Supreme Court Decision Imposing Personal Liability Should Prompt Review of Fiduciary Procedures

(Reprinted with permission from The FIA Perspective)

A recently decided U.S. Supreme Court case clarifies certain circumstances under which individual ERISA plan participants may recover for breach of fiduciary duty. The Court ruled unanimously in LaRue v. DeWolff, Boberg & Associates, Inc. that an individual participant may recover from a plan fiduciary for breaches of fiduciary duties that impair the value of assets held in the participant’s plan account. Mr. LaRue sued his former employer (DeWolff) and the 401(k) Plan administered by DeWolff. The Plan permitted participants to direct the investment of their contributions to the Plan in accordance with certain procedures. Mr. LaRue claimed that DeWolff breached its fiduciary duty by failing to carry out his investment instructions and that such failure depleted his plan account balance by approximately $150,000. Mr. LaRue sought to have his loss restored by DeWolff from its own assets, claiming relief under the Employee Retirement Income Security Act of 1974 (“ERISA”).

Section 502(a)(2) of ERISA permits a participant to sue for breach of fiduciary duty, and the fiduciary is held personally liable to make good any losses to the plan caused by its breach. Several years before, in a case concerning a group disability plan, the Supreme Court ruled that a fiduciary breach involving one participant’s rights did not provide a basis for the participant to sue the fiduciary unless the breach adversely impacted the entire plan. Several courts had since relied on this ruling to deny breach of fiduciary duty claims involving ERISA-governed retirement plans.

However, in LaRue the Supreme Court found that in the case of an individual account plan (such as a 401(k) plan), the entire plan approach is not relevant. Rather a fiduciary breach that diminishes assets in an individual account creates the type of harm intended to be protected under ERISA even if it does not affect all plan participants and beneficiaries. Justice Clarence Thomas clearly articulated the defined contribution plan approach when he stated in his concurring opinion that since a defined contribution plan is the sum of its parts, losses experienced by any one account due to a fiduciary breach is a loss experienced by the plan.

In his concurring opinion Chief Justice Roberts raised the issue which seems unresolved by the case whether such a claim for breach of fiduciary duty can be made without first exhausting administrative remedies that would normally be required before a participant is permitted to sue through a claim for benefits.

By allowing an individual participant to impose personal liability on a plan fiduciary, the LaRue case serves to emphasize the importance of plan fiduciaries fulfilling their duties and responsibilities under ERISA. Employers, plan administrators and other plan fiduciaries should take steps (with assistance from plan recordkeepers, consultants and counsel to) assess their practices and procedures to assure compliance with ERISA including: (i) identifying plan fiduciaries and assigning administrative duties to particular individuals or committees; (ii) establishing and following a claims procedure; (iii) assuring that administrative practices are consistent with the terms of the plan; (iv) consider engaging an independent investment advisor for assistance in developing an investment policy statement and selecting and monitoring investment options offered under the plan; (v) review administrative service agreements, ERISA bonds and consider purchasing fiduciary liability insurance; (vi) review plan procedures for compliance with ERISA section 404(c), including qualified default investments; and (vii) work with plan record keepers, consultants and counsel to assure compliance with reporting and disclosure requirements, particularly with regard to the new notice requirements imposed by the Pension Protection Act.


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