In a closely watched decision, the US Supreme Court held this week that Section 502(a)(2) of the Employee Retirement Income Security Act (ERISA), the federal law that protects pensions and other employee benefits, affords a remedy to an individual participant in a defined contribution plan who suffered investment losses to his plan account due to a breach by the plan’s fiduciaries.  LaRue v. DeWolff Boberg & Assocs. Inc., 2008 WL 440748 (February 20, 2008). 
 
Section 502(a)(2) of ERISA permits a plan participant to bring a lawsuit for appropriate relief under Section 409.  That section, in turn, imposes personal liability on plan fiduciaries for breaches that result in “losses to the plan.” 
 
At issue in this case was whether a loss to a participant’s individual account in a defined contribution plan is a loss “to the plan” or only a loss to the individual. 
 
LaRue was a participant in a 401(k) plan sponsored by his former employer.  The plan permitted participants to direct the investment of their contributions.  LaRue alleged that in 2001 and 2002 he directed his employer to make certain changes to the investments in his plan account but those directions were never carried out, resulting in a loss of $150,000 to his account. 
 
LaRue filed a lawsuit against his former employer claiming it breached its fiduciary duties by failing to follow his investment directions and sought reimbursement of the $150,000 loss.  The US District Court for the District of South Carolina held that LaRue was not entitled to relief under ERISA. 
 
The US Court of Appeals for the Fourth Circuit affirmed, holding that Section 502(a)(2) does not allow a participant to sue for losses to his individual account because, under that section, recovery must inure to the benefit of the plan as a whole, not to an individual participant.
 
Reversing the Fourth Circuit, the Supreme Court, in an opinion written by Justice John Paul Stevens, held that “although § 502(a)(2) does not provide a remedy for individual injuries distinct from plan injuries, that provision does authorize recovery of fiduciary breaches that impair the value of plan assets in a participant’s individual account.” 
 
Focusing on the nature of defined contribution plans, which provide an individual account to each participant with benefits based on the amount in the account at retirement, and now “dominate the retirement plan scene,” the court reasoned that whether a fiduciary breach diminishes plan assets payable to all participants or only to a particular individual account, such a breach creates the kind of harm that concerned the draftsmen of ERISA’s fiduciary breach provisions. 
 
Although the majority opinion handed down a victory for LaRue and all 401(k) plan participants, a concurring opinion written by Chief Justice John Roberts may have provided a silver lining for employers and plan administrators. 
 
Roberts asserted that LaRue’s claim was really a claim for benefits and, as such, arguably could only be brought under a different provision of ERISA, Section 502(a)(1)(B), and not under Section 502(a)(2).  This would raise the possibility that LaRue, and others like him, would first have to exhaust their administrative remedies before filing suit in court.  And, once in court, the administrator’s decision would be reviewed only for an abuse of discretion. 
 
Roberts made clear, however, that whether a participant who has a claim under Section 502(a)(1)(B) may also bring a claim under Section 502(a)(2) was not a “settled question,” adding that “other courts in other cases remain free to consider what we have not – what effect the availability of relief under § 502(a)(1)(B) may have on a plan participant’s ability to proceed under § 502(a)(2).” 
 
While the Supreme Court’s decision will likely lead to an increase in lawsuits by participants who have suffered a loss to their individual account, Robert’s concurrence also provides a ray of hope to employers by opening the door not only to a possible administrative exhaustion defense, but also to a highly deferential standard of review.

Gretchen A. Dixon
dixon.gretchen@arentfox.com
202.775.5772

Carol Connor Cohen
cohen.carol@arentfox.com
202.857.6054

Caroline T. English
english.caroline@arentfox.com
202.857.6178

Nancy S. Heermans
heermans.nancy@arentfox.com
202.775.5722