Supreme Court Permits Employees to Sue Retirement Plan Fiduciaries for Losses to Individual Account Balances

In a decision on February 20, 2008, the Supreme Court effectively removed a major defense that had, until now, been routinely used to overcome claims by retirement plan participants seeking to recover for losses to their individual account balances allegedly caused by the actions or inactions of plan fiduciaries. In doing so, however, the Supreme Court may have created some new questions and more uncertainties.

In LaRue v. DeWolf Boberg & Associates, Inc., No. 06-856 (February 20, 2008), an employee alleged that plan fiduciaries ignored his request to change his investment options and, as a result, his account balance dropped by more than $150,000. The lower court, following a number of similar decisions, ruled that the employee could not sue plan fiduciaries for individual losses that did not affect the plan as a whole. The Supreme Court disagreed and reversed. 

Although all nine justices agreed that the employee could sue to recover for the losses to the employee's individual account, they differed on the appropriate theory of recovery. In that regard, ERISA provides a variety of jurisdictional provisions that, in many cases, federal courts have held limit the types of claims that can be asserted and the available remedies. It is in the interpretation of these complex ERISA provisions that the justices have left some potential confusion. Here is why.

A majority of the court concluded that if a plan fiduciary — such as a plan administrator or trustee — failed to act or acted inappropriately, thereby causing losses to the retirement plan that impaired the value of plan assets in an individual's retirement plan account, the employee could maintain a claim for breach of fiduciary duty. Such a claim involves personal liability for the fiduciaries, generally does not require the employee to first exhaust plan administrative remedies, and the fiduciaries' actions are considered de novo and not under any sort of abuse-of-discretion standard of review. 

In contrast, Justices Roberts and Kennedy were of the view that the proper cause of action in this type of situation is a claim for benefits against the retirement plan. Such a claim requires the employee to first exhaust plan administrative remedies. Moreover, the plan administrator's decision in a claim for benefits is frequently is considered under a more favorable abuse-of-discretion standard of review, and generally a claim for benefits has been held to preclude a related claim for breach of fiduciary duty. Notably, however, the majority did not respond to this argument, and four of the justices who made up the majority expressly stated that they were not addressing whether an employee must first exhaust plan remedies before pursuing a claim for breach of fiduciary duty. 

In sum, the decision in LaRue means that employees can now more freely assert claims to recover for losses to their individual retirement plan balances allegedly caused by the actions or inactions of plan fiduciaries. While it appears that plan  fiduciaries will be the primary targets of such claims, retirement plans themselves may be sued as well under the theory espoused by Justices Roberts and Kennedy. Traditionally, however, an employee could not assert a claim against plan fiduciaries if the employee had an adequate remedy against the retirement plan itself. Therefore, confusion in this area will likely continue and retirement plans may be at the forefront of initially determining how to resolve these types of claims.