In a much-anticipated opinion, the U.S. Supreme Court Feb. 20, 2008 ruled unanimously that ERISA permits individual participants in defined contribution plans, such as 401(k) plans, to bring suit against plan fiduciaries under section 502(a)(2) of ERISA for losses to their individual accounts that result from breaches of fiduciary duty. Prior to this decision, the lower courts were split as to whether a lawsuit for recovery that will go to some, but not all, participant accounts was sustainable under ERISA section 502(a)(2).

In LaRue v. DeWolff, Boberg & Associates Inc., a 401(k) plan participant sued his plan administrator for breach of fiduciary duty for failing to carry out his direction to make investment changes for his plan account. He sought as a remedy $150,000, representing the difference between his plan account value and the value he alleged it would have been if his directions had been followed. In 2006, the U.S. Court of Appeals for the Fourth Circuit held that the plaintiff could not pursue a fiduciary breach claim under ERISA section 502(a)(2) because he sought “individual” relief rather than relief on behalf of the plan as a whole.

The Fourth Circuit’s decision was based in large part on oft-cited Supreme Court language from its 1985 decision in Massachusetts Mutual Life Ins. Co v. Russell, in which the Court held that injuries were redressable under ERISA section 502(a)(2) only where the remedy sought would benefit the “entire plan,” as opposed to just one individual. In overturning the Fourth Circuit’s decision, the Supreme Court has now narrowed the import of its Russell decision by ruling that the concept of a remedy being applicable to the “entire plan” under section 502(a)(2) applies only in the context of defined benefit plans. For purposes of a defined contribution plan, however, ERISA section 502(a)(2) “authorize(s) recovery for fiduciary breaches that impair the value of plan assets in a participant’s individual account.” In addition, by way of a closing footnote, the Supreme Court made mention of another deeply contested issue in the lower courts, namely, whether a former employee who has received a full distribution from the plan may retain standing to bring suit as a “participant.” The Supreme Court’s footnote indicates, without providing any additional analysis, that this question could be answered in the affirmative so long as the former employee has a “colorable claim for benefits.”

The implications of the Supreme Court’s unanimous LaRue decision are noteworthy. Prior cases had debated whether 401(k) plan participants would have a remedy under section 502(a)(2) if less than all were affected, and if so, whether there was possibly a minimum percentage of plan participants that would need to be affected. Because this case involved a single plan participant claiming damages that affected only his particular account, the result makes clear that there is no minimum number of participant accounts that must be affected to qualify to bring a damages claim for fiduciary breach. The result also makes less important to 401(k) plan lawsuits the lower courts’ limitation on the scope of “equitable” relief under another ERISA remedies provision, section 502(a)(3), because if participants can bring claims for losses under section 502(a)(2), they need not rely on the alternative equitable remedy provided under section 502(a)(3).

The Supreme Court’s holding in LaRue, which is consistent with the view previously adopted by a majority of the lower courts, has now put to rest the central issue relating to relief under ERISA section 502(a)(2). In a non-binding concurring opinion, however, the Chief Justice raised the question of whether the cause of action in LaRue should have more properly been brought as a claim for benefits as opposed to a claim for breach of fiduciary duty. The impact, if any, of the Chief Justice’s comments on this point remains to be seen.