401(k) Participants Can Sue Under ERISA, Supreme Court Rules
February 22, 2008
Todd D. Steenson- Chicago
In an important ERISA decision issued Wednesday, February 20, the Supreme Court significantly expanded the litigation risks that 401(k) and other defined contribution plan sponsors, administrators and other fiduciaries face. The Court ruled that an individual employee who claimed that the value of his individual 401(k) plan account dropped because plan fiduciaries failed to make the investments he directed may sue for breach of fiduciary duty under ERISA. LaRue v. DeWolff, Boberg & Assoc., Docket No. 06-865 (February 20, 2008) (available at http://www.supremecourtus.gov/opinions/07pdf/06-856.pdf). This decision opens the door to suits against 401(k) plan administrators and fiduciaries for mistakes that allegedly harm individual 401(k) participants.
Section 502(a)(2) of ERISA allows ERISA plan participants to sue plan administrators and trustees for breaches of fiduciary duty – breaches of their obligation to follow the ERISA plan’s terms and manage the plan’s assets and affairs in a reasonable and prudent manner. Fiduciaries are individually liable for losses caused by breaches of fiduciary duty. But ERISA has been interpreted to allow suits for breach of fiduciary duty only for losses to an ERISA plan as a whole, not just losses to the individual participant alone. In a 1985 decision, the Supreme Court ruled that a participant in an employer-sponsored disability plan could not sue under ERISA Section 502(a)(2) to recover damages based on the plan fiduciaries’ alleged delay in processing her disability claim. Such a claim did not allege losses to the plan, but merely claimed individual losses, the Supreme Court ruled.
In the LaRue case, the Supreme Court considered whether a participant in a defined contribution plan, such as a 401(k) plan, may sue under Section 502(a)(2) to recover losses caused by a breach of fiduciary duty, even when those losses affected only the participant’s individual account. James LaRue claimed that the plan administrator of his 401(k) plan failed to make certain investments as he had directed in breach of its fiduciary duties, resulting in an alleged loss of approximately $150,000 to his individual 401(k) account.
The Supreme Court agreed that LaRue could sue for breach of fiduciary duty under Section 502(a)(2). The Court noted that the purpose of ERISA’s fiduciary duty provisions is to ensure 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 Court ruled that the kind of loss LaRue alleged involved the purpose of ERISA’s fiduciary duty rules, and stated that fiduciary misconduct “need not threaten the solvency of the entire plan to reduce benefits below the amount that participants would otherwise receive.”
What Does This Mean for Employers, Plan Sponsors, Administrators and Fiduciaries?
Today, 401(k) plans are the most common kind of employer-sponsored retirement plan. They cover more than 50 million workers who have over $2.7 trillion invested. The Supreme Court’s LaRue decision opens the door to lawsuits by individual 401(k) plan participants or beneficiaries claiming that they lost money because of mistakes made by plan administrators or fiduciaries. Although the plaintiff will have to prove a breach of fiduciary duty, if he or she does, the plan administrators or fiduciaries can be held individually liable for the resulting losses. It is also unclear whether a plan participant or beneficiary will be required to exhaust plan administrative remedies before suing or whether plan administrators’ decisions will be given the benefit of the doubt in court. Defined contribution plan sponsors, administrators and fiduciaries can expect more of these kinds of suits to be filed and should take precautions.
For more information, email Todd D. Steenson at todd.steenson@hklaw.com or call toll free, 1.888.688.8500.