clear, but other facts may develop. A settlement offer may appear.
Who’s paying attention?
Twenty days – a hundred and twenty days – what’s the difference? It may not have meant a lot to any of the many participants in the Plan. But it can be quite a lot when a huge law firm is “borrowing” millions of dollars that employees have saved toward retirement.
To answer the question posed above, Tyler Paetkau appears to have been watching. Maybe we should all do more of that.
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