The U.S. Supreme Court granted certiorari yesterday in LaRue v. Dewolff, No. 06-856, a case in which the Fourth Circuit denied relief to a section 401(k) plan participant claiming that his account lost money because the plan administrators failed to follow his investment instructions. Relying on Mass. Mutl. Life Ins. Co. v. Russell, 473 U.S. 134 (1985), the Fourth Circuit reasoned that relief under ERISA §§ 502(a)(2) and 409(a) was not available because the plaintiff was not seeking relief on behalf of the plan as a whole. The Fourth Circuit also rejected the plaintiff’s § 502(a)(3) claim on the grounds that the participant was not seeking equitable relief. The Supreme Court’s eventual ruling in this matter could have significant implications for the claims and relief that can be pursued by plan participants, particularly in the context of self-directed individual account plans.
The defendant is a nationwide management consulting firm which administers section 401(k) retirement savings plans for current and former employees and served as administrator of the plan in which plaintiff participated. As with most such plans, participants were permitted to direct their own investments. The plaintiff alleged that in 2001 and 2002, he directed the defendant to make certain changes to the investments in his plan account, but that these directions were never carried out, resulting in a loss of approximately $150,000. In 2004 plaintiff filed suit, claiming that the failure to carry out his instructions amounted to a breach of fiduciary duty. Plaintiff initially sought recovery under the “equitable relief” provision of ERISA § 502(a)(3), and on appeal argued that ERISA § 502(a)(2) provided an additional basis for recovery. Under § 502(a)(2), a participant may seek relief under ERISA § 409(a), which provides in part that a fiduciary “shall be liable to make good to [the] plan any losses to the plan resulting from” a breach of fiduciary duty.
The U. S. Court of Appeals for the Fourth Circuit affirmed the district court’s decision granting judgment on the pleadings (click here for the opinion). Judge Wilkinson, writing for the Fourth Circuit, observed that even if the § 502(a)(2) argument had not already been waived by not being raised below, it must fail on the merits. Quoting Mass. Mutl. Life Ins. Co. v. Russell, 473 U.S. at 140, the court held that recovery under ERISA § 502(a)(2) must “‘inure to the benefit of the plan as a whole,’ not to particular persons with rights under the plan.” The court found that the relief plaintiff sought was purely personal in that (1) he sought recovery to be paid into his own plan account; (2) the measure of the recovery would be a loss suffered by him alone; and (3) the loss itself allegedly arose as the result of defendants’ failure to follow plaintiff’s own instructions, thereby breaching a duty owed solely to him.
While acknowledging that in a very narrow sense the recovery plaintiff sought might be seen as accruing to the plan as a whole, given that the plaintiff’s personal plan account was a part of the plan, the court concluded that such an interpretation would undermine the limitations Congress has placed on the scope of ERISA relief.
The Fourth Circuit also found relief inappropriate under ERISA § 502(a)(3). Under Great-West Life & Annuity Insurance Co. v. Knudson and Sereboff v. Mid Atlantic Medical Services, Inc., relief under this provision is limited to those forms of relief historically available from a court of equity, whereas plaintiff was in essence seeking compensatory damages, a classic form of legal relief.
The Fourth Circuit issued a subsequent opinion denying rehearing (click here for the rehearing opinion)¸ after which plaintiff filed a petition for certiorari. In February, the Supreme Court invited the Solicitor General to express the views of the United States. The United States filed an amicus brief in support of plaintiff’s petition, arguing that the Fourth Circuit decision conflicted with decisions of other circuits and further arguing, inter alia, that:
- Mass Mutual is distinguishable because the plaintiff there sought compensatory and punitive damages payable directly to her, while the plaintiff here sought payment to the plan.
- Allowing plaintiff’s claim under § 502(a)(2) would benefit the plan as a whole by increasing the assets in the plan.
- The assets of a defined contribution plan are allocated, as a bookkeeping matter, to individual accounts within the plan for the beneficial interests of the participants, but the assets are nevertheless held in a unitary trust and legally owned by one or more of the trustees.
- The duty to follow a participant’s investment instructions was a duty owed to all plan participants, not just petitioner.
- The § 502(a)(3) claim should be allowed because, historically, equity exercised exclusive jurisdiction over claims by a trust beneficiary against a trustee for breach of trust.
These arguments are undoubtedly a precursor to the arguments that will be made in the briefing on the merits.
The Supreme Court’s rulings on both the § 502(a)(2) issue and the § 502(a)(3) issue could have broad implications in a variety of contexts for the kinds of claims and relief that participants are permitted to pursue under ERISA, particularly in the context of self-directed individual account plans, such as most section 401(k) plans. The Supreme Court can be expected to issue a decision in this case during its next term, i.e., by June 2008.