Questions and Answers with John Burkhardt

Published: June 20, 2008

Q: Was there a decision earlier this year by the United States Supreme Court that will now make it easier for individual participants in defined contribution plans such as 401(k) to recover for losses to their individual accounts?

A: Yes. That decision was in LaRue v. DeWolff, Broberg & Associates Inc. which resolved a difference of opinions between federal circuit courts about a fundamental issue under the Employee Retirement Income Security Act ("ERISA”).

Q: Could you explain more about this particular case?

A: Sure. This case arose when James LaRue, a participant in DeWolff, Broberg & Associates Employee Savings Plan (a 401(k)), sued the plan and its administrators for breach of fiduciary duties to him because they allegedly failed to implement changes that Mr. LaRue had directed them to make with respect to the investments in his individual plan account.

Relying on an earlier 1985 Supreme Court decision interpreting ERISA, both the district court and the Fourth Circuit Court of Appeals concluded that ERISA did not allow an individual participant, like Mr. LaRue, to sue to recover for fiduciary breaches that impaired the value of plan assets in a participant's individual account. The Supreme Court, however, disagreed.

The Supreme Court distinguished its earlier decision and concluded that ERISA authorizes individual participants in a defined contribution plan, such as a 401(k), to recover money damages for fiduciary breaches that decrease the value of plan assets in his or her individual account. Prior to the Supreme Court's most recent decision in LaRue, many employees, employers and lawyers mistakenly assumed that under ERISA, an individual could only seek relief on behalf of the entire plan, not just on behalf of his or her own interest in the plan, in order to obtain monetary relief for losses incurred due to a breach of fiduciary duties.

Q: Is this development significant to individuals who participate in defined contribution plans; and, if so why?

A: Yes, potentially, it is quite significant. The reason is that participants are naturally the persons most directly affected by losses to their individual retirement accounts. Now with this decision in LaRue, it is clear that if such losses were due to a breach of a fiduciary's duties under ERISA, the effected participants have the right to initiate a suit, if necessary, to remedy such harm.

This is potentially very significant because ERISA contains a broad set of fiduciary duties that are essentially intended to protect plan participant's interests. For example, fiduciaries are generally prohibited from engaging in transactions involving conflicts of interests, they must act solely in the interests of plan participants or beneficiaries, and for the exclusive purpose of providing benefits to them as well as defraying reasonable expenses.

These duties also include the duty to exercise prudence or care with respect to the plan and participants, as well as to comply with ERISA's many requirements. In short, LaRue makes it clear that participants can bring legal proceedings under ERISA to remedy certain harm incurred in their individual retirement accounts, without having to rely upon the plan or other plan fiduciaries to do so for them, and regardless of whether such harm also adversely affected the entire plan.

Q: Could this decision also impact employers who sponsor such employee retirement plans; and, if so how?

A: Yes it could. Since it is common for employers who sponsor such plans to be found to have fiduciary duties, if they have failed to fulfill their duties, and a participant's individual account has been adversely affected as a result, employers may now face a greater risk of legal liability.

Business Writer Paula Burkes

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