In a 9-0 decision, the Supreme Court has ruled that ERISA allows a participant in a defined contribution plan to sue for reimbursement of investment losses suffered by the participant’s individual account that resulted from a failure of the plan fiduciaries to follow investment directions. (LaRue v. DeWolff No. 06-856, February 20, 2008)
 
The specific investment losses occurred during a market downturn in the early 2000s. Prior to this downturn the participant provided the employer with instructions to make changes to his investment allocations; however, these instructions were not executed. As a result the participant’s account was reduced by $150,000 before either party realized what had occurred. 

Before LaRue, the federal courts had consistently maintained that ERISA provides remedies for entire plans rather than individuals. Thus, plan participants were limited to suing for “recovery on behalf of the plan.” In LaRue, a plan participant sought to make his individual account whole. The employer argued that this was not what was meant by “recovery on behalf of the plan” based on the Supreme Court’s ruling in Massachusetts Mutual Life Ins. Co. v. Russell, 473 U.S. 134 (1985). The trial and federal appeals court each ruled in favor of the employer based on that  precedent; however, the Supreme Court disagreed. Instead, it held that Russell  arose in the context of a defined benefit plan, which was not relevant in a situation involving an individual account defined contribution plan.

The Supreme Court found that while ERISA does not provide a remedy for individual injuries as distinct from plan injuries, it does authorize recovery for fiduciary breaches that impair the value of plan assets in a particular participant’s individual account.  (Note that ERISA only allows recovery of compensatory damages and that lawsuits for punitive damages are not permitted.)

The court then unanimously agreed that if an employer fails to follow a participant’s investment direction and the participant’s retirement benefit is reduced because of this, then the employer – as fiduciary - is responsible. It is considered a breach of fiduciary duty, to act or fail to act in the employee’s best interest. Although all nine justices agreed that a fiduciary breach had occurred, they were not unanimous in their reasoning. Five of the justices joined in the Court’s majority opinion that was written by Justice Stevens; however, the remaining four justices explained their differences with the majority in two concurring opinions. 

Opens Possibility of Lawsuits, But Fiduciary Responsibility Unchanged
It seems that if an employer is providing the participants with investment direction and placing the responsibility for the choice of investments upon the participant, than the employer should follow the investment direction of the participants. 

The Supreme Court’s decision seems fair in regard to making the participant “whole” under the plan. The fact that this case may open the employer as plan fiduciary up to lawsuits cannot be dismissed. However, the fiduciary requirements have not changed and have always required an employer to conduct him or herself in a manner that protects the plan assets. Employer’s that breach their fiduciary duty are subject to not just penalties and personal liability but also the possibility of a lawsuit, whether the breach affects the entire plan, or, as in the LaRue case, just one participant’s account.

Fiduciary duties include many responsibilities such as the exclusive benefit rule, the prudent person rule, having an investment policy statement and reviewing it annually and, for plans with participant direction, seeking to comply with ERISA Section 404(c). Perhaps more employers will wish to look into the fiduciary protection related changes from the Pension Protection Act such as prohibited transaction exemption for fiduciary advisers, or qualified default investment alternative.

The employer should continue to be aware of the fiduciary responsibilities inherent with a qualified plan and see to it that they are properly discharged, year-in and year-out.

The Majority Opinion
Justice Stevens examined the interplay of ERISA Section 409, which concerns fiduciary responsibility, with Section 502, which determines who may bring an action to enforce ERISA rights and protections.  According to ERISA section 409(a), 

 “Any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by this title shall be personally liable to make good to such plan any losses to the plan resulting from each such breach, and to restore to such plan any profits of such fiduciary which have been made through use of assets of the plan by the fiduciary, and shall be subject to such other equitable or remedial relief as the court may deem appropriate, including removal of such fiduciary. A fiduciary may also be removed for a violation of section 411 of this Act.”

Thus, 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. ERISA section 502(a)(2), in turn, provides that a civil action may be brought by the Secretary of Labor, or by a participant, beneficiary or fiduciary for appropriate relief under section 409.

Although the language of the statue is couched in terms of harm to the plan as a whole rather than to specific participants, Justice Stevens reasoned that LaRue was different from Russell because the alleged misconduct directly reduced a plan participant’s benefit whereas in Russell, the plaintiff received all applicable benefits but was seeking damages based upon a delay in processing a claim.

