LaRue v. DeWolff, Boberg & Associates, Inc. (06-856), 128 S. Ct. 1020 (2008).
Argued November 26, 2007, Decided February 20, 2008

Introduction:

The Supreme Court recently changed course regarding remedies available to individual defined contribution plan participants. The Court held that ERISA permits a plan participant to bring an action under § 502(a) (2), 29 U.S.C. § 1132(a) (2), to recover losses to his defined contribution plan account that were caused by a breach of fiduciary duty.

The Facts:

James LaRue, the petitioner and a participant in a defined contribution pension plan, alleged that the plan administrator failed to follow the written investment directions he provided for his 401(k) account in 2001 and 2002. LaRue claimed losses of about $150,000 to his account as a result, and alleged a breach of fiduciary duty claim for make whole relief under ERISA § 502(a)(3), 29 U.S.C. § 1132(a)(3), but the district court concluded that he was not seeking the equitable relief permitted under that section. On appeal, LaRue asserted that relief was alternatively available under ERISA § 502(a) (2), which the Court of Appeals rejected on the merits because, it reasoned, relief under § 502(a) (2) must inure to the plan as a whole, not to an individual account.

The Legal Question:

Whether or not a defined contribution plan participant may recover individual account losses resulting from a breach of fiduciary duty under ERISA § 502(a) (2).

The Supreme Court:

The Supreme Court rejected the Fourth Circuit's restrictive interpretation of ERISA § 502(a) (2). The Court distinguished Massachusetts Mutual Life Ins. Co. v. Russell, 473 U.S. 134 (1985), explaining that Russell involved a defined benefit pension plan, rather than a defined contribution plan with individual accounts, like the 401(k) plan at issue. The Court explained that Russell's emphasis on protecting the entire plan from fiduciary misconduct reflected a landscape of benefit plans that had changed dramatically since Russell was decided in 1985. Specifically, the Court noted the decline in popularity of defined benefit pension plans and the concurrent increase in defined contribution plans, such as the 401(k) plan here.

Noting the concerns of ERISA's drafters, the Supreme Court explained that relief is available under ERISA § 502(a)(2) regardless of whether the alleged fiduciary breach diminished plan assets payable to all participants or only a single participant's individual account. The Court noted that the references to the "entire plan" in Russell "are beside the point in the defined contribution context." 128 S. Ct. at 1025. The Court further held that although ERISA § 502(a)(2) does not provide a remedy for individual injuries distinct from plan injuries, that provision permits recovery for fiduciary breaches that impair the value of plan assets in a single participant's account. Notably, the Supreme Court found that ERISA § 502(a) (2) encompasses "appropriate claims" for "lost profits." Id. at 1024, n.4.

Concurring Opinions:

Although the Supreme Court's decision was unanimous, there were two concurring opinions expressing different approaches to the result. In one concurring opinion, Chief Justice Roberts, joined by Justice Kennedy, suggested that ERISA § 502(a)(2) may not be the correct remedial provision for the LaRue plaintiff's claims. Rather, Chief Justice Roberts suggested that LaRue's claim properly lies only under ERISA § 502(a) (1) (B), 29 U.S.C. § 1132(a) (1) (B), a provision that allows lawsuits for garden-variety claims for benefits and is separate and apart from ERISA's fiduciary breach provisions. Assuming LaRue had an ERISA §502(a) (1)(B) claim, Chief Justice Roberts explained that LaRue would not have a proper ERISA § 502(a)(2) claim under established Court precedent that bars benefits claims from being recast as fiduciary breach claims.

In a second concurring opinion, Justices Thomas and Scalia agreed with the majority's holding that ERISA § 502(a) (2) authorizes recovery for LaRue, noting specifically that assets allocated to an individual participant's 401(k) plan account are plan assets under ERISA. This concurring opinion, however, would not create divergent views of claims permitted under ERISA § 502(a) (2) depending upon whether the pension plan was a traditional defined benefit plan or a defined contribution 401(k) plan. Justices Thomas and Scalia explained that their agreement with the majority holding did not stem from what they termed "trends in the pension plan market" or "the ostensible ‘concerns' of ERISA's drafters." 128 S. Ct. at 1028. Rather, their agreement in the result was based on ERISA's "unambiguous text" as applied to both defined benefit and defined contribution plans.

From the Employer's Perspective:

As a result of the decision in LaRue defined contribution plan administrators should establish procedures to insure plan participant elections are followed and monitor daily plan administration to insure that participant directions are followed. The LaRue decision effectively transforms a ministerial error in plan administration into a fiduciary breach where a participant can allege losses to an individual account balance. An open question is where the plan should come up with the money to make a plan participant like LaRue whole because defined contribution plans are based on individual plan allocations, not a collective pool of assets.

