In the Wake of The Great Recession, Federal Courts Provide Broad Statutory Interpretations in an Effort to Protect Erisa Plan Participants
The Employee Retirement Income Security Act (“ERISA”) was enacted in 1974 in large part to protect the interests of employee benefit plan participants by (1) establishing strict standards of conduct for plan fiduciaries and (2) providing statutory remedies to enforce those standards of conduct. On its face, the language of ERISA affords rather narrow protection for plan participants. Accordingly, the provisions of ERISA have proven difficult for federal courts to interpret in trying to maintain the protections intended by the Act.
Early federal court decisions reflected an intent to strictly interpret the ERISA statutory language, which consequently led to minimal protections for plan participants. However, since the Great Recession of 2008, when millions of retirees and soon-to-be retirees lost a substantial portion of their retirement savings, there has been a clear shift in the interpretation of ERISA statutory provisions. This shift evidences a renewed emphasis on protecting employees and their beneficiaries from wrongful or careless conduct by plan fiduciaries, even if that means providing plan participants with protections that are not explicitly afforded under ERISA.
Creation of Fiduciary Liability for Plan Participants’ Individual Account Losses Within Defined Contribution Plans under ERISA Section 409(a)
Section 502(a)(2) of ERISA provides that “[a] civil action may be brought…(2) by a participant, beneficiary or fiduciary [of an employee benefit plan] for appropriate relief under [ERISA Section 409].” ERISA Section 409(a) makes a plan fiduciary personally liable for breaches of his or her fiduciary duties with respect to an ERISA plan:
Any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries…shall be personally liable to make good to such plan any losses to the plan resulting from each 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….(emphasis added)
Notwithstanding the clear legislative intent of ERISA, the language of Section 409(a) has led to controversy over whether plan participants can bring suit against plan fiduciaries to recover individual losses for breaches of fiduciary duties, or whether plan participants are limited to recovery on behalf of the entire plan.
The United States Supreme Court first addressed this controversial issue in Massachusetts Mutual Life Ins. Co. v. Russell. In Russell, the plaintiff was a beneficiary of an employee defined benefit plan who brought action to recover damages from a fiduciary who violated an ERISA provision by untimely processing her claim for disability benefits. On appeal, the Ninth Circuit Court of Appeals determined that the fiduciary’s untimely processing of the plaintiff’s claim violated the fiduciary’s obligation to process claims in good faith and in a fair and diligent manner. The Ninth Circuit held that the fiduciary’s violation therefore gave rise to a cause of action under ERISA Section 409(a), and that the plaintiff, a plan beneficiary, had a right to seek recovery for individual losses under ERISA Section 502(a)(2).
The Supreme Court reviewed and ultimately overturned the Ninth Circuit’s holding. In its opinion, the Court agreed that “Section 502(a)(2) authorizes a participant or beneficiary to bring an action against a fiduciary who has violated Section 409.” However, the Court gave a much more limited interpretation of Section 409(a) as inuring only “to the benefit of the plan as a whole” and not an individual participant. The Court opined that its strict interpretation was supported by the plain language of Section 409:
“…[W]hen the entire section  is examined, the emphasis on the relationship between the fiduciary and the plan as an entity becomes apparent. Thus, not only is the relevant fiduciary relationship characterized at the outset as one “with respect to the plan,” but the potential personal liability of the fiduciary is “to make good to such plan any losses to the plan…and to restore to such plan any profits of such fiduciary which have been made through use of assets of the plan…”
To read directly from the opening clause of Section 409(a), which identifies the proscribed acts, to the “catchall” remedy phrase at the end—skipping over the intervening language establishing remedies benefiting, in the first instance, solely the plan—would divorce the phrase being construed from its context and construct an entirely new class of relief available to entities other than the plan….
…A fair and contextual reading of the statute makes it abundantly clear that its draftsmen were primarily concerned with the possible misuse of plan assets, and with remedies that would protect the entire plan, rather than with the rights of an individual beneficiary.
The Supreme Court’s holding in Russell stood uncontested for over 20 years. However, in 2008, the Supreme Court revisited the issue of fiduciary liability to plan participants in LaRue v. DeWolff, Boberg, & Associates, Inc. In LaRue, the plaintiff, a participant in an employee defined contribution plan, brought an action alleging that his employer failed to follow his directions for making changes to investments in his account, resulting in substantial losses. Relying on the Supreme Court’s decision in Russell, the Fourth Circuit Court of Appeals held that the plaintiff could not recover for his personal losses because ERISA Section 502(a)(2) “provides remedies only for entire plans.”
