In LaRue: Supreme Court Upholds Participant's Damages Claim

[Dave Baker]

From today's BenefitsLink Retirement Plans Newsletter:

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[Official Guidance] Text of LaRue Unanimous Supreme Court

Opinion Upholding Damages Claim Against ERISA Fiduciaries

for Participant's Investment Losses (PDF)

http://benefitslink.com/cases/larue-06-856.pdf

18 pages; decided February 20, 2008. Excerpt (from the

opinion's syllabus): "Held: Although §502(a)(2) does not

provide a remedy for individual injuries distinct from

plan injuries, it does authorize recovery for fiduciary

breaches that impair the value of plan assets in a

participant's individual account. . . . For defined

contribution plans . . . fiduciary misconduct need not

threaten the entire plan's solvency to reduce benefits

below the amount that participants would otherwise

receive. Whether a fiduciary breach diminishes plan

assets payable to all participants or only to particular

individuals, it creates the kind of harms that concerned

§409's draftsmen. Thus, [the references in Massachusetts

Mutual Life Ins. Co. v. Russell to] 'entire plan' . . .

which accurately reflect §409's operation in the

defined benefit context, are beside the point in the

defined contribution context." (United States Supreme

Court)

[J Simmons]

An issue not addressed directly in the LaRue decision was whether he yet had standing since he'd been paid out, I understand, the entire balance of his DC plan account. However, implicit is that such a participant may have standing (at least for a 502(a)(2) action brought derivatively on behalf of the plan) "whether his account includes 1% or 99% of the total assets in the plan." Arguably by the time he brought suit, LaRue had zero percent in the plan. However, that was not addressed in the Court's opinion, or in either of the two concurring opinions.

[PLAN MAN]

An issue not addressed directly in the LaRue decision was whether he yet had standing since he'd been paid out, I understand, the entire balance of his DC plan account. However, implicit is that such a participant may have standing (at least for a 502(a)(2) action brought derivatively on behalf of the plan) "whether his account includes 1% or 99% of the total assets in the plan." Arguably by the time he brought suit, LaRue had zero percent in the plan. However, that was not addressed in the Court's opinion, or in either of the two concurring opinions.

See bulletpoint #6 on page 8:

6 After our grant of certiorari respondents filed a motion to dismiss the writ, contending that the case is moot because petitioner is no longer a participant in the Plan. While his withdrawal of funds from the Plan may have relevance to the proceedings on remand, we denied their motion because the case is not moot. A plan “participant,” as defined by §3(7) of ERISA, 29 U. S. C. §1002(7), may include a former employee with a colorable claim for benefits. See, e.g., Harzewski v. Guidant Corp., 489 F. 3d 799 (CA7 2007).

[J Simmons]

Thanks, PLAN MAN, I hadn't had time to sift through the footnotes yet. Glad they spelled that out.

[Guest mjb]

But what was resolved? The only thing the Supremes agreed on is that a DC plan participant is not prohibited from bringing a claim on behalf of the plan under 502(a)(2) for a breach of fiduciary duty which resulted in a loss only to his acocunt.. The Supremes did not say that he has a right to a claim under ERISA 502(a)(2). Indeed CJ Roberts concurring opinon leaves open the question whether the availability of relief under 502(a)(1)(B) for a claim to benefits precludes a claim for breach of fiduciary duty under 502(a)(2). " I see nothing in today's opinion precluding the lower courts on remand, if they determine that the argument is properly before them, from considering the contention that LaRue's claim may proceed only under 502(a)(1)(B). In any event other courts in other cases remain free to consider what we have not- what effect the availability of relief under 502(a)(1(B) may have on a plan participant's ability to proceed under 502(a)(2). "

As a practical matter LaRue's claim that his investment instructions were not followed can be avoided by stricter plan provisions governing investment decisions by participants, e.g., by requiring that all changes to contribution % and investment selections must be submitted via the internet or by a written request submitted via an 800 fax # to the plan admin which must be confirmed in writing. Most large plans have such procedures in effect already.

[J Simmons]

mjb, is your point that while the Supremes say that LaRue can bring the derivative action under 502(a)(2) on behalf of the plan against the fiduciaries for breach and obtain a restoration to the plan for its losses, LaRue might not then receive the restored amount as benefits payable from the plan to LaRue other than per 502(a)(1)(B)? The claim for breach losses belongs to the plan (though brought by a participant). All a participant has is a claim for benefits against the plan, not the fiduciaries.

[Guest mjb]

mjb, is your point that while the Supremes say that LaRue can bring the derivative action under 502(a)(2) on behalf of the plan against the fiduciaries for breach and obtain a restoration to the plan for its losses, LaRue might not then receive the restored amount as benefits payable from the plan to LaRue other than per 502(a)(1)(B)? The claim for breach losses belongs to the plan (though brought by a participant). All a participant has is a claim for benefits against the plan, not the fiduciaries.

No. According the the CJ the courts could determine that LaRue's only viable claim is a claim for benefits under 501(a)(1)(B) which does not allow a recovery for lost profits because recovery under 502(a)(2) is only available if it is appropirate relief. According the the CJ the SC in Varity Co v. Howe determiend that relief under 502(a)(3) is not appropriate if relief under 502(a)(1)(B) offers an adequte remedy. Therefore the courts could preclude recovery under 502(a)(2) if the courts believe that he is compensated adequately for his loss under 502(a)(1)(B). This analysis of course would only be needed if the courts conclude that he suffered a loss because of a breach of fiduciry breach.

Stay tuned for LaRue II.

[J Simmons]

The issue I see with 502(a)(1)(B) being inadequate is that the plan does not have in LaRue's plan account the other $150,000 he is claiming as additional benefits. Would he have an adequate remedy in a DC plan where the only assets to honor the benefits claim would be through shorting the plan accounts (and thus benefits) of other employees, which would trigger a cascade of additional claims? The employer cannot put the $150,000 into the plan as an 'employer contribution' to cover the benefits claim, as such a contribution would have to be allocated per the plan's formula and LaRue is terminated with no compensation on which to base any.

