Occasionally our firm is contacted by an investor who has suffered the misfortunate of having his or her 401k savings either fraudulently withdrawn or mistakenly transferred to a third-party who has absconded with the money. When the money cannot be easily recovered from the recipient, or cannot be recovered at all, the logical place to look for reimbursement is the plan administrator that authorized the withdrawal or transfer. You might think that liability is clear cut in these types of situations, but that isn’t always the case. The two leading cases dealing with this issue illustrate the starkly different outcomes that could unfold.

In Gatlin v. National Healthcare Corp (6th Cir. 2001), the plaintiff Judy Gatlin brought claims against her retirement plan administrator after a check issued in her name by the administrator was intercepted by her estranged husband, who then forged an endorsement of the check and cashed it at his bank. The check was not sent to the address where Ms. Gatlin had directed it to be sent because, shortly before the check was mailed, an unidentified third party (presumably the estranger husband) called the administrator to provide new mailing instructions. When Ms. Gatlin discovered what had happened, she demanded that the administrator send a second check. When the demand was rebuffed, she filed suit. The district court applied a highly deferential standard to review the administrator’s decision not to reimburse Ms. Gatlin, but still concluded that the administrator was liable. The decision was upheld on appeal on the grounds that it was “objectively unreasonable [for the administrator]. . . to allow someone other than the beneficiary to change the address to which the benefits check would be sent.”

In Foster v PPG Industries (10th Cir. 2012), the court upheld a retirement plan administrator’s decision not to reimburse an 401k account holder whose ex-wife stole funds from his account by making fraudulent online withdrawal requests. The court ruled that the administrator was not liable because it was not required to inquire into the identity of the requesting party, and had no reason to suspect that fraud was afoot.

While the Gatlin and Foster cases deal specifically with ERISA accounts, the reasoning in those cases could easily be applied to other situations involving fraudulently procured withdrawals or distributions. In all of these cases, when it comes to determining whether the administrator is liable, the crucial factor is likely to be whether or not the administrator or custodian was on inquiry notice of the fraud.

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