The United States Supreme Court in Larue v. DeWolff, Boberg & Associates, Inc. February 20 ruled that although Section 502(a)(2) of the Employee Retirement Income Security Act of 1974 (ERISA) generally does not provide a remedy for individual injuries distinct from plan injuries in plans providing “fixed benefits,” ERISA § 502(a) does allow individual participants to seek to recover individually from fiduciaries for lost value to plan assets in a participant's individual account resulting from a fiduciary breach. The decision permits individual participants and beneficiaries to sue 401(k) and other defined contribution plan fiduciaries under ERISA § 502 to recover for individual account losses resulting from a fiduciary breach. Accordingly, companies sponsoring 401(k) and other defined contribution plans and the officers, directors, employees and service providers involved in the administration or oversight of these plans now are likely to face a greater risk of being sued for breach of fiduciary duty under ERISA by individual participants upset about a decline in the value of their individual plan accounts.
Section 502(a)(2) provides for suits to enforce the provisions of ERISA §409 concerning breaches of fiduciary duties that harm plans. The principal statutory duties imposed by §409 relate to the proper management, administration, and investment of plan assets, with an eye toward ensuring that the benefits authorized by the plan are ultimately paid to plan participants. Even prior to the LaRue decision, companies sponsoring 401(k) and other defined contribution plans and their leaders involved in plan related activities already faced significant liability under ERISA to private plaintiff fiduciary litigation and Labor Department fiduciary enforcement actions. See, e.g., Stamer, ”Enron litigation has implications for plan sponsors and management”, 401K Advisor (December 1, 2006).
Prior to Larue, however, defendants in ERISA fiduciary breach actions frequently were able to rely upon the Supreme Court’s holding in Massachusetts Mutual Life Insurance Co. v. Russell, that ERISA §502(a)(2) only authorizes recovery only by the plan as an entity (the “entire plan rule”) and does not permit individuals to bring suit when they do not seek relief on behalf of the plan as a shield against suits brought by individual participants seeking damages for losses in the value of their plan accounts.
In the majority opinion written by Justice Stevens joined in by Justices Souter, Ginsburg, Breyer, and Alito, however, the Supreme Court majority ruled that this entire plan rule does not bar actions by an individual participant seeking relief for losses in the value of their individual defined contribution plan account resulting from a fiduciary breach.
According to the majority opinion written by Justice Stevens, a breach of fiduciary duty action brought by a participant or beneficiary whose defined contribution account lost value as a result of a breach of fiduciary duty is distinguishable from breach of fiduciary duty claims brought by a participant or beneficiary seeking relief for fiduciary breaches arising under plans providing a “fixed benefit” such as the disability benefit plan addressed in Russell or other defined benefit plan, where the plaintiff received all of the benefits to which the participant was contractually entitled, but sought consequential damages arising from a delay in the processing of the participant’s claim.
The Majority opinion written by Justice Stevens states that Russell's emphasis on protecting the "entire plan" reflects the fact that the disability plan in Russell, as well as the typical pension plan at that time, promised participants a fixed benefit. Misconduct by such a plan's administrators will not affect an individual's entitlement to a defined benefit unless it creates or enhances the risk of default by the entire plan.
In contrast, the Supreme Court majority found Russell's "entire plan" references, which accurately reflect ERISA §409's operation in the defined benefit context, to be “beside the point” in the defined contribution context. In the case of actions seeking recovery for losses to individual defined contribution accounts, the Majority reasoned whether a fiduciary breach diminishes plan assets payable to all participants or only to particular individuals, it creates the kind of harms that concerned §409's draftsmen. Consequently, the Supreme Court concluded that for defined contribution plans, fiduciary misconduct need not threaten the entire plan's solvency to reduce benefits below the amount that participants would otherwise receive. Accordingly, the Supreme Court found that Russell’s entire plan rule did not bar the participant’s suit to recover individually for losses to this individual defined contribution account allegedly resulting from a fiduciary breach.
The opportunity allowed under Larue for individual participants and beneficiaries to seek to recover individually, rather than on behalf of the plan as a whole, when their individual plan accounts lose value due to a fiduciary breach increases the likelihood that individual participants and beneficiaries will sue defined contribution plan fiduciaries for breach of fiduciary duty just as Labor Department fiduciary regulations for defined contribution standards are evolving and substantial market volatility creates a heightened risk of losses in account values. As a result, the LaRue decision reinforces the need for defined contribution plan fiduciaries to exercise care to act, and be prepared to defend the adequacy of their fiduciary actions under ERISA.
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If you have questions about the implications of the Supreme Court’s decision in Larue, your status or responsibilities as an employee benefit plan fiduciary, steps you can take to manage fiduciary risks, or other fiduciary responsibility or employee benefit matters, please contact Cynthia Marcotte Stamer by writing to Cynthia Marcotte Stamer, P.C., Member, Glast, Phillips & Murray, P.C., 2200 One Galleria Tower, 13355 Noel Road, LB 48, Dallas, Texas 75240 or via telephone at(972) 419-7188 or via e-mail at [email protected]