On February 20, 2008, the United States Supreme Court issued a unanimous decision in LaRue v. DeWolff, Boberg & Associates that permits individual defined contribution pension plan participants to sue for fiduciary breaches that impair the value of plan assets in an individual’s plan account. This highly-publicized Supreme Court decision clarifies that harm to a specific individual’s account is actionable under the fiduciary provisions of ERISA.
James LaRue sued his former employer (“DeWolff”) and its 401(k) plan claiming that he had directed DeWolff to make certain changes to the investments in his individual account, but DeWolff failed to carry out these directions. Mr. LaRue claimed that this failure resulted in a depletion of his account balance by approximately US$150,000 and amounted to a breach of fiduciary duty under ERISA. The district court dismissed Mr. LaRue’s claim, concluding that he was seeking money damages (rather than equitable relief), which are not permitted under Section 502(a)(3) of ERISA. On appeal, the Fourth Circuit agreed with the district court and rejected Mr. DeWolff’s Section 502(a)(3) of ERISA claim. The Fourth Circuit also rejected Mr. LaRue’s claim under Section 502(a)(2) of ERISA, which provides for claims for breaches of certain fiduciary duties set forth in Section 409(a) of ERISA. Citing the Supreme Court’s decision in Massachusetts Mutual Life Ins. Co. v. Russell, 473 US 134 (1985), the Fourth Circuit rejected Mr. LaRue’s Section 502(a)(2) of ERISA claim because Mr. LaRue’s claim was to recover losses to his individual account and that Section 502(a)(2) of ERISA only provides relief for the entire plan.
The Supreme Court reversed. Writing for the Court’s majority, Justice Stevens concluded that although Section 502(a)(2) of ERISA “does not provide a remedy for individual injuries distinct from plan injuries, that provision does authorize recovery for fiduciary breaches that impair the value of plan assets in a participant’s individual account.” The majority distinguished its decision in Russell, stating that, in Russell, which addressed a “defined benefit” plan, the emphasis on protecting the “entire plan” reflected the fact that the plan in Russell promised participants a fixed benefit and that a breach of a fiduciary duty by a plan’s administrator in such a 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. The Court stated that Russell’s emphasis on protecting the “entire plan” from fiduciary misconduct reflects the “former landscape” of employee benefit plans which has changed with defined contribution plans now dominating the retirement plan scene. Fiduciary misconduct need not threaten the entire plan’s solvency to reduce benefits that an individual participant may receive in a defined contribution plan.
Consequently, the Court stated that its references to the “entire plan” in Russell are not relevant in a case involving defined contribution plans. The Court noted that Section 404(c) of ERISA, which exempts plan fiduciaries from liability or losses caused by participants’ exercise of control over assets in their individual accounts, would serve no purpose if fiduciaries did not have liability for losses in individual accounts.1
One of the consenting opinions, written by Chief Justice Roberts and joined by Justice Kennedy, agreed with the Court’s overturning of the Fourth Circuit’s decision but raised a question as to whether Mr. LaRue’s claim was raised under the proper ERISA provision. Chief Justice Roberts stated that it was possible that Mr. LaRue’s claim should have been made under Section 502(a)(1)(B) of ERISA instead of under Section 502(a)(2) of ERISA. If that were the case, Chief Justice Roberts believed that LaRue’s claim under Section 502(a)(1)(B) of ERISA may preclude bringing the same claim under Section 502(a)(2) of ERISA. Section 502(a)(1)(B) of ERISA permits a plan participant or beneficiary to recover benefits under the plan and to enforce his or her rights under the terms of the plan and caselaw under Section 502(a)(1)(B) of ERISA provides plan administrators with certain safeguards including the safeguard that a participant exhaust the administrative remedies mandated by ERISA before filing suit under Section 502(a)(1)(B) of ERISA. Chief Justice Roberts raised a concern that allowing “what is really a claim for benefits under a plan to be brought as a claim for breach of fiduciary duty under Section 502(a)(2) of ERISA, rather than as a claim for benefits due ‘under the terms of [the] plan,’ Section 502(a)(1)(B) of ERISA, may result in circumventing such plan terms.” The Roberts concurrence is interesting in that it shows that the majority opinion in LaRue effectively permits fiduciary-type claims relating to individual accounts to proceed without requiring the litigant to have exhausted all administrative remedies and raises the possibility that the Court may want to reexamine the question of whether Section 502(a)(1)(B) of ERISA should take precedence.
