Edward A. Zelinsky is the Morris and Annie Trachman Professor of Law at the Benjamin N. Cardozo School of Law of Yeshiva University. In the article below, Zelinsky discuses the U.S. Supreme Court’s recent decision in LaRue v. DeWolff, Boberg & Associates, Inc. In LaRue, the Court twice cited an article by Zelinsky. That cited article was an earlier version of several chapters in Zelinsky’s new book, The Origins of the Ownership Society: How The Defined Contribution Paradigm Changed America.
In the pension community, the recent decision of the U.S. Supreme Court in LaRue v. DeWolff, Boberg & Associates, Inc. is widely perceived as a watershed development. In LaRue, a participant in his employer’s 401(k) plan claimed that the plan failed to execute the participant’s investment instructions. This failure, Mr. LaRue alleged, resulted in a lower account balance in his 401(k) account. The U.S. Supreme Court held that Mr. LaRue, if indeed harmed by the inaction of the plan’s fiduciaries, may sue for relief under the Employee Retirement Income Security Act of 1974 (ERISA).
Those who aren’t ERISA mavens can be excused for asking what the fuss is about. ERISA is supposed to protect plan participants and their retirement resources. If a plan’s fiduciaries did something wrong or failed to do something they should have done, why should it take the nation’s highest tribunal to conclude that the injured participant can obtain relief under ERISA?
The simple answer is history. The U.S. Supreme Court’s 1985 decision in Massachusetts Mut. Life Ins. Co. v. Russell raised legitimate doubts as to the ERISA remedies available to Mr. LaRue and other similarly situated 401(k) participants.
Section 409 of ERISA requires plan fiduciaries to “make good” to the plan “any losses to the plan resulting from” the fiduciaries’ breach of their fiduciary duties to the plan. ERISA Section 502(a)(2) authorizes plan participants like Mr. LaRue to sue to enforce Section 409. As Justice Thomas persuasively argued in his LaRue concurrence, it is straightforward to read Sections 409 and 502(a)(2) as together authorizing Mr. LaRue to sue the plan’s fiduciaries to pay to the plan the value Mr. LaRue allegedly lost as a result of the fiduciaries’ failure to execute Mr. LaRue’s investment instructions. Once in the plan, such funds would properly be allocated to Mr. LaRue’s account and, from there, distributed to him.
The problem for this straightforward reading of the statute was the U.S. Supreme Court’s earlier decision in Russell. In that case, the Court had characterized ERISA Section 409 as providing remedies which benefit “the entire plan.” If this observation was part of the Supreme Court’s holding in Russell, Mr. LaRue and others like him lack a remedy under ERISA Sections 409 and 502(a)(2) since they seek the payment of funds, not to “the entire plan,” but for the limited purpose of replenishing their own particular 401(k) accounts.
On the other hand, if the Court’s reference in Russell to “the entire plan” is treated as dicta, then Section 409 is naturally read as permitting Mr. LaRue’s ERISA-based lawsuit to proceed.
In LaRue, the Court characterized its reference in Russell to “the entire plan” as reflecting the predominance of defined benefit plans at the time Russell was decided. A defined benefit participant does not have an individual account in a plan or a claim to particular plan assets. Rather, a defined benefit participant has a claim for a specified benefit payable from the total pool of plan assets.
Today, in contrast, the typical ERISA-governed retirement plan is a defined contribution arrangement like the 401(k) plan in which Mr. LaRue participated. In this setting, Mr. LaRue is entitled to receive the distribution of his individual account in the plan.
Without quite saying say so, the Supreme Court in LaRue dismissed as dicta its earlier statement in Russell indicating that remedies under ERISA Sections 409 and 502(a)(2) must go to “the entire plan”:
[O]ur references to the “entire plan” in Russell, which accurately reflect the operation of Section 409 in the defined benefit context, are beside the point in the defined contribution context.
Hence, Mr. LaRue’s lawsuit may proceed under ERISA Sections 409 and 502(a)(2).
Like most important decisions of the U.S. Supreme Court, LaRue answers some questions while it creates others. Most obviously, Mr. LaRue must now, as a matter of fact, demonstrate in the federal district court that the events (or, more precisely, the nonevents) took place as he alleges. If Mr. LaRue can prevail factually, there is then the legal issue whether the fiduciaries’ failure to execute Mr. LaRue’s investment instructions constituted a breach of fiduciary duty for purposes of ERISA Section 409.
Nevertheless, in the world of ERISA law, LaRue is a significant development. LaRue affirms the ability of injured participants in defined contribution plans to sue for relief under ERISA Sections 409 and 502(a)(2). Since many Americans hold their retirement assets in 401(k) and other ERISA-regulated defined contribution accounts, the fuss over LaRue is justified.
You ask, “If a plan’s fiduciaries did something wrong or failed to do something they should have done, why should it take the nation’s highest tribunal to conclude that the injured participant can obtain relief under ERISA?”
Exactly! What is would be highly unusual to assume that a participant wouldn’t have recourse to obtain relief. The Supreme Court made the right decision.