In a closely watched case, which may redefine claims and remedies allowed under the Employee Retirement Income Security Act (ERISA), the United States Supreme Court heard arguments on November 26, 2007, on a ruling rejecting a plaintiff's requests to recover losses to his individual 401(k) retirement account. The U.S. Court of Appeals for the Fourth Circuit rejected the requested relief because the relief sought was not "equitable" in nature and the suit did not seek relief on behalf of the plan. The decision of the appeals court denying the plaintiff's request follows traditional legal analysis in ERISA cases under ERISA provision 29 U.S.C. § 1132(a)(2), which authorizes recovery of "any losses to the plan." LaRue v. DeWolff, Boberg & Associates, Inc., No. 06-856.
The case involves an employer's 401(k) retirement savings plan for which the employer also is the sponsor and plan administrator. The plaintiff/employee provided certain investment instructions to the employer/plan administrator regarding his personal account. The employer/administrator never implemented the plaintiff's instructions regarding his plan investments.
In the lawsuit brought under 29 U.S.C. § 1132(a)(3) of ERISA, the plaintiff alleged that, but for this omission, his personal account would have increased in value by $150,000. The plaintiff argued that this omission was a breach of fiduciary duty. As relief, the plaintiff demanded compensation for his $150,000 loss, which he denominated as "appropriate 'make whole' or other equitable relief" pursuant to § 1132(a)(3). The employer/plan administrator asserted that such monetary compensation was not available as a matter of law for claims arising under § 1132(a)(3). The district court agreed and dismissed the action.
On appeal, the plaintiff presented a number of arguments subsequently rejected by the Fourth Circuit Court of Appeals in affirming the decision of the district court. The appeals court panel observed that, in the final analysis, the plaintiff was seeking nothing more than compensatory damages, relief foreclosed under § 1132(a)(3) by existing Supreme Court precedent, including Mertens v. Hewitt Associates, 508 U.S. 248 (1993), and Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002). Rejecting the plaintiff's attempt to classify his claim as one of equitable restitution, the court noted the plaintiff's admission that the employer/administrator did not possess his funds:
Plaintiff does not allege that funds owed to him are in defendants' possession, but instead that these funds never materialized at all. He therefore gauges his recovery not by the value of defendants' nonexistent gain, but by the value of his own loss -- a measure that is traditionally legal, not equitable.
Among other arguments rejected by the court was that Mertens and Knudson only foreclosed "make whole" relief sought by fiduciaries from beneficiaries, not beneficiaries seeking relief from the fiduciary.The court concluded there was no precedent supporting the theory that "whether a particular form of relief is 'equitable' depends on the identity of the parties." The court also rejected the plaintiff's attempt to characterize his request as an action under ERISA to require the fiduciary to "make good" to a plan "any losses resulting from each [breach]." Accordingly, because the plaintiff sought "to particularize the recovery to himself," the action under § 1132(a)(2) was foreclosed.
If the Supreme Court reverses the decision of the Fourth Circuit in LaRue, it would increase significantly the monetary liability of ERISA fiduciaries for errors and omissions. A reversal also could likely tip the balance in favor of broader relief for individual plan participants, not only in 401(k) individual account situations, but also in other ERISA contexts, such as benefits denial claims.