It would appear to me that in a DC plan environment, a 502(a)(1)(B) claim could not be an adequate remedy for a claim about the impact of investment underperformance (such as through failure to implement an investment directive from the employee or through excessive fees being charged). The plan first needs to collect the loss amount from the malfeasant fiduciary per 502(a)(2) in order to have the funds to then pay the benefits claimed by LaRue under 502(a)(1)(B). Until the plan has collected through a 502(a)(2) action from the fiduciary, the employee's 502(a)(1)(B) claim cannot be honored and is an inadequate remedy.

I think the net uptake of the 9-0 LaRue decision is two-fold: (a) a former employee whose account balance has all been paid out has standing under ERISA by virtue of having a colorable claim to additional benefits, and (b) even though it would redound just to the benefit of an employee's plan account, the employee can pursue a derivative action under 502(a)(2) on behalf of the plan to recover the losses occasioned by the fiduciary breach.

But, for the reasons explained above, I do not see how 502(a)(1)(B) could provide an adequate remedy in a DC plan situation where the employee claims his benefits balance should be greater but the plan doesn't have corresponding other assets to honor the claim for additional benefits--unless the plan has recouped from the malfeasant fiduciary the necessary funds to then be able to honor the benefits claim.

[Steelerfan]

Unfortunately for mjb, there will likely be no LaRue II because CJ Roberts concurring opinion is NOT the law. The majority opinion, which is the law, states very clearly that if a fiduciary breach occurred, this behavior "falls squarely within that category" of misconduct that is meant to be redressed by the remedial provisions of 502(a)(2); the only potential limits should be (1) there was no fiduciary breach or (2) one of the other limits discussed in footnote 3 applies (failure to exhaust administrative remedy, etc.).

Roberts says that courts are free to consider the effect of 502(a)(1)(B) on the ability to proceed under 502(a)(2), but this statement is not supported by the rule or rationale put forth by the majority. The plaintiff, by the terms of the opinion, need not show that 502(a)(1)(B) is inadequate, and a trial court that makes this argument should be overturned.

But really, as has been pointed out very eloquently, 502(a)(1)(B) would not be adequate in most breaches of this type, anyway, so why open this can of worms, it adds nothing and only serves to detract from the analysis. Justice Roberts pointed out that other plaintiffs have used 501(a)(1)(B) for similar claims. Well, duh, that's because they're making every argument they can where the deck was heavily stacked against them. Any plaintiff would be stupid not to make every argument, and I fail to see how there would be a proliferation of claims for benefits that are being recharacherized as fiduciary breach in cases where, as in this case, the money is gone and isn't going to instantaneously materialize out of nowhere. Maybe someone can help me out on why he should be so overconcerned about that.

We may wonder whether Roberts is right, but we shouldn't have to care, and it shouldn't really matter anyway, since you would have to prove fiduciary breach and the plaintiff will only be entitled to be "made whole."

[jpod]

Thomas and Roberts got it right. The correct cause of action is and can only be 502(a)(2): restoring losses to the plan caused by a 409 breach. Once the loss is restored to the plan, it is then merely a function of the plan's investment and accounting procedures that the amount restored is allocated to LaRue's account. (Indeed, I think a different plan participant would have had standing to sue under 502(a)(2) in place of LaRue, but that's an issue for another day.) The next step is that LaRue files an applicaton for benefits and signs all the necessary consents (with his or her spouse's consent, if applicable). If the plan does not give LaRue his replenished account balance, he can follow the plan's claims procedures, etc., exhaust his administrative remedies, and if necessary bring a new lawsuit to recover beneits under 502(a)(3).

[jpod]

In my last sentence I meant to say "502(a)(1)(B)," not "502(a)(3)."

[Steelerfan]

I think you mean thomas and Scalia. I agree that that the action is for a participant to restore losses to the plan, then the participant should recover from the plan. Before this case was decided, in an other thread I said something like the term "plan" in the statute should be construed to include an individual's account. The majority didn't seem to concern itself with that detail.

the next step, though is that he go back to trial and prove there was a fiduciary breach since it would seem that administrative remedies would be futile at this point.

[Guest mjb]

The issue I see with 502(a)(1)(B) being inadequate is that the plan does not have in LaRue's plan account the other $150,000 he is claiming as additional benefits. Would he have an adequate remedy in a DC plan where the only assets to honor the benefits claim would be through shorting the plan accounts (and thus benefits) of other employees, which would trigger a cascade of additional claims? The employer cannot put the $150,000 into the plan as an 'employer contribution' to cover the benefits claim, as such a contribution would have to be allocated per the plan's formula and LaRue is terminated with no compensation on which to base any.

It would appear to me that in a DC plan environment, a 502(a)(1)(B) claim could not be an adequate remedy for a claim about the impact of investment underperformance (such as through failure to implement an investment directive from the employee or through excessive fees being charged). The plan first needs to collect the loss amount from the malfeasant fiduciary per 502(a)(2) in order to have the funds to then pay the benefits claimed by LaRue under 502(a)(1)(B). Until the plan has collected through a 502(a)(2) action from the fiduciary, the employee's 502(a)(1)(B) claim cannot be honored and is an inadequate remedy.

I think the net uptake of the 9-0 LaRue decision is two-fold: (a) a former employee whose account balance has all been paid out has standing under ERISA by virtue of having a colorable claim to additional benefits, and (b) even though it would redound just to the benefit of an employee's plan account, the employee can pursue a derivative action under 502(a)(2) on behalf of the plan to recover the losses occasioned by the fiduciary breach.

