Supreme Court Permits Lawsuits By Individual Participants
in 401(k) and Other Defined Contribution Plans
In LaRue v. DeWolff, Boberg & Associates, Inc., No. 06-856 (Feb. 20, 2008), the United States Supreme Court held that an individual participant in a 401(k) plan has standing to pursue a cause of action against a plan fiduciary for allegedly failing to follow the participant’s investment instructions. While this ruling is unlikely to affect the recent wave of lawsuits against retirement plans for failing to control plan costs, the Court’s decision in LaRue creates the potential for additional litigation against defined contribution plan fiduciaries.
James LaRue, the plaintiff, alleged that he instructed the plan administrator of his employer’s 401(k) plan to change his investment elections on two separate occasions, but the administrator did not comply. According to LaRue, had the changes been made, his account balance would have been $150,000 higher. LaRue sued his former employer and the plan under Sections 502(a)(2) and 502(a)(3) of the Employee Retirement Income Security Act (“ERISA”), alleging that the fiduciaries “depleted” his interest in the plan by failing to implement the changes he requested. The United States Court of Appeals for the Fourth Circuit rejected LaRue’s claims, holding that claims could be brought against ERISA fiduciaries only to recover losses suffered by the plan as a whole, not losses incurred by individual accounts.
The Supreme Court observed that a participant’s benefits in a defined contribution plan, unlike a defined benefit plan, may be reduced by fiduciary misconduct that affects only the participant’s own account without jeopardizing the overall solvency of the plan. For that reason, the Court held “that although § 502(a)(2) 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.” Thus, fiduciaries of 401(k) and other defined contribution plans may be subject to liability for any act or omission that affects a participant’s individual account balance, regardless of the consequences of that misconduct on the plan as a whole.
However, certain questions remain unanswered regarding the precise scope of a fiduciary’s liability. For example, the Court’s majority opinion did not address whether LaRue’s claims may be brought under § 502(a)(3) of ERISA, which permits injunctive relief. Also, in a footnote at the end of its opinion, the Court noted that LaRue’s claims were not moot even though he was no longer a participant in the plan. To date, courts have been split on the issue of whether a participant who takes a final lump sum distribution from a plan retains standing to assert claims of breach of fiduciary duty. Although the issue was not squarely presented to the Supreme Court, this footnote seems to have resolved this issue.
Although the precise contours of liability for plan fiduciaries are still not fully defined, plan fiduciaries should establish protocols – if they have not done so already – to ensure that requests for investment changes by individual plan participants are documented and that those changes are made. Plans also may wish to consult with counsel to review their plan language, practices, and materials distributed to participants in light of the Supreme Court’s ruling.
This article is for informational purposes only. These materials do not constitute legal advice. If you have a legal question, you should contact an attorney and seek legal advice based on your particular situation. The author expressly disclaims liability for any actions taken or not taken in reliance on this article and disclaims any liability for third-party content that may be accessed through this article.