Expanded Remedies for Fiduciary Breach Claims
by Paul M. Hamburger, P.C., Nancy G. Ross, Michael T. Graham, and John A. Litwinski
On February 20, 2008, the Supreme Court of the United States issued a long-awaited decision affecting remedies available under the Employee Retirement Income Security Act of 1974 (ERISA) for individual plan participants in 401(k) plans. In LaRue v. DeWolff, Boberg & Associates, Inc., the Supreme Court clarified that an individual plan participant may recover damages as a result of an ERISA fiduciary’s breach of duty even if that breach affected only that individual’s 401(k) plan account. Prior to LaRue, courts had generally taken the view that ERISA Section 502(a)(2) provided a remedy for fiduciary breach claims only for relief sought for the plan as a whole.
Supreme Court’s Decision
James LaRue, the plaintiff, was a participant in a 401(k) retirement plan sponsored by his employer. Like other such plans, the 401(k) plan in LaRueprovided for individual accounts and allowed participants to direct the investments of their plan contributions. LaRue alleged that in 2001 and 2002, he directed his employer to make certain changes to his plan investments. The employer, however, allegedly failed to carry out those instructions. LaRue alleged that, as a result of the fiduciary’s failure, his interest in the plan was “depleted” by approximately $150,000. It is unclear from the record whether the alleged $150,000 injury resulted from a decline in the value of assets that LaRue wanted sold (but that his employer failed to sell), or whether it represented an increase in the value of assets that LaRue wanted to purchase (but that his employer failed to purchase).
LaRue sued, seeking relief for his injuries under ERISA for a breach of fiduciary duty. The district court dismissed his claims. On appeal, the U.S. Court of Appeals for the Fourth Circuit rejected LaRue’s ERISA Section 502(a)(2) breach of fiduciary duty claim because of language in a prior Supreme Court opinion, Massachusetts Mutual Life Insurance Company v. Russell. The Fourth Circuit interpreted Russell as holding that ERISA Section 502(a)(2) provides remedies only for injuries sustained by an entire plan, not for individual participants.
LaRue successfully appealed to the Supreme Court, which rejected the Fourth Circuit’s restrictive interpretation of ERISA Section 502(a)(2). InLaRue, the Supreme Court distinguished Russell, explaining that Russellinvolved a defined benefit pension plan, rather than a defined contribution plan with individual accounts, like the 401(k) plan at issue. The Supreme 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 Supreme Court noted the decline in popularity of defined benefit pension plans and the concurrent increase in defined contribution 401(k) pension plans.
Noting the concerns of ERISA’s drafters, the Supreme Court explained that relief is available under ERISA Section 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 Supreme Court explained that the references to the “entire plan” in Russell “are beside the point in the defined contribution context.” The Supreme Court further held that although ERISA Section 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 Section 502(a)(2) encompasses what the Supreme Court called “appropriate claims” for “lost profits.”
Although the Supreme Court’s holding 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 Section 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 Section 502(a)(1)(B), a provision that allows for garden-variety claims for benefits and is separate and apart from ERISA’s fiduciary breach provisions. Assuming LaRue had an ERISA Section 502(a)(1)(B) claim, Chief Justice Roberts explained that LaRue would not have a proper ERISA Section 502(a)(2) claim under established Court precedent that bars claims that are essentially 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 Section 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 Section 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.” Rather, their agreement in the result stemmed from ERISA’s “unambiguous text” as applied to both defined benefit and defined contribution plans.
Impact on Plan Fiduciaries and Employers
The LaRue decision will likely result in an increased number of lawsuits against employers, 401(k) plans and plan fiduciaries, which will likely be fashioned as fiduciary breach claims under ERISA Section 502(a)(2). These new lawsuits may be based on issues similar to those raised in LaRue — alleged administration or investment errors — or on issues raised in the so-called “stock drop” cases, where claims based on a drop in value of employer stock held in a 401(k) or similar defined contribution plan affect individual participant accounts.
Plan fiduciaries and administrators can take several precautionary steps in an attempt to ward off new lawsuits based on LaRue and to provide potential defenses if new litigation is filed. Fiduciaries should first review their current plan administration and account investment processes to ensure that all steps are being taken to avoid administrative errors affecting plan participants’ accounts. Proper and diligent administration is generally the best defense against potential litigation.
However, even with the best procedures in place, administrative mistakes do occur. If fiduciaries learn of investment errors or other administrative claims involving individual benefit decisions, administrators may attempt to rely on Chief Justice Roberts’ concurring opinion and treat any challenges to administrative or investment errors as claims for benefits under the plan. By treating these issues as garden-variety benefit claims, the plan administrator can require the participant to first exhaust administrative remedies, giving the plan the opportunity to determine whether any errors have occurred before litigation is filed. If the claims are denied, the plan administrator can argue in litigation that the decision and any interpretations of plan terms should be reviewed under a deferential standard of review. If a claim is viable, the plan administrator may grant the benefit claim during the administrative review, which can save litigation defense costs and avoid payment of attorneys’ fees to the participant’s lawyer if litigation is commenced.
Finally, employers should review their existing fiduciary insurance coverage to determine whether it is sufficient if the amount of ERISA fiduciary breach litigation increases, or consider purchasing fiduciary coverage if none is in place. Any increase in fiduciary litigation could become very costly for employers, and fiduciary insurance policies may have limits that could be quickly reached if the number of lawsuits against any plan increases greatly.