But, for the reasons explained above, I do not see how 502(a)(1)(B) could provide an adequate remedy in a DC plan situation where the employee claims his benefits balance should be greater but the plan doesn't have corresponding other assets to honor the claim for additional benefits--unless the plan has recouped from the malfeasant fiduciary the necessary funds to then be able to honor the benefits claim.

As a real world matter most DC plans will not have non allocated assets sufficient to pay a claim for lost profits.

Assuming the claim is really worth $150,000 (which as yet to be determined) what happens in the likely event that the fiduciary declares bankruptcy after being adjudged to have breached his fiduciary duty in the amount claimed? What is the adequate remedy? Should the fiducary's own benefits be seized because of an innocent mistake? Can the participant recover some or all of his 150k from the accounts of the other plan participants if no other funds are available? Can the plan sue the non fiduciary employer to pay the judgment instead of taking it out of the participant's accounts?

The practical answer to these questions is the reason why Congress limited the recovery for participant benefit claims under 502(a)(1)(B) to the remedies in equity, e.g, the account balance plus any earnings pocketed by the wrongdoer. Recovery is not permitted for money damages such as lost profits or punative damages. Allowing recovery of lost profits by individual participants as a breach of fiduicary duty will have a detrimental impact on DC plans and their participants as well result unpaid judgements.

As a separate matter do you think small/midsized DC plans will be able to afford fiduciary insurance?

The court decisions I have reviewed did not allow recovery under both 502(a)(1)(B) and 502(a)(2) by a participant. They only allow recovery under one or the other provision, but not both. If you have a case that holds differently I would like to see it.

[jpod]

Thanks Steelerfan, I did mean Scalia. The typing fingers really outraced the brain in my post.

[Steelerfan]

mjb--Yes, there is personal liability for fiduciary breaches under ERISA. So they can and should be held personally liable.

But why are you worried about collection? You are now ignoring the law and have entered the realm of not agreeing with it. The Court did say that a resoration of profits under trust law is an appropriate remedy under ERISA. If Congress doesn't like it they need to amend the statute.

[jpod]

One thing I would like to know is how did this case get to the S. Ct. without being settled for something between $0 and $150k? Who is paying the lawyers (or are they handling it for free for the privilege of appearing before the Court and the name recognition)? Are there other, similarly situated participants in LaRue's plan who filed complaints to toll the SOL and their cases are on hold pending the resolution of LaRue's case?

Don't bother to speculate, but if you actually know the answers I'd be interested to hear them.

[Guest mjb]

Thomas and Roberts got it right. The correct cause of action is and can only be 502(a)(2): restoring losses to the plan caused by a 409 breach. Once the loss is restored to the plan, it is then merely a function of the plan's investment and accounting procedures that the amount restored is allocated to LaRue's account. (Indeed, I think a different plan participant would have had standing to sue under 502(a)(2) in place of LaRue, but that's an issue for another day.) The next step is that LaRue files an applicaton for benefits and signs all the necessary consents (with his or her spouse's consent, if applicable). If the plan does not give LaRue his replenished account balance, he can follow the plan's claims procedures, etc., exhaust his administrative remedies, and if necessary bring a new lawsuit to recover beneits under 502(a)(3).

If what you say is true why does Roberts state in his last paragraph "I see nothing in today's opinion precluding the lower courts on remand, if they determine that the argument is properly before them, from considering the contention that LaRue's claim my proceed only under 502(a)(1)(B)"?

In an earlier part of the same paragraph the CJ states that the availability of relief under 502(a)(1)(B) may alter the Supreme Court's determination that a claim may be brought under 502(a)(2).

Also, what benefits can LaRue recover under ERISA 502(a)(3) other than his account balance? The cases that I have seen have held that "other equitable relief" does not include money damages which would include lost profits.

[J Simmons]

The issue I see with 502(a)(1)(B) being inadequate is that the plan does not have in LaRue's plan account the other $150,000 he is claiming as additional benefits. Would he have an adequate remedy in a DC plan where the only assets to honor the benefits claim would be through shorting the plan accounts (and thus benefits) of other employees, which would trigger a cascade of additional claims? The employer cannot put the $150,000 into the plan as an 'employer contribution' to cover the benefits claim, as such a contribution would have to be allocated per the plan's formula and LaRue is terminated with no compensation on which to base any.

It would appear to me that in a DC plan environment, a 502(a)(1)(B) claim could not be an adequate remedy for a claim about the impact of investment underperformance (such as through failure to implement an investment directive from the employee or through excessive fees being charged). The plan first needs to collect the loss amount from the malfeasant fiduciary per 502(a)(2) in order to have the funds to then pay the benefits claimed by LaRue under 502(a)(1)(B). Until the plan has collected through a 502(a)(2) action from the fiduciary, the employee's 502(a)(1)(B) claim cannot be honored and is an inadequate remedy.

I think the net uptake of the 9-0 LaRue decision is two-fold: (a) a former employee whose account balance has all been paid out has standing under ERISA by virtue of having a colorable claim to additional benefits, and (b) even though it would redound just to the benefit of an employee's plan account, the employee can pursue a derivative action under 502(a)(2) on behalf of the plan to recover the losses occasioned by the fiduciary breach.

But, for the reasons explained above, I do not see how 502(a)(1)(B) could provide an adequate remedy in a DC plan situation where the employee claims his benefits balance should be greater but the plan doesn't have corresponding other assets to honor the claim for additional benefits--unless the plan has recouped from the malfeasant fiduciary the necessary funds to then be able to honor the benefits claim.

As a real world matter most DC plans will not have non allocated assets sufficient to pay a claim for lost profits.

