Trust Updates Archive

2008 Banks Taxes IRS Supreme Court Changing Landscape -- Plan Participants Can Sue to Recovery Individual Losses

Feb. 21, 2008--Chicago, IL)--Individual participants in defined contribution plans can sue to recover losses to their account, the U.S. Supreme Court ruled yesterday in LaRue v. DeWolff (No. 06-856). The Court was unanimous in its finding that individual participants have a right to sue, but was divided on the issue of recovery, with Chief Justice John Roberts seemingly mapping legal strategy for opponents of the ruling.

The Court's ruling potentially opens the door to scores of 401(k) lawsuits seeking equitable relief. ERISA authorizes the Secretary of Labor as well as plan participants, beneficiaries, and fiduciaries, to bring actions "on behalf of a plan" to recover losses. The Court emphasized this point in Massachusetts Mutual Life Insurance v. Russell, decided in 1985, when it ruled that an individual participant could not bring suit to recover damages specific to her.

"When Russell was decided," Justice John Paul Stevens writes on behalf of the Court, "the [defined benefit] plan was the norm of American pension practice . . . That landscape has changed."

For defined contribution plans, he writes, fiduciary misconduct need not threaten the solvency of the entire plan. Whether 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 concern ERISA. "Consequently," he concludes, "our references to the 'entire plan' in Russell, which accurately reflect [ERISA statute] in the defined benefit context, are beside the point in the defined contribution context."

James LaRue alleged that in 2001 and 2002, he directed his employer, the plan sponsor, to make certain changes to the investments in his 401(k) account, but the changes were never carried out. In 2004, he brought suit against his employer, DeWolff, Boberg & Associates, and the plan, claiming that failure to act amounted to a breach of fiduciary duty. Their failure to act, he asserted, resulted in economic losses of some $150,000.00. To recover this loss, what his account would have earned had his instructions been followed, LaRue sought equitable relief under ERISA. A federal district ruled for his employer, as did the Fourth Circuit Court of Appeals.

For James LaRue, the Court's decision means a lower federal court can now determine his damages. However, Chief Justice Roberts, in a concurring, but separate opinion, has suggested that the lower court could hear arguments that deny the plaintiff recovery.

Roberts argues that LaRue, who sought recovery of damages under ERISA section 502(a)(2), should have done so under section 502(a)(1)(B) and that the high court erred in finding that he could obtain relief under (a)(2). The distinction, he says, "is not merely a matter of picking the right provision to cite in the complaint." Rather, he insists, allowing LaRue to seek recovery under 502(a)(2) damages "safeguards" under ERISA.

"Allowing what is really a claim for benefits under a plan to be brought as a claim for breach of fiduciary duty under 502(a)(2), rather than as a claim for benefits due 'under the terms of [the] plan, 502(a)(1)(B), may result in circumventing such plan terms." he writes.

He closes his argument by noting that the lower court could hear such an argument when the case is heard for damages. "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 [claims] may proceed only under 502(a)(1)(B)."

"In any event," he adds, "other courts in other cases remain free to consider what we have not -- what effect the availability of relief under 502(a)(1)(B) may have on a plan participants ability to proceed under 502(a)(2)."

For more on this topic, see the upcoming issue of Trust Regulatory News.

No statement in this issue is offered as or should be
construed as legal opinion or advice

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