This past February, the U.S. Supreme Court issued a significant opinion clarifying an individual’s right to sue his or her individual account plan under ERISA for losses suffered due to a fiduciary breach.

In LaRue v. DeWolff, Boberg & Associates, Inc., 128 S. Ct. 1020 (2008), Mr. LaRue was a former employee of DeWolff, Boberg & Associates, Inc. (DeWolff) who participated in DeWolff’s 401(k) retirement savings plan. Mr. LaRue brought suit against DeWolff claiming that DeWolff had breached its fiduciary duty as a plan administrator when it failed to make certain changes he had requested to the investments in his individual account. Mr. LaRue claimed that these omissions effectively reduced his account balance by approximately $150,000, and he requested that his account be made whole. On appeal, Mr. LaRue claimed that the $150,000 was appropriate relief under §502(a)(2) of ERISA because of DeWolff’s breach of fiduciary duty. §502(a)(2) of ERISA permits the U.S. Secretary of Labor, participants, beneficiaries and fiduciaries to bring a civil action for appropriate relief to the plan against a plan fiduciary for breaches of fiduciary duties.

The U.S. Court of Appeals for the Fourth Circuit had dismissed Mr. LaRue’s claim under §502(a)(2) of ERISA by relying on the U.S. Supreme Court’s decision in Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134 (1985). The Russell case involved a disability plan that provided a fixed monthly benefit to its beneficiaries, and the claim was for consequential damages related to a delay in payment of the disability plan’s promised benefits. In Russell, the Court, denied the claim by the participant, stating that suits under §502(a)(2) of ERISA were meant to protect the financial integrity of the entire plan, instead of the rights of an individual plan participant or beneficiary.

The majority opinion, written by Justice Stevens, distinguished Mr. LaRue’s claim from the Court’s decision in Russell, noting that, unlike when ERISA was enacted and Russell was decided, defined contribution plans (like DeWolff’s 401(k)), not defined benefit plans, are currently the more common form of benefit plan. The Court found that the “entire plan” language in Russell was irrelevant in the context of a defined contribution plan, because, unlike the disability plan in Russell, the defined contribution plan at issue in this case had individual accounts, which could be impacted by a fiduciary’s financial mismanagement without affecting the entire plan. In the defined benefit plan context, fiduciary misconduct by administrators would not affect an individual’s benefit unless it creates or heightens the risk borne by the entire defined benefit plan. In contrast, in the defined contribution plan context, fiduciary misconduct does not have to threaten plan solvency to reduce an individual participant’s benefits. The Court noted that this position is supported by the existence of §404(c) of ERISA, which exempts fiduciaries from liability related to losses incurred by a participant’s choices relating to the investment of his or her individual account. Such a provision would be rendered meaningless if fiduciaries could not be held liable for losses to individual accounts. Using this reasoning, the Court reversed the Fourth Circuit Court of Appeals decision and remanded the case for a decision on the merits of Mr. LaRue’s claim.

Two concurring opinions offer a very different interpretation of §502(a)(2) of ERISA. Chief Justice Roberts’ opinion, while concurring that the Fourth Circuit Court of Appeals decision was flawed, claimed that permitting individual recovery under §502(a)(2) of ERISA could permit plaintiffs to avoid employer safeguards developed under §502(a)(1)(B) of ERISA. In particular, the plaintiff could be allowed to avoid the requirement that of the exhaustion of administrative remedies prior to filing suit. Roberts believed that lower courts should be asked to determine whether §502(a)(1)(B) of ERISA precludes a claim under §502(a)(2) of ERISA. The second concurring opinion by Justice Thomas also concurred in the majority’s holding, but argued that the Court should have grounded its opinion in the plain language of §409 and §502(a)(2) of ERISA. According to Justice Thomas, §409 and §502(a)(2) of ERISA permit recovery for all plan losses due to fiduciary breaches. Because amounts allocated to individual accounts are plan assets, fiduciary breaches that lead to losses in individual accounts are still losses to the plan. Therefore, participants may bring suit under §502(a)(2) of ERISA to recover such losses. However, any monetary relief recovered may only be paid to the plan, not directly to the participant.

This decision clearly opens a new avenue for fiduciary lawsuits in the defined contribution plan world. In the context of a §404(c) defined contribution plan, fiduciaries may wish to examine the policies and procedures being used to implement participant and beneficiary directions regarding their accounts to ensure that such directions are being implemented in a timely manner and fiduciary duties are being met.