Assuming the claim is really worth $150,000 (which as yet to be determined) what happens in the likely event that the fiduciary declares bankruptcy after being adjudged to have breached his fiduciary duty in the amount claimed? What is the adequate remedy? Should the fiducary's own benefits be seized because of an innocent mistake? Can the participant recover some or all of his 150k from the accounts of the other plan participants if no other funds are available? Can the plan sue the non fiduciary employer to pay the judgment instead of taking it out of the participant's accounts?

The practical answer to these questions is the reason why Congress limited the recovery for participant benefit claims under 502(a)(1)(B) to the remedies in equity, e.g, the account balance plus any earnings pocketed by the wrongdoer. Recovery is not permitted for money damages such as lost profits or punative damages. Allowing recovery of lost profits by individual participants as a breach of fiduicary duty will have a detrimental impact on DC plans and their participants as well result unpaid judgements.

As a separate matter do you think small/midsized DC plans will be able to afford fiduciary insurance?

The court decisions I have reviewed did not allow recovery under both 502(a)(1)(B) and 502(a)(2) by a participant. They only allow recovery under one or the other provision, but not both. If you have a case that holds differently I would like to see it.

I don't know that small/midsized DC plans will be able to afford fiduciary insurance. Such plans will likely move more towards brokerage windows rather than investment menus set by plan officials, particularly in light of the Hecker v Deere decision of June 21, 2007 (albeit now being appealed by the employee plaintiffs). Others may go all the way to open architecture.

I agree that double recovery is not allowed under ERISA, but there does seem to be room for 502(a)(2) relief beyond what 502(a)(1)(B) provides. 502(a)(1)(B) provides a right to claim benefits due under the plan. But the employee might need to pursue a 502(a)(2) action on behalf of the plan against the fiduciaries in order to recoup losses, so that the plan fund has assets with which to honor the 502(a)(1)(B) claim. Equitable recoupment from the fiduciary might be needed so that the plan has the funds to provide the employee an adequate remedy under his 502(a)(1)(B) claim.

Here are a couple of cases that slice and dice, finding room for 502(a)(2) and (a)(3) relief to aid an employee who is also pursuing a 502(a)(1)(B) benefits claim:

In Ehrman v Standard Ins Co, ND California Case # 3:06-cv-05454-MJJ, the court entered an Order

Granting in Part and Denying in Part Defendants’ Motion to Dismiss and to Strike Plaintiffs’

First Amended Complaint on May 2, 2007. There, the court said it did

not read Forsyth or Ford to stand

for the broad proposition that a Plaintiff may not seek relief under § 1132(a)(3) merely because

he or she has also pleaded a claim under § 1132(a)(1)(B), § 1132(a)(2) and/or other ERISA

remedial sections. Indeed, reading such a bright-line rule into Forsyth or Ford would run

contrary to the Supreme Court's recognition in Varity that even where Congress has fashioned a

remedial provision for a class of injury, there may still be circumstances where additional

equitable relief under § 1132(a)(3)'s ‘catch-all’ provision is appropriate. 516 US at 515 (‘we

should expect that where Congress elsewhere provided adequate relief for a beneficiary's injury,

there will likely be no need for further equitable relief, in which case such relief normally would

not be 'appropriate’ ’) (emphasis added).

In Schultz v Texaco Inc, 127 FSupp2d 443 (SD NY 2001), the court said:

It is true that Varity (Corp v Howe, 516 US 489 (1996)) holds that a litigant may not double dip

by seeking to recover on a Section 502(a)(1)(B) claim while at the same time pursuing

the equitable remedies of Section 502(a)(3). However, that is not the plaintiffs' theory. The

Amended Complaint alleges a denial of benefits and, as a separate and distinct argument,

asks the Court to use its injunctive powers to find that plaintiffs were employees as defined

under ERISA and to require that the employer reclassify them as such.

[JDuns]

I actually wonder if plans will have the opposite reaction (not widen the window for self direction but narrow it). LaRue claims he lost money because his election was not followed. The only way to ensure that all elections are properly followed, is to not let elections be made (ie, direct money for them).

A plan is put in the position of being at risk for not following directions and is also at risk for following directions where the fiduciary believes that the investment is no longer a prudent investment. We all know that the fiduciaries won't be sued if they were right (and saved the participant from losses).

It is all going to come down to plan drafting, policies, participant communications and general participant relations.

[Steelerfan]

It'd be pretty safe to assume that the Supreme Court was aware of 502(a)(1)(B) but likely assumes that a claim under that section would either be denied or used as an adjuct/subsequent claim to recover what is owed after the loss is restored. The Court clearly stated that there can be a cause of action under 502(a)(2) assuming a breach occurred. Who cares if 502(a)(1)(B) is available or unavailable for relief? It's a different claim. What is the point of continuing to discuss the interplay between them, other than the obvious point that no one should be able to double dip?

Does anyone here seriously think that after this opinion, a court could or should get away with dismissing this claim on the basis that 502(a)(1)(B) provides an adequate remedy because relief under 502(a)(2) might be inappropriate?

[Locust]

Roberts opinion doesn't make a lot of sense to me. On the one hand he affirms the majority decision that there is a claim somewhere, but then he says that if the court had considered 502(a)(1) maybe he didn't really have a claim. Not very helpful - it seems like he thinks that in this instance the participant was harmed and ought to have a remedy, but he doesn't want to say that out loud because he doesn't want to give too much away to plaintiffs, so he just says yeah he can sue but I'm not saying why.

The whole discussion of whether to consider the "landscape" of employee benefit plans is interesting. In one way Thomas' opinion saying that you shouldn't take into account "trends in the pension plan market" and you should just say that it's ok to sue a fiduciary for harm to a participant's individual account because that is harm to the plan is appealing, but I think it unrealistic and would result in convoluted interpretations because the landscape has in fact changed so much since 1974. Interpretation by "original intention" is ok in some contexts, but here?

