Supreme Court Expands Liability Exposure of Fiduciaries of Individual Account Plans

Recent rulings related to pension benefits have raised concerns among fiduciary liability policy holders.

The U.S. Supreme Court unanimously ruled on February 20, 2008 in LaRue v. Dewolff, Boberg & Associates that an individual participant may bring suit for fiduciary breaches under the Employee Retirement Income Security Act (ERISA) to recover losses in an individual defined contribution account.

The LaRue Facts

The plaintiff James LaRue is a former employee of plan administrator DeWolff, Boberg & Associates who participated in DeWolff's 401k plan. He claimed that in 2001 and 2002 he directed DeWolff to "make certain changes to the investments in his individual account," apparently changing his investment elections out of funds with stock exposure during a market decline. But he claimed that DeWolff never made the changes and that this omission "depleted" his interest in the plan by $150,000. LaRue sued the DeWolff firm and the DeWolff's 401k plan seeking "make whole" or other equitable relief under section 502(a)(3) of ERISA, codified as 29 U.S.C. 1132(a)(3).

The district court dismissed LaRue's complaint on the grounds that LaRue sought money damages, which are not permitted under Section 502(a)(3).

LaRue appealed to the Fourth Circuit relying on both Section 502(a)(2) and 502(a)(3). The Fourth Circuit affirmed the Section 502(a)(3) dismissal on the same grounds as the district court. The appellate court rejected LaRue's Section 502(a)(2) claim on the ground that the Supreme Court's 1985 opinion in Massachusetts Life Ins. Co. v. Russell permitted Section 502(a)(2) claims only on behalf of the entire plan rather than on behalf of any one participant's individual interest.

Ruling in favor of LaRue, the Supreme Court reversed the lower courts and held that an individual plan participant like LaRue has the right to pursue an individual action, notwithstanding the court's prior holding in Russell. The Court expressly noted that, in contrast to the 1970's era of ERISA's founding when defined benefit plans predominated, "defined contribution plans dominate the retirement scene today." The circumstances for an individual participant in a defined benefit plan, according to the Court, are quite different than under a defined contribution plan, because misconduct relating to a defined benefit plan would not affect any one individual's plan interest unless the misconduct caused a default of the defined benefit plan itself:

For defined contribution plans, however, fiduciary misconduct need not threaten the solvency of the entire plan to reduce benefits below the amount that participants would otherwise receive. Whether a fiduciary breach diminishes plan assets payable to all participants and beneficiaries, or only to persons tied to particular individual accounts, it creates the kind of harms that concerned the draftsmen of [ERISA's liability provisions]. Consequently, our references to the "entire plan" in Russell . . . Are beside the point in the defined contribution context.

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