Article by: Sara Braz, Senior Client Relationship Manager

Plan sponsors across the nation took notice as the US Supreme Court unanimously ruled in the case, LaRue v DeWolff, Boberg & Associates, that individual employees may sue to recover damages in the event of a fiduciary breach in the administration of their employer sponsored retirement plan.

James LaRue of Southlake, TX, claimed that he directed his former employer, “the plan administrator,” to change the investment allocation in his 401(k) and that the plan administrator failed to carry out his instructions, resulting in a loss of $150,000.

On November 26th, 2007 the case was brought to the US Supreme Court. While it is yet to be determined whether, in fact, the administrator failed to carry out Mr. LaRue’s instructions, the Court ruled in favor of the plaintiff to his right to seek recovery of the damages.

In the opinion letter, dated February 20th, 2008, the Court stated that in an employer sponsored retirement plan, individual participants may sue “a fiduciary whose alleged misconduct impaired the value of plan assets in the participant’s individual account.” The ruling brings forth clarity in a murky area that was previously treated inconsistently by the courts.

The law before LaRue

Before the Court’s most recent decision, the leading precedent was another Supreme Court decision, Massachusetts Mutual Life v Russell. In this case, which involved a claim for benefits under an employer sponsored disability plan, the Court upheld that ERISA’s provision authorizing the recovery of money damages by the plan.

As a result, since 1985, individual participants claiming they suffered a loss due to a breach of fiduciary duty and the money damages were not “recoverable” had a hard time.

Despite the Russell decision relating to a disability plan, some courts interpreted the ruling in the context of defined contribution plans to mean that if a fiduciary breach harmed an individual participant, but did not damage the entire plan, money damages were not recoverable.

However, other courts took the position that in these cases, any money recovered by the plan would be paid to the accounts of the affected participants.

LaRue v DeWolff

In Mr. LaRue’s case, the circumstances are somewhat unusual. Typically employees communicate changes to their 401(k) plans via toll free phone numbers or the internet site of the recordkeeper, while LaRue alleges he gave the investment directions to his employer, in which the failure to carry out these instructions led to a financial loss.

The case lost at trial level court. The Court of Appeals held that the money damages are not available under ERISA when the claim applied to the account of a single participant.

The Supreme Court overturned the decision of the Court of Appeals. The majority opinion, written by Justice Stevens, focused on the fact that defined contribution plans, as opposed to DB plans, are now the dominant employer sponsored plan.

“[F]iduciary misconduct need not threaten the solvency of the entire plan to reduce benefits below the amount that participants would otherwise receive.”

What now?

The decision opens up the possibility for individual participants to sue plan fiduciaries for money damages even if she is the only participant affected by an alleged breach of fiduciary duty.

However, industry experts say it is too early to say whether the LaRue decision will actually result in a spike in ERISA litigation. Recall that prior to the decision, Circuit Courts of Appeals in some parts of the country had already ruled that individual participants could sue to recover damages, yet did not experience significantly more litigation.

Regardless, there is no doubt the case will result in more scrutiny on plan fiduciaries. To combat this, the law firm Reisch, Luftman, Reicher & Cohen suggests plan sponsors and fiduciaries should do the following:

• Check to make sure there is adequate liability insurance coverage in the event of such a
  claim.

• Clearly communicate with plan participants who is, and who is not, responsible for carrying out participant and beneficiary investment instructions.

• Carefully review contracts with recordkeeping service providers to fully understand which parties are liable in the event of failure to carry out participant instructions. If these terms suggest that the provider is relieved from wrongdoing, consider negotiating with the provider to eliminate these terms.

• Review the agreements of all parties involved in the 401(k) plan administration and ensure the responsibilities of carrying out participant instructions is delineated, and it is consistent with the protocol defined in the summary plan description.

Sources:
US Supreme Court website. http://www.supremecourtus.gov/opinions/07pdf/06-856.pdf

Faucher, Joe and Vanic, Mike. “The Supreme Court’s Decision in LaRue v DeWolff, Boberg & Associates: How it Affects You, What You Should Do, and Ruminations Regarding The Fractured Opinion.” Reish Luftman Reicher & Cohen April 2008 Bulletin.