Supreme Court Allows Individual ERISA Suits in Landmark Ruling

In a landmark ruling eagerly awaited by the retirement services community, the U.S. Supreme Court on Wednesday declared that defined contribution participants can bring fiduciary breach suits to recover individual damages.

In handing down the decision in LaRue v. DeWolff, justices declared that the continuing transition from defined benefit pensions to defined contribution programs made it appropriate to lift the prohibition against individual recoveries under 502(a)(2) imposed in a 1985 case. Justices David H. Souter, Ruth Bader Ginsburg, Stephen Breyer, and Samuel Alito joined with John Paul Stevens, who wrote Wednesday’s majority opinion.

“A fair contextual reading of (the Employee Retirement Income Security Act) makes it abundantly clear that its draftsmen 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,” the Supreme Court wrote in the 1985 case.

However, Stevens wrote that, the current retirement landscape with a strong weighting of 401(k) programs now made it necessary to rethink that legal approach: “Defined contribution plans dominate the retirement plan scene today.”

Stevens ruled: “For defined contribution plans, however, fiduciary misconduct need not threaten the entire plan’s solvency to reduce benefits below the amount that participants would otherwise receive. Whether a fiduciary breach diminishes plan assets payable to all participants or only to particular individuals, it creates the kind of harms that concerned (ERISA Section) 409’s draftsmen.”

Focusing only on potential planwide damages in the modern 401(k)-centric environment is “beside the point,’ Stevens contended.

There are also other ERISA implications, Stevens argued, including the all-important safe harbor provisions. “Most significant is 404(c), which exempts fiduciaries from liability for losses caused by participants’ exercise of control over assets in their individual accounts,’ Stevens declared. “This provision would serve no real purpose if, as respondents argue, fiduciaries never had any liability for losses in an individual account.’

A Separate View by Justice Thomas

In a separate opinion issued along with Justice Antonin Scalia, Justice Clarence Thomas argued that the majority was right that plaintiff James LaRue had an individual claim, but wrong in the way it extrapolated the meaning of ERISA.

“The plain text of 409(a), which uses the term “plan’ five times, leaves no doubt that 502(a)(2) authorizes recovery only for the plan,” Thomas argued. “Likewise, Congress’ repeated use of the word “any’ in 409(a) clarifies that the key factor is whether the alleged losses can be said to be losses “to the plan,’ not whether they are otherwise of a particular nature or kind.”

LaRue of Southlake, Texas sued his employer, DeWolff, Boberg & Associates Inc., to regain $150,000 that he charged was lost from his 401(k) account because the plan administrators twice disregarded his order to move funds to different investment options.

U.S. District Judge David C. Norton of the U.S. District Court for the District of South Carolina ruled against LaRue in 2005 and the 4th U.S. Circuit Court of Appeals agreed in June 2006, hearing arguments last fall (See High Court Ponders Scope of Fiduciary Breach Suits).

Wednesday’s ruling overturned the 4th Circuit decision and sent it back for additional proceedings. A recent ruling by another federal appellate court disagreed with the 4th Circuit’s holding (See Appellate Court Splits with Sister Court on 401(k) Breach Remedies).

According to an Associated Press news report, the Bush administration supported workers, contending that appeals court ruling barring LaRue’s lawsuit would leave 401(k) participants without a meaningful remedy from any federal, state or local court when plan administrators fail to live up to their duties.

On the other side, business groups supported LaRue’s employer, the news report said. They argued that ERISA is aimed at encouraging employers to set up pension plans, while guarding against administrative abuses involving the plan as a whole. The law doesn’t permit individual lawsuits like LaRue’s, the business groups said.

The ruling in LaRue v. DeWolff, 06-856, is located here.