Supreme Court: Individual Participants Can Sue for Breaches of Fiduciary Duty in 401(k) Accounts.

Last week, the Supreme Court issued a much anticipated decision involving the right of an individual benefit plan participant (i.e., an employee) to sue the plan administrator (i.e., the plaintiff’s employer) for breaches of fiduciary duty involving the participant’s individual defined contribution plan – (i.e., 401(k) account). LaRue v. DeWolff, Boberg & Associates, Inc., No. 06-856 (2/20/08). In that case, the plaintiff employee alleged that the failure of the employer to follow the plaintiff’s investment instructions “depleted” (or caused a loss in) his 401(k) account of approximately $150,000 and that this failure constituted a breach of fiduciary duty under ERISA. The Supreme Court agreed that ERISA would govern the plaintiff’s claim and could provide him with a remedy if he were to ultimately prevail at trial.

In Massachusetts Mutual Life Ins. Co. v. Russell, 473 U.S. 134 (1985), the Court had previously indicated that § 502(a)(2) of ERISA does not provide a remedy for individual injuries apart from injuries to the benefit plan, although the statute authorized recovery for breaches of fiduciary duties which impair the value of plan assets in a participant’s individual account. However, the Russell case involved a disability plan -- defined benefit plan – which was typical at the time – and LaRue raised questions about a defined contribution plan. The Russell plaintiff also eventually received her full contractual benefits under the benefit plan and sought through her lawsuit only consequential damages for the delay in processing her claim. When faced with a defined benefit plan, the participants are promised a fixed benefit. Remedying any breach of fiduciary duty involving a defined benefit plan will not affect an individual’s entitlement to the fixed benefit since the remedy to the plan will benefit all participants equally. However, in a defined contribution plan, breaches of fiduciary duties could reduce an individual’s benefits without threatening the solvency of the entire plan. As observed by the Court:

“Russell’s emphasis on protecting the “entire plan” from fiduciary misconduct reflects the former landscape of employee benefit plans. That landscape has changed. Defined contribution plans dominate the retirement plan scene today. In contrast, when ERISA was enacted, and when Russell was decided, ‘the [defined benefit] plan was the norm of American pension practice.’ . . . Unlike the defined contribution plan in this case, the disability plan at issue in Russell did not have individual accounts; it paid a fixed benefit based on a percentage of the employee’s salary. “

“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 §409. Consequently, our references to the “entire plan” in Russell, which accurately reflect the operation of §409 in the defined benefit context, are beside the point in the defined contribution context.”

“We therefore hold that although §502(a)(2) does not provide a remedy for individual injuries distinct from plan injuries, that provision does authorize recovery for fiduciary breaches that impair the value of plan assets in a participant’s individual account.”

Insomniacs may read the decision in full at: http://www.supremecourtus.gov/opinions/07pdf/06-856.pdf.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.