Supreme Court Makes ERISA Sausage

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“Laws are like sausages. It’s better not to see them being made.” Otto von Bismarck

This quote came to mind as my fatigued late-night-blogging mind struggled through last week’s Supreme Court decision in LaRue v. DeWolff, Boberg & Assoc., Inc., et al.

In Larue, The Court upheld the right of an individual participant in a 401(k) retirement plan to sue under ERISA for a breach of fiduciary duty in the plan’s administration.

• Right result. But messy and costly process, argumentation, and judicial reasoning to get there (the sausage making).

In the common-law system, with law made as much by court decisions as by legislation, the sausage-making analogy sometimes seems as apt for all the legal maneuvering and argumentation going into appellate court decisions as for the politics going into the passage of legislation.

As I struggled through the detailed reasoning of the Supreme Court’s three separate opinions in LaRue,all reaching the same result, my mind cleared for a moment and I saw how absurd this case must look to a nonlawyer – because as a simple matter of fairness and justice the result seems an absolute no-brainer.

This is hardly unusual. Creative defense attorneys work hard to persuade courts of all manner of technical legal reasons to prevent recovery.

If the court believes that justice calls for allowing recovery, then it must make the sausage – navigating around and disposing of all those creative arguments, and articulating a rationale that can be squared with statutory language and/or past court decisions.

ERISA, the main federal law governing employee benefit plans, has proven particularly messy, with issues coming to the Supreme Court quite regularly, often presenting relatively slight variations on previously-decided issues — so that previous cases must be carefully parsed and extended or distinguished.

So, here’s how it went in the LaRue case:

Facts

• James LaRue sued his former employer, DeWolff, Boberg & Associates, and the 401(k) retirement savings plan it administered.
• Under the plan, LaRue had the right to direct the investment of his contributions in accordance with specified procedures and requirements.
• LaRue alleged that he properly directed DeWolff to make certain changes to his 401(k) investments, but DeWolff failed to do so, causing his account’s value to be approximately $150,000 less than if the changes had been properly executed.
• He contended that this amounted to a breach of fiduciary duty under ERISA, and sought an appropriate “make-whole” remedy that would restore his account to the position it would have been in had his directions been properly carried out.

It’s here that my common sense kicked my lawyer’s myopia in the rear, and yelled out:

“I mean, come on, the employer totally dropped the ball, breaching its fiduciary duty, and the guy’s retirement account is out $150,000 as a result. Of course he can recover!”

But my common sense was almost wrong. The defense almost won, relying on a few words from an earlier Supreme Court ERISA opinion.

Defense Wins First Two Rounds

1. Granting a defense motion, the district court held that since the employer and 401(k) plan “did not possess any disputed funds that rightly belonged to [LaRue], he was seeking damages rather than equitable relief available under [ERISA] §502(a)(3).”
2. On appeal, LaRue also argued he was entitled to relief under a different section of ERISA, §502(a)(2). The Court of Appeals rejected this argument, citing language from an earlier Supreme Court case, Massachusetts Mut. Life Ins. Co. v. Russell, that states that that this section “protect[s] the entire plan, rather than the rights of an individual beneficiary.” LaRue was only seeking to protect his own rights, not that of the whole plan, the court of appeals reasoned, affirming the denial of relief.

Supreme Court Reverses (Plurality Opinion — 5 of 9 Justices)

The Supreme Court plurality assumed there had been a breach of fiduciary duty adversely impacting the value of LaRue’s account.

The plurality explained that ERISA §502(a)(2) “authorizes . . . actions on behalf of a plan to recover for violations of [fiduciary] obligations defined in §409(a) — mainly those that “relate to the proper management, administration, and investment of fund assets, with an eye toward ensuring that the benefits . . . are ultimately paid . . . .” It said the misconduct alleged by LaRue fell “squarely within that category.”

The plurality distinguished Russell, relied upon by the Court of Appeals, as a case in which the plaintiff received all benefits to which she was entitled, but sought damages for claim-processing delay, whereas Larue suffered permanent damage to the value of his account.

Then the plurality distinguished the Russell “entire plan” statement, limiting that statement’s applicability to defined benefit plans — traditional pension plans in which the amount an individual receives is based on a set formula, not on a fund’s investment performance.

• Today, the Court said, the employee benefit plan landscape has changed, and “[d]efined contribution plans dominate the retirement plan scene.” With defined contribution plans, an individual’s benefit depends on contributions to their account and the success of the investment of such contributions.
• “Unlike the defined contribution [401(k)] plan in this case, the disability plan at issue in Russell did not have individual accounts; it paid a fixed benefit based on a percentage of the employee’s salary.”
• With a defined benefit plan, “[m]isconduct by the administrators . . . will not affect an individual’s . . . benefit unless it creates or enhances the risk of default by the entire plan.”
• “For defined contribution plans, however, fiduciary misconduct need not threaten the solvency of the entire plan to reduce benefits below the amount that participants would otherwise receive.”
• “Whether a fiduciary breach diminishes plan assets payable to all participants and beneficiaries, or only to persons tied to particular individual accounts, it creates the kind of harms that concerned the draftsmen of §409. Consequently, our references to the “entire plan” in Russell, which accurately reflect the operation of §409 in the defined benefit context, are beside the point in the defined contribution context.”
• “Other sections of ERISA confirm that the ‘entire plan’ language from Russell . . . does not apply to defined contribution plans. Most significant is §404(c), which exempts fiduciaries from liability for losses caused by participants’ exercise of control over assets in their individual accounts. . . . This provision would serve no real purpose if, as respondents argue, fiduciaries never had any liability for losses in an individual account.”

The Court concluded:

We therefore hold that although §502(a)(2) does not provide a remedy for individual injuries distinct from plan injuries, that provision does authorize recovery for fiduciary breaches that impair the value of plan assets in a participant’s individual account. Accordingly, the judgment of the Court of Appeals is vacated, and the case is remanded for further proceedings consistent with this opinion.

Further complicating matters are the two concurring opinions, offering different ways to reach the right result on the facts of Larue. The unanimity of the outcome is suggestive to me of the rightness of the result; the fragmented reasoning reflective of the challenging ERISA sausage making.

LaRue may mean many things; it always takes the passage of years to determine which Supreme Court decisions wind up having a major impact and which more or less just resolve the specific issues involved in them.

But it does not mean what some careless summaries state: “The Supreme Court ruled Wednesday that individual participants in the most common type of retirement plan can sue under a pension protection law to recover their losses.”

This makes it sound like if you lose money in a defined contribution plan, you can recover. Remember, the Court in LaRue started with the assumption that there had been a breach of fiduciary duty. That will have to be proven in every case.

In LaRue, it seems obvious: complete disregard of investment instructions. The Court also assumed this caused losses. That will not always be so self-evident in other cases, either.

On balance, LaRue may stimulate more litigation, but I wouldn’t expect an overwhelming quantity. And it will provide some needed protection against the type of error that caused LaRue’s investment strategy to fail — not it’s lack of wisodm, but the plan administrator’s failure to execute.

For further reading:

• Reflections on the LaRue Decision
• Supreme Court Vacates Fourth Circuit’s Decision In LaRue
• Plan participants can sue to recover investment losses, U.S. Supreme Court holds (good summary, but misleading headline)
• Court Says 401(k) Participants Can Sue
• A Couple of Other Perspectives on LaRue

Photo credit: Spigoo via flickr

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