James LaRue 401(k) Law Suit

[Andy the Actuary]

The Washington Post carried a news story about James LaRue who claims his employer failed to implement investment changes he requested and subsequently lost $150,000 as a result of the employer's failure to act:

http://www.washingtonpost.com/wp-dyn/conte...7112500356.html

I read the article and persused the plaintiff's brief and nowhere do I find any discussion pertaining to how Mr. LaRue requested investment changes and whether or not such requests were in accordance with the Plan docuement. It almost sounds as if he simply verbally asked someone to make changes and they didn't.

Does anyone have any background information on the entire transaction?

[david rigby]

Does this help?

http://www.abanet.org/publiced/preview/bri...c07.shtml#06856

[Andy the Actuary]

Thank you.

Those are the documents I had perused. I guess I was looking for Mr. LaRue duly submitted change request on signed and dated Plan form to the Plan administrator. . .

Having once administered 401(k) plans, I'm well aware that it's not unusual for participants to call attention to "mishaps" long after the fact, but with the amount of $ at stake, one would have assumed Mr. LaRue would have been more thoughtful about verifying the transaction. One would have thought he would have been looking for confirmation of his transaction or at least reviewing his account statement to see if the transaction were effected.

Oh, well.

[Peter Gulia]

The news reporting (and even the parties’ and friends’-of-the-court briefs on the appeal and review) are thin about the facts of the participant’s investment direction and the plan administrator’s handling of it for two reasons: (1) the case proceeds on the law question of whether LaRue stated a claim; and (2) LaRue’s complaint never went to trial, or even discovery.

In the dismissed trial-court proceeding, LaRue didn’t describe how he requested investment changes, and DeWolff didn’t describe how LaRue “rescinded” anything that he did submit.

LaRue’s action asks the court to order restoration to the plan of what was lost by not following his alleged investment direction, to be followed by an allocation of that restoration to LaRue’s individual account. What’s in play now isn’t the facts of what did or didn’t happen, but rather whether ERISA provides or precludes this kind of remedy.

If LaRue is successful with the Supremes (and it helps to have a brief and oral argument of the United States Government on your side), he doesn’t win his claim; he wins the opportunity to return to the trial court to begin trying to prove his claim.

As some have observed, there seem to be weaknesses in this participant’s claim. The defendants admitted that LaRue requested an investment change, but also say that he later “rescinded” his request [see attachments]. If the Supremes send the case back for a “do-over”, the plan fiduciaries could state the facts and arguments that they believe would show that LaRue didn’t really direct the investment change he sued for (for example, that he failed to act according to the plan’s investment-direction procedure), or that he somehow ratified or accepted his individual account as the plan stated it to him.

For now, the important question is whether a participant may pursue relief under ERISA § 502(a)(2)or(3) if his is the only account affected by an alleged fiduciary breach.

[Peter Gulia]

Here's the plaintiff's complaint, and the defendants' answer.

DeWolff_answer.pdf

[Peter Gulia]

I guessed wrong on the software's rules; here's the plaintiff's complaint.

LaRue_complaint.pdf

[Andy the Actuary]

Dear FGC:

Thank you for such a thoughtful response.

While I understand where this case is headed, I still can't get past that no basis for establised for filing a law suit to begin with. I.e., Where are the facts to support that there was any nonfeasance?

Happy holidays,

Andy T. A.

[Locust]

Interesting that the SPD attached to the complaint is a generic Corbel/Sunguard thing - no mention whatsoever of participant direction of investments. Also, no mention anywhere in the complaint of the TPA, who presumably would have established the investment direction procedures.

[Guest mjb]

Dear FGC:

Thank you for such a thoughtful response.

While I understand where this case is headed, I still can't get past that no basis for establised for filing a law suit to begin with. I.e., Where are the facts to support that there was any nonfeasance?

Happy holidays,

Andy T. A.

The facts have never been detailed because La Rue's claim was dismissed by both the district court and the appellate court without discovery or trial because the "reduction" of his account balance by $150,000 on account of the failure to follow his instructions was not a claim for which relief is permitted under ERISA.

LaRue is claiming a right to bring an action under ERISA 502(a)(2) for a breach of fiduciary duty which causes a loss to the plan which has been construed by the courts to require that the claim must be made on behalf of all participants or a class of participants in the plan not just for the benefit of a single individual. This claim was first raised on appeal and was dismissed by the appeals court.