Finally, I wonder what this opinion bodes for the cash balance cases where participants claim that the accrual rate rules for defined benefit plans are violated by the cash balance formula. There seems to be a recognition in the majority opinion that db plan rules are different, and Thomas talks about what ERISA originally said (without regard to the trends in the pension plan market). This would seem to favor the cash balance participants - unless the majority takes into account the changing landscape and concludes that the original understanding of the accrual rate rules shouldn't apply to cash balance plans. On the other hand favoring participants in these cases is not what Roberts and Thomas like to do - they are more free market types it seems to me - so would they take into account current trends in looking at cash balance plans?

[Steelerfan]

responding to Locusts second paragraph--sometimes I wish the justices would address concurring and dissenting opinions like they used to do. I actually thought that Thomas was slightly misinterpreting the majority. I didn't get the sense that the majority was saying that the change in benefits landscape caused a change in how the law should be interpreted. If that's what they are saying, then I don't really agree and I definitely don't think they had to go that far. I interpreted that part of the discussion as essentially saying that Russell was decided with defined benefit-type plans in mind and should be basically be interpreted in that light and limited to analogous facts. I mean Russell isn't irrelevant just because the benefits landscape changed.

A Cash balance plan would really be problematic as a hybrid; it would be hard to tell when to apply the "entire plan" theory or the individual account theory. Likely the answer would depend on the nature of the breach, the approprate remedy and whether the behavior affects the "individual account" aspects of the plan or the "defined benefit" nature of the plan.

[Guest mjb]

You are all so focused on what are the participants rights to recovery that you are ignoring the question how will participants be compensated if they prevail, not to mention the fact of who will want to be the fiduciary of a DC plan who has exposure to unlimited liability for innocuous mistakes in processing participant allocations. Most fiducaries will not have the personal assets to pay the cost of a judgment for lost profits of $150,000 plus legal fees. Which would the participant prefer: a recovery of the current value of the account balance and any earnings credited to the plan or a judment for lost profits that cannot be enforced because the plan fiduciary declares bankruptcy? Or would you prefer that all participants pay for the lost profits to make one participant whole?

Most employers will institute procedures to require that plan participants submit changes in elections/deferrals by email or by faxing the form to the plan administrator to avoid liabilty and pay for the assitional cost of the security. Small employers will lose fiduciary coverage and the plan fiduicary will not have enough personal asset to pay the judgment.

What will you say to the corporate employee who asks what is my exposure if I am a fiduciary?

If you think about it, the CJ's concurring opinion was intended to bring this issue before the court again in the context of what is the proper remedy under ERISA after the lower courts have thoughly vetted the facts and renderd a judgment rather than havng the supreme ct rule on a vague claim for $150,000 in lost profits which have not been proved. It is also possible that the case could be dismissed because of the payment of benefits.

Like I said stay tuned for LaRue II.

[Steelerfan]

well, I actually just spoke with an ERISA litigator who has been operating all along under the assumption (i.e." advising clients") that these types of claims are (have always been) permissible based on the fact that many lower courts have held that such claims are permissible and a belief that the defenses against these claims have been generally regarded as weak. His advice is that, based on the above assumption having been in place and generally regarded as true, there shouldn't be a flood of litigation, unless all the media attention focusing on this case causes participants to file suit.

But even if that isn't true, and there is a flood of litigation, since when does the tail wag the dog. How to collect or the feasibility of collection is ancillary to substantive rights and many people get out of judgements by filing bankruptcy or just being uncollectible (this happens all the time in tort and contrat law) Ability to collect shouldn't dictate law. Why should a person who has lost substantial retirement income not be able to recover just because a mistake might be as you say innocuous? It's about making the party who can better bear the cost be responsible. Why should the participant bear the cost? A participant generally will not be able recover finanacially froms such a blow. There is no evidence to support the contention that allowing these claims will destroy the foundation of the current retirement scheme or the fabric of the universe.

[Guest mjb]

well, I actually just spoke with an ERISA litigator who has been operating all along under the assumption (i.e." advising clients") that these types of claims are (have always been) permissible based on the fact that many lower courts have held that such claims are permissible and a belief that the defenses against these claims have been generally regarded as weak. His advice is that, based on the above assumption having been in place and generally regarded as true, there shouldn't be a flood of litigation, unless all the media attention focusing on this case causes participants to file suit.

But even if that isn't true, and there is a flood of litigation, since when does the tail wag the dog. How to collect or the feasibility of collection is ancillary to substantive rights and many people get out of judgements by filing bankruptcy or just being uncollectible (this happens all the time in tort and contrat law) Ability to collect shouldn't dictate law. Why should a person who has lost substantial retirement income not be able to recover just because a mistake might be as you say innocuous? It's about making the party who can better bear the cost be responsible. Why should the participant bear the cost? A participant generally will not be able recover finanacially froms such a blow. There is no evidence to support the contention that allowing these claims will destroy the foundation of the current retirement scheme or the fabric of the universe.

You still dont get it. Why would a litigator take on a case that has little potential for recovery if a favorable judgment is rendered? I have seen many promising cases that not been prosecuted because there is little possible of collecting on the claim. I dont know of many litigators who will file suit against a client who will declare bankruptcy if a judgment is rendered.

What I still dont understand is how can a participant recover a judgment from a DC plan if the plan fiduciary does not have sufficient assets to pay the judgment.

I disagree that participant claims for lost profits are automatially recoverable, as the CJ opined that it is up to the lower courts to determine the validity of a claim that lost profits are to be recovered under 502(a)(2) instead of being limited to the remedies under 502(a)(1)(B). This issue will be before the Supreme Court again.

I also dont understand what you mean by the third party conversation that these claims have always been permissible and defenses are weak. There have been cases in the 6th (Helfrich v PNC Bank, 267 F3d 477) and 9th circuits (against Charles Schwab) which have denied claims for lost profits by participants and beneficiaries.

