Supreme Court allows 401(k) participant to sue employer-sponsor for losses

The Supreme Court handed a stunning victory to employees when it unanimously ruled in LaRue v. DeWolff, Boberg & Assoc., Inc., that participants in defined contribution plans like 401(k)s can sue under the Employee Retirement Income Security Act of 1974 (ERISA) for losses to their retirement savings accounts arising from breaches of fiduciary duties. The Court’s decision is a departure from lower court rulings that have steadfastly held that a plan participant can only sue on behalf of “the plan” and has no right to recover for losses sustained to an individual’s particular account.

Background

A participant in a defined contribution pension plan (a 401(k) plan) filed suit in 2004 against his former employer and the ERISA-regulated 401(k) retirement plan that the employer administered and in which he participated. The participant alleged that in 2001 and 2002 he directed his employer to make specific changes to the investments in his individual account, but that his employer never carried out his directions and as a result, the participant’s plan sustained a $150,000 loss.

The participant argued that his employer’s failure to follow his instructions amounted to a breach of fiduciary duty and he sought “make-whole” or equitable relief under ERISA §502(a)(3). The district court and the Fourth Circuit Court of Appeals sided with the employer.

Supreme Court reverses

The Supreme Court reversed the lower courts, holding that a 401(k) plan participant’s claim for losses sustained to an individual account as a result of a breach of fiduciary duties is actionable under ERISA §502(a)(2). According to the High Court, while ERISA §502(a)(2) does not provide a remedy for individual injuries distinct from plan injuries, it does permit suits for fiduciary breaches under ERISA §409 and that impair the value of plan assets in a participant’s individual account. ERISA §409 imposes statutory duties of proper management, administration and investment of plan assets. The court determined that the misconduct by the participant’s employer fell within this category.

Wiggle room still left for employers?

Although concurring with the majority, Chief Justice John Roberts signaled that “it is not at all clear that” §502(a)(2) authorizes recovery in cases such as this. Roberts suggested that participant’s action more properly lied under §502(a)(1)(B) of ERISA, which allows a plan participant or beneficiary “to recovery benefits due to 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.” He continued, “I see nothing in today’s opinion precluding the lower courts on remand, if they determine that the argument is properly before them, from considering the contention that [the participant’s] claim may proceed only under §502(a)(1)(B).” Cases brought under §502(a)(1)(B), however, may be harder for a plan participant to win.