Like almost 70 million other Americans, James LaRue elected to save money for retirement through his employer’s 401(k) plan. When administrative errors reduced his account balance by nearly $150,000, Mr. LaRue sued his employer in federal court under ERISA to recover that amount. Initially, he lost. In a decision handed down on February 20, 2008, however, the United States Supreme Court resurrected his claim, in an apparent victory for Mr. LaRue and similarly situated 401(k) plan participants. LaRue v. DeWolff, Boberg & Associates, Inc.) Unfortunately, the Supreme Court’s decision raises more questions than it resolves.
Mr. LaRue alleged that his employer, DeWolff, Boberg & Associates, failed to properly carry out investment changes that LaRue had directed in his 401(k) plan account. He filed suit against the employer (presumably because it was designated as the plan’s administrator in the plan document, and thus was an ERISA “fiduciary”) to recover the amount that his account lost (or that it failed to earn) as a result of the employer’s alleged mismanagement. Before he was allowed to proceed with his claim, however, his employer requested, and the district court granted, a dismissal of his suit. According to the court, even if Mr. LaRue could prove that his employer mismanaged his account, ERISA gave him no remedy.
To make any sense of the district court’s ruling, one must understand the statutory parameters under which participants like Mr. LaRue may bring suit under ERISA. Participants in ERISA plans have essentially three avenues of relief available to them. They can sue to recover benefits due to them under the terms of their plan, or to enforce their rights under the plan, by invoking Section 502(a)(1)(B) of ERISA. They also can sue under Sections 502(a)(2) and 409 of ERISA to recover “losses to the plan” caused by a plan fiduciary’s violation of his or her duties. Finally, participants may bring suit under Section 502(a)(3) of ERISA to recover “other appropriate equitable relief.”
The courts have developed elaborate and distinct rules that apply to each of these theories of recovery. For instance, to succeed on a claim for benefits under Section 502(a)(1)(B), participants generally must first exhaust their rights to administrative appeals under the terms of the plan, and then must show that the plan administrator’s actions in denying their benefit claims were arbitrary and capricious. Section 502(a)(2) has been interpreted as providing relief only when a fiduciary breach causes damage to a plan as a whole, rather than to individuals. And the Supreme Court has very narrowly construed the term “other equitable relief” in Section 502(a)(3) to preclude most forms of money damages.
In this case, Mr. LaRue first characterized his claim as one for breach of fiduciary duty under Section 502(a)(3). The district court rejected that theory, and Mr. LaRue appealed. Perhaps recognizing that this approach was unlikely to succeed under the Supreme Court’s prior rulings, he argued for the first time on appeal that he also meant to assert a claim under Section 502(a)(2) of ERISA. The United States Court of Appeals for the Fourth Circuit considered and rejected both claims. The appellate court first held that the damages Mr. LaRue sought to recover were not “equitable relief” within the meaning of Section 502(a)(3). It then concluded that he could not recover under Section 502(a)(2) because the relief he sought would not go to “the plan as a whole,” but only to his individual account under the plan. Thus, according to the lower courts, even if Mr. LaRue could prove that his employer violated its fiduciary duties and that this violation resulted in a $150,000 loss to his plan account, the law gave him no remedy.
Supreme Court Allows 502(a)(2) Suits to Recover Individual Losses
When it agreed to hear Mr. LaRue’s appeal, the Supreme Court asked the parties to present arguments on both the Section 502(a)(2) and 502(a)(3) issues. Had the Court actually ruled on both issues, LaRue truly would have been a monumental decision. In the end, however, the Supreme Court held that the Fourth Circuit Court of Appeals placed constraints on Section 502(a)(2) that are not justified either by the text of ERISA itself or the Court’s prior rulings. Reversing the lower court’s ruling on that claim, the Supreme Court remanded Mr. LaRue’s lawsuit back to the district court so that he may proceed with his claim under that Section. The Court found it unnecessary to determine whether the kind of relief that Mr. LaRue sought also may be awarded under Section 502(a)(3). Thus, that piece of ERISA jurisprudence remains in disarray.
Writing for a majority that included five of the nine justices, Justice Stevens concluded that whether a fiduciary breach affects the accounts of all participants or only a single individual, Section 502(a)(2) authorizes relief for actions that impair the value of plan assets. (Justices Thomas and Scalia joined in a concurring opinion that even more forcefully reached this conclusion.) Justice Stevens distinguished a prior ruling from the Court that denied Section 502(a)(2) relief to a defined benefit plan participant – a decision on which the Fourth Circuit had relied in holding that relief must go to the “entire plan,” rather than a single participant – as inapplicable in the context of defined contribution arrangements like Mr. LaRue’s 401(k) plan.
The “entire plan” language … speaks to the impact of [ERISA] on plans that pay defined benefits. Misconduct by the administrators of a defined benefit plan will not affect an individual’s entitlement to a defined benefit unless it creates or enhances the risk of default by the entire plan…. For defined contribution plans, however, fiduciary misconduct need not threaten the solvency of the entire plan to reduce benefits below the amount that participants would otherwise receive.
The Supreme Court therefore concluded that individual participants like Mr. LaRue may sue under Section 502(a)(2) to recover losses – including lost profits – to their individual plan accounts.
