This was shaping up to be a good week for business at the Supreme Court. On Wednesday, the justices delivered decisions in three cases that pitted state legislation against federal rules -- and in all three they ruled, unanimously or nearly so, that Federal law preempts the states. That's good for businesses, which don't want to deal with 50 different, and often very stringent, regulatory schemes. But in a fourth case, the High Court went the other way, and by the same margin. The justices ruled unanimously (!) that individuals can sue their employers and others for mismanaging the 401(k) retirement plan.

In the case at hand, an employee sued his former firm for failing to act on his instructions to change his investment allocation, a breach of fiduciary responsibilities which he claimed cost him $150,000 in stock market losses. The defendant, relying on an earlier Supreme Court case, insisted that only entire plans were able to bring suit under the ERISA law, but the Supreme Court waved the argument away. That precedent applied to a disability plan, but as Justice John Paul Stevens wrote, "Misconduct by such a plan's administrators will not affect an individual's entitlement to a defined benefit unless it creates or enhances the risk of default by the entire plan. For defined contribution plans, however, fiduciary misconduct need not threaten the entire plan's solvency to reduce benefits below the amount that participants would otherwise receive."

The company's lawyer told the Washington Post that "Ultimately, employers aren't going to sponsor plans if they're going to be sued every time they make an innocent mistake." Right -- and if you believe that, I have a front-loaded mutual fund to sell you. When they're being candid, 401(k) consultants will tell you that employers set up such defined contribution plans for their benefit as much as their employees'. It's the only way company owners and executives can save a lot of money while taking a double tax advantage -- first as company owners, reducing the firm's taxable income by the expense of the plan (which if designed prudently can direct most of the company contribution to them), and then as beneficiaries. It's unlikely you'll see entrepreneurs cutting off their own noses to engage in face-spiting.

What this does mean, however, is that small companies cannot afford to be cavalier or complacent when it comes to setting up a retirement plan. Insurers, brokerages, and big mutual fund companies have done brisk business selling small firms products whose chief virtue is that you don't have to think about it. That's a bad approach, especially when it comes to structuring investments. Some plan sponsors have been sued for poorly performing portfolios, others for failing to educate participants about the risks of investing, but many observers predict a wave of legal action over the fees -- high fees and hidden fees -- embedded in the mutual funds that underpin so many retirement accounts. Big corporations have been lately pummeled by a slew of class action lawsuits -- G.M. settled one in January for $37.5 million -- but the Supreme Court decision now leaves smaller firms vulnerable to litigation.

Interestingly, the Bush Administration backed the employee, which no doubt caused much head-slapping throughout the corridors of power in Washington. But the position does not likely represent an ideological about-face. Rather, it probably reflects the Department of Labor's growing concern about mutual fund fees. The agency is mulling new disclosure standards, which many in Congress say don't go far enough. Stay tuned.