Supreme Court Rules Defined Contribution Plan Participants Can Sue for Losses to Their Individual Accounts
The United States Supreme Court, in LaRue v. DeWolff, Boberg & Associates, Inc. (“LaRue”), has confirmed the right of a participant in a defined contribution plan to bring a claim for fiduciary breach under ERISA for losses to his or her individual plan account. In so ruling, the court overturned a decision by the Fourth Circuit Court of Appeals, LaRue v. Dewolff, Robert & Assocs., Inc., 458 F.3d 359 (4th Cir. 2006), which had held that a participant who files a suit under ERISA section 502(a)(2) must bring a claim on behalf of the “entire plan” in order to seek monetary relief. The Fourth Circuit had based its reasoning upon the prior Supreme Court decision in Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134 (1985).
The Facts and Lower Court Rulings
James LaRue was a participant in a 401(k) plan (the “Plan”) administered by DeWolff, Boberg & Associates (“DeWolff”). The Plan permitted participants to direct the investment of their contributions in accordance with the Plan terms. LaRue filed a lawsuit against DeWolff alleging that he had directed a change in his account investments but that DeWolff never carried out his instructions. LaRue claimed that DeWolff’s omission was a breach of fiduciary duty under ERISA that had depleted his interest in the Plan by approximately $150,000. LaRue initially sought “equitable relief” under ERISA section 502(a)(3). The District Court dismissed LaRue’s lawsuit holding that LaRue was actually seeking “monetary damages” — relief unavailable under ERISA section 502(a)(3). On appeal, LaRue argued that he had a claim for relief under both ERISA section 502(a)(2) and Section 502(a)(3). The Court of Appeals noted that LaRue had raised his Section 502(a)(2) claim for the first time on appeal, but nevertheless rejected it on the merits.
In dismissing LaRue’s claim, the Court of Appeals relied on the Supreme Court’s holding in Russell that ERISA section 502(a)(2) was intended to “protect the entire plan, rather than the rights of an individual beneficiary.” Finding that the relief LaRue sought was “personal” (he “desires recovery to be paid into his plan account, an instrument that exists specifically for his benefit”), the Court of Appeals held that no relief was available under Section 502(a)(2). The lower court also rejected LaRue’s argument that the relief he sought was “equitable” and thus available under ERISA section 502(a)(3).
The Supreme Court Decision
The Supreme Court reversed the Fourth Circuit in an opinion authored by Justice Stevens. In reaching its holding, the Supreme Court distinguished the facts of LaRue from the facts of Russell and distanced itself from the holding in Russell. Interestingly, Justice Stevens was also the author of the Russell opinion 23 years earlier.
ERISA section 502(a)(2) authorizes plan participants, as well as the Secretary of Labor, plan beneficiaries and fiduciaries, to bring an action for relief under ERISA section 409. According to the Supreme Court in LaRue:
The principal statutory duties imposed on fiduciaries by [section 409] “relate to the proper management, administration, and investment of fund assets,” with an eye toward ensuring that “the benefits authorized by the plan” are ultimately paid to participants and beneficiaries.
The Supreme Court found that the misconduct alleged by LaRue, unlike the misconduct alleged by the plaintiff in Russell, fell squarely within the scope of conduct Congress was seeking to regulate when it adopted Section 409 because LaRue alleged that the Plan administrator’s mismanagement of his Plan account reduced the value of the assets that should have been in his account under the Plan. On the other hand, the plaintiff in Russell had received all of the benefits to which she was contractually entitled under the terms of her employer’s disability plan, and was seeking consequential damages caused by a delay in the processing of her claim. The Supreme Court stood by its holding in Russell that ERISA section 502(a)(2) does not provide a remedy for the type of personal injury Ms. Russell alleged. Though Section 502(a)(2) does not require an injury to the “entire plan”, it does apparently require that the fiduciary breach be “with respect to a plan” and that the plan be the victim of the misconduct.
The Supreme Court also relied on changing trends in retirement plans in reaching its holding. The Supreme Court explained that Russell’s emphasis on protecting the “entire plan” from fiduciary misconduct reflected the former landscape of employee benefit plans and that this concept has lost its relevance in a landscape dominated by defined contribution plans. The Court stated that, in the 1980s when Russell was decided, most retirement plans were defined benefit plans. In the context of such plans, misconduct by plan fiduciaries would not affect an individual participant’s entitlement to benefits unless it created or increased the risk of default by the entire plan — thus the focus in Russell on injury to the “entire plan.” The Court recognized that since Russell was decided defined contribution plans have become the dominant form of retirement plans, and explained that for defined contribution plans, unlike defined benefit plans, fiduciary misconduct need not threaten the solvency of the entire plan to reduce benefits below the amount that participants would otherwise receive. As stated by the Court:
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 concerned the draftsmen of § 409. Consequently, our references to the “entire plan” in Russell, which accurately reflect the operation of § 409 in the defined benefit context, are beside the point in the defined contribution context.
The Supreme Court concluded that ERISA section 502(a)(2) does authorize recovery for fiduciary breaches that impair the value of plan assets in a participant’s individual account.
Should Plan Fiduciaries Be Nervous About LaRue?