La Rue's primary claim for recovery is that the reduction of his account balance by $150,000 is a claim for other equitable relief under ERISA 502(a)(3). The District court and Appeals court both rejected this argument on the grounds that the 150,000 is monetary damages which cannot be awarded under ERISA which allows only recovery for the specific property held by the wrongdoer. In a similar case earlier this year the 9th Circuit held that a delay by a plan administrator in paying out retirement benefits to a beneficiary for several years after the death of the participant during which the value of the account declined by 900k was a claim for money damages which was not permitted under ERISA 502(a) which only permits equitable relief.

There is also a question of whether LaRue's claims should be dimissed for lack of standing because he withdrew his account balance from the plan in 2006 which resulted in him no longer being a participant who can file a claim for benefits under ERISA 502(a).

[Don Levit]

mjb:

In the ninth circuit case earlier this year, was the plan a defined contribution plan or a defined benefits plan.

One of the arguments in LaRue is that a defined contribution plan must effect the plan as a whole, whether it affects one person, a class of persons, or every participant.

I do not know how this argument can be made for health benefit claims, however.

Those claims seem to be a lot more individual and personal, rather than effecting the plan itself.

Don Levit

[Guest mjb]

mjb:

In the ninth circuit case earlier this year, was the plan a defined contribution plan or a defined benefits plan.

One of the arguments in LaRue is that a defined contribution plan must effect the plan as a whole, whether it affects one person, a class of persons, or every participant.

I do not know how this argument can be made for health benefit claims, however.

Those claims seem to be a lot more individual and personal, rather than effecting the plan itself.

Don Levit

DC plan. I dont understand what you are saying. LaRue's claim is only on his own behalf, not on behalf of the participants which is characteristic of claim for benefits under 502(a)(1). Any recovery 502(a)(2) should inure to the benefit of all plan participants with accounts under the plan, not just his account.

[david rigby]

More discussion:

http://lawprofessors.typepad.com/laborprof...l-comments.html

[Steelerfan]

I.e., Where are the facts to support that there was any nonfeasance?

Unless a claim is for fraud, allegation of specific facts is not generally required to sustain a complaint. E.g it would be enough to simply allege that an instruction was given and not followed by the plan fiduciary. On a motion for summary judgement the defendant could submit evidence that no proper instruction was given, etc. Otherwise, if there is a trial, the facts will come out. As stated previously, this appeal will not decide whether the plaintiff will succeed on his claim, but rather whether such a claim can be sustained under ERISA. If so, the plaintiff could very well lose anyway. This happens all the time and is nothing new or unusual.

[Steelerfan]

Any recovery 502(a)(2) should inure to the benefit of all plan participants with accounts under the plan, not just his account.

Where is the logic in reaching the conclusion that an individual account is not "the plan"? Where in the statute does it say that a loss to the plan means the whole plan or more than one participant and not one account under the plan? Nowhere, that's why the Supremes took the case, and there is no analogous case. What if a plan fiduciary mishandled one particular asset, such as failing to remove a particular mutual fund as an investment option after being instructed by the employer to do so, and only one participant was negatively affected? That may be a little far fetched, but it is possible. Would you then say that that participant had no remedy under 502(a)(2) because no one else was affected?

[John Feldt ERPA CPC QPA]

Locust. See page 15 of the pdf file, where it says "How will the money in the Plan be invested?" You will be able to direct ...

[Guest mjb]

Any recovery 502(a)(2) should inure to the benefit of all plan participants with accounts under the plan, not just his account.

Where is the logic in reaching the conclusion that an individual account is not "the plan"? Where in the statute does it say that a loss to the plan means the whole plan or more than one participant and not one account under the plan? Nowhere, that's why the Supremes took the case, and there is no analogous case. What if a plan fiduciary mishandled one particular asset, such as failing to remove a particular mutual fund as an investment option after being instructed by the employer to do so, and only one participant was negatively affected? That may be a little far fetched, but it is possible. Would you then say that that participant had no remedy under 502(a)(2) because no one else was affected?

The issue raised in LaRue is easily avoided (and in fact is already in place in many plans) by requiring that all elections to invest be submited via the internet or by fax which will be confirmed in writing by the the plan administrator. Of course this requires that TPAS/ plans spend the funds to upgrade their systems.

The adverse result of a decision in La Rue that economic loss in a DC plan can be a breach of fiduciary duty can be avoided by plan drafting or by treating any employee inquiry over plan contributions/investments as a claim for benefits under the provisions of ERISA 503 which will be determined by the plan adminstrator instead of a loss due to breach of fiduciary duty under ERISA 502(a)(2).