On February 20, 2008, the United States Supreme Court decided the case of LaRue v DeWolff, Boberg & Associates, Inc., unanimously holding that individual participants in defined contribution plans regulated by ERISA (the Employee Retirement Income Security Act of 1974) can sue their plan administrator for a breach of fiduciary duty that reduces the value of their individual account.

The plaintiff, LaRue, participated in an ERISA-regulated 401(k) retirement plan administered by his former employer, DeWolff, Boberg & Associates. As is normal with 401(k) plans, LaRue made contributions that were allocated to an individual retirement account for his personal benefit, and he was allowed to direct the investment of the money allocated to his individual account. LaRue claimed that he directed DeWolff to make certain investment changes in 2001 and 2002 that were never carried out. LaRue alleged that his individual account lost approximately $150,000 as a result.

LaRue sued DeWolff under ERISA, arguing that DeWolff breached its fiduciary duty by failing to make the investment changes. He sought to recover the money that would have been allocated to his individual account if the 2001 and 2002 changes had been carried out. The lower federal courts held that LaRue's claims failed as a matter of law, ruling that LaRue could not sue for a breach of fiduciary duty because ERISA limits such claims to situations where the "plan as a whole" was injured.

The Supreme Court disagreed, holding that LaRue's lawsuit could proceed. The Court clarified that its decision in Russell, which the lower courts relied upon, was based on the fact that the retirement plan in that case was a defined benefit plan, i.e. one where participants are provided with fixed benefits and do not have individual accounts to manage. For such defined benefit plans, misconduct by the administrator does not threaten the fixed benefits provided to any individual participant unless the misconduct creates or enhances the risk of default by the entire plan as to all participants.

The 401(k) plan at issue in the LaRue case, by contrast, is a defined contribution plan, i.e. one where retirement benefits are based on the amount of money allocated to individual accounts by the individual participants. For these kinds of plans, fiduciary misconduct by the plan administrator can reduce an individual's benefits by reducing the amount allocated to his or her individual account, even without threatening the solvency of the entire plan. Because of this difference, the Supreme Court concluded that individual participants in defined contribution plans may sue a plan administrator to recover for fiduciary breaches that impair the value of the individual participant's account.

Because defined contribution plans now "dominate the retirement plan scene," as the Court expressly acknowledged, this decision has opened the door to possible lawsuits by individual participants in defined contribution plans who claim that the value of their individual account is reduced by the conduct of the plan administrators. Because the potential for liability is significant, employers are encouraged to make time to review their ERISA-regulated plans with their benefit advisors to ensure that they are complying with their fiduciary and other obligations.

Click here for the full text of the LaRue opinion, along with concurring opinions from Chief Justice Roberts and Justice Thomas.