In an opinion authored by Justice Stevens, the Supreme Court has ruled that a participant in a 401(k) defined contribution plan can assert a breach of fiduciary duty claim under 29 U.S.C. § 1132(a)(2), ERISA § 502(a)(2), for a loss limited to that participant’s individual account.

In LaRue v. DeWolff, __ U.S. __, 2008 WL 440748 (Feb. 20, 2008), the plaintiff alleged that DeWolff, plaintiff’s former employer and the plan’s sponsor, failed to follow his investment directions. He contended this failure resulted in depletion of his interest in the plan by approximately $150,000 and amounted to a breach of fiduciary duty under ERISA. Plaintiff did not allege that the failure to follow his investment directions resulted in a loss to all the plan’s participants. Relying on the Supreme Court’s 1985 decision in Massachusetts Mutual Life Insurance Company v. Russell, the Fourth Circuit held that § 1132(a)(2) provided for recovery that would inure to a pension plan as a whole and not for recovery for an individual participant.

The Court framed the question before it as whether § 1132(a)(2)—the enforcement mechanism for the fiduciary duty provisions of 29 U.S.C. § 1109, ERISA § 409—authorized the plaintiff to sue for misconduct that impaired the value of plan assets in his individual account but not in other participant’s accounts. In Russell, the Court had held that § 1132(a)(2) did not provide a remedy for an individual participant who had received the benefits due under the plan, but sought consequential damages for a delay in processing her claim for benefits. The Russell Court reasoned that “the text of § 409(a) characterizes the relevant fiduciary relationship as one ‘with respect to a plan,’ and repeatedly identifies the ‘plan’ as the victim of any fiduciary breach and the recipient of any relief.”

The Court based its decision in LaRue in part on the fact that defined contribution plans “dominate the retirement plan scene today.” Unlike the plan in LaRue, the plan in Russell did not contain individual accounts for each participant; thus, the “entire plan language in Russell speaks to the impact of § 409 on plans that pay defined benefits.” The Court further distinguished Russell, reasoning:

For defined contribution plans, however, fiduciary misconduct need not threaten the solvency of the entire plan to reduce benefits below the amount that participants would otherwise receive. Whether a fiduciary breach diminishes plan assets payable to all participants and beneficiaries, or only to persons tied to particular individual accounts, it creates the kind of harms that concerned the draftsmen of § 409. Consequently, our references to the “entire plan” in Russell, which accurately reflect the operation of § 409 in the defined benefit context, are beside the point in the defined contribution context.

Accordingly, the Court held that “although § 502(a)(2) 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.”

All nine justices concurred in the judgment. Chief Justice Roberts, joined by Justice Kennedy, wrote separately to suggest that on remand, the appropriate remedy for plaintiff may be a claim for benefits under 29 U.S.C. § 1132(a)(1)(B), ERISA § 502(a)(1)(B). Justice Thomas, joined by Justice Scalia, wrote separately to explain his view that plaintiff’s claim was brought on behalf of the plan because plaintiff’s account was part of the plan, and any recovery should go to the plan, which presumably would allocate it to plaintiff’s account.

This decision is a dramatic change in the law, and it may open the door to numerous claims and/or lawsuits involving losses that are relatively small but expensive to defend. It also leaves open many questions about how such claims and cases can and should be defended.