Justice Thomas, joined by Justice Scalia, issued a separate concurring opinion in which he stated that his reading of Sections 409(a) and 502(a)(2) of ERISA is that the text of such provisions is unambiguous as applied to defined contribution plans. In Justice Thomas’ opinion, losses to Mr. LaRue’s individual 401(k) account resulting from DeWolff’s alleged breach of its fiduciary duties were losses to the plan because assets allocated to Mr. LaRue’s individual account were plan assets. The Thomas concurrence concludes that, since a defined contribution plan is not merely a collection of unrelated accounts but one plan that is the “sum of its parts,” when a defined contribution plan sustains losses, those losses are reflected in the balances of the affected participants and a recovery of such losses is allocated to the applicable individual accounts and that Section 502(a)(2) of ERISA on its face permits the participant to recover such losses on behalf of the plan.
While most practitioners appear to have expected that the Supreme Court would side with Mr. LaRue, the Court’s highly-publicized decision is not without impact and, at least in the short term, there may well be a noticeable increase in litigation. The LaRue decision has settled a split in the circuit courts regarding whether an individual participant could make a claim against his or her employer under Section 502(a)(2) of ERISA. While courts generally would probably not have left Mr. LaRue without a remedy, it is now clarified that participants will now have the ability to sue their employers for various breaches of fiduciary claims and have their plan accounts be made whole. LaRue’s clarification could cause plaintiffs and their counsel to be more confident in their ability to bring suit and there is the possibility that the mere high-profile publicizing of the right to bring these claims could result in additional lawsuits. LaRue may also have the effect of insulating stock-drop cases, excessive-fee cases and other class actions and similar cases from arguments that the cases should be dismissed because of a lack of plan-wide harm. It is also noted that the decision in LaRue, when read in light of the Roberts concurrence, may embolden plaintiffs to proceed before exhausting their administrative remedies.
Thus, while it is too early to determine the full effect of this opinion on employers who sponsor defined contribution plans, the fact that the Supreme Court has highlighted the importance of fiduciary responsibility in the context of defined contribution plans, means that plan sponsors and fiduciaries should act now to further reduce their potential exposure to claims by plan participants and beneficiaries by taking certain steps such as:
- Carefully reviewing (i) the terms of the plan to ensure that the plan is administered in accordance with its terms and (ii) the plan’s procedures for carrying our participant directions are adequate. In this regard, consideration should be given to having the plan’s procedures and practices audited to be sure that the administration of their plans is proper.
- Identifying who are the plan’s fiduciaries. Since plan fiduciaries are personally liable for losses caused to the plan, it is important for each fiduciary to know what his or her individual fiduciary duties are with respect to the plan.
- Reviewing the plan’s policies and procedures for compliance with Section 404(c) of ERISA. Since Section 404(c) of ERISA can relieve fiduciaries from certain liabilities resulting from losses in participant-directed accounts if certain procedures are followed, it is important that plan fiduciaries comply with the various Section 404(c) of ERISA requirements (which include, for example, ensuring that participants are provided with sufficiently diversified investment alternatives).
- Consider hiring an independent investment advisor to assist with the selection and monitoring of investment options that are chosen as participant investment alternatives under the plan. The hiring of such an independent investment advisor can help plan fiduciaries avoid liabilities resulting from losses sustained by participants in the event of negative investment performance.
- Reviewing the plan’s fiduciary liability insurance policies, indemnification agreements or procedures and bonding. In anticipation of possible increases in lawsuits by plan participants and beneficiaries, employers should review their fiduciary insurance, indemnity and bonding protections to ensure that their individual fiduciaries (who may be personally liable) are adequately protected.
- Reviewing all contracts with third-party providers who provide administrative services to the plan to ensure that such contracts contain adequate protections for the plan sponsor and plan fiduciaries (e.g., provisions that sufficiently indemnify the plan sponsor and plan fiduciaries against mistakes made by any such third-party provider).