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Guest Article
(From the June 25, 2007 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)
The U.S. Supreme Court on June 18, 2007 announced it will review a case involving the ERISA remedies available to 401(k) plan participants when plan administrators fail to carry out their investment instructions. LaRue v. DeWolff, Boberg & Associates, Inc., 450 F.3d 570 (4th Cir. 2006), cert. granted, 551 U.S. ____ (2007). The Fourth Circuit Court of Appeals ruled ERISA does not allow an individual participant to recover money damages in this situation.
Case Overview
Basically, the case involves a 401(k) plan participant who claims to have instructed the plan administrator to make certain changes to his investment allocation in 2001 and 2002. The plan administrator did not carry out these instructions. As a result, according to the participant, by 2004 his account balance was $150,000 less than it would have been if his instructions had been executed. He sued to recover this amount, claiming the plan administrator had breached its ERISA fiduciary duties.
A federal district court granted the plan administrator’s motion for judgment on the pleadings. Essentially, the district court ruled that even if the plan administrator breached its fiduciary duties (and the district court did not decide if a breach occurred), the remedy the participant is seeking – i.e., to have the $150,000 added to his 401(k) account – is not available under ERISA. The participant appealed to the Fourth Circuit Court of Appeals, which upheld the district court’s ruling.
Issue
The question before the Supreme Court is what remedies ERISA provides to 401(k) plan participants who have suffered losses in their accounts due to a fiduciary breach. At issue is ERISA § 502(a), which provides (in relevant part) –
A civil action may be brought –
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The cross-referenced provision, ERISA § 409(a), provides –
Any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by this title shall be personally liable to make good to such plan any losses to the plan resulting from such breach, and to restore to such plan any profits of such fiduciary which have been made through use of assets of the plan by the fiduciary, and shall be subject to such other equitable or remedial relief as the court may deem appropriate, including removal of such fiduciary. |
In this case, the participant wants the 401(k) plan administrator to put $150,000 into his account. Presumably, this amount represents the difference between his current balance and the amount he would have had if the plan administrator had carried out his instructions. If this case did not involve an ERISA plan, that is how the participant’s economic damages would be measured. But the 401(k) plan is an ERISA plan, so the participant is limited to the remedies available under ERISA.
The participant claims he is entitled to relief pursuant to ERISA § 502(a)(2) or (3). However, the Fourth Circuit Court of Appeals ruled ERISA § 502(a)(2) provides remedies only for harm caused to plans, and not for individuals. Furthermore, citing Supreme Court precedent, the Fourth Circuit concluded ERISA § 502(a)(3) provides only “equitable relief,” meaning only “’those categories of relief that were typically available in equity’ in the days of the divided bench.” Compensatory damages of the type the participant is seeking here are traditionally thought of as legal, rather than equitable, remedies.
Outlook
The Supreme Court will have the final say on the appropriate interpretation of ERISA’s existing remedial scheme, and it may reach a different conclusion than the Fourth Circuit Court of Appeals. But Congress can amend ERISA, and there may be some discussion about doing so if the Supreme Court upholds the Fourth Circuit’s decision.
When ERISA was enacted in 1974, defined benefit plans were by far the predominant type of employer-sponsored pensions. Because the plan sponsor bears the risk of investment performance in defined benefit plans, Congress might not have seriously contemplated whether individual remedies would be needed for situations like this.
As the Fourth Circuit Court of Appeals pointed out, ERISA does provide some remedies for participants in these circumstances. These include seeking an injunction to force the plan administrator to comply with the investment instructions, or even suing on the plan’s behalf to have the fiduciary removed. Whether these are adequate remedies for this situation is a question for Congress to decide.
| The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.
If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Taina Edlund 202.879.4956, Laura Edwards 202.879.4981, Mike Haberman 202.879.4963, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Laura Morrison 202.879.5653, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2007, Deloitte. |
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