Leading Companies Online Magazine Archives
The LaRue Decision Shakes Up Qualified Plan Fiduciaries
By Tony I. Mathews, Beyster Institute Staff
The recent Supreme Court decision in La Rue v. DeWolff, Boberg & Associates, Inc. (“DeWolff”) may lay the groundwork for a significant change in the level of risk assumed by qualified plan fiduciaries.
LaRue was an employee of DeWolff and a participant in their qualified 401(k) Plan. In the normal course of participation, LaRue gave the trustees investment direction with respect to his account and (it is undisputed) the trustees failed to implement the directions he provided. La Rue then sued claiming that the DeWolff 401(k) plan trustees had breeched their fiduciary duty when they failed to make investment changes as he directed, and that because of their failure his account suffered a loss of earnings of $150,000.
The district court dismissed the suit, finding that La Rue’s claim was not an appropriate claim under ERISA. Prior to this ruling, courts have held consistently that damage to a plan must be to the plan as a whole (rather than a single participant) in order to come under the umbrella of an ERISA claim against the fiduciaries, and the relief has to be “equitable relief,” which means that relief would be granted by way of changing operation of the plan rather than, necessarily, specific monetary damages to the plaintiffs. The circuit court appellate division agreed with the district court finding that, since the only damage suffered was to a single account (rather than the plan as a whole), La Rue didn’t have a claim under ERISA. Nevertheless, La Rue persisted and the U. S. Supreme Court (the last house on the block, so to speak) agreed to hear the case.
Just so we don’t get off track here, I need to remind you that none of these courts have begun considering whether the fiduciaries are liable where an administrative error causes a comparative loss to a participant’s account. None of these courts have even heard evidence on that issue. All these courts, so far, are just considering whether La Rue has a legal standing to sue at all – if damage to a single employee’s account can give rise to a claim based on fiduciary violations.
Well, La Rue finally found a sympathetic ear on that matter in Washington D.C. After hearing the arguments of counsel for both La Rue and DeWolff, and reviewing the arguments of all the lower courts, the Supreme Court held (seemingly contradicting its own findings in previous cases) that in a defined contribution plan (like a 401(k) or an ESOP), since the plan balance is merely the accumulated balances of all the individual accounts, a loss in an individual account is, by definition, a loss to the plan as a whole. So, just like that, La Rue is approved to sue over the loss in his account and the case is sent back to the lower court to begin hearing all the evidence related to the real issue.
Of course, there is no way to know how that will come out, but at this point, there’s enough in the current finding to get the defined contribution plan legal community thinking about it. If individuals have the right to sue as individuals related to losses that are not patterns of behavior that affect the plan as a whole, will that cause the filing of a huge number of lawsuits that would all have to be defended separately? Are we watching the first ripple of an avalanche that could suffocate plan sponsors all across the country?
Well, it is certainly possible, but consensus seems to be that, while this does represent a shift in the court’s thinking on the rights of individual participants to sue fiduciaries, it is unlikely that this will result in wholesale law suits on the matter. The more cynical among the community seem to think that the individual account losses would, for the most part, not be large enough to interest counsel in taking the cases. Others feel that this decision might actually make it more difficult for participants to sue in a class action. In any case, the landscape has changed and it remains to be seen how much of a difference that will make in the long term. For its part, the Supreme Court’s opinion provided a number of good arguments to support the contention that this sort of an error would not create fiduciary liability anyway.
In all events, the most significant effect will likely be felt by sponsors of qualified 401(k) plans and may be very visible in the number of “stock drop” cases that are currently finding their way through the courts.
Even though in general this should not create issues for ESOP companies, there may be particular areas of practice for ESOP sponsors that will create vulnerability under this “individual suit” exposure. For example, while we don’t think that administrative errors automatically create fiduciary issues, we do think that independent design decisions might.
Take, for example, the practice of converting terminated participants' ESOP accounts from stock to cash after termination but before distribution. If the stock later goes up considerably in value, could the individual terminees sue the fiduciaries? We think they might be able to do so.
How can one defend against this sort of assault? Well, this is a great example of the real advantage of writing into your document exactly what you intend to do. If the plan provides that terminees’ accounts will be treated in this way, and the fact is disclosed in the summary plan description as well, we believe that the exposure is reduced to very little, if any.
We will certainly keep an eye on the development of this new way of looking at qualified plan participant rights, and we’ll keep you up to date as new developments emerge.
©2008 The Beyster Institute and its authors and their entities. All rights reserved.
|
Back |
|
|
Print this page |
|