In a recent decision, the United States Supreme Court held that a participant in a 401(k) plan can sue the plan fiduciary under ERISA for losses to his individual account caused by the fiduciary’s alleged breach of fiduciary duty. The Court’s decision in LaRue v. DeWolff, Boberg & Associates may make it easier for 401(k) plan participants to sue employers or other plan fiduciaries for declines in the value of their individual accounts.

The participant in the LaRue case alleged he directed the plan administrator of his 401(k) plan to make certain changes to the investments in his plan account, but the administrator never did. The participant sued the administrator under ERISA Section 502(a)(2), claiming that the administrator breached its ERISA fiduciary duty by failing to carry out his instructions, thereby causing his individual account in the plan to lose $150,000.

The U.S. Court of Appeals for the Fourth Circuit ruled against the participant, holding that ERISA Section 502(a)(2) authorizes only claims for damages when the fiduciary breach affects the entire plan, not just the account of an individual participant.

In a unanimous opinion, the U.S. Supreme Court rejected the Fourth Circuit’s restrictive interpretation of ERISA Section 502(a)(2). The Supreme Court distinguished its prior precedent, which involved a defined benefit pension plan, rather than a defined contribution plan with individual accounts. The Court explained that “misconduct by the administrators in a defined benefit plan will not affect an individual’s entitlement to a defined benefit unless it creates or enhances the risk of default by the entire plan.” In a defined contribution, the Court noted the fiduciary misconduct need not threaten the solvency of the entire plan for a participant’s benefit to be reduced below the amount the participant would otherwise receive. Accordingly, the Court held that a 401(k) plan participant can sue a fiduciary under ERISA Section 502(a)(2) regardless of whether the alleged fiduciary breach diminishes plan assets payable to all participants or only a single participant’s individual account.

What Should Plan Fiduciaries and Employers Do?

The LaRue decision will likely result in an increased number of claims against 401(k) plan administrators, investment managers and other plan fiduciaries by individual participants seeking to recover investment losses. Employers and plan administrators should consider the following actions to reduce their potential liability for such claims:

  • Review current plan administration and investment processes to ensure that safeguards are in place to avoid administrative errors affecting plan participants’ accounts;
  • Hire an independent investment advisor to select and monitor investment ¬options offered under the plan;
  • Require recordkeepers and third party administrators (TPA) to agree to indemnify the plan administrator if the plan administrator has liability on account of their negligence;
  • Comply with requirements of ERISA Section 404(c), which provides limited protection to fiduciaries for participant directed investments;
  • Obtain and/or review fiduciary liability insurance to ensure plan fiduciaries are adequately protected;
  • Hire legal counsel to perform a fiduciary compliance audit.