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401(k) case could boost plan fiduciaries' liability


WASHINGTON—Employers with defined contribution plans may face more fiduciary liability depending on how the Supreme Court interprets sections of federal pension law.

The high court agreed last week to hear arguments in James LaRue vs. Dewolff, Boberg & Associates Inc.

At issue is whether the Employee Retirement Income Security Act allows an individual participant in a defined contribution plan to sue fiduciaries to recover individual plan account losses caused by an alleged fiduciary breach.

Federal courts have ruled differently.

The 4th U.S. Circuit Court of Appeals in Richmond, Va., which upheld a lower court decision in the LaRue case, ruled that while ERISA provides that a lawsuit may be brought by a participant against a fiduciary who is liable to make good any losses to the plan due to a fiduciary breach, the remedy is only for entire plans, not for individual accounts.

Additionally, the appeals court noted, in drafting ERISA, Congress sought to balance the protection of participants' rights with the encouragement of plan formation.

By making fiduciaries liable where there was no "unjust enrichment" to the fiduciary would seriously discourage plan formation and the service of qualified individuals and institutions as fiduciaries, the appeals court said.

In this case, James LaRue, who has participated in Dewolff, Boberg & Associates' 401(k) plan since 1993, alleges his retirement account is short $150,000 because the management firm, 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 firm in 2004.

In an amicus curiae brief encouraging the Supreme Court to review the 4th Circuit ruling, U.S. Solicitor General Paul D. Clement noted that every other courts of appeals that has addressed the issue have all held that ERISA authorizes suits by participants in such instances not withstanding that the recovery will ultimately be allocated to the plan accounts of a limited number of participants.

As it stands, the 4th Circuit ruling "threatens to leave many plan participants without any effective redress for breaches of ERISA's fiduciary duties," he said.

If the Supreme Court overturns the 4th Circuit, employers will face more fiduciary liability risks, attorneys say.

"This could have a sweeping impact on employers" and other fiduciaries, said Martha N. Steinman, a partner in the executive compensation and ERISA practice of LeBoeuf, Lamb, Greene & MacRae L.L.P. in New York. "Fiduciaries have just been adding increasingly higher levels of risk in terms of potential liability in recent years, which makes a lot of people reluctant to be fiduciaries," she said. "A reversal in this case will have a significant impact on that."

"I find it unlikely that employers are just saying 'Well so what? We don't care if we get this right or not because we can't get sued,"' said Stephen Rosenberg, head of the ERISA practice for the McCormack Firm L.L.C. in Boston.

But if the Supreme Court rules in favor of plan participants, fiduciaries will be held liable if they are not being "scrupulous and really detailed oriented" in making sure the plan is directing investment decisions exactly the way the participant wants, Mr. Rosenberg said, noting that he believes the Supreme Court will overturn the 4th Circuit.