In February 20, the U.S. Supreme Court issued its long-awaited decision in LaRue v. DeWolff, Boberg & Associates., Inc. The Court unanimously voted that an individual participant in a defined contribution plan could sue plan fiduciaries to recover losses resulting from the plan administrator’s failure to correctly implement his investment directions.

Mr. LaRue was a former participant who claimed that his 401(k) plan account was “depleted” by $150,000 due to the plan administrator’s failure to implement his direction to change the investment of his plan account. After taking a distribution of his plan account, he sued the plan administrator and the 401(k) plan for the $150,000 he claimed he lost.

The Supreme Court’s decision involved an interpretation of Section 502(a) of ERISA, which permits civil lawsuits by a participant or beneficiary to (1) enforce liability under Section 409 of ERISA for breach of fiduciary duty (Section 502(a)(2)) and (2) provide equitable relief to redress violations of any provision of Title I of ERISA or the terms of the plan (Section 502(a)(3)).

LaRue’s suit under Section 502(a)(3) was initially dismissed by the district court on the basis that it was a claim for monetary damages rather than equitable relief as provided under Section 502(a)(3). Because the plan no longer held any funds that could rightly belong to LaRue, the district court concluded that he was seeking damages rather than equitable relief and dismissed the case. On appeal to the Fourth Circuit, LaRue argued that he had the right to sue under Section 502(a)(3) and under Section 502(a)(2). The Fourth Circuit agreed with the district court that LaRue’s claim was for damages rather than equitable relief and rejected his argument under Section 502(a)(3).

The Fourth Circuit also rejected LaRue’s claim under Section 502(a)(2) because he was seeking a recovery for his individual plan account and not the plan as a whole. In reaching this decision it relied on the Supreme Court’s holding in Massachusetts Mutual Life Ins. Co. v. Russell, which involved a lawsuit by a participant in a defined benefit plan for consequential damages resulting from a delay in the payment of her benefits. The Supreme Court dismissed the participant’s claim, saying that misconduct by the administrator of a defined benefit plan will not affect an individual’s entitlement to a defined benefit unless it creates or enhances the risk of default by the entire plan. The Fourth Circuit interpreted this language to mean that Section 409 protected the entire plan rather than the rights of an individual beneficiary and dismissed LaRue’s claim. LaRue then appealed to the Supreme Court.

Supreme Court Ruling
The members of the Supreme Court voted unanimously to reverse the Fourth Circuit’s ruling, but they issued three separate opinions. The majority of the Justices differentiated LaRue’s case from Russell because it involved a defined contribution plan instead of a defined benefit plan and ruled that LaRue had a cause of action under Section 502(a)(2). The majority opinion focused on the difference between defined benefit and defined contribution plans and the fact that in a defined benefit plan, an individual’s benefits would not be affected by a fiduciary breach unless benefits under the entire plan were threatened. Contrasting this with the situation in a defined contribution plan, the opinion stated:

“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 A7409.”

Applying this analysis, the majority held that while Section 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 individual account.

The Supreme Court’s opinion also addressed another issue regarding an individual’s ability to sue a plan administrator for a fiduciary breach. After the Supreme Court agreed to hear the case, the defendants filed a motion to dismiss the case because LaRue had withdrawn his plan account and was no longer a participant in the plan. In a footnote to the opinion, citing a recent Seventh Circuit case, Harzewski v. Guidant Corp., without discussion, the Court stated that a plan participant as defined by Section 3(7) of ERISA may include a former employee with a colorable claim for benefits.

Conclusion
Reactions to the LaRue decision have varied widely. Many employee benefits experts believe that the Supreme Court’s ruling is correct because otherwise an individual participant would have no way to recover losses resulting from a fiduciary breach that only affects his or her account. Others are concerned that the Supreme Court’s decision opens the door to a flood of lawsuits by individual participants unhappy with their 401(k) investment results. Only time will tell who is right.