[Steelerfan]

People do it all the time. You may or may not be sure you'll collect, and maybe you sue, maybe you don't. Take the OJ Simpson civil case as an example. I still don't think the goldman's have recovered much if anything. When evel knievel died there was a 30+ year old personal injury judgement against him that remained uncollected. You're putting the cart before the horse because you don't like the rule. But why go into this tangent just because some judgments may be uncollectable? If it's uncollectible, you either sue for principle or you walk away. Why is this relevant?

Of course some courts had ruled against these claims, Im not saying it was unanimous, just saying that most lawyers are not fighting this and were not surprised by the ruling. It was merely confirmation of what they already knew and they aren't changing their operations.

No one ever said recovery would be automatic, if you read my prior posts it makes clear that there is a long road ahead of this participant in order to win.

Not sure what issue you think is still litigable after this decision. It's as if you disregad the majority opinion in favor of a concurring opinion that has no force of law and has no rationale that makes sense in the context of the facts. Roberts's opinion offers no rationale or explanation of why or how 502(a)(1)(B) could or should preclude recovery where it is shown that the plan has sustained a loss that cannot be restored to the plan without further action. The majority opinion is the law and Roberts's opinion runs counter to it. His opinion could be persuasive in cases where the participant could receive his full benefit without the need for a 502(a)(2) remedy. But sec 502(a)(2) in this case is not providing icing on the cake like 502(a)(3) might in another case; rather it constitutes the meat of the remedy in this case, without it, Larue must live with what he got.

In addition, you have offered no explanation or rationale for your position despite several posts (not all by me) describing the inadequacy of 502(a)(1)(B) as a remedy on the facts of LaRue or similar facts, and several posts that fairly substantially skewer Robert's opinion--in fact im begining to think that the majority didn't address his opinion because it make so little sense in the context of the case at bar that it wasn't worth the time and effort to respond to it.

I'm not sure there's anything more I can say about this that hasn't been said, we may just have to agree to disagree.

[Guest mjb]

People do it all the time. You may or may not be sure you'll collect, and maybe you sue, maybe you don't. Take the OJ Simpson civil case as an example. I still don't think the goldman's have recovered much if anything. When evel knievel died there was a 30+ year old personal injury judgement against him that remained uncollected. You're putting the cart before the horse because you don't like the rule. But why go into this tangent just because some judgments may be uncollectable? If it's uncollectible, you either sue for principle or you walk away. Why is this relevant?

Of course some courts had ruled against these claims, Im not saying it was unanimous, just saying that most lawyers are not fighting this and were not surprised by the ruling. It was merely confirmation of what they already knew and they aren't changing their operations.

No one ever said recovery would be automatic, if you read my prior posts it makes clear that there is a long road ahead of this participant in order to win.

Not sure what issue you think is still litigable after this decision. It's as if you disregad the majority opinion in favor of a concurring opinion that has no force of law and has no rationale that makes sense in the context of the facts. Roberts's opinion offers no rationale or explanation of why or how 502(a)(1)(B) could or should preclude recovery where it is shown that the plan has sustained a loss that cannot be restored to the plan without further action. The majority opinion is the law and Roberts's opinion runs counter to it. His opinion could be persuasive in cases where the participant could receive his full benefit without the need for a 502(a)(2) remedy. But sec 502(a)(2) in this case is not providing icing on the cake like 502(a)(3) might in another case; rather it constitutes the meat of the remedy in this case, without it, Larue must live with what he got.

In addition, you have offered no explanation or rationale for your position despite several posts (not all by me) describing the inadequacy of 502(a)(1)(B) as a remedy on the facts of LaRue or similar facts, and several posts that fairly substantially skewer Robert's opinion--in fact im begining to think that the majority didn't address his opinion because it make so little sense in the context of the case at bar that it wasn't worth the time and effort to respond to it.

I'm not sure there's anything more I can say about this that hasn't been said, we may just have to agree to disagree.

1. Just so we dont misunderstand each other what do you think will be the result on remand?

2. What is still litigable is virtualy everying except the question of whether an individual participant can bring a claim on behalf of the plan for losses to his account. As noted in the majority opinion (P4) " whether the petitioner can prove these allegations and whether the respondents may have valid defenses to the claim are not matters before us. Footnote 3 notes several issues which need to be determined by the court including whether he was required to exhaust remedies set forth in the plan before he can seel relief under 502(a)(2). Valid defenses include the availability of relief under 502(a)(1)(B) and the relevance of Justice Thomas's position that any recovery by LaRue must be paid to the plan, not to him directly (see footnote at end of his opinion).

With regard to the need to submit the claim to the plan administrator before bringng a lawsuit under ERISA note that in Vizcaino v. Microsoft claims for 401k plan benefits by the plaintiff consultants were eventually dismissed and remanded to the plan administrator for determination pursuant to the claims procedure of ERISA 503.

3. As to whether the question of whether the remedy under 502(a)(1)(B) is adequate as the CJ notes allowing participants to recast claims for benefits under a plan as as a breach of fiduciary duty under 502(a)(2) can result in circumventing previous precedents under Firestone that grants the plan adminstators discretion in determining the meaning of plan terms.

[Steelerfan]

Of course I don't know what the result on remand will be, but I think P will have to prove a breach occured, that much is clear. All the facts will have to be sorted out to determine whether the P followed the plans proper procedures, etc. I already said before that footnote 3 presents obsacles, but the employer's position is clear and I would bet that exchaustion would be futile at this point and thus not a bar to a court proceeding.

