401(k) Plan Sponsors Beware: Supreme Court Rules That Participants Can Sue For Individual Account Losses

April 30, 2008

     In three concurring opinions, the United States Supreme Court unanimously ruled that its previously heralded decision in Massachusetts Mutual Life Ins. Co. v. Russell does not prevent 401(k) plan participants from suing plan fiduciaries for individual account losses.  The Supreme Court’s decision in LaRue v. DeWolff, Boberg & Associates, Inc. opens the door to individual participant claims to recover investment losses in all types of defined contribution plans, including 401(k) plans, 403(b) plans, profit sharing plans, and employee stock ownership plans.

     LaRue was a participant in DeWolff’s 401(k) plan.  LaRue alleged that the plan fiduciaries failed to follow his investment directions, and that his 401(k) plan account lost about $150,000 as a result.  LaRue cast his claim as a breach of fiduciary duty claim under ERISA Section 502(a)(3) and sought “appropriate equitable relief,” which the Fourth Circuit rejected as a claim for money damages.  Relying on Mass. Mutual, the Fourth Circuit also held that LaRue’s claim was not cognizable under ERISA Sections 502(a)(2) and 409(a) because those Sections only allow for recovery of losses to the plan “as a whole.”  Taking a long leap away from its decision in Mass. Mutual which limits fiduciary liability to “plan” losses, the Supreme Court held in LaRue that participants in defined contribution plans can sue for individual account losses.  The Supreme Court ruled that fiduciary misconduct “need not threaten the solvency of the entire plan,” and that ERISA Sections 502(a)(2) and 409(a) are meant to protect the financial integrity of a plan as a whole, regardless of whether the fiduciary misconduct harms all participants or just individual accounts. 

     While Chief Justice Roberts agreed with the judgment, his cautionary opinion highlights the threat to plan sponsors that the majority’s ruling presents.  Before LaRue, 401(k) plan participants who suffered investment losses to their accounts were usually limited to a claim for benefits under ERISA Section 502(a)(1)(B).  Plan administrators have long been afforded important defenses to such claims, including the requirement that participants first exhaust their administrative remedies before they may file in court, and – most important – judicial deference to the plan administrator’s reasonable discretionary decision-making.  Justice Roberts noted that these defenses not only encourage employers to voluntarily provide medical and retirement benefits to their employees, but have engendered substantial reliance by employers and fiduciaries on their continued availability.  But, under LaRue, Justice Roberts is concerned that participants may now be able to recast an ERISA Section 502(a)(1)(B) claim for benefits as an ERISA Section 502(a)(2) breach of fiduciary duty claim, thereby avoiding the obligation to exhaust administrative remedies and depriving fiduciaries of judicial deference to their discretionary decision-making. 

     As a result of LaRue, plan sponsors, administrators and fiduciaries must heighten their fiduciary diligence, especially with respect to plan investments.  Because the Supreme Court’s decision coincides with a downturn in the economy, when many participants either have or will suffer investment losses in their accounts, defined contribution plan sponsors will undoubtedly face breach of fiduciary duty claims for individual account losses. 

            What should defined contribution plan sponsors do?  Plan sponsors should immediately take steps to review, evaluate and update all plan documentation, communications, operational procedures and vendor performance relating to investments.  In particular, plan sponsors should undertake an ERISA Section 404(c) compliance audit to ensure that plan fiduciaries are afforded the protection against fiduciary liability that provision provides.  Plan sponsors should also take steps to ensure that vendors implement participant investment instructions promptly and accurately, and otherwise audit plan operations and procedures.

     Montgomery, McCracken’s Employee Benefits and Executive Compensation Practice Group can assist plan sponsors with an ERISA Section 404(c) compliance audit and review their fiduciary practices and procedures.  Such diligence and close attention to a plan’s investment procedures and outcomes will serve both to reduce the risk of future breach of fiduciary duty claims for individual account losses and place plan sponsors in a strong defensive position should such a claim be filed.