Supreme Court Holds that 401(k) Participants May Sue for Breach of Fiduciary Duty to Recover Losses in Individual Accounts

In a closely watched ERISA case, the Supreme Court has clarified the right of employees to sue plan fiduciaries for mismanaging their individual 401(k) accounts.  There had been some division in the lower courts as to whether the ERISA remedies sections of 29 U.S.C. §1132(a)(2) (ERISA §502(a)(2)) and 29 U.S.C. § 1109 (ERISA §409) allowed recovery for breaches that affected only individual accounts and did not affect “the plan as a whole.”  The Supreme Court in LaRue v. DeWolff, Boberg & Associates, Inc, No. 06-856 (issued February 20, 2008), has now settled that issue and held that ERISA authorizes a plan participant to recover for fiduciary breaches even if those breaches affect only individual accounts.

While employed at the management consulting firm DeWolff, Boberg & Associates, James LaRue participated in the firm’s ERISA-regulated 401(k) retirement savings plan.  In June 2004, LaRue filed suit against DeWolff and the plan, alleging breach of fiduciary duty.  According to LaRue’s complaint, in 2001 and 2002 he directed DeWolff to make certain changes as to how the money in his account was invested, but DeWolff failed to follow his direction.  LaRue further alleged that this failure caused his account to suffer losses of around $150,000.  Rather than seek money damages, which would be prohibited under ERISA, LaRue requested “make-whole or equitable relief” under ERISA §502(a)(3).  That section permits a participant to bring a civil action for “appropriate equitable relief” to redress violations of a plan, to enforce ERISA’s provisions, or to enforce the plan’s terms.  DeWolff and the plan moved for judgment on the pleadings, arguing that the complaint was not authorized by ERISA because, essentially, LaRue was making a claim for money damages.  The district court granted the motion, finding that to hold for LaRue, “the court would have to transfer money from defendants to plaintiff,” whereas the statute permits only injunctive relief. 

On appeal, LaRue made a broader argument. In addition to raising §502(a)(3), LaRue also argued that his suit was proper under §502(a)(2), which permits a participant to bring a civil action “for appropriate relief” for breach of fiduciary duty.

The Fourth Circuit rejected both arguments and affirmed the district court.  Although it found that the new §502(a)(2) argument had been waived, the Fourth Circuit nonetheless addressed the argument and held that under the Supreme Court’s precedent in Mass Mutual Life Insurance Co. v. Russell, 473 U.S. 134 (1985), recovery under §502(a)(2) must inure to the benefit of the plan as a whole, not a particular person who participated in the plan.  As to §502(a)(3), the Fourth Circuit agreed with the district court that LaRue sought money damages, not equitable relief.

The Supreme Court reversed.  The Court held that it did not need to reach the issue of §502(a)(3) because its interpretation of §502(a)(2) was dispositive in LaRue’s favor.  Writing for the Court, Justice Stevens—who wrote the decision in Russell—distinguished Russell on the ground that the “landscape” of employee benefit plans has changed.  The Court found that a breach of fiduciary duty that harms a single participant “creates the kind of harm that concerned the draftsmen of §409.”  To that end, the Court held that §502(a)(2) authorizes “recovery for fiduciary breaches that impair the value of plan assets in a participant’s individual account.” 

Although LaRue leaves the reach of §502(a)(3) for another day, it clarifies that participants can bring claims for losses caused to individual accounts and need not make a demand for plan-wide relief.  And while LaRue highlights that subsection (a)(2) only encompasses “appropriate claims for ‘lost profits,’” it leaves to the lower courts to determine the type of “lost profits” claims that may be recovered.  Look for more ERISA litigation in the future.