Earlier this week, the United States Supreme Court issued its much-anticipated opinion in the case of LaRue v. DeWolff, Boberg & Associates, Inc., holding that ERISA allows an individual participant in a defined contribution plan such as a 401(k) plan to directly sue a fiduciary for a breach of fiduciary duty that harms the plan, even when the harm affects only that participant’s account. The case involved a 401(k) plan participant who directed the plan administrator (also the employer and plan sponsor) to change how his plan account was invested. The administrator allegedly did not carry out the directions, and the participant claimed that his interest in the plan was “depleted” by $150,000 as a result. The Fourth Circuit Court of Appeals (which includes North and South Carolina) held for the employer on the basis that ERISA provides remedies for the plan as a whole but not for individual participants.
The Supreme Court rejected reliance on an earlier case that considered remedies under a disability plan, where it indicated that recoveries for fiduciary breaches were permitted only to protect an “entire plan.” The Court distinguished the situation in LaRue based on the existence of individual accounts, which did not exist in disability and defined benefit plans. Recognizing that the “landscape has changed” and that “[d]efined contributions plans dominate the retirement plan scene today,” the Court reasoned that the “entire plan” concept was appropriate in the defined benefit context, but was “beside the point in the defined contribution context.” It further noted that if fiduciaries did not have potential liability for losses in individual accounts, it would render meaningless ERISA §404(c), which exempts fiduciaries from such liability when participants exercise control over investments of their individual accounts.
It is important to note that the decision results in remand to the Fourth Circuit, which must determine whether LaRue properly made the alleged investment directions and whether he was required to exhaust remedies provided under the plan before filing suit.
Unfortunately, fiduciaries sometimes make mistakes in carrying out participant directions, including failures to carry out investment directions, process salary deferral contribution elections, and process plan loan repayments. Often, fiduciaries voluntarily correct such mistakes (which may be necessary to avoid possible plan disqualification). Where corrections are not made, the LaRue decision may encourage participants to take legal action. With recent volatility in financial markets, the most significant losses in defined contribution plans are likely to occur when fiduciaries fail to promptly follow participants’ investment directions. All plan sponsors and fiduciaries should verify that appropriate procedures are in place to avoid investment mistakes. When alleged mistakes are subject to dispute, plan sponsors and fiduciaries should look to competent ERISA counsel to evaluate defense strategies that may be available in light of LaRue.