Following the Supreme Court’s decision in LaRue, articles in the popular press headlined that the floodgates of ERISA litigation had been opened and plan fiduciaries would be the target of numerous frivolous lawsuits. In our view, the sky is not falling on ERISA fiduciaries because of LaRue. The Fourth Circuit’s holding, that an individual claim for fiduciary breach could not be brought under ERISA section 502(a)(2), had already been rejected, or at least questioned, by many courts before the Supreme Court stepped in to set the Fourth Circuit straight. In recent years, several courts have held that participants in defined contribution plans can bring a fiduciary breach claim under Section 502(a)(2) where the alleged wrongdoing has not caused losses to the accounts of all plan participants. See, e.g., Milofsky v. American Airlines, Inc., 442 F.3d 311 (5th Cir. 2006) (en banc) (allowing a subset of participants to proceed with breach of fiduciary duty claims under ERISA section 502(a)(2)); see also In re Schering–Plough Corp., 420 F.3d 231, 232 (3d Cir. 2005, amended on rehearing Sept. 15, 2005) (same); Hill v. Tribune Co., 2006 WL 2861016 (N.D. Ill. Sept. 29, 2006) (same); Rogers v. Baxter Int’l, 417 F. Supp. 2d 974, 982 (N.D. Ill. 2006) (same); Woods v. Southern Co., 396 F. Supp. 2d 1351, 1361–63 (N.D. Ga. 2005) (same). Indeed, even while LaRue was pending before the Supreme Court, the Sixth Circuit ruled that individual participants can pursue fiduciary breach claims under ERISA section 502(a)(2). See, e.g., Pfahler v. Nat’l Latex Products Co., Nos. 06–3677/3678 (6th Cir. Dec. 14, 2007) (individuals seeking damages to their own personal plan accounts could proceed under Section 502(a)(2)); Tullis v. UMB Bank, No. 06–4632/4633 (6th Cir. January 28, 2008) (same). Individual claims for fiduciary breach in defined contribution plans are really nothing new and we believe the Supreme Court’s opinion in LaRue should have little impact on whether these cases go forward, outside of the Fourth Circuit.
Far from being a setback, employers and plan fiduciaries defending against LaRue–type claims may find that the multiple opinions issued by the Supreme Court in LaRue have provided them with some extra protection. The majority opinion leaves open the question of whether a participant must exhaust administrative remedies prior to filing an individual claim for breach of fiduciary duty under ERISA section 502(a)(2). The lower courts are currently divided on this issue. See, e.g., Milofsky v. American Airlines, Inc., 442 F.3d 311, 313 (5th Cir. 2006) (no exhaustion required for breach of fiduciary claim); Smith v. Sydnor, Inc., 184 F.3d 356, 364 (4th Cir. 1999), cert. denied, 528 U.S. 116 (2000) (same); but see Mason v. Continental Group., Inc., 763 F.2d 1219, 1226–27 (11th Cir. 1985) (exhaustion of administrative remedies required prior to bringing fiduciary breach claim); Spivey v. Southern Company, 427 F. Supp. 2d 1144 (N.D. Ga. 2006) (same). This divided issue in ERISA jurisprudence will continue as a powerful defense in some Circuits, and may gain a foothold in others.
A concurring opinion by Chief Justice Roberts appears to encourage defense counsel to argue that a LaRue–type claim is properly brought only as a claim for benefits, complete with the requirement that the participant first exhaust administrative remedies and subject to the significant deference given by the federal courts in reviewing the decisions by plan fiduciaries on claims for benefits. Chief Justice Roberts states his view that LaRue’s claim should have been brought under ERISA section 502(a)(1)(B), as a claim for benefits under the Plan, rather than as a claim for breach of fiduciary duty under ERISA section 502(a)(2). Section 502(a)(2) allows a participant to obtain “appropriate relief” under Section 409, and Roberts questions that relief may not be “appropriate” if another provision, such as Section 502(a)(1)(B), offers an adequate remedy. Similar arguments have been successfully made with respect to ERISA section 502(a)(3) based on similar language. See Varity Corp. v. Howe et al., 516 U.S. 489, 515 (1996). Chief Justice Roberts cautions against the dangers of allowing a claim for benefits to proceed as a claim for breach of fiduciary duty because a plaintiff may circumvent the deferential “abuse of discretion” standard of review often granted to a plan administrator’s decision to deny plan benefits. Defense counsel will likely utilize Roberts’ reasoning in responding to participant claims for fiduciary breach.
The Court’s majority opinion does provide an extra nugget to ERISA plaintiffs suing for “losses” to their plan accounts. In footnote 4 of the opinion, the majority approves of participant claims seeking “lost profits” under Section 502(a)(2). This is a benefit to plaintiffs who, to date, have had to rely on old case law, such as the 23–year–old Second Circuit decision in Donovan v. Bierwirth, 745 F.2d 1049 (2d Cir. 1985), for arguments that recoverable losses could include not just assets improperly managed by plan fiduciaries and the resulting losses to the plan, but lost earning potential as well.
The “Plain Text” of the Statute
In addition to Justice Stevens’ majority opinion and Chief Justice Robert’s concurrence, a second concurrence was penned by Justice Thomas that is based on the statutory text of ERISA and the common sense conclusion that losses to individual accounts in any type of defined contribution plan are “losses” to the plan within the meaning of ERISA section 409 and are recoverable as such. Justice Thomas begins his concurrence by stating that his opinion “is not contingent on trends in the pension plan market… [n]or does it depend on the ostensible “concerns” of ERISA’s drafters.” According to Thomas, the “unambiguous text” of ERISA section 409 makes clear it authorizes recovery only for the “plan.” Thus, the question Thomas takes in his crosshairs is whether losses to a participant’s individual plan account resulting from an alleged breach of fiduciary duty are “losses to the plan.” Justice Thomas concludes that they are, for the simple reason that assets allocated to a participant’s individual account are plan assets. A defined contribution plan is nothing more than the sum of its parts. When a participant sustains losses to his or her individual account as a result of a fiduciary breach, the plan’s aggregate assets are diminished by the same amount. Thus, concludes Justice Thomas, Section 502(a)(2) permits a participant to recover such losses on behalf of the plan.