Chief Justice Roberts Muddies the Waters
Seven of the nine justices agreed that Section 502(a)(2) of ERISA authorizes participants like Mr. LaRue to sue. Two others, however, weren’t so sure. In a concurring opinion joined by Justice Kennedy, Chief Justice Roberts threw cold water on what was otherwise an unqualified victory for plan participants. Although these two justices agreed that the Fourth Circuit erred in dismissing Mr. LaRue’s lawsuit, they suggested that his claim should have been brought under Section 502(a)(1)(B) as a claim for benefits, rather than under Section 502(a)(2) for breach of fiduciary duty.
The Roberts concurrence may seem to be just another technical but meaningless detour off of ERISA’s long and winding remedial road. It is not. If, as the Chief Justice suggests, claims like Mr. LaRue’s are more properly characterized as benefit claims, then participants will have two additional hurdles to jump – and plan fiduciaries two additional defenses to raise – before such claims can succeed.
It is well settled that participants who sue to recover benefits due to them under Section 502(a)(1)(B) must first have their benefit claims denied by the appropriate plan fiduciaries, and then must exhaust all of their administrative rights to appeal those denials under the plan’s claims and appeals procedures. Only after they exhaust these administrative remedies may such claims be pursued in court. And even then, if the plan gives the fiduciaries the discretion to interpret the plan’s terms, federal courts may overturn benefit denials only if the fiduciaries’ decisions were arbitrary and capricious. Thus, 502(a)(1)(B) claims generally place a greater burden on participants than claims under Section 502(a)(2).
Regardless of the merits of the Roberts concurrence, it will certainly be cited by defendants in future litigation in an effort to recharacterize fiduciary breach claims as claims for benefits. It is unclear, however, whether such a characterization makes any sense. For example, if a claim like Mr. LaRue’s for lost earnings must be brought as a claim for benefits under Section 502(a)(1)(B), must the participant request a distribution from the plan of a particular amount, have that request denied, appeal and have his appeal denied, before he may file a lawsuit? What if the participant is not entitled to a distribution from the plan at the time he or she becomes aware of the injury to his or her account? Under the terms of a 401(k) plan, participants have no right to the amounts in their accounts, including lost earnings, until they are entitled to a distribution from the plan.
Moreover, participants are not entitled to a distribution from a 401(k) plan until they have experienced one of the Tax Code’s distributable events, such as a termination of employment, death, disability, or retirement. If a 401(k) plan participant becomes aware of an administrative error, must the participant terminate his or her employment in order to seek redress for that claim? Alternatively, must the participant wait until he or she has a distributable event before pursuing the claim? If so, does the statute of limitations on such a claim run in the interim?
While the Chief Justice tacitly encouraged the lower courts to consider how Mr. LaRue’s claim should be characterized, he did not conclude that it should be construed as a 502(a)(1)(B) claim. Instead, he opined that “it is not clear” whether the claim may be maintained under Section 502(a)(2), and that “it is at least arguable” that a claim like this lies only under Section 502(a)(1)(B). What is clear, however, is that these issues will be the subject of much additional litigation, both in Mr. LaRue’s case and others.
Many Questions Remain
Despite Mr. LaRue’s apparent victory in the Supreme Court, he still may not be entitled to recover the losses his plan account allegedly suffered. Especially in light of the Roberts concurrence, his employer will have many legal defenses available as the case proceeds. And Mr. LaRue still must establish facts sufficient to prove that the alleged losses were not the result of his own poor investment choices, for which his employer may be immune under Section 404(c) of ERISA.
The Court’s LaRue decision left at least three legal issues unresolved. First, are participants like Mr. LaRue required to exhaust their administrative appeal remedies before pursuing a 502(a)(2) claim? The majority opinion itself leaves open the issue whether 502(a)(2) claims – like 502(a)(1)(B) claims – are subject to the exhaustion requirement. Second, are claims like Mr. LaRue’s cognizable under Section 502(a)(3) as requests for “other equitable relief”? The Court expressly avoided that issue, as well. Finally, will Mr. LaRue be allowed to pursue his claim even though he took a complete distribution of his account balance from the plan after filing his appeal? The majority concluded in a footnote that the cash-out did not render Mr. LaRue’s claim moot, but it also noted that the distribution “may have relevance to the proceedings on remand.” It is not clear what that relevance may be.
The one clear message from LaRue is that participants in individual account plans may sue under ERISA when administrative errors cause damage to their accounts. This may result in an increase in the number of single-participant lawsuits against employers and third-party administrators to correct such errors. If so, employers might expect the administrative charges assessed by third parties, as well as their fiduciary liability insurance premiums,to increase in order to offset that risk.
The Supreme Court’s statement that “lost profits” are among the damages that may be recovered under Sections 409 and 502(a)(2) will make the scope of fiduciary protection against such damages under ERISA Section 404(c) the next big litigation battleground. Section 404(c) insulates fiduciaries from liability for investment losses, as long as participants are given the ability to make their own investment choices among an appropriate mix of options. Solidifying that defense will be of critical importance to employers in light of LaRue
Currently pending class action litigation also will be affected by the LaRue decision. For instance, plaintiffs in the many employer “stock drop” cases, in which participants challenge the prudence of employer stock funds in 401(k) plans and ESOPs, and in the 401(k) “excessive fee” cases, in which participants allege that fees assessed to their accounts were excessive, will have one fewer battle to fight. Defendants in some of those cases had argued that because not all participants lost money in the employer stock funds or were charged excessive fees, relief was not available under Section 502(a)(2).LaRue expressly rejects that argument.
Whether Mr. LaRue ultimately will prevail on his claim is yet to be determined. What is certain, however, is that the Supreme Court decision bearing his name will be parsed at length by lower courts attempting to follow it.