In a momentous decision by the Supreme Court, the Court reversed the Fourth Circuit’s holding and essentially disregarded the plain language of Section 409. Indeed, in an effort to override the Court’s strict interpretation of Section 409 in Russell, the Court distinguished LaRue from Russell, noting that “the rationale for Russell’s holding supports the opposite result in this case.” Specifically, the Court asserted that “Russell’s emphasis on protecting the ‘entire plan’ from fiduciary misconduct reflects the former landscape of employee benefit plans. That landscape has changed.” For instance, “[u]nlike the defined contribution plan in [LaRue], the disability plan at issue in Russell did not have individual accounts; it paid a fixed benefit based on a percentage of the employee’s salary.”
Through its holding in LaRue, the Supreme Court expressly limited its strict interpretation of Section 409 in Russell to defined benefit plans, thereby rendering the holding in Russell inapplicable to defined contribution plans and in turn rendering Russell essentially obsolete. In support of its arguably overreaching decision, the Court noted that “misconduct by [fiduciaries] 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.” In contrast, fiduciary misconduct in defined contribution plans “need not threaten the solvency of the entire plan to reduce benefits below the amount that participants would otherwise receive.” Relying on this distinction, the Supreme Court sided with the plaintiff in holding that although ERISA Section 502(a)(2) does not provide a remedy for individual injuries distinct from plan injuries, Section 502(a)(2) does authorize recovery for fiduciary breaches that impair the value of plan assets in a participant’s individual account.
Relaxed Enforcement of Pleading Requirements for ERISA Plaintiffs under Federal Rule of Civil Procedure 8
Rule 8 of the Federal Rules of Civil Procedure requires that a complaint present "a short and plain statement of the claim showing that the pleader is entitled to relief." In order to meet the Rule 8 pleading standard and survive a motion to dismiss under Rule 12(b)(6), a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face. A complaint states a plausible claim for relief if its factual content allows the court to draw a reasonable inference that the defendant is liable for the misconduct alleged in the complaint.
On November 25, 2009, the Eighth Circuit Court of Appeals issued a decision in Braden v. Wal-Mart Stores, Inc. aimed at preserving employee benefit plan participants’ right to bring actions against ERISA plan fiduciaries despite the participants’ limited ability to satisfy the requirements of Rule 8. In Braden, the plaintiffs brought suit alleging that Wal-Mart’s 401(k) plan paid excessive management fees and that the trustee of the plan breached certain fiduciary duties. Wal-Mart and the other defendants moved for dismissal under Rules 12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure—lack of subject matter jurisdiction and failure to state a claim respectively. The District Court for the Western District of Missouri granted the defendants’ motion to dismiss, holding in pertinent part that the plaintiff’s complaint was inadequate under Rule 8 because it did not allege sufficient facts to show how the defendants’ decision-making process was flawed.
On appeal, the Eighth Circuit refused to honor the District Court’s strict interpretation of Rule 8, holding that the District Court erred in two ways: (1) the court ignored reasonable inferences supported by the facts alleged, and (2) the court drew inferences in defendants’ favor. As the Eighth Circuit noted, “[e]ach of these errors violates the familiar axiom that on a motion to dismiss, inferences are to be drawn in favor of the non-moving party.”
In its decision, the Eighth Circuit acknowledged that in interpreting Rule 8’s pleading standard, courts must not “ignore the significant costs of discovery in complex litigation and the attendant waste and expense that can be inflicted upon innocent parties by meritless claims.” However, the court further emphasized that in applying Rule 8, courts must be “attendant to ERISA’s remedial purpose and evident intent to prevent through private civil litigation ‘misuse and mismanagement of plan assets.’” Moreover, the court recognized that ERISA plaintiffs often (and perhaps most of the time) lack important information necessary to plead their claims in detail. Accordingly, the court essentially held that the intent behind ERISA requires courts to interpret Rule 8 loosely for ERISA plaintiffs:
Congress intended that private individuals would play an important role in enforcing ERISA's fiduciary duties—duties which have been described as "the highest known to the law." Donovan v. Bierwirth, 680 F.2d 263, 272 n.8 (2d Cir. 1982). In giving effect to this intent, we must be cognizant of the practical context of ERISA litigation. No matter how clever or diligent, ERISA plaintiffs generally lack the inside information necessary to make out their claims in detail unless and until discovery commences. Thus, while a plaintiff must offer sufficient factual allegations to show that he or she is not merely engaged in a fishing expedition or strike suit, we must also take account of their limited access to crucial information. If plaintiffs cannot state a claim without pleading facts which tend systemically to be in the sole possession of defendants, the remedial scheme of the statute will fail, and the crucial rights secured by ERISA will suffer. These considerations counsel careful and holistic evaluation of an ERISA complaint's factual allegations before concluding that they do not support a plausible inference that the plaintiff is entitled to relief.
