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LaRue: Supreme Court Expands Rights of Individual 401(k) Plan Participants to Recover for Losses Caused by Fiduciary Breaches
On February 20, 2008, the United States Supreme Court ruled in LaRue v. DeWolff, Boberg & Associates, Inc., et. al. that § 502(a)(2) of the Employee Retirement Income Security Act of 1974 (“ERISA”) permits individual participants in defined contribution plans, such as 401(k) plans, to recover for losses to their individual accounts caused by breaches of fiduciary duties.1 The Fourth Circuit Court of Appeals had held that ERISA § 502(a)(2) allows participants to recover losses only on behalf of the entire retirement plan. In overruling, Justice Stevens wrote for the Court 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.”2
James LaRue alleged that his former employer, DeWolff, Boberg & Associates, failed to implement changes LaRue requested in the investment of his individual 401(k) account and claimed resulting losses of $150,000. The federal district court dismissed the suit. The Fourth Circuit Court of Appeals affirmed, relying on the Supreme Court’s decision in Massachusetts Mutual Life Ins. Co. v. Russell3 to hold that § 502(a)(2) permits an individual retirement plan participant to recover only losses to the entire plan rather than losses to his or her individual account.
The Supreme Court disagreed. The Court distinguished the defined benefit plan analyzed in Russell, “the norm of American pension practice [in 1974],” from the defined contribution plans at issue in LaRue, that “dominate the retirement plan scene today.”4 Justice Stevens, who also wrote the majority opinion in Russell, explained “[m]isconduct by the administrators of a defined benefit plan will not affect an individual’s entitlement to a defined benefit unless it creates or enhances the risk of default by the entire plan.”5 “For defined contribution plans,” on the other hand, “fiduciary misconduct need not threaten the solvency of the entire plan to reduce benefits below the amount that participants would otherwise receive.”6 Moreover, “[w]hether 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.”7 Consequently, the “entire plan” requirement applied in Russell to defined benefit plans is “beside the point in the defined contribution context.”8
Chief Justice Roberts, joined by Justice Kennedy, concurred in the judgment and with the Court’s finding that the appellate court’s reasoning was flawed. Chief Justice Roberts expressed concern however that permitting recovery under § 502(a)(2) may allow plaintiffs to circumvent the safeguards developed under § 502(a)(1)(B), including the requirement that one exhaust administrative remedies prior to filing suit and would ask lower courts to determine whether § 502(a)(1)(B) precludes a claim under § 502(a)(2).9 Justice Thomas, joined by Justice Scalia, also concurred in the majority’s holding but wrote separately to argue that the Court should have grounded its opinion in the “unambiguous text of §§ 409 and 502(a)(2),” rather than the “trends in the pension plan market.”10
As the concurring opinions suggest, the majority left many questions unanswered: “we do not decide whether petitioner made the alleged investment directions in accordance with the requirements specified by the Plan, whether he was required to exhaust remedies set forth in the plan before seeking relief in federal court pursuant to § 502(a)(2), or whether he asserted his rights in a timely fashion.”11 Thus, while LaRue may allow individual plan participants a new avenue of redress, the decision does not clear the way of the other evidentiary and procedural obstacles that may still arise.
This alert was authored by Dale E. Barnes, Todd E. Gordinier and Michael D. Mortenson. For assistance, please contact the following lawyers:
Dale E. Barnes, Co-chair, Securities Litigation
dale.barnes@bingham.com, 415.393.2522
Jordan D. Hershman, Co-chair, Securities Litigation
jordan.hershman@bingham.com, 617.951.8455
Russell E. Isaia, Partner, Employee Benefits and Executive Compensation
russell.isaia@bingham.com, 617.951.8427
Roger P. Joseph, Practice Group Leader, Investment Management; Co-chair, Securities Area
roger.joseph@bingham.com, 617.951.8247
Neal E. Sullivan, Practice Group Leader, Broker-Dealer; Co-chair, Securities Area
neal.sullivan@bingham.com, 202.373.6159
1 LaRue v. DeWolff, Boberg & Associates, Inc., et. al., 2008 U.S. LEXIS 2014*, No. 06-856 (February 20, 2008).
2 Id. at *14.
3 473 U.S. 134, 105 S.Ct. 3085 (1985)(denying recovery of consequential damages by a participant in a defined benefit plan purportedly caused by a delay in processing participant’s disability benefits claim.)
4 LaRue v. DeWolff, Boberg & Associates, Inc., et. al., 2008 U.S. LEXIS at *11.
5 Id. at *13.
6 Id.
7 Id.
8 Id.
9 Id. at *19-20.
10 Id. at *22.
11 Id. at *8, n.3.
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