Supreme Court Upholds 401(k) Participant’s Right to Sue

By Alistair M. Nevius, J.D.

The Supreme Court has held that an individual Sec. 401(k) plan participant had a right to sue the plan administrator for breach of fiduciary duty under ERISA §502(a)(2) (LaRue v. DeWolff, Boberg & Assocs., Inc., S. Ct. Dkt. 06-856 (U.S. 2/20/08)).

The petitioner participated in his employer’s defined-contribution 401(k) plan. He directed his employer—the plan administrator—to make certain changes to the investments in his account, but the administrator never carried out those changes. The petitioner alleged that this failure to follow his investment directions depleted his interest in the plan by approximately $150,000 and amounted to a breach of fiduciary duty under ERISA. (It is not clear whether the $150,000 represented a decline in the value of plan assets that the administrator should have sold or an increase in the value of assets that the administrator should have purchased.)

The ERISA breach-of-fiduciary-duty provision (§502(a)(2)) provides for suits to enforce plan administrators’ duties to properly manage and administer the plan and to invest plan assets to ensure that the benefits authorized by the plan are ultimately paid to plan participants. The plan administrator got the case dismissed in federal district court by arguing that the petitioner’s complaint was a claim for monetary relief and not a suit to enforce the administrator’s duties and was therefore not actionable under the equitable relief provisions of §502(a)(3) (LaRue v. DeWolff, Boberg & Assocs., Inc. (D.S.C. 2004)).

The Fourth Circuit, hearing the case on appeal, agreed with the district court, holding that §502(a)(2) concerns breaches of fiduciary duty that harm the entire plan, not individual participants in the plan (LaRue v. DeWolff, Boberg & Assocs., Inc., 450 F3d 570 (4th Cir. 2006)). The petitioner sought to have any recovery paid into his plan account, and the court was “skeptical” that the plaintiff’s individual interest could serve as a “legitimate proxy for the plan in its entirety” (450 F3d at 574).

The Supreme Court reversed, holding that although §502(a)(2) does not provide a remedy for individual injuries, it does authorize recovery by individual plan participants where an administrator’s breach of fiduciary duty has impaired the value of the assets in that individual’s account.

The majority opinion, by Justice Stevens, discussed the fact that defined-contribution plans now “dominate the retirement plan scene” (slip op. at 6). In the context of defined-benefit plans, a breach of fiduciary duty would not affect an individual’s entitlement to the benefit unless the breach created a risk of default by the entire plan. In a defined-contribution plan, on the other hand, fiduciary misconduct can reduce the amount that an individual plan participant will receive even though the plan itself is not threatened with insolvency (and even though other participants are unaffected).

The Court held that this “creates the kind of harms that concerned the draftsmen” of ERISA (slip op. at 7), vacated the Fourth Circuit’s decision, and remanded the case for further proceedings consistent with its holding.

Chief Justice Roberts concurred in the result but wrote his own opinion, in which he stated that this suit would have been better brought under ERISA §502(a)(1)(B), which allows an individual plan participant to “recover benefits due him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan” (Roberts, C.J., concurring, slip op. at 2). However, plan participants must exhaust various administrative remedies before they can sue under §502(a)(1)(B), and, the Chief Justice wrote, if the petitioner “may bring his claim under §502(a)(1)(B), it is not clear that he may do so under §502(a)(2) as well” (id.). The Chief Justice opined that the lower court, on remand, could consider the question of whether the petitioner could sue only under §502(a)(1)(B), even though that provision was not raised in any of the prior proceedings.

The Court’s decision may lead to a flood of breach-of-fiduciary-duty suits against plan administrators. It remains to be seen if the Chief Justice has provided a roadmap for plan administrators to defend against these suits.

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