As its name implies, a “defined contribution plan” or “individual account plan” promises the participant the value of an individual account at retirement. The balance in that account is a function of the amounts contributed to that account and the investment performance of those contributions. A “defined benefit plan,” by contrast, generally promises the participant a fixed level of retirement income, which is typically based on the employee’s years of service and compensation. By the very nature of a defined benefit plan, misconduct will not affect a specific participant’s benefit unless the entire plan defaults. This is because the employer is required to make actuarially determined minimum funding payments to provide participants with their accrued benefit at retirement (and the employer rather than the participant assumes the investment risk).

However, in an individual account plan, fiduciary misconduct need not threaten the entire plan’s solvency to reduce benefits below the amount that the participant would otherwise be entitled to receive. In LaRue, the employer’s failure to execute the participant’s investment directions directly resulted in the reduction of the balance of participant’s retirement account. As such, the employer’s conduct constituted a breach of fiduciary duty for which the employer could be held responsible and could be required to make the participant whole under ERISA Section 502(a)(3). Therefore, the majority concluded that whether the fiduciary breach affects all participants or only one, such fiduciary breach creates the type of harm that concerned the drafters of ERISA 409(a).

Chief Justice Roberts’ concurring opinion
Chief Justice Roberts agreed that a fiduciary breach had occurred, but raises a question of the claim being made under the wrong ERISA provision.

Roberts contended that LaRue had actually made a claim for benefits due under the terms of the plan rather than a claim for breach of fiduciary duty. Therefore, he argued that ERISA Section 502(a)(1)(B) applied to the claim rather than ERISA Section 502(a)(2), and to allow such a claim to proceed could result in circumvention of plan terms.

According to Roberts, LaRue’s right to direct the investments was a right granted and governed by the plan document. As such, LaRue’s claim for benefits should be based on the application and interpretation of the plan terms governing investment options and how to exercise them. Based on this argument, LaRue could recover because ERISA Section 502(a)(1)(B) permits a plan participant or beneficiary “to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan.”

According to the Chief Justice, LaRue could not also proceed with the fiduciary claim under Section 502(a)(2) because such relief is not “appropriate” if another provision, such as §502(a)(1)(B), offers an adequate remedy. Further, he cited Courts of Appeals decisions that prevented plaintiffs from recasting what are in essence plan-derived benefit claims as claims for fiduciary breaches.

Lastly, Roberts raised a concern that such a recasting might permit plaintiffs to circumvent certain administrative safeguards that have developed under case law interpreting ERISA Section 502(a)(1)(B). These include:

• Exhausting the administrative remedies mandated by ERISA for participants before they may file a civil suit,
• that the decisions of plan administrators and fiduciaries who have been granted discretion to determine benefit eligibility and the meaning of plan terms may be reviewed only for abuse of discretion based on Firestone Tire & Rubber Co. v. Bruch, 489 U. S. 101, 115 (1989).

Roberts contends that these safeguards encourage employers and others to undertake the voluntary step of providing medical and retirement benefits to plan participants, see Aetna Health Inc. v. Davila, 542 U. S. 200, 215 (2004), and have no doubt engendered substantial reliance interests on the part of plans and fiduciaries.

Justice Thomas’s concurring opinion
Justice Thomas reasoned that LaRue’s claim flowed directly from the unambiguous text of sections 409 and 502(a)(2) as applied to defined contribution plan context. According to Justice Thomas, these sections permit recovery of all plan losses caused by a fiduciary breach. The question then became whether the losses to LaRue’s individual account that stemmed from the employer’s failure to follow instructions were losses “to the plan.”

It was his opinion that LaRue’s losses were plan losses because the assets allocated to his account remained assets of the plan. Although ERISA requires that assets of a DC plan (including “gains and losses” and legal recoveries) be allocated for bookkeeping purposes to individual accounts within the plan, nonetheless all the assets in the plan remain plan assets to be held in trust and legally owned by the plan trustees for the benefit of the plan participants.

Thus, according to the Justice, the assets of an ERISA defined contribution plan constitute the sum of all the assets allocated for bookkeeping purposes to the participants’ individual accounts and losses attributable to the accounts of individual participants are necessarily “losses to the plan” for purposes of §409(a). Therefore, if a participant sustains losses to his individual account as a result of a fiduciary breach, the plan’s aggregate assets are similarly diminished by the same amount, and Section 502(a)(2) permits the affected participant to recover such losses on behalf of the plan.
 
Case not moot. In a footnote to the ruling at the end of the majority opinion
The Court also ruled on the respondent’s motion to dismiss the case because LaRue had withdrawn all his funds from the plan and is no longer a participant. The Court denied the motion stating that although the funds have been withdrawn, the case is not moot as ERISA Section 3(7) defines a participant to include a former employee with a colorable claim for benefits. 

Bill Grossman, QPA