The decision in LaRue will likely result in an increased number of lawsuits against employers, 401(k) plans and plan fiduciaries based on fiduciary breach claims under 502(a) (2). Lawsuits that follow in the mold of LaRue may be based on similar alleged administration and investment election errors. LaRue may also open the door to resurgence in claims similar to those made in the "stock drop" cases where claims based on a drop in the value of employer stock held in a 401(k) or other defined contribution plan negatively impacts the value of individual account balances.

It will be important to monitor district and circuit court opinions that apply the holding in LaRue. If courts find a wider scope of application for plan participant remedies available for a fiduciary breach under ERISA § 501(a)(2) plan administrators and employers may need to renegotiate fiduciary insurance contracts, redefine plan administration procedures and require plan participants to control the investment election processes directly with a third party administrator.

From the Employee's Perspective:

LaRue is an important decision for participants in defined contribution plans who find themselves the victims of fiduciary breaches but lack a legal remedy under ERISA § 502(a)(3) to correct the breaches. As the Supreme Court noted, defined contribution plans, where each participant has an account into which contributions and investment income are allocated, are becoming the pension plan of choice among employers, rather than the more traditional defined benefit plans. However, as pointed out by the concurrence of Justices Thomas and Scalia, each individual account is still part of the larger defined contribution plan, and so a loss of assets allocated to one individual account constitutes a loss to the plan within the meaning of ERISA § 502(a)(2). Thus, a remedy that requires the fiduciary to restore money to the account to correct the breach of fiduciary duty certainly inures to the benefit of the plan. 128 S.Ct. at 1029.

The Court was correct in permitting a lawsuit to proceed under ERISA § 502(a)(2) even where the remedy will impact just one participant because, as the Court noted in distinguishing Russell, in defined contribution plans "fiduciary misconduct need not threaten the solvency of the entire plan to reduce benefits below the amount that participants would otherwise receive." Id. at 1025. Therefore, if a breach impacts plan assets that are contained in an individual's account, recovery is authorized under ERISA § 502(a) (2). Id. at 1026. Moreover, it matters not whether the participant has already received his distribution after terminating employment, since, as the Court noted, "A plan ‘participant,' as defined by § 3(7) of ERISA, 29 U.S.C. § 1002(7), may include a former employee with a colorable claim for benefits." 128 S. Ct. at 1026, n.6 (citing Harzewski v. Guidant Corp., 489 F.3d 799 (7 th Cir. 2007)).

Although the Supreme Court did not reach the issue of whether "make whole" relief is available under ERISA § 502(a)(3) in scenarios such as the one presented by LaRue, this case will go a long way toward correcting the inequity of courts being unable to provide a remedy to participants who have proven a breach of fiduciary duty. See, e.g., Farr v. U.S. West Communications, Inc., 151 F.3d 908, 911 (9th Cir. 1998) ("although Defendants breached their fiduciary duties to Plaintiffs, the damages Plaintiffs seek are nonetheless not recoverable as ‘other appropriate equitable relief' under ERISA § 502(a) (3)"). Now, participants in defined contribution plans who have lost plan benefits as a result of a breach are free to sue under ERISA § 502(a)(2) to recover those lost plan assets. Congress's intent in enacting ERISA "to promote the interests of employees and their beneficiaries in employee benefit plans and to protect contractually defined benefits," is well-served by the LaRue decision. Firestone Tire and Rubber Co. v. Bruch, 489 U.S. 101, 113 (1989) (internal quotations omitted).

Link to the Supreme Court Opinion:

www.supremecourtus.gov/opinions/07pdf/06-856.pdf

Contributing Authors

William M. Kinney, Lewis, Overbeck & Furman, LLP, Chicago, IL
Mr. Kinney advises employee benefit plan trustees and fiduciaries. He is an ABA Young Lawyers Division Fellow currently appointed to the Employee Benefits Committee of the Labor and Employment Law Section

Nancy G. Ross, McDermott, Will & Emery, LLP, Chicago, IL
Ms. Ross counsels clients under ERISA and practices in the area of employee benefits class action litigation. She is a member of the Employee Benefits Committee of the Labor and Employment Law Section.

Cassie Springer-Sullivan, Lewis, Feinberg, Lee, Renaker & Jackson, P.C., Oakland, CA.
Ms. Springer-Sullivan represents plan participants in plaintiff-side ERISA litigation. She currently serves as a co-chair on the Benefit Claims and Individual Rights Subcommittee of the ABA's Section of Labor & Employment Law.