I meant litigable back up to the Supreme Court, as you keep talking about LaRue II. There is no issue left that should go back up to the SC. The entire issue surrounding whether a breach occurred can be litigated, but 502(a)(1)(B) is not an obstacle; it is irrelevant in this context. How would you propose to win on the argument that the plaintiffs remedy under 502(a)(1)(B) is adequate and relief under 502(a)(2) is inappropriate? There is no authority (other than Robert's misprint--which is not even legal authority) to say that 502(a)(1)(B) can be a defense to this claim. The Court made it clear that if a fiduciary breach occurred causing a loss, liability under 502(a)(2) is the remedy--period, end of sentence, no ifs ands or buts. The P will have an opportumity to prove that a breach ocurred, and 502(a)(1)(B) cannot bar recovery if a breach is proved. That is clear from the language of the majority opinion, regardless of Roberts rantings in his concurrance.

[Locust]

A Cash balance plan would really be problematic as a hybrid; it would be hard to tell when to apply the "entire plan" theory or the individual account theory. Likely the answer would depend on the nature of the breach, the approprate remedy and whether the behavior affects the "individual account" aspects of the plan or the "defined benefit" nature of the plan

Steelerfan - Regarding your comment above, I think this gets to the issue. Can you treat a cash balance plan as a hybrid, using db funding rules and dc accrual rules? As a old ERISA person, I know that ERISA never contemplated such a vehicle and that the rules were not set up that way - it's either a db plan or a dc plan. So if you're of the "original intention" school, I'd think you'd have to say that a cash balance plan is a db plan and has to meet all of the rules applicable to db plans. On the other hand if you are a "realist" or wish to take into account "current trends" or are just an old-fashioned "judicial activist," you might want to allow and construct some sort of hybrid structure, applying db plan rules when "appropriate" (such as funding), and dc plan rules when "appropriate" (such as benefit accrual) because that's what a lot of people want. That's certainly what the 6th Circuit did in my view.

[Guest mjb]

In all of the intense discussion of the liability potential to employers of LarRue that has occupied the the ERISA bar what has been overlooked is the obvious: Does a participant have a duty to promptly notify plan administrator of the failure to carry out investment instructions upon discovery of such failure and what is the measure of damages if the participant delays notifying the plan administrator.

There is a doctrine under common law that an injured party has a duty to mitigate damages to extent reasonably possible and cannot act voluntarily in a way that will increase the damage. For example, in employment discrimination cases an employee who has filed a claim for discrimination for wrongful termination has an obligation to seek new employment and accept a reasonable offer while his complaint is pending. Failure to do so could result in a reduction of any damages that would be awarded. Employees who have pending employment discrimination claims are notified by their counsel that they have to seek out and apply for employment in their field and keep records of jobs applied for and the results of each application in case the defendant requsts such records.

Does a participant who files a claim under ERISA for failure to follow investment instructions have a similar obligation to mitigate damages by promptly notifying the plan adminstrator if instructions are not followed and can such failure to notify the plan administrator affect any damages awarded?

For example, say a participant gives instructions to sell a fund on Jan 2 when the FMV is 20 and no sale occurs. ( Assume that there are instructions to place the proceeds in a money market account for which the earnings will be ignored). When the participant gets the 1st quarter statement on April 10 the price of the fund has declined to 15 but no action is taken by the participant. At the time the 2nd quarter report is received on July 10 the fund has increased to 18 but again no action is taken. At the time the 3rd quarter report is received by the participant on October 10 the value of the fund is now 25 but no action is taken. On Jan 10 of the following year after receiving the 4th Quarter report listing the price of the fund as 8 on Dec 31 the participant notifies the plan administrator of the failure to follow his instructions given on Jan 2 of the prior year. The fund is sold immediately at 9. Assume the participant's reason for not notifying the plan admin earlier of of the failure to follow instructions is that he only looks at his statements once a year when he rebalances his portfolio.

Assuming that there was a breach of duty what is the participant's "loss"?

Is it 11 (the difference between the FMV on Jan 2 and the date the fund is sold after the participant notified the plan administrator on Jan 10 of the following year)?

Is is it 5 (the difference between the FMV on Jan 2 and the date the participant recieved the 1st quarter report for which no acton is taken)?

Is it 0 because the price of the stock rose from 20 on Jan 2 to 25 at the end of the 3rd quarter without any compliant by the participant and therefore there is no loss? Can inaction by the participant be deemed to be a cancellation of the original order to sell?

Is is it 12 because that is the amount of the "lost profits" due the failure of the plan administrator to sell on Jan 2?

Or is it 2 or some other amount such as a moving average duing the period?

Many 401k plans provide explicit instructions to participants on each quarterly report of the obligation to notify the plan administrator of any discrepancies in their account and disclaim any liability if notification is not given. Is such notice sufficient to mitigate any liability by the plan administrator?

[J Simmons]

I agree, mjb, with regards to the unimplemented investment directive at issue in LaRue. There are many defenses, and the $150,000 will likely be chopped down to just a fraction of that through various defenses. Also, if the DeWolff plan did not specify in a very concrete, mechanical way how an investment directive must be delivered (via some means that yields hard copy proof), then at trial it may be nothing more than a 'he said, she said' about whether the directive was in fact delivered.

I suspect the holding in LaRue will have more impact in the pending class action lawsuits against employers and plan officials over excessive, hidden fees (the 'excessive revenue sharing' lawsuits). The issue addressed in LaRue was one that plagued those lawsuits too: could the employees sue under 502(a)(2) in the name of the plan to go after the fiduciaries in a way that benefits those employees disproportionately rather than purely plan-wide? If the plan had, at some point prior to suit, changed to lower fee investments and services, then the amount recouped would perhaps not benefit the DC accounts of those who first accrued benefits after the switch to the lower cost investments and services. The issue in LaRue was whether a claim could be brought under 502(a)(2) against fiduciaries if the result was more benefits for that employee rather than benefiting the plan as a whole. That has been answered. This is why I think the LaRue decision will nudge more plans towards brokerage windows and open architecture rather than back to non-directed status.

