In an opinion issued February 20, 2008, the U.S. Supreme Court held that Section 502(a)(2) of the Employee Retirement Income Security Act of 1974 ("ERISA") provides a remedy for participants in defined contribution plans, such as 401(k) plans, to sue for investment losses caused by a breach of fiduciary duty. See LaRue v. DeWolff Boberg & Assocs. Inc., U.S., No. 06-856, 2/20/2008.

At issue was whether Section 502(a)(2) provides a remedy to plan participants who suffer losses to their individual investment accounts. LaRue, a participant in DeWolff Boberg & Associates' 401(k) plan alleged that Respondents, DeWolff Boberg & Associates and its ERISA-regulated 401(k) retirement savings plan, breached their fiduciary duties by failing to follow LaRue's investment directions, resulting in a loss of $150,000 to LaRue's 401(k) account. Relying on the Supreme Court's previous holding in Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134 (1985), Respondents argued that LaRue possessed no remedy under ERISA because Section 502(a)(2) "provides remedies only for entire plans, not for individuals." Although the District Court and the Court of Appeals for the Fourth Circuit agreed with Respondents, the Supreme Court did not, holding that the rationale of Russell supports individual relief in the context of defined contribution plans.

In reconciling the holding of Russell with the facts in LaRue, the Supreme Court drew a sharp distinction between defined benefit plans, which pay a fixed benefit based upon a predetermined formula, and defined contribution plans, which involve individual accounts that are often self-funded by plan participants. With respect to defined benefit plans, the Court held that fiduciary misconduct will not affect an individual's entitlement to a defined benefit unless it creates or enhances the risk of default by the entire plan. Thus, relief may be sought only on behalf of the entire plan and not by individuals. For defined contribution plans, the Court held that fiduciary conduct need not threaten the solvency of the entire plan in order to reduce benefits below the amount a participant would otherwise receive. In either case, whether a fiduciary breach diminishes plan assets payable to all of a plan's participants or only to an individual account holder, the Court held that the injuries sustained are the type of injuries ERISA was intended to redress. Thus, the Court held that its requirement in Russell that relief be sought on behalf of the "entire plan," although applicable to defined benefit plans, has no applicability to defined contribution plans such as 401(k) plans.

While the Court's decision will likely lead to increased lawsuits regarding diminished investments in defined contribution plans, plan fiduciaries are not helpless to defend against them.

It is important to emphasize that the Supreme Court's holding in LaRue does not erode the protections provided for under Section 404(c) of ERISA. Under Section 404(c), fiduciaries who prudently select and monitor plan investments and provide plan participants with appropriate investment information are not held responsible for losses caused by a plan participant's investment decisions. Indeed, the Court's opinion specifically referred to the protections afforded by Section 404(c), holding that those protections would be meaningless if there were no remedy under Section 502(a)(2) for losses to individual accounts in defined contribution plans.

Additionally, the Court leaves open the possibility that plan participants such as LaRue must first exhaust plan remedies before bringing a claim in federal court, holding in a footnote that the issue remains unresolved. In a concurrence joined by Justice Kennedy, Chief Justice Roberts provides further support for the argument that a plan participant must first exhaust plan remedies before seeking relief due to losses to individual accounts in defined contribution plans. In support, Chief Justice Roberts argued that LaRue's claims should have properly been brought as a claim for benefits under Section 502(a)(1)(B) of ERISA. In such case, exhaustion would have surely been required, as all Circuits require exhaustion of plan remedies before a claim under Section 502(a)(1)(B) may be brought. Emboldening Respondents to raise this issue on remand, Chief Justice Roberts opined that there is nothing in the Court's opinion that would foreclose the District Court from determining that LaRue's claims should properly proceed under Section 502(a)(1)(B) rather than 502(a)(2).

Exhaustion, if required, could be a major factor in combating class actions, such as employee stock drop cases. Any purported class would likely be complicated by individualized issues of proof regarding whether or not its purported members exhausted their remedies. Thus, while LaRue certainly opens the door to increased litigation, the full impact of its holding and what it will mean for plan fiduciaries of defined contribution plans is yet to be realized.