Change in the Landscape: ERISA Fiduciary Claims in the Wake of LaRue
By: Dennis Rolstad and Scott M. Bloom1
Introduction
A new decision of the United States Supreme Court provides ERISA plan participants with a remedy for personal losses caused by plan fiduciaries. This represents a significant change in the liability landscape for plan fiduciaries, who now face the possibility of individual claims brought by plan participants seeking recovery of purely personal loss.
Previously, participants in ERISA-governed pension plans, such as 401(k) plans, could not individually seek damages but could only sue on behalf of the plan to recover damages incurred by the plan, rather than personal loss incurred by individual participants. In LaRue v. DeWolff, Boberg & Associates, the Supreme Court unanimously decided that individual participants in a 401(k) plan can bring actions against plan fiduciaries for losses incurred by an individual, rather than the plan as a whole.2 The LaRue decision may be anomaly, or it may signify the opening of a new area of litigation for plan fiduciaries.
In fact, within weeks of the LaRue decision, the United States Court of Appeals for the Seventh Circuit—which hears appeals from federal courts in Illinois and Indiana—followed the Supreme Court and allowed a class action to proceed against Baxter Corporation for individual losses caused by investments in the company’s employee stock ownership plan (“ESOP”). If this is a sign of things to come, fiduciaries may be facing claims in greater frequency and severity.
401(k) Plans and Fiduciary Liabilit
LaRue involved a dispute over losses in a 401(k) plan. ERISA recognizes two types of retirement plans, categorized as defined benefit plans and defined contribution plans3 . Today, most 401(k) plans are structured as defined contribution plans.
Retirement plans must have both an administrator and a fiduciary. A person (or an entity) is considered to be a “fiduciary” of a 401(k) plan if that person exercises control or authority over plan assets, exercises discretionary authority or control over the management of the plan, or has discretionary authority or responsibility in plan administration.4
Section 404 of ERISA imposes the following duties on fiduciaries:
1. The duty of loyalty to act in the best interests of the plan participants;
2. The duty of prudence, to act with the skill, care and diligence that a prudent person would use under the same or similar circumstances;
3. The duty to diversify plan investments;
4. Duty to comply with plan documents.
Section 409 of ERISA provides that any person who is a fiduciary “with respect to a plan,” and who breaches any fiduciary duty under ERISA, is personally liable “to make good to such plan any losses to the plan resulting from the breach.”
Section 502(a) of ERISA allows plan participants to bring an action against plan fiduciaries to recover damages for violations of Section 409. Section 502 provides three types of claims, each with its own remedy:
1. Section 502(a)(1) authorizes a participant or beneficiary to file an action to recover benefits due or enforce rights under a plan;
2. Section 502(a)(2) permits a beneficiary or fiduciary to file suit under Section 409 (discussed above) against fiduciaries of the plan;
3. Section 502(a)(3) allows individual participants to sue fiduciaries or parties in interest for individual relief of an equitable nature (i.e., claims that do not seek any damages).
Lawsuits alleging ERISA violations typically allege one of the three aforementioned basis for liability.
The Law Before LaRue
The LaRue decision is a significant departure from a 1985 decision of the Supreme Court5. In Russell, the Court held that ERISA did not authorize individual plan participants to recover “consequential” damages (i.e., damages beyond the loss of plan benefits). Russell involved claims by a plan participant arising out of delays in processing her claim. The Supreme Court rejected Russell’s claim to “consequential” damages, because ERISA provided a remedy for the plan but not for individual participants’ claims of loss.
The Court noted that the draftsmen of ERISA “were primarily concerned with the possible misuse of plan assets, and with remedies that would protect the entire plan, rather than with the rights of an individual beneficiary.” Id. at 142.
Following Russell, it was assumed that the only viable claims under Section 409 were claims involving damage to the entire plan, rather than damage to a single participant.
LaRue: Individual Losses Now Fair Game for Fiduciary Claims
LaRue filed suit against his plan fiduciaries after they allegedly failed to effectuate contribution instructions. LaRue alleged that due to the failure of plan fiduciaries to follow his instructions, his retirement account lost $150,000.
LaRue sought to be “made whole” or to recover “such other and further relief as the court deems just and proper.” LaRue sought relief under section 502(a)(3) of ERISA, based on an alleged violation of the fiduciaries’ obligations under section 409 of ERISA. The employer moved to dismiss the complaint on the grounds that individual damages are not authorized for so-called “502(a)(3)” claims. The District Court granted the employer’s motion.