[PAL]

mjb has a good point and it is one that worries me. I see a future where any kind of error by the plan sponsor/administrator could be an endless source of profit for wise plan participant.

Several years ago, a company I know had a participant call and demand that they be made whole for the loss they incurred as a result of their money not being transferred correctly almost a year before. In addition to the three quarterly statements the participant had received (showing that the money had not been correctly transferred), their recordkeeper was able to pull three recorded phone calls from the participant. The calls all came in during the period when the error was still outstanding and on each call, the participant requested detailed account balance and share price information (exactly what would be required in order to determine if he was ahead or behind based on the error). The third time the participant called, his account was down and he called back within an hour to demand that his account be "corrected" and the "loss" to his account be fixed.

It's the same dilemma when a participant enrollment or increase in deferral election percent in not entered into payroll correctly. A wise employee will see that the correct amount is not coming out of their pay and they will say nothing because at the end of the day, it doesn't matter that the employee has received plan statements every quarter and a pay stub every week for the past year and a half. The correction for that mistake is for the employer to contribute the money (plus earnings) that the employee did not.

I understand that the employer should be responsible for the mistakes they make but I really believe there should be a limit and the employee should have some accountability as well.

PAL

[Steelerfan]

J Simmons quote: "This is why I think the LaRue decision will nudge more plans towards brokerage windows and open architecture rather than back to non-directed status. "

How does brokerage window and open archtecture work?

[Don Levit]

Folks:

We have some very bright people in our midst.

Together, we border on the genius!

I agree with John Simmons that the only viable course is by suing the fiduciary.

There is very little, if no chance at all, that the participants will be forced to surrender parts of their accounts to make LaRue whole.

We know that, according to this decision, that "misconduct by the administrators of a defined benefit plan will not affect an individual's entitlement to a defined benefit unless it creates or enhances the risk of default by the entire plan."

It also mentioned that "The disability plan at issue in Russell did not have individual accounts."

I am wondering, then, if only the fiduciary breach would be applicable to suits involving welfare benefits, which are, typically, "defined benefit" plans?

Also, wouldn't fidiciary insurance cover losses such as the one in LaRue?

Or, would that be considered willful negligence, and typically be excluded?

Don Levit

[Don Levit]

Folks:

For an interesting explanation of what we are discussing, you may want to go to the current blog at www.healthplan.com to get Roy Harmon's views.

Don Levit

[Don Levit]

Folks:

I gave the incorrect web site for Roy Harmon's excellent blog.

It is www.healthplanlaw.com.

Don Levit

[Guest mjb]

Folks:

For an interesting explanation of what we are discussing, you may want to go to the current blog at www.healthplan.com to get Roy Harmon's views.

Don Levit

What are his views? The only entry on the site is excerpts from the case.

The only way to cover such loss is to have a fiduicary policy which is usually not available or is prohibitively expensive for most employers.

[Steelerfan]

I am wondering, then, if only the fiduciary breach would be applicable to suits involving welfare benefits, which are, typically, "defined benefit" plans?

I thought the fiduciary duty rules didn't apply to welfare benefit plans as long as assets are not held in trust.

[Guest Akkula]

Hopefully this issue of the extent of liability will be addressed soon. Putting no responsiblity on the participant to monitor their own account makes the potential liability very scary if they can try to recover investment losses over an unlimited period of time. They should have the obligation to prudently monitor their own account and notify their administrator of errors. It appears that the justices saw that DB plans and DC plans differ with respect to the investment performance in individual accounts but I am not sure they fully considered another pandora's box they were opening.

Allowing individual participants the right to recover damages in a DC plan outside of a class action brought on behalf of the plan essentially makes the fiduciary liable for unlimited damages if they are now required to defend themselves from mistakes on individual participant accounts instead of having to answer for the entire of the plan's management. In a DB plan, the benefit is pre-determined and as long as the promise to pay is fulfilled, it would be fulfilled for all participants and the fiduciary would know exactly what they would be "on the hook" for since they are managing their risk by choosing the funding vehicles behind the scenes to fund this fixed, promised future benefit. As long as the plan remains funded, there is little risk to the fiduciary.

In a DC plan, there is no fixed amount that the fiduciary could be liable for and thus any administrative mistake could really cause an unlimited liability if the participant has no duty to mitigate damages in a timely fashion. Furthermore, there is little that the fiduciary can do to totally eliminate their risk to clerical errors and, thus, there is really nothing that they can do to reduce their exposure because they have no fixed future amount that they must pay. If the benefit were fixed, the fiduciary could make prudent arrangements in case of errors, but since of the variable retirement benefit in a DC plan, there is no way for the fiduciary to predict the potential gains to the participant.

While the court seemed to recognize certain changes in the DC/DB market when making their decision, they didn't recognize all of them, unfortunately, when they decided to overturn all of the previous rulings. Their ruling allowed participants to recover damages individually but they didn't allow fiduciaries to protect themselves precisely because they didn't seem to consider the differences between the the unpredicatable losses that could be experiencd by a participant in a DC plan versus the pre-determined losses that would be in a DB plan.

It is too bad that the court decided they wanted to make new laws and try to interpret legislation that was designed for a different purpose and for different types of plans and for a different time. This issue really should have been addressed by lawmakers and not by the courts. For all the bad press they get, I really wish that some lobbyists from the retirement plan industry were able to protect the interests of plan sponsors and recordkeepers by speaking to the lawmakers.

Participants should have the right to make their accounts whole if a mistake is made if they bring it to the attention of the administrator in a timely fashion. However, fiduciaries should have some protection and the ability to protect themselves against inevitable clerical errors. The court totally ignored this second fact when it decided to overturn precedent and loosely interpret the law to reflect what they felt was the intention of the law. Unfotunately this is what happens when the courts decide to write laws; they didn't have the input of all the stakeholders in this decision and didn't consider all the ramifications of overturning precedent.