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Supreme Court Rules on ERISA and 401(k) Liability

Yesterday, the U.S Supreme Court handed down an important decision regarding the liability of ERISA plans, and in particular, employer-sponsored 401(k) plans, to individual plan participants.

In LaRue v. DeWolff, Boberg and Associates, Inc., the plaintiff had sued his employer-sponsored 401(k) for breach of fiduciary duty under ERISA § 502(a)(2) after, he alleged, the plan failed to implement his investment directions, resulting in a loss of about $150,000 to his account. The Fourth Circuit affirmed the District Court’s dismissal on the pleadings, holding that ERISA provides such remedies only for entire plans, and not for individual participants.

The Supreme Court reversed, holding that its reasoning in Massachussetts Mutual Life Ins. Co. v. Russell, 473 U.S. 134 (1985) which limited recoveries under § 502(a)(2) to “the plan as a whole” nonetheless did not bar an fiduciary breach claim by the plaintiff in the present case. Interestingly, the majority opinion by Justice Stevens pointed to particular features of defined contribution plans such as 401(k) plans, as opposed to the defined benefit plan at issue in Russell. Justice Steven’s opinion noted that “Russell’s emphasis on protecting the “entire plan” from fiduciary misconduct reflects the former landscape of employee benefit plans. That landscape has changed.” The unanimous court ruled that the plaintiff could proceed with his ¶ 502(a)(2) fiduciary breach claim. (Chief Justice Roberts, joined by Justice Kennedy, concurred in the judgment, noting that he questioned whether the claim was properly brought under § 502(a)(2), rather than the non-fiduciary provisions of § 502(a)(1)(B). Justices Thomas, joined by Justice Scalia, filed a separate concurrence, noting, characteristically, a reliance on the “plain text” of 502(a)(2), and that the decision should not be “contingent on trends in the pension plan market” nor “the ostensible “concerns” of ERISA’s drafters.”

So what does this mean? The short of it is that ERISA plan fiduciaries are now, unequivocally, subject to claims by individual participants based on alleged fiduciary breaches in handling an individual participant’s account. This is a walk-down from what had been understood to be a fair degree of protection under ERISA, at least for ERISA-based fiduciary claims, from lawsuit based on losses in individual participant accounts, as opposed to claims for damages by plan fiduciaries to the “plan as a whole.”

Full post as published by OverRegd - Securities Regulation and Litigation Blog on February 21, 2008 (boomark / email).