February 20, 2008 --  A unanimous Supreme Court today ruled that an individual 401(k) plan participant can sue under ERISA to recover losses to his account allegedly caused by the plan fiduciary's failure to follow the participant's investment directions.  The High Court's much-anticipated decision in LaRue v. DeWolff, Boberg & Associates settles -- at least for now -- confusion over the reach of ERISA's remedial provisions that courts and litigants have wrestled with since the last time the Court considered the issue in the 1985 case of Massachusetts Mutual Life Insurance Company v. Russell, 437 U.S. 134 (1985).   

Writing for the Court, Justice Stevens' opinion was influenced by the changing nature of employer-sponsored retirement plans.  When the Court decided Russell 23 years ago, it emphasized that ERISA sections 502(a)(2) and 409(a) permit monetary recovery from fiduciaries for losses to "the entire plan," indicating among other things that "the crucible of congressional concern" when enacting ERISA was the misuse of plan assets by plan fiduciaries.  That emphasis on protecting the "entire plan," however, "reflects the former landscape of employee benefit plans," Justice Stevens wrote.  "That landscape has changed." 

Now, since "(d)efined contribution plans dominate the retirement plan scene," a different emphasis is required. Treating the "entire plan" language in Russell as dicta, Justice Stevens harkened back to ERISA's legislative history and found that a fiduciary breach that diminishes the assets in a particular individual account "creates the kind of harms that concerned the draftsmen of § 409."

For Court-watchers, it will not be surprising to learn that Justices Thomas and Scalia, while agreeing with the Court's outcome, took issue with Justice Steven's reliance on legislative intent.  The Court's most ardent strict constructionists noted that it is "ERISA's text and 'not the kind of harms that concerned [ERISA's] draftsmen' that compels" the Court's result.  The right of an individual to sue for losses, wrote Justice Thomas, should not be "contingent on trends in the pension plan market…(or) on the ostensible 'concerns' of ERISA's drafters." Since ERISA § 409 permits recovery to any participant for losses to "the plan," the only question is whether losses to an individual account is the same as losses to the plan.  In the opinion of Justice Thomas, since individual accounts in a defined contribution plan represent little more than bookkeeping entries, each of which are comprised of plan assets, harm suffered by one account represents a loss to the plan. 

A defined contribution plan is not merely a collection of unrelated accounts.  Rather, ERISA requires a plan's combined assets to be held in trust and legally owned by the plan trustees…In short, the assets of a defined contribution plans under ERISA constitute, at the very least, the sum of all the assets allocated for bookkeeping purposes to the  participant's individual accounts. Because a defined contribution plan is essentially the sum of its parts, losses attributable to the account of an individual participant are necessarily 'losses to the plan' for purposes of § 409(a).

In an even more narrowly drawn concurring opinion, Chief Justice Roberts agreed with the Court that the decision below by the Fourth Circuit should be reversed, but did not necessarily agree that ERISA § 502(a)(2) is the appropriate remedial vehicle for this type of lawsuit.  Rather, it may be more appropriate to have similar individual account complaints proceed under § 502(a)(1)(B), which provides a cause of action to recover benefits due under the plan.  Among other things, a suit under § 502(a)(1)(B) carries with it the requirement (in most circuits) that a participant exhaust a plan's internal administrative remedies before pursuing federal district court litigation.  The internal administrative review protects plan sponsors from precipitous litigation, creates a record for courts to review, and creates a favorable environment for employers to voluntarily sponsor a benefit plan.  Permitting participants to recast a claim for benefits as a fiduciary breach would circumvent these protections, according to the Chief.

Of course, as with most Supreme Court pronouncements, there remains significant additional questions.  Some have even suggested that the opinion raises more questions than it raises.  See, for example, the Boston ERISA Law Blog and the ERISA Law Blog for competing analyses.