As employment lawyers, we inevitably deal with retirement and other employee benefit issues, but at this firm we aren’t employment benefits specialists. (They would be the geeks who aced all the tax courses in law school.) However, no tax expertise is required to recognize the importance of the Supreme Court’s recent ruling that individual employees who participate in a 401(k) have a right to sue for equitable relief when the value of their individual retirement assets has been depleted due to a fiduciary breach by plan administrators. In LaRue v. DeWolff, Boberg & Associates, Inc., et al., Slip op. 06-856, decided on February 20, 2008, the Court held that §502(a)(2) of the Employment Retirement Income Security Act of 1974 (ERISA) “does authorize recovery for fiduciary breaches that impair the value of plan assets in a participant’s individual account.” Interestingly, there were no dissents, but every justice signed on either to the majority opinion (by Justice Stevens) or to the concurrences by Chief Justice Roberts (wondering whether §502(a)(1)(B) is not a better fit) and Justice Thomas (construing “losses to the plan due to fiduciary breach” to include losses within LaRue’s individual plan account).
The majority opinion is short and to the point. Primarily, it distinguished LaRue’s 401(k) problems from those at issue in an earlier case, Massachusetts Mutual Life Ins. Co. v. Russell, 473 U.S. 134 (1985), which the lower courts had referenced in dismissing LaRue. Mr. LaRue argued that a failure to reallocate his plan assets as he had instructed had lowered their value by approximately $150,000. He was seeking to recover those losses. The Court noted that ERISA’s definition of fiduciary obligations is primarily concerned with payment of benefits to beneficiaries, the financial integrity of the plan and plan asset management and stated, “The misconduct alleged by [LaRue] falls squarely within that category.” By contrast, the employee in Russell suffered secondary losses due to an improper temporary termination of benefits but did eventually receive all of the benefits to which she was entitled under the plan. In Russell the Court held that ERISA §502(a)(2) does not permit individual beneficiaries to recover compensatory or punitive damages for delayed payment of benefits.
From the employee’s perspective, LaRue is a very positive development. ERISA was enacted in 1974 and, as I seem to recall from that extremely interesting class way back in law school, has not been updated in particularly helpful ways since then. Back in 1974, many employers offered honest-to-goodness pension plans (“defined benefit plans”) wherein, if you gave the company twenty or thirty years, the company would take care of you in old age. (Health care costs were much more reasonable back then, too.) Many of ERISA’s retirement-security provisions are concerned with old-style pension plans, which are increasingly irrelevant today. Today, pensions are almost solely available to public sector employees; most private-sector employees do not expect to receive anything other than social security benefits and the proceeds of whatever they themselves have invested through 401(k)’s and other “defined contribution” investment vehicles. If you are lucky, your employer matches your 401(k) contribution. Thus it is crucial that individuals have the right to seek redress if a plan fiduciary violates its duty of care in ways that could seriously diminish the value of individual retirement savings.
ERISA is based on the law of trusts. The decision in LaRue is consistent with the idea that a person who willingly accepts responsibility for managing a retirement plan has a heightened duty of competence and loyalty to plan participants – like a trustee or the executor of an estate. If a plan administrator pockets retirement funds, invests retirement funds for his or her own benefit, or, as in LaRue, fails to comply with employee requests to reallocate funds within a reasonable amount of time, s/he shouldn’t be in charge of a retirement plan with millions of dollars in assets. And the employee now has a way to recover the lost value.
Importantly, in LaRue the court did not address whether a fiduciary breach had actually occurred in the case, whether the depletion in value was as great as the employee claimed, or whether the depletion in value was attributable to the alleged breach. Now that the Supreme Court has decided that Mr. LaRue has the right to sue, he must prove all of these key points in the trial court.
The Court also expressly stated that it was not ruling on whether Mr. LaRue was required to exhaust the complaint process specified in his plan’s handbook and other documents before bringing his case in court. This is a very dangerous issue: it may well turn out that, though he has scored a great victory for employees who have 401(k)s, he forfeited his own right to obtain relief by failing to complain timely about the plan’s failure to reallocate his assets in a timely manner or to exhaust the entire dispute resolution process specified in the plan before going to court. It is an (all too common) recipe for disaster. The moral of nearly every story that involves ERISA is this: you must be familiar with the plan documents because they establish the rules of the game. If the plan documents say that you have to complain about or grieve a problem within a set amount of time, make sure you do it. For his sake, we hope Mr. LaRue did.