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ERISA Allows Individuals to Sue for Profits Lost in Defined Contribution Plans, U.S. Supreme Court Holds
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March 24, 2008
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Howrey LLP
The U.S. Supreme Court has held in that an individual participant in a 401(k) plan can sue under the Employee Retirement Income Security Act (ERISA) for lost-profits damages caused by the plan administrator's alleged breach of fiduciary duty. LaRue v. DeWolff, Boberg & Associates, Inc., 128 S.Ct. 1020 (2008).
James LaRue was a participant in his employer's 401(k) plan, which the company self-administered. According to the terms of the plan, participants were allowed to direct the investment of their plan contributions. LaRue alleged that his employer failed to carry out his investment instructions, and as a result, his plan account was damaged by $150,000. He sued for make-whole relief, alleging a breach of fiduciary duty by his employer in its role as plan administrator.
The U.S. District Court granted the defendant's motion to dismiss on the ground that LaRue's claim was not authorized by ERISA. The U.S. Court of Appeals for the 4th Circuit upheld the District Court based on a 1985 Supreme Court decision, Massachusetts Mutual Life Insurance Co. v. Russell, 473 U.S. 134, 105 S.Ct. 3085 (1985).
The 4th Circuit interpreted Russell as holding that ERISA authorizes participant suits for damages (as distinct from unpaid plan benefits) only when the alleged breach harms the entire pension plan, not just the account of a single participant. Because LaRue was seeking a "personal" remedy for the alleged harm to his plan account, the Court of Appeals rejected his claim.
Majority Opinion
The Supreme Court held that the 4th Circuit misread the Russell decision and ERISA provisions authorizing damages for breaches of fiduciary duty, §§409(a) and 502(a)(2). The Russell case involved claims for compensatory and punitive damages in a disability plan, which is a defined benefit plan, not a defined contribution pension plan.
The high court explained that Russell emphasized harm to the plan as a whole because ERISA's principal fiduciary duties are designed to ensure that the plan's assets are properly managed and invested. Given the prevalence of defined benefit pension plans at that time, under which participants are entitled to a benefit determined according to a formula rather than an account balance, there was little need for the Russell opinion to address the distinction between defined benefit and defined contribution plans, the court explained.
Today, however, 401(k) and other defined contribution plans have come to dominate the retirement-plan landscape, and there was nothing in the Russell decision intended to preclude the relief sought by LaRue, the court held.
The court explained that relief is available under §502(a)(2) regardless of whether the alleged fiduciary breach diminished defined contribution plan assets payable to all participants or only to persons tied to a single participant's account. It held that although §502(a)(2) does not provide a remedy for individual injuries distinct from plan injuries, it does authorize recovery for fiduciary breaches that impair the value of plan assets in a participant's individual account.
Concurring Opinions
Although the Supreme Court's holding was unanimous, there were two concurring opinions that used different reasoning to arrive at the same result. Justices Roberts and Kennedy argued that the majority did not adequately consider whether LaRue's claim actually was a claim for benefits (as opposed to a claim for damages), in which case the claim "arguably" should have been brought under a separate provision of ERISA, §502(a)(1)(B), which authorizes suits "to recover benefits due to him under the terms of his plan [and] to enforce his rights under the terms of the plan...."
They reasoned that LaRue's right to direct the investment of his contributions was governed by the plan, and because he seeks benefits he would have had if his investment instructions had been carried out, his "claim, therefore, is a claim for benefits that turns on the application and interpretation of the plan terms." They further warn against allowing claims for benefits to be "recast" into breach of fiduciary duty claims for damages, which might make suits too easy to bring and thereby lead to a decline in employer-sponsored pension plans.
Justices Thomas and Scalia agreed that LaRue's claim was rightly regarded as one for damages, appropriately brought under §502(a)(2). But they preferred to ground the decision solely in the text of the statute rather than in what they characterized as "trends in the pension plan market" and vague notions of the "concerns" of ERISA's drafters. Instead, they reasoned that LaRue could recover losses suffered by his account under §502(a)(2) because that section authorizes recovery for the plan, and the assets allocated to his account were plan assets. Individual accounts, they said, were merely a bookkeeping convenience but did not compel the conclusion that LaRue's losses were not losses to the plan.
Conclusion
The approach taken by the 4th Circuit was unique to that circuit. All of the other U.S. Courts of Appeals and most of the District Courts to have considered the issue had concluded that 401(k) plan participants can sue for harm to their individual accounts. The Supreme Court's rejection of the 4th Circuit's anomalous approach, therefore, was not unexpected.
While LaRue is the first Supreme Court case to expressly hold that lost-profits damages are recoverable under ERISA, there is language in both the majority opinion and the Roberts concurrence indicating the potential availability to fiduciaries of certain procedural protections, such as the requirement that participants exhaust their administrative remedies before suing, the discretion fiduciaries often have under plan documents to construe the terms of the plan and determine eligibility for benefits, and the judicial deference to which those determinations frequently are entitled.
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©2008 Howrey LLP
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