On Wednesday, February 20, 2008, the U.S. Supreme Court issued a ruling that overturned the Fourth Circuit Court of Appeals' decision that a participant in a 401(k) plan is prohibited from using provisions of ERISA to recover losses allegedly caused by their employer's failure to carry out investment instructions (LaRue v. DeWolff, Boberg & Associates, Inc., No. 06-856, U.S. Supreme Court [February 20, 2008]). Effectively, the ruling allows James LaRue to try to recover $150,000 the he believes was lost when the plan manager failed to respond to his investment directions, but has the potential to open a floodgate of litigation on defined contribution plan sponsors.

The Court held that Section 502(a)(2) of ERISA permits claims by individual participants to recover losses alleged to arise from a breach of fiduciary duty, even if those losses are limited to (and the relief would work to the benefit of) the individuals' accounts in the plan. The ruling notes the distinction between fiduciary misconduct with respect to defined benefit plans (in which a loss to the plan may have no adverse effect on an individual's benefits unless the plan becomes insolvent) and misconduct with respect to defined contribution plans (in which the effects may impact an individual's benefits without any affect on the benefits of other participants). The Court also remarked that other provisions of ERISA and related Department of Labor regulations would be rendered meaningless if the "whole plan" language of Russell ( a prior case) is applied to defined contribution plans.

The decision clears the way for any participants who argue that they have been harmed by fiduciary misconduct to attempt to recoup losses. As plan sponsors shift more responsibility for investment decisions to plan participants, they will not be able to avoid liability in total. LaRue indicates that fiduciaries may be liable for failure to implement participant directed decisions in a timely fashion.

The complete implications of the LaRue ruling are not completely known, as clarification and further legislation are sure to come. Check back at www.cowdenassociates.com/news next week for an in-depth examination of this Supreme Court ruling and its repercussions.