Employee Benefits: U.S. Supreme Court Says Individuals Can Recover Damages for Mishandling of Retirement Accounts; Self-Protection Options for Employers

In an important new development, the U.S. Supreme Court has unanimously ruled that when fiduciary misconduct diminishes the value of an individual account in a defined contribution plan, such as a 401(k), the harmed employee can sue for damages. In the past, courts have taken the contrary position that the federal employee benefits law only permitted suits for harm to the plan as a whole. Because of this new ruling, employers that offer defined contribution plans could now see a deluge of employee claims over losses in individual accounts.

Employer Doesn’t Follow Investment Directive

James LaRue participated in a 401(k) plan administered by his employer, DeWolff, Boberg & Associates, a South Carolina-based management consulting firm. The retirement plan permitted participants to direct the investment of their contributions.

In 2001 and 2002, LaRue instructed DeWolff to make changes to his 401(k) investments, but DeWolff never carried out these directions. According to LaRue, DeWolff’s inaction led LaRue’s account to lose approximately $150,000.

LaRue sued DeWolff under ERISA (the federal Employee Retirement Income Security Act), charging that the employer breached its fiduciary duties under the retirement plan. DeWolff countered that LaRue couldn’t recover for losses to his individual account, as ERISA only provides a remedy for breach of fiduciary duty if the plan as a whole was injured, and not just particular individuals. After a federal appeals court sided with DeWolff and dismissed the case, LaRue appealed to the U.S. Supreme Court.

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Remedies for Individual Account Losses

The Supreme Court has reinstated LaRue’s case.¹ According to the court, ERISA language allowing for the recovery of  “any losses to the plan” that were caused by a fiduciary breach applies to defined contribution plans not just when the plan as a whole is injured but also when the misconduct lowers the value of a participant’s individual account. The court explained that its own earlier decisions stating that ERISA permitted suits only for injury to the “entire plan” did not apply to defined contribution plans such as the 401(k) LaRue participated in.

LaRue’s case will now return to the lower court. To prevail, he will have to demonstrate that DeWolff breached its fiduciary obligations under the 401(k) plan and that the misconduct damaged his individual account’s value. DeWolff may be able to present various defenses, such as whether LaRue properly exhausted remedies under the plan before heading to court.

Protect Yourself

This case significantly increases the risk for defined contribution plan sponsors (including employers) and administrators of being sued for mishandling individual plan accounts. And as the Supreme Court noted in its opinion, 401(k)s have become the most common type of employer-sponsored retirement plan in the United States—so this decision will have wide-reaching impact, and employers can expect a flood of new claims.

What can you do to protect yourself if you offer employees a defined contribution plan? Here are three suggestions:

1. Assess your risk. Jason Roberts, Esq., with the law firm of Edgerton & Weaver, LLP, in Hermosa Beach, recommends conducting a top-down risk assessment on your plan to determine whether your administrative functions are sound—and where there are weaknesses. As part of this process, make sure employees involved in plan administration are receiving ongoing training regarding their responsibilities and make sure they’re aware that mistakes can translate into big monetary liability for your organization.
2. Look into insurance. Roberts also says that employers should look into purchasing fiduciary insurance to provide coverage for administrative errors and simple negligence.
3. Consider risk transfer options. The Pension Protection Act of 2006, says Roberts, gave plan sponsors two new ways to transfer some risk for individual investment losses to a third party. First, you can implement “qualified default investment alternatives,” or QDIAs. Second, you can contract with a “fiduciary adviser” (FA), which is a financial planner that assumes responsibility for providing investment advice to plan participants. For more information on limiting your liability, including the QDIA and FA options, check out the U.S. Department of Labor publication “Meeting Your Fiduciary Responsibilities.”

¹LaRue v. DeWolff, Boberg & Associates, Inc., U.S. Supreme Court No. 06-856, 2008