On appeal, LaRue added a claim for damages under section 502(a)(2) of ERISA. The Fourth Circuit Court of Appeal, citing Russell, agreed that ERISA did not provide a remedy for individual 401k plan participants. Notably, the Court of Appeals considered claims made under sections 502(a)(2) and 502(a)(3), although the (a)(2) claims were not pled in the initial complaint.
The Supreme Court reversed the Fourth Circuit, noting that "defined contribution plans dominate the retirement plan scene today." “Russell’s emphasis on protecting the ‘entire plan’ from fiduciary misconduct reflects the former landscape of employee benefits. That landscape has changed.” Id.
The Court distinguished Russell because it involved a participant in a defined benefit plan. The Court observed that defined benefit plans are different than defined contribution plans, which involve individualized accounts. In a defined benefit plan, “[m]isconduct by the administrators of a defined benefit plan will not affect an individual’s entitlement to a defined benefit unless it creates or enhances the risk of default by the entire plan.” Id. However, with respect to defined contribution plans, “fiduciary misconduct need not threaten the solvency of the entire plan to reduce benefits below the amount that participants otherwise would receive.” Id.
Chief Justice Roberts and Justice Thomas agreed with the majority but issued concurring opinions. Taking issue with the majority’s observations about the shift towards defined contribution plans, Justice Thomas noted that his “reading of §§409 and 502(a)(2) is not contingent on trends in the pension plan market.” Id. at 1028. But Justice Thomas noted that “[t]he plain text of §409, which uses the term ‘plan’ five times, leaves no doubt that §502(a)(2) authorizes recovery only for the plan.” Id. Justice Thomas noted that the individual losses described in LaRue were losses to the plan, because the assets belong to the plan and are allocated to individual participants. Thus, individual loss remains, at its core, plan loss.
Aftermath of LaRue
Shortly after LaRue was decided by the Supreme Court, the U.S. Court of Appeals for the Seventh Circuit interpreted LaRue to allow claims brought by “the beneficiary of a defined-contribution account that suffers a loss, even though other participants are uninjured by the acts said to constitute a breach of fiduciary duty.” In Rogers v. Baxter International, Inc., the court adopted the holding in LaRue but appeared skeptical of the claim: “Plaintiffs maintain that defendant should not have allowed investment in Baxter’s stock at any time. That avoids the problem we have mentioned, but to recover on this theory plaintiffs must demonstrate that Baxter’s stock is always overpriced, and that defendants know it. That amounts to an assertion that pension fiduciaries have a duty to outsmart the stock market, a contention with little prospect of success.” Id. at 5.
As in the LaRue case, it remains to be seen whether plaintiffs will be able to prove their allegations at trial.
Conclusion
While it may be too early to tell if the LaRue decision will open the floodgates to a wave of ERISA breach of fiduciary litigation, numerous cases have already been pursued to recover for individual participant losses, and plan fiduciaries and their insurers must be prepared for such suits.
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1. Dennis G. Rolstad is a partner in
the Insurance Practice Group of Sedgwick, Detert, Moran
& Arnold's San Francisco office. He has extensive
experience representing insurers in ERISA maters and
other insuarnce litigation. Scott Bloom is special
counsel to the firm and practices in the areas of
directors and officers insurance and fiduciary liability
insurance. The views expressed in this article are those
of the authors, and should not be attributed to
Sedgwick, Detert, Moran & Arnold, LLP or its clients.
2. LaRue v. DeWolff, Boberg & Associates,
552 __U.S. __, 120 S. Ct. 1020 (2008).
3. Hughes Aircraft v. Jacobson, 525 U.S. 432, 4333
(1999).
4. 29 USCA section 1002(21)(a).
5. Massachusetts Mutual Life Insurance Co. v.
Russell, 473 U.S. 134 (1985) ("Russell"
).
6. LaRue, 126 S.Ct. at 1025.
7. Rogers v. Baxter International, Inc. Slip.
Op. (No. 06-3241).
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The article reprinted herein is the exclusive work of the authoring lawyer/law firm, and any legal information or opinions expressed therein are the sole responsibility of the author. Neither RLI nor any of its employees are giving any legal advice by publishing this article.
