Editor’s Note: William Joseph Austin is a member of the Labor and Employment Section of Ward and Smith, P.A.
In the recent case of LaRue v. DeWolff, the United States Supreme Court held that an employer can be liable for financial loss to an individual employee’s 401(k) account in certain circumstances. This ruling may encourage more lawsuits by individual employees who participate in plans that provide this benefit.
The LaRue Decision
LaRue v. DeWolff involved employee rights under the Employee Retirement Income Security Act of 1974 ("ERISA"), which regulates retirement plans, health and disability plans, and other employee benefits ("ERISA Plans"). The employee in LaRue alleged that his former employer, the ERISA Plan sponsor, breached its fiduciary duty under ERISA. More specifically, the employee alleged that he told his employer to make certain changes to the investments in his individual account, but the employer never carried out those instructions. That failure allegedly resulted in a financial loss to the employee’s account in the amount of $150,000. The Supreme Court held that, under these circumstances, the employer could be held responsible for replenishing the employee’s account to the extent of the loss resulting from the employer’s omission.
The ERISA Plan in the LaRue case was a "defined contribution plan," or a pension plan which provides for individual bookkeeping accounts for participants and benefits based on the amount contributed to the account subject to subsequent earnings, losses, and forfeitures. The Supreme Court held that for 401(k) and other defined contribution plans, the employer’s breach of fiduciary duty could be remedied under ERISA even if the harm is limited to assets in an individual account and not to the ERISA Plan as a whole. Assets in the employee’s individual account are ERISA Plan assets.
Did This Overrule Earlier Cases?
LaRue did not overrule the Court’s previous holding in Massachusetts Mutual Life Insurance Company v. Russell which held that for a breach of an employer’s fiduciary duties under ERISA to be actionable, recovery would have to benefit the ERISA Plan as a whole. The Supreme Court in LaRue explained that the Russell holding involved a different type of ERISA Plan. The plaintiff in Russell recovered benefits under a disability plan, which the Court in LaRue compared to a "defined benefit plan." Additional explanation will be helpful.
The phrase "defined benefit plan" usually refers to a pension plan under ERISA that promises the participant a specific monthly benefit at retirement, sometimes in terms of an exact dollar amount. Technically, in the ERISA lexicon, a disability plan is a "welfare benefit plan" which provides disability benefits in an exact dollar amount at the end of the claim process. In a sense, then, disability benefits closely resemble a defined benefit. Terminology aside, the plaintiff in Russell received her disability benefits, but sued to recover consequential damages suffered by her and allegedly resulting from an extended delay in processing her claim for benefits. During the delay, her husband cashed out retirement savings to make ends meet. The Court held that there could be no recovery of losses resulting from the cashing out of the separate retirement savings because the recovery would not benefit the ERISA plan.
In LaRue, the Supreme Court held that ERISA still does not provide a remedy for individual injuries and losses distinct from injury to ERISA Plan assets, but does authorize recovery for fiduciary breaches that impair the value of the ERISA Plan assets even if the losses are only to those in a participant’s individual account. LaRue does not overrule Russell as it relates to damages that are purely personal to the participant. In short, LaRue and Russell together hold that ERISA protects a participant’s individual assets in the ERISA Plan, not the participant’s assets or interests outside of the ERISA Plan. Still, LaRue marks a departure from a trend that was restricting remedies against any fiduciary under ERISA.
Even in a bull market, LaRue would be a significant development. Times being what they are, it may be the beginning of a revival of what had become more dormant ERISA litigation against employers, with employees suing employers on different theories related to losses in their 401(k) accounts, claiming that the losses arose from some act or failure to act on the part of the employer. How far this potential new liability will extend, particularly in ERISA Plans that permit participants to direct the investment of their contributions, is an open question. Employers who offer ERISA Plans to employees now must pay more careful attention to the operation and administration of such Plans.
© 2008, Ward and Smith, P.A.
Ward and Smith, P.A. provides a multi-specialty approach to the representation of technology companies and their officers, directors, employees, and investors. William Joseph Austin, Jr. practices in the Labor and Employment Section, where he concentrates his practice in workers’ compensation and employee benefits. Comments or questions may be sent to email@example.com
This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.