Employee Benefits Update: Supreme Court Opens Floodgates for Individual 401(k) Recoveries

In a significant employee benefits case, the United States Supreme Court recently held in LaRue v. DeWolff that an individual participant in a 401(k) plan can sue to recover losses from errors by fiduciaries that affect only his or her account in the plan. Prior to this case, many courts had relied on a 1985 Supreme Court decision (Massachusetts Mutual Life Insurance Company v. Russell), which held that, under the Employee Retirement Income Security Act of 1974 (ERISA), suits to recover losses from fiduciaries may provide remedies only for entire plans, not for individuals.

The recent Supreme Court case involved a self-directed 401(k) plan in which the participant instructed the broker to make certain changes to his investments. Because the broker never carried out those directions, the participant alleged that this failure constituted a breach of the broker’s fiduciary duties and sought to be made whole for the $150,000 in losses that had occurred.

The Changing Employee Benefits Landscape

When the Supreme Court ruled on February 20, 2008, it did not actually overturn the Russell case. Instead, the court held that the same rationale used in the 1985 case supported the opposite result in LaRue v. DeWolff. Integral to the decision was the court’s recognition that the landscape of employee benefit plans has changed over time. When ERISA was enacted in 1974, defined benefit plans were the norm. Because that type of plan involves no individual accounts and the investment risk and portfolio management are entirely under the control of the employer, investment results do not directly affect a participant's benefit. Today, self-directed 401(k) plans, which focus more on the individual, dominate the retirement plan world. In this current environment, the Supreme Court concluded that ERISA does authorize recovery for fiduciary breaches that impair the value of plan assets on a participant's individual account.

Participants with benefit claim disputes have traditionally faced many hurdles, including a requirement that the administrative review process be exhausted before the parties can proceed to litigation. Other obstacles include the deferential standard of review used by courts when interpreting the plan and the strict application of statutes of limitations. Now, however, participants who can cast their dispute as a broader breach of fiduciary duty claim, rather than a benefit claim, may be able to avoid these limitations.

As a result of the decision in LaRue v. DeWolff, we expect to see a surge in cases where plan participants sue to recover their own individual losses due to breaches of fiduciary duty.