SCOTUS opinion could potentially create new flood of ERISA suits

Until the decision of the United States Supreme Court in LaRue v. DeWolff, Boberg & Associates, Inc., employee benefit plan participants who sued plan fiduciaries for investment losses in their retirement account faced significant legal hurdles to recovery. In LaRue, an opinion released February 20, 2008, the Court removed most of those hurdles, potentially opening the floodgate to new lawsuits. As fiduciaries of employee benefit plans are personally liable for losses to the plan, this decision represents a significant expansion of the liability faced by fiduciaries.

The fact scenario in LaRue was straightforward: LaRue’s employer offered a 401(k) plan to itsemployees. Plan participants could direct the investments in their individual accounts.According to the allegations, LaRue gave instructions to the plan fiduciary to make changes inthe investment of his individual account. For whatever reason, those instructions were notfollowed. As a result, La Rue’s account was allegedly worth $150,000 less than it would havebeen had his instructions been followed. LaRue sued the plan fiduciary for his investmentlosses.The Employee Retirement Income Security Act (“ERISA”) governs the enforcement of claimsinvolving employee benefit plans.

Since the U.S. Supreme Court’s decision in MassachusettsMutual Life Ins. v. Russell in 1985, a participant’s ability to recover for individual losses due toan alleged fiduciary breach has been significantly limited. In Russell, a plan participant receivedher benefits, but sued the plan fiduciary for damages allegedly resulting from a delay inprocessing her benefit claim. The Court ruled that while ERISA Section 502(a)(2) allowedrecovery for fiduciary breaches damaging the plan as a whole, it did not allow recovery fordamages to an individual participant.

After Russell, unless a disgruntled plan participant couldallege a class-action type of harm, the ability to recover for individual losses appeared severelylimited.In LaRue, however, the Court opened the door for individual participant lawsuits by focusing onthe type of retirement plans at issue: the plan in Russell was a defined benefit plan, and the planassets were not affected by the alleged breach about which the participant complained.

TheLaRue Court reasoned that with a 401(k) plan (a defined contribution plan), an individualparticipant’s account was a part of the plan’s assets, and therefore, investment losses to anindividual account affected the plan.