401(k) Participant Entitled to Sue for Investment Losses

The U.S. Supreme Court ruled last week that a participant may sue for losses to his 401(k) account caused by the employer's failure to carry out investment instructions. Based on prior court rulings, many practitioners thought participants had no cash remedy for such breaches by plan fiduciaries and could only force fiduciaries to carry out the terms of the plan. The ruling in LaRue v. Dewolff, Boberg & Associates, Inc. clarifies that an individual participant may bring a claim for money damages for breach of fiduciary duty under the Employee Retirement Income Security Act of 1974 (ERISA), though several key questions remain unanswered.

In light of this ruling, employers should review investment plan procedures so they can be confident that employee investment instructions are well documented and properly handled. Summary plan descriptions and other investment information should be reviewed to determine if employees are obligated to review investment summaries to be sure their investment instructions have been implemented. In addition, fiduciaries for plans will want to review their fiduciary insurance and indemnification rights to be sure they are adequately covered for potential claims.

James LaRue participated in the 401(k) plan of his employer, Dewolff, Boberg & Associates. Like many 401(k) plans, LaRue could direct the investment of his account among a variety of investments. He claimed his employer, as fiduciary for the plan, had failed to follow his investment instructions in accordance with the terms of the plan, and that such failure had caused his account to be “depleted” by $150,000.

Lower court holdings and prior case law

ERISA generally preempts state law in the area of employee benefits provided by private employers. LaRue pursued his claim in federal district court where he lost a claim for equitable relief to enforce the terms of the plan. He then lost before the Fourth Circuit Court of Appeals on that claim, and on a second claim for breach of fiduciary duty. The Supreme Court addressed only the issue of whether LaRue had a claim for breach of fiduciary duty.

Prior cases dating back to the 1980s held that a claim of breach of fiduciary duty must be brought on behalf of the entire plan. The cases generally held that money damages were not available for situations in which a single participant was the only one to suffer from a breach of fiduciary duty. The best the participant could hope for was to stop whatever actions constituted a breach of fiduciary duty. In contrast, if a fiduciary's breach caused the entire plan to lose money, the fiduciary could be held liable to make the plan whole. Because of this anomaly, the U.S. Department of Labor filed a “friend of the court” brief in LaRue to argue that the Supreme Court should find for the participant or else a participant such as LaRue would have no remedy for the breach of fiduciary duty of the employer.

Supreme Court analysis

In LaRue, the majority five-justice opinion of the Supreme Court ruled that because individual account plans are the new paradigm for retirement plans, individuals may bring an action for breach of fiduciary duty to protect their individual accounts. Potential cash recovery includes losses to an account and also lost profits caused by the fiduciary's breach. Two justices, Clarence Thomas and Antonin Scalia, came to the same result, but reasoned that an individual could always have sued to protect his or her account since the plan assets in a defined contribution plan, such as a 401(k) plan, are made up of the sum of the individual accounts. Two other justices, Chief Justice John Roberts and Anthony Kennedy, agreed there was a cause of action for LaRue but suggested what he was really doing was suing for benefits that he was promised under the plan, including the manner the plan had set out for making investments, rather than making a claim for breach of fiduciary duty.

In the end, the Supreme Court sent the LaRue case back to the lower courts to determine if the employer had failed to follow the employee's investment directions in accordance with the plan terms. It may be determined that LaRue failed to properly plead his claim for breach of fiduciary duty at trial court and it is now to late to do so. However, the principle of the case stands: A participant may bring a claim for breach of fiduciary duty and seek money damages for the participant's individual account.

What does LaRue mean for employers and fiduciaries?

1. Following plan terms is important, especially with respect to investment directions in an individually directed account. If there is a failure to follow instructions and the employee suffers a loss, the responsible fiduciary can be held liable for losses and lost profits that result.
   
   
2. Plan investment procedures should be reviewed to be sure that they do not present administrative or other challenges that could interfere with promptly fulfilling the investment obligations.
   
   
3. To limit potential losses, plan investment procedures should require employees to review investment statements to confirm their investment changes have been implemented.
   
   
4. Fiduciaries should review their liability insurance policies and indemnification provisions with the employer to be sure they have adequate coverage in the event of a claim.
   
   
5. The Court's ruling leaves questions unanswered, and shows some confusion on the part of the justices as to how ERISA operates. For example, the Court stated that they were not addressing whether an employee must exhaust the plan's internal administrative review procedure prior to filing an action for breach of fiduciary duty. Prior to such statement, it was settled law that a participant can sue for breach of fiduciary duty on behalf of the plan without submitting the claim to the plan's internal review process. Until further guidance is provided (by the courts, Congress or Department of Labor), plan fiduciaries should continue to strictly follow the plan's claims procedure and insist that participants and beneficiaries comply with the claims procedure before bringing legal action
   
   
6. ERISA contains a complicated series of claims for relief, and it is clear LaRue struggled to determine what claims he should bring. The Supreme Court justices, while unanimously overturning the Court of Appeals, disagreed on the appropriate claim for relief. What this disagreement means for the future is that participants will have to sue on several theories, which will likely complicate litigation until courts determine the appropriate claims for relief.