BNA Pension and Benefits Blog

Should We Rue LaRue?

Last month the Supreme Court resolved, at least for one case, this question: Do individual employees have a cause of action when a fiduciary violates its responsibilities with respect to the assets in an individual’s defined contribution account? In the case, LaRue v. Dewolff, Boberg & Associates, Inc. (42 Empl. Benefits Cas. 2857), the Court held that an individual does have a cause of action. The judgment was unanimous, but Justice Roberts wrote a mystifying and mischievous concurring opinion, joined by Justice Kennedy, which might raise a question as to whether the issues purportedly addressed by the Court are really settled.

The case involved straightforward facts: a participant in a defined contribution plan gives investment instructions with respect to his account. The plan fiduciary, to whom the instructions were given, does not follow them. The account suffers a loss, and the participant brings a civil action against the fiduciary to recover the loss. Does ERISA provide jurisdiction for such a civil action?

The fiduciary argued no, because relief against a fiduciary (except for equitable relief) is available only if the fiduciary caused harm to the entire plan , as opposed to this situation in which the harm was to a participant. This argument was quite plausible given earlier Supreme Court decisions interpreting the scope of ERISA Sections 502(a)(2) and 409. (Section 409 provides, in part, that a fiduciary “is liable to make good to [the] plan any losses to the plan resulting from” the fiduciary breach.)

The Court, though, said that the loss in this case--even though felt by only a single plan participant--was still a loss to the plan under Section 409.

My initial reaction to the decision recalls a quote from “The Godfather,” when Marlon Brando, presiding over a meeting of the five families to establish a peace, asks “How did things ever get this far?” How could we, more than 30 years after ERISA, still be debating whether a participant in a defined contribution plan has a cause of action against a fiduciary whose breach reduced the value of the employee’s account?

But now, thanks to LaRue, the issue is settled. Or is it?

Justice Roberts wrote separately. His opinion says that LaRue’s true claim was a claim for benefits under Section 502(a)(1)(B) of ERISA and that “it is at least arguable that a claim of this nature properly lies only under § 502(a)(1)(B). . . . If LaRue may bring his claim under § 502(a)(1)(B), it is not clear that he may do so under § 502(a)(2) as well.”

Justice Roberts says this is important, because under Section 502(a)(1)(B), it is clear that a participant ordinarily has to exhaust administrative remedies and that a plan can grant a fiduciary a significant degree of discretion in determining benefit eligibility and the meaning of plan terms.

Although Justice Roberts does not expressly say so, it is also possible that if the action is under section 502(a)(1)(B), there may be no relief at all—LaRue’s action was an attempt to get the fiduciary to make good the plan’s loss; how would that be possible under section 502(a)(1)(B), where the fiduciary would not even be the proper defendant? (Maybe if there is a loss, the loss would have to be recovered ratably from the accounts of all participants. Now that would be a happy result for the other participants. Now could they bring an action against the plan fiduciaries for not suing the fiduciary responsible for causing LaRue a loss? And would that be actionable only under section 502(a)(1)(B), since they are basically saying the same thing that Justice Roberts says Larue is saying: “My benefit should be larger”? I can see an endless cycle of complaints here.)

The most unfortunate thing about Justice Roberts’ concurrence is that it ensures us a new period of uncertainty. Certainly every fiduciary defendant will seize on Justice Roberts' words, and courts will have to figure out just what the concurrence means and if any Justices, other than Justices Roberts and Kennedy, may in the future be sympathetic to the concurrence’s rather odd position.

I should add that it is particularly odd, given that Justice Roberts, at least in his confirmation hearings, suggested that he wanted the Court to speak, as often as possible, with a single voice. In LaRue, he opts for point, counterpoint.

[Ed. Note: For coverage of the LaRue decision see 34 Pens. & Ben. Daily (Feb. 21, 2008); 35 Pens. & Ben. Rep. 467  (Feb. 26, 2008); and 42 Empl. Benefits Cas. 2857.]

Preparing for the Code section 409A Compliance Deadline

The extension for amending plans for compliance with Code section 409A and the final regulations thereunder under Notice 2007-86 does not mean that companies or individuals should wait to address these issues until later this year.  During the course of an IRS examination, one company received an information and document request from the IRS agent inquiring regarding what the company was doing to comply with Code section 409A.  The IRS is interested in how companies are preparing to comply, what will your or your client's answer be?

In preparing for Code section 409A compliance, it is important to study carefully the transition rules because these can be helpful tools in addressing arrangements that may not be able to continue in the same manner as they have operated in the past under Code section 409A.  Each situation needs to be addressed considering the operations of the plan, the company's payroll system and the administration system for the plan.  It is important to consider not only operations today in working to design the plan for compliance, but also how operations will work in the future and how to structure arrangements considering the impact of mergers and acquisitions on the non-qualified deferred compensation plans.

During the interim it is also important to review operational foot faults in light of the relief provided under Notice 2007-100.  The corrections available under Notice 2007-100 should be carefully reviewed and the notice obligations under such Notice must be followed to be able to receive the benefits of the corrections provided. 

During 2008, companies need to develop their own internal compliance policies and procedures for Code section 409A, including identifying all plans and arrangements potentially subject to Code section 409A, creating a procedure to identify what new agreements or arrangements need to be reviewed under Code section 409A, limiting the internal personnel who can send communications about plans or enter into agreements to avoid inadvertent documentary compliance issues, coordinating plans (particularly those that are linked to qualified plans, other non-qualified benefits or that have unique offset arrangements), collecting documentation showing compliance in operation, and determining how to deal with problems under either the transition rules, good faith compliance, one of the exemptions in the final regulations,  or fixing violations under Notice 2007-100.  It is also important to consider whether the issue is not addressed in the final regulations or Notice 2005-1 and can be addressed as being in "good faith compliance."   It is important to remember there is no remedial amendment period for compliance with Code section 409A.

After 2008 based upon the currently existing guidance, you will not be able to fix bad documents, most bad plan designs, bad substitutions or discounted stock options that have been exercised. The IRS is asking about 409A preparations, it is time to begin work on your answer.