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 claims?
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 account.
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 firstname.lastname@example.org or (614) 621-7002.