Supreme Court allows suit over 401(k) account

WASHINGTON—Employers with defined contribution plans will likely face increased fiduciary liability exposures after the U.S. Supreme Court ruled last week that plan participants can sue to recover individual account losses as a result of a fiduciary breach, attorneys say.

Federal courts have ruled differently whether provisions of the Employee Retirement Income Security Act allow individual participants only to sue fiduciaries for damages on behalf of the entire plan or whether they can sue for damages involving a single account.

The case, James LaRue vs. DeWolff, Boberg & Associates Inc., involves James LaRue a participant in Dewolff, Boberg & Associates' 401(k) plan since 1993. He alleged that his retirement plan account was short $150,000 because Dewolff, which administers the plan, failed to carry out his directions to make certain investment changes to his account in 2001 and 2002. He sued the management firm in 2004.

The 4th U.S. Circuit Court of Appeals in Richmond, Va., ruled in June 2006 that participants may sue a fiduciary to make good on losses due to a fiduciary breach, but only on behalf on an entire plan, not an individual account. The Supreme Court on Feb. 20 unanimously overturned that decision.

The 4th Circuit relied on the Supreme Court's earlier decision in Massachusetts Mutual Life Insurance Co. vs. Russell, in which the high court held that a participant in a disability plan that paid a fixed level of benefits could not bring suit under ERISA to recover consequential damages arising from delay in the processing of her claim.

While the Supreme Court said that the Russell decision accurately reflects ERISA's operation in the defined benefit context, it is "beside the point in the defined contribution context."

"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. For defined contributions plans, however, fiduciary misconduct need not threaten the entire plan's solvency to reduce benefits below the amount that participants would otherwise receive," states the opinion written by Associate Justice John Paul Stevens.

The alleged misconduct in the LaRue case "falls squarely within" provisions under ERISA that allow plan participants to bring actions on behalf of a plan to recover for violations of the plan administrator's obligations, he said.

Although ERISA "does not provide a remedy for individual injuries distinct from plan injuries, that provision does authorize recovery for fiduciary breaches that impair the value of plan assets in a participant's individual account," Justice Stevens wrote.

ERISA attorneys say the decision opens the door to broader claims and remedies for alleged breaches of fiduciary duty, and as a result, it will lead to more litigation.

"I think it's a very big deal" for plan sponsors, said Stephen Rosenberg, head of the ERISA practice for the McCormack Firm L.L.C. in Boston. The decision means that sponsors are "no longer at risk for big ticket litigation over their pension and 401(k) plans. What they're really facing now is the risk of death by a 1,000 cuts of the types of cases like in LaRue, which was just one person with a $150,000 mistake."

Combined with the fact that plaintiffs prevailing in ERISA suits can collect attorneys' fees, "I think you'll see a lot more lawyers willing to bring these suits," he said.

"I believe firmly that this will lead in the next year or two, to a spate of new lawsuits," said Ed Harold, a partner with Fisher & Phillips L.L.P. in New Orleans.

"People see their account values go down and they look for someone to blame," he said. "And if they can come up with some sort of 'You didn't do what I asked you to do' or 'You shouldn't have this investment option within the plan,"' they're likely to bring suit. "The individualization of the claim creates more opportunity for people to become plaintiffs," he said.

"I think it potentially opens a whole new avenue of claims for plan participants and provides a form of remedy for defined contribution plan participants, which previously there was very much an open question whether this remedy existed or not," said Martha N. Steinman, a partner in the executive compensation and ERISA practice of Dewey & LeBoeuf L.L.P. in New York.

Attorneys say that the ruling means plan sponsors should look at their defined contribution plans to make sure there is sufficient oversight and everything is documented.

LaRue vs. DeWolff, Boberg & Associates Inc. et al., No. 06-856; decided Feb. 20, 2008

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