Supreme Court Ruling Enables §401(k) Plan Participants to Sue for Losses in Their Accounts Caused by Administrative Errors

On February 20, 2008, the U.S. Supreme Court held that ERISA allows a defined contribution (DC) plan participant to sue for losses incurred as a result of the plan administrator’s mishandling of his or her account, even if the plaintiff was the only person harmed by the breach. In LaRue v. DeWolff Boberg & Associates, Inc.,¹ Mr. LaRue claimed that the plan administrator breached its fiduciary duty by failing to properly carry out his investment direction, thereby causing a loss of $150,000 in his account.

BACKGROUND AND THE DECISION IN BRIEF

The Court of Appeals held that LaRue could not sue, because the Supreme Court had held in 1985 that a fiduciary breach suit could only be brought to recover for losses inflicted on the plan as a whole, not for actions that only affected one participant. All nine Supreme Court justices held that an individual participant in a DC plan could sue even if he or she was the only one harmed by the alleged misconduct.

The majority opinion holds that the 1985 decision — Massachusetts Mutual Life Ins. Co. v. Russell (473 US 134)² — was analyzed in the context of defined benefit-type plans, but that its reasoning is not appropriate for defined contribution plans. Accordingly, it held, redress for breach of fiduciary responsibility under ERISA Section 409 is available, in the case of a DC plan, for a loss that is limited even to one participant. The case was sent back to the trial court, where Mr. LaRue will have a chance to prove that the plan administrator violated its fiduciary duty when it failed to honor his investment instructions.

IMPLICATIONS FOR SPONSORS OF DC PLANS

The LaRue decision is likely to lead to more litigation against DC plan sponsors and administrators, even when plans are generally well managed, if individuals believe that losses in their accounts can be attributed to specific administrative errors. Given current investment uncertainty, this ratchets up the stakes for plan sponsors. An independent assessment of the administrative, compliance and investment-related operations of their §401(k) plans can uncover possible weaknesses so that they can be fixed before they ripen into participant claims.

As with all issues involving the interpretation or application of laws, plan sponsors should rely on their legal counsel for authoritative advice on U.S. Supreme Court’s decision in LaRue v. DeWolff. Sibson Consulting can be retained to work with DC plan sponsors and their attorneys to complete an assessment and an appropriate process to support ongoing fiduciary obligations.

1	To see the decision, No. 06-856, U.S. Supreme Court (February 20, 2008), click here. (To return to the Compliance Alert text, click here.)
2	The Russell case involved a group disability plan, which the Court treated as conceptually the same, for this purpose, as a defined benefit pension plan. (To return to the Compliance Alert text, click here.)

Compliance Alert, Sibson Consulting’s periodic electronic newsletter summarizing important developments affecting benefit plan compliance, is for informational purposes only. It is not intended to provide authoritative guidance. On all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for legal advice.

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