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Plan participant can sue under ERISA for losses to assets in a 401(k) account
March 6, 2008
Benefits Alert
Author(s): Thomas J. McCord

U.S. Supreme Court rules that a participant in a defined contribution pension plan has remedy under Section 502(a)(2) of ERISA for losses to plan assets in an individual 401(k) account due to a breach of fiduciary duty.

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By Thomas J. McCord, Joseph A. Carello, and Jillian S. Folger-Hartwell

In a unanimous decision, the United States Supreme Court recently ruled that a participant in a defined contribution pension plan has a remedy under the Employee Retirement Income Security Act of 1974, as amended (ERISA), for losses to plan assets in an individual account due to a breach of fiduciary duty. (LaRue v. DeWolff Boberg & Assocs. Inc., No. 06-856, Feb. 20, 2008).

The plaintiff filed suit in federal district court against his former employer and the ERISA-regulated 401(k) retirement savings plan administered by the employer. The plan permitted participants to choose how their contributions would be invested in accordance with certain procedures and requirements. The plaintiff alleged that he directed the employer to make certain changes to his investments in his account, but that the employer never made these changes. The plaintiff further contended that his account was affected by $150,000 as a result of the employer’s failure to follow his investment directions, and that this amounted to a breach of fiduciary duty under ERISA.

The district court dismissed the plaintiff’s suit for failure to state a claim. The plaintiff had sought reimbursement for his losses under ERISA § 502(a)(3), which typically allows plaintiffs to seek an injunction or other equitable relief. On appeal, the plaintiff asserted that he also had a claim under ERISA § 502(a)(2), which permits a plan participant to bring suit for appropriate relief under § 409. Section 409 imposes personal liability for a breach of fiduciary duty. The Fourth Circuit Court of Appeals affirmed the district court’s ruling as to the plaintiff’s ability to seek relief under § 502(a)(3). The court also dismissed the § 502(a)(2) claim, citing the Supreme Court’s decision in Massachusetts Mut. Life Ins. Co. v. Russell, which stated that such claims are intended to “protect the entire plan, rather than the rights of an individual beneficiary.”

The Supreme Court reversed the Fourth Circuit, ruling that the plaintiff had a valid claim under § 502(a)(2). The court was able to differentiate its 1985 decision in Russell by pointing out the dramatic change in the retirement plan landscape in the intervening years, as more and more employers have opted for defined contribution plans. The court pointed out that, in the context of 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. Whether a fiduciary breach diminishes plan assets available 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.” According to the court, the legal issue under § 502(a)(2) “is the same whether his account includes 1 percent or 99 percent of the total assets in the plan.”

The court thus concluded that, even though § 502(a)(2) does not provide a remedy for individual remedies distinct from plan injuries, it “does authorize recovery for fiduciary breaches that impair the value of plan assets in a participant’s individual account.”

Chief Justice Roberts concurred in the judgment but raised an issue that could be addressed by lower courts in the future. The concurrence observed that the plaintiff’s claim, which was brought as a breach of fiduciary duty claim under § 502(a)(2), was arguably a claim for benefits that could (or should) have been brought pursuant to § 502(a)(1)(B). Section 502(a)(1)(B) permits a “person” to bring a civil action “to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan.” The significance of this distinction, the concurrence observed, is that “[a]llowing a § 502(a)(1)(B) action to be recast as one under § 502(a)(2) might permit plaintiffs to circumvent safeguards for plan administrators that have developed under § 502(a)(1)(B).” These safeguards include exhaustion of administrative remedies and deferential review of plan administrator decisions. The safeguards, the concurrence noted, encourage employers to voluntarily undertake to provide medical and retirement benefits to plan participants. In sum, Justice Roberts noted, “I see nothing in today’s opinion precluding the lower courts on remand, if they determine that the argument is properly before them, from considering the contention that LaRue’s claim may proceed only under § 502(a)(1)B).”

As a result of the concurrence, the lower courts may take up the issue of whether a claim like the plaintiff’s, which could arguably be a claim for benefits under Section 502(a)(1)(B), is precluded from being brought directly as a breach of fiduciary duty claim. If lower courts pick up on the argument that such claims may only be brought as claims for benefits, plans would fare better because of the existence of administrative safeguards and a deferential standard of review of plan administrators’ decisions.

Regardless of the interpretations of lower courts in the future, the LaRue case makes it easier for individual participants to sue for damage to their own accounts in 401(k) and other defined contribution plans. In general, the best defense to suits for breach of fiduciary duties is to regularly review such duties and the mechanisms for performing those duties. In particular, fiduciaries should identify the responsible fiduciaries under plan documents and ERISA; these could include company directors, a committee, or certain individual officers. Fiduciaries should schedule regular meetings and take minutes concerning their decisions and actions. Plan fiduciaries should also consider establishing training programs for themselves and their administrators, and periodically review existing service contractor arrangements. In the case of investments, fiduciaries should consider retaining an independent investment advisor to review plan investment performance.

The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.