Arecent Supreme Court decision has significantly altered who can and cannot
bring claims against ERISA (the Employee Retirement Income Security Act
of 1974) plan fiduciaries. ERISA was enacted
to protect the interests of employee benefit
plan participants and their beneficiaries.
The new ruling says that individual plan
participants may sue an ERISA plan and its
trustees for breach of fiduciary duties that
impair the value of plan assets in a participant’s individual account. Thus, it is much
easier for individual participants in 401(k)
plans to bring lawsuits against their employers and other plan fiduciaries for losses to
their accounts arising from alleged breaches
of fiduciary duty.
“This ruling could have a significant impact
on the number of claims filed against ERISA
plan fiduciaries, and it likely will make fiduciary insurance more costly,” says Al Lucas, the
head of the Columbus litigation department
at Calfee, Halter & Griswold LLP.
Smart Business spoke with Lucas about
the case that brought this on and what companies can do to protect themselves.
Why did the Supreme Court make this ruling?
On Feb. 20, 2008, the U.S. Supreme Court
unanimously issued a decision in LaRue v.
DeWolff, Boberg & Associates Inc. that overturned an earlier decision by the 4th Circuit
Court of Appeals. The Supreme Court decision says that individual participants do have
the right to sue and recover losses to their
individual accounts in a defined contribution
plan. The plaintiff in the LaRue case sued his
former employer, who was the sponsor of a
section 401(k) plan in which he was a participant. The plaintiff alleged that he had directed his employer to make certain changes to
the investments in his account under the
plan, but that his employer never carried out
those directions. He claimed that this omission depleted his interest in the plan by
approximately $150,000 and that it was a
breach of fiduciary duty under ERISA.
The U.S. District Court granted the employer’s motion to dismiss, and the 4th Circuit
upheld it. The 4th Circuit cited the 1985 U.S.
Supreme Court Massachusetts Mutual Life
Insurance Company v. Russell, which held
that relief for a breach of fiduciary duty claim
could only be granted for an entire plan, not
for individual participants under a plan. In
LaRue, the Supreme Court limited its holding
in Russell to being applicable only to defined
benefit plans in which participants do not
maintain separate accounts within the plan.
The Supreme Court stated that when ERISA
was enacted and when Russell was decided,
the defined benefit plan was the norm of
American pension practice, while defined
contribution plans dominate today’s retirement plans.
In light of these circumstances, the court
held that ERISA does authorize recovery for
fiduciary breaches that impair the value of
plan assets in a participant’s individual
account in a defined contribution plan.
What has been the fallout from this decision?
Prior to LaRue, claims against ERISA plans
and their fiduciaries alleging a breach of the
duty of care could only be brought on by or
on behalf of the plan. Now, a plan participant
has legal standing to bring fiduciary breach
claims where there is alleged damage to the
participant’s individual account balance.
Now that participants have the right to sue
for damages to individual account balances, a greater number of claims will undoubtedly
be filed against ERISA plans and their fiduci-aries. This is particularly true in the current
economic climate, which is marked by stock
market declines and decreases in the value of
plan assets. ERISA plans and their sponsors
should also expect to see an increase in the
cost of fiduciary insurance. As future fiduciary breach claims are filed, insurers will
increase premiums to offset the cost of
defending against such claims.
How can a company protect itself from these
As the old saying goes, an ounce of prevention is worth a pound of cure. Now is
the time for ERISA plan sponsors to reevaluate their plan administrative process
to reduce the likelihood of future claims.
The LaRue case involved a claim that plan
fiduciaries ignored the participant’s directions regarding the management of the participant’s individual account. Plan administrators and fiduciaries should make sure
that proper systems are in place to accurately record and timely implement participant directions regarding an individual
Plan administrators and fiduciaries
should also make sure that their ERISA
plan is offering appropriate investments in
the current economic climate and make
sure that fund managers are performing at
or above market standards. Plan administrators and fiduciaries should also review
the level of fiduciary insurance to make
sure that there is adequate coverage to protect against future claims.
In addition, plan administrators may
want to reconsider those employees who
are serving as plan fiduciaries. As the number of ERISA claims increases, the amount
of time fiduciaries spend on these claims
will also increase, thereby taking away
from their other duties. Adopting these
measures will greatly reduce the likelihood
of claims by individuals against ERISA
plans and their fiduciaries, and will help
companies manage claims more efficiently
in the future.
AL LUCAS is the head of the Columbus litigation department at Calfee, Halter & Griswold LLP. Reach him at [email protected] or