The Supreme Court of the United States recently issued a decision in the case of Larue v. DeWolff, Boberg & Associates that could have a drastic impact on fiduciaries of qualified retirement plans subject to the Employee Retirement Income Security Act (ERISA).
Plaintiff, James Larue, a former employee of the management consulting firm of DeWolff, Boberg & Associates, brought suit against his former employer seeking lost appreciation in his 401(k) defined contribution pension account. The plan in which Larue was a participant allowed participants to select from a variety of investment options in which to invest their individual account balances. Larue alleged that the plan administrators failed to follow his investment instructions which “depleted” his account balance by approximately $150,000. Larue asserted that the failure by the administrators to implement his investment strategy amounted to a breach of fiduciary duty under ERISA and sought the alleged damages.
The lower trial court and appellate court both ruled in favor of the employer holding that ERISA only provides remedies to entire plans harmed by fiduciary misconduct, not individual participants. However, on February 20, 2008, the Supreme Court, by a unanimous decision, held that ERISA does “authorize recovery for fiduciary breaches that impair the value of plan assets in a participant’s individual account.” The result in Larue is a bit of a surprise to many involved with ERISA plans, as the Court held in the 1985 case of Massachusetts Mut. Life Ins. Co. v. Russell that the relevant provision of ERISA provides a remedy only for an entire plan, not for individuals covered by the plan. However, the Court drew a distinction between Russell and Larue because Russell involved a defined benefit plan, whereas Larue involved a defined
A defined benefit plan generally promises the participant a fixed level of retirement income based on the employee’s number of years of service and compensation and is not based on an individual account balance. In contrast, a defined contribution plan promises the participant the value of an individual account at retirement based upon the contributions made and the investment performance of the contributions. As a result, a participant in a defined benefit plan is not likely to be harmed by fiduciary misconduct unless the misconduct harms the entire plan. “For defined contribution plans, however, fiduciary misconduct need not threaten the solvency of the entire plan to reduce benefits below the amount that participants would otherwise receive. Whether a fiduciary breach diminishes plan assets payable to all participants and beneficiaries, or only to persons tied to particular individual accounts, it creates the kind of harms that
concerned the draftsmen of [ERISA].”
Despite the holding, the Court did not find in favor of Larue outright. Rather, the Court remanded the case for further determinations by the lower court. In fact, the Court added a qualification to the opinion in footnote 3 by stating: “For example, we do not decide whether petitioner made the alleged investment directions in accordance with the requirements specified by the Plan, whether he was required to exhaust remedies set forth in the Plan before seeking relief in federal court pursuant to ERISA, or whether he asserted his rights in a timely fashion.” As a result of Larue, it is more important than ever to clearly articulate the requirements of a plan participant with regard to directing his or her account investments and require strict adherence to such requirements. Also, plan administrators should maintain a thorough procedure to ensure that all participants’ investment directions are implemented as requested.