In the short time since Braden, federal courts have unanimously upheld the Eighth Circuit’s holding, thereby preserving the intent behind ERISA by giving employee benefit plan participants the means to enforce ERISA’s fiduciary duties.
Narrow Interpretation of ERISA Preemption under ERISA Section 514(a)
ERISA Section 514(a) provides that the laws of ERISA preempt—with certain exceptions—“any and all State laws insofar as they may now or hereafter relate to any other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of this subchapter or the terms of the plan.” (emphasis added).
In April 2010, the United States District Court for the Eastern District of Pennsylvania issued an opinion expanding the potential liabilities for ERISA plan advisers who are found to not be fiduciaries under the plan. In Nagy v. De Wese, the plaintiff brought suit against three defendants in part for breach of fiduciary duty under ERISA, unjust enrichment and breach of fiduciary duty under state law. One of the defendants, Smith Barney, moved to dismiss the plaintiff’s state law breach of fiduciary duty claim under Rule 12(b)(6) of the Federal Rules of Civil Procedure, asserting that the plaintiff’s state law claim was preempted by ERISA.
Specifically, Smith Barney argued that the language of Section 514(a) preempted the plaintiff’s state law breach of fiduciary duty claim because it “related to” an “employee benefit plan” within the meaning of Section 514(a). Significantly, the plaintiff admitted that his state law breach of fiduciary duty claim was preempted if Smith Barney was found to be an ERISA fiduciary. However, the plaintiff asserted that his state law claim was merely an alternative pleading to support recovery if Smith Barney was found not to be an ERISA fiduciary by the court. In response, Smith Barney argued that whether it was an ERISA fiduciary or not was irrelevant to whether the plaintiff’s state law breach of fiduciary duty claim “related to” the plan at issue.
Disregarding Smith Barney’s argument, the Eastern District of Pennsylvania relied upon the Third Circuit’s holding in Glaziers and Glassworkers Union Local No. 252 Annuity Fund v. Newbridge Securities, Inc. in finding that in some instances, ERISA fiduciary status may in fact affect whether a state law claim is preempted. In Glaziers, the Third Circuit Court of Appeals recognized that if a defendant is found not to be an ERISA fiduciary, there is still “room to argue that any fiduciary duty [the defendant] may have had…arises under state law and does not ‘relate to,’ but only ‘affects and involves' an ERISA plan. That is, the state law claim may not relate to the administration of an employee benefit plan at all.”
With Glaziers in mind, the Eastern District analyzed the plaintiff’s state law breach of fiduciary duty claim as follows:
Unlike plaintiff’s allegations that Smith Barney breached fiduciary duties owed to the Plan, which involve duties owed under state law by virtue of the Plan’s status as Smith Barney’s customer, and not as an ERISA plan, the allegations that Smith Barney breached fiduciary duties owed to the Plan’s participants depend on the existence of, and Smith Barney’s knowledge of, the Plan. Because the existence of the Plan and Smith Barney’s knowledge of the Plan are essential elements of the state law breach of fiduciary duty claim to the extent that the claim alleges breach of duties owed to the Plan’s participants, that claim is preempted."
Relying on Glaziers, the Eastern District ultimately granted in part and denied in part Smith Barney’s Rule 12(b)(6) motion to dismiss. Specifically, the court held that the plaintiff’s state law breach of fiduciary duty claim was preempted to the extent it sought to recover for Smith Barney’s breach of fiduciary duties owed to the plan participants. However, the plaintiff’s breach of fiduciary duty claim was not preempted to the extent that it sought to recover for Smith Barney’s breach of fiduciary duties owed to the plan itself if Smith Barney was determined not to be an ERISA fiduciary.
Analysis and Conclusion
Through their decisions in LaRue, Braden and Nagy, federal courts at every level offered broad interpretations of clear statutory language. These decisions reflect a renewed effort to preserve the intent behind ERISA, and they will likely afford greater protections for future ERISA plan participants by providing them with the remedies and enforcement mechanisms intended by the drafters of the ERISA. Moreover, the decisions will motivate plan fiduciaries to take better care in the administration of their employee benefit plans, which will help ensure that plan participants’ retirement savings are protected. Given the Obama administration’s commitment to a complete overhaul of the financial industry in favor of greater protections for investors, there is no reason to believe federal courts will shift their broad interpretive approach any time soon.