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.]

Comments

[scott macey]

I agree with the primary opinion of Professor Stein that the Supreme Court got it right that remedies for such matters as were addressed in LaRue should be available under ERISA. I also agree that opinion and the Roberts' concurrence are muddled. However, I disagree with the premise that a participant should go directly to litigation when there is a claim and review process available that may result in granting the participant's claim and avoid costly and time consuming litigation. The Supreme Court will address what deference should be given the administrative decision when there is an actual or apparent conflict (e.g. deciding the claim and funding the benefit) in the MetLife v. Glenn case. Why should every administrative error be turned into a fiduciary breach case if it can be resolved through the adminsitrative processes under the plan. A failure to follow a participant's direction under a 404(c) plan seems that it is first a claim for benefits or to enforce participant rights under 502(a)(1)(B). Generally, the claim and review process is adminsitered by the employer. If a review committee upholds the participant's claim, it would then have to be funded by the sponsor/employer or the adminsitrator/fiduciary who made the mistake. Otherwise (if it is not funded), the claim would be considered denied and the participant could then file a lawsuit.

[Carl Johnson]

As unfortunate as the Roberts' opinion was (and we can only wonder, "what was this man thinking?"), what about Stevens' majority opinion? It was almost as muddled. Which is more important? Somehow trying to rationalize the misguided "entire plan" language in Russell, or writing a clear, logical and consistent opinion to tell us what ERISA provides in light of its language and purpose? Although I hate to say it, Thomas (and Scalia) were the only ones who "got it right," or mostly so.

What really strikes me as odd is that not one of the three opinions addresses the nature of a "plan." The majority, at least, seems to equate "plan" with a real "fund" of money. It's true that section 409(a), to which section 502(a)(2) points, seems to focus primarily on funded plans and losses to funds, but also provides for "other equitable or remedial relief . . . ." Although the plans in both this case and Russell were funded, I think of a plan as simply an arrangement or scheme (a foreign term I really like in this context) of rules and procedures intended to result in the payment of determinable benefits (retirement, or deferred compensation or other) which may or may not involve funding and where failure to follow the rules may not necessarily affect all participants. There is nothing "entire" that is inherent about a "plan." You can consider an entire "fund," but not an entire plan. There is no such thing.

To Roberts' point, what if the plan in LaRue had been unfunded with benefits simply mirroring investment options specified by the participant. A claim for benefits is clearly the way to go. However, where the plan calls for benefits to be based on a share of the plan's actual investment fund, a claim for benefits would be worth no more than what's actually in the fund. Seems simple enough to me.

The shame of it is that, as Professor Stein points out, we're more than 30 years down the road from ERISA and still dealing with this very fundamental issue. Ultimately, the fault lies with Congress and its failure to amend ERISA to give participants, clearly, the remedies needed to be protect their rights to benefits as provided by the terms of a plan. The financial services industry has sold us on the 401(k) plan as the "retirement" plan of choice and on the importance of letting participants direct the investment of their accounts to achieve their retirement (or whatever) objectives, yet participants whose investment choices are ignored still have no clear remedy. This would be funny if it weren't so sad.

Congress needs to act, not only to clarify the instant issue but also to deal with the related equitable/legal remedy problem and the real meaning of section 404(c), given the Labor Department's reluctance to address the consequences of an employer's failure to comply with the 404(c) regulations in a participant-directed, funded indivdual account plan.

[SHL]

Shouldn't the "502(a)(2)"s in paragraphs 8 and 9 be "502(a)(1)(B)"s? That is, shouldn't it say, "...because under Section 502(a)(1)(B), it is clear that a participant ordinarily has to exhaust administrative remedies..." and "...it is also possible that if the action is under section 502(a)(1)(B), there may be no relief at all -"