Since the U.S. Supreme Court’s recent ruling that an individual employee who lost money in his 401(k) account could sue under ERISA, lawyers have been weighing the decision’s impact – and they’re split.
Some say the case represents a big change.
“This is the biggest case to come down in a long time – and people keep talking about it,” said Eva Cantarella, an ERISA plaintiffs’ attorney with Hertz Schram PC in Bloomfield Hills, Mich. Others are unconvinced.
“The business community and the employee community expected this decision,” said Evan Miller, an ERISA litigator in Washington and an advisor to several amici in the case.
The plaintiff, James LaRue, was a participant of a defined contribution plan. He claimed that the plan administrator did not follow his directions on how to invest his money, resulting in a loss of $150,000 to his individual account.
The court held that LaRue could sue for breach of fiduciary duty under §502(a)(2) of ERISA, even though his account was the only one affected by the alleged breach.
“Whether a fiduciary breach diminishes plan assets payable to all participants and beneficiaries, or only to persons tied to particular individual accounts, it creates the kind of harms that concerned the draftsmen of [the liability provisions relating to fiduciary obligations of] §409,” wrote Justice John Paul Stevens for the court. (LaRue v. DeWolff Boberg & Associates, No. 06-856)

More lawsuits?

Some see the ruling as spawning multiple lawsuits by individual 401(k) account holders.
“I don’t think it will be an avalanche, but plan sponsors are definitely looking at death by a thousand cuts,” said Stephen Rosenberg, an attorney with The McCormack Firm in Boston, who blogs on ERISA issues.
But Peter Stris, a law professor at Whittier Law School who represented LaRue, disagreed. He said the outcome was entirely predictable and merely “a victory for the status quo.”
However, to the extent the ruling clears up an area of the law there was some question about, it will make it easier for people who have suffered an individual loss under a 401(k) plan to get monetary relief, said Cantarella.
“Over the years, the defense has been arguing that unless everyone’s account is affected, you don’t have a plan-wide loss. The court said even if one person’s account is affected, you do have a loss to the plan,” she said.
“The idea that we need every single participant on board to file a claim is gone after this decision,” said Russell Hirschhorn, an ERISA defense attorney with Proskauer Rose in New York.
Fiduciary breaches occur frequently, said Cantarella. She cited cases she has handled in which a 401(k) plan says the participant has the right to direct investments but does not honor that, or where there are not enough plan options to make prudent investments.
However, an individual would still have to demonstrate significant losses in order to convince a lawyer to take his or her case, she noted.
And even though ERISA provides for attorney fees, they are not a given, and lawyers can never assume they will be awarded, Cantarella said.
The ruling does send a message to employers and plan administrators.
“The biggest take away is it emphasizes to fiduciaries that they need to monitor their plans closely,” said Debra Davis, an ERISA defense attorney with Reish Luftman Reicher & Cohen in Los Angeles who represented several amici in the case.
“It certainly seems that 401(k) plan sponsors are going to really beef up their operational processes to avoid future LaRues,” said Susan Mangiero, CEO of Pension Governance LLC in Trumbull, Conn.
This includes making sure a plan document is in place and is updated regularly to reflect changes in the law, Davis said.
If an employer uses a third party administrator or investment company to handle the plan’s investments, then the employer needs to make sure it does its record-keeping, and confirm that when an employee wants an investment made it’s done, she added.

‘New avenue to defend ERISA claims’

The part of the ruling raising the most eyebrows is a concurring opinion by Chief Justice John Roberts, joined by Justice Anthony Kennedy.
“Roberts muddied the waters,” said Davis.
In the opinion, Roberts questioned whether the plaintiff’s claim is in fact a breach of fiduciary claim brought under §502(a)(2), or whether it would be more properly brought as a claim for benefits under the terms of the plan under a different section of ERISA, §502(a)(1)(B).
If so, Roberts wrote, it is “not clear” whether the plaintiff can make a claim under both sections.
“The significance of the distinction between [claims under the two different sections] is not merely a matter of picking the right provision to cite in the complaint. Allowing a 502(a)(1)(B) action to be recast as one under 502(a)(2) might permit plaintiffs to circumvent safeguards for plan administrators that have developed under 502(a)(1)(B),” Roberts wrote.
If there’s going to be any uptick in litigation, it will be over this issue, said Stris.
This could “make legitimate claims tremendously more difficult for participants to bring. It opens a new avenue to defend ERISA claims and there will be much litigation over that procedural issue. It’s a Pandora’s box – a whole new minefield,” he said.
One key difference between the provisions is the standard of review.
A claim for a breach of fiduciary duty under §502(a)(2) is reviewed de novo, while a claim under §502(a)(1)(B) for a benefits gives great deference to the plan and is reviewed only for “arbitrary and capricious” behavior.
A more complicated difference between the two provisions is that a claim for breach of fiduciary duty under §502(a)(2) holds the fiduciary personally liable for monetary losses, but a claim for benefits under §502(a)(1)(B) is made against the plan.
In the 401(k) context, even if the plaintiff wins the latter type of claim, there is no means to collect, because the only way to reimburse a plan participant for losses would be to take money from other participants’ individual accounts, which is prohibited by ERISA.
“If you get a judgment against the plan, it’s just a piece of paper that’s worthless, because the plan doesn’t have the money that was lost,” said Stris. “The plaintiff has to hope that the plan then sues the fiduciary, but in the vast number of cases, the plan is the fiduciary. If that happens, the plaintiff has to bring a separate lawsuit claiming that the plan acted inappropriately. It creates a lot of extra hurdles.”
Until the lower courts sort these arguments out, plaintiffs’ attorneys are likely to try to proceed under both provisions, said Cantarella.
“Plaintiffs will plead in the alternative under §502(a)(2) to the extent it’s a breach of a fiduciary duty, and under §502(a)(1)(B) to the extend it’s a breach of the terms of the plan,” she said.
Cantarella also noted that the ruling left open the hotly-debated issue of whether a third section – §502(a)(3), which allows “appropriate equitable relief” – permits monetary relief for losses caused by a fiduciary breach.
The court granted certiorari on that issue but declined to rule on it.