Supreme Court Says Individuals Can Sue Retirement Plan Fiduciaries; Implications for ESOPs Unclear

Since a seminal case in 1985 (Massachusetts Mutual Life Insurance Company v. Russell, 473 U.S. 134), courts have largely, if not unanimously, concluded that individuals could not sue ERISA plan fiduciaries for individual losses to the plan. The argument was that monetary damages could be provided only for the plan as a whole, so employees could sue only on behalf of the plan, not themselves. But in a defined contribution plan, losses to individuals represent a more difficult problem. Under Internal Revenue Code Section 502(a)(3), which allows participants to sue on behalf of a plan, a typical decision (as has happened in a number of "stock drop" suits) has been for the plan to be changed so that assets become more diversified. Assets in the plan overall might also be restored, such as by making an additional corporate contribution and adding benefits to a class of former employees affected by the fiduciary breach. But what if the problem concerns not all the participants, but just one or a few? If they cannot sue for monetary damages individually, but only on behalf of the plan, what good would that do them? How could their losses be restored, especially if they no longer worked for the company?

On February 20, 2008, in LaRue v. DeWolff, Boberg & Associates (No 06-856), the Supreme Court unanimously concluded that individuals do have the right to sue for individual monetary damages under Section 502(a)(2), although a concurring opinion in the case written by Chief Justice Roberts argued individuals have to exhaust administrative remedies first.

So what does this mean for ESOPs? Generally, ESOP experts believe it will have much more impact on 401(k) plans, particularly with respect to fiduciary errors and omissions and to excessive plan charges. The large majority of ESOPs are funded by the company with no individual choices or directions, so losses to one participant's account are likely to be mirrored in accounts of other participants. ESOP lawsuits, in other words, could already usually proceed under Section 502(a)(2). Of course, that does not mean some aggressive attorneys will not try this tack anyway or that there could not be situations where there are specific individual issues, particularly regarding errors and omissions for individual accounts (failing to offer a diversification election, for instance).