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Retirement Planning > Retirement Investing

High Court Hears Arguments In Retirement Plan Servicer Suit Case

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Members of the U.S. Supreme Court are thinking about the remedies available to retirement plan members who say plan servicers failed to follow their directions.

The question came up at the court on Nov. 26, when lawyers presented arguments regarding LaRue vs. DeWolff, Boberg & Associates Inc., No. 06-0856.

James LaRue, a man who participated in a 401(k) savings plan administered by his former employer, DeWolff, Boberg & Associates Inc., Dallas, a management consulting firm, says the firm cost his 401(k) plan account $150,000 by failing to execute changes he had requested.

A federal district court and a panel of the 4th U.S. Circuit Court of Appeals both dismissed LaRue’s suit, contending that the Employee Retirement Income Security Act does not allow a plan participant to sue the administrator for breach of fiduciary duty.

LaRue’s lawyers say Section 502(a)(2) of ERISA allows plan participants to sue plan administrators in connection with allegations of breach of fiduciary duty in order to “make good to such plan any losses to the plan resulting from each such breach.”

ERISA mandates that plan administrators, servicers or fiduciaries, not the plan itself, must absorb the loss for the type of mistake that occurred in the LaRue case, according to Peter Stris, a Costa Mesa, Calif., lawyer who is representing LaRue.

To do otherwise, would “pick the pockets of the other participants” in the plan, Stris said Monday.

Thomas Gies, a Washington lawyer who was representing DeWolff, said LaRue is suing in response to personal losses, rather than the losses of the retirement plan as a whole.

One consideration “is whether Congress really intended for these individual kinds of ‘he said; she said’ claims to be brought,” Gies said. “We think not.”

The U.S. solicitor general’s office is supporting LaRue.

“We don’t think that you could rob the other accounts to pay this … participant,” Roberts said. “That would likely violate the fiduciary’s duty of loyalty to those participants, the fiduciary duty of prudence under … ERISA…. The crux of the matter here is that the plan has suffered a loss and that the appropriate remedy is against the fiduciary in his personal capacity.”

The argument by DeWolff lawyers that the only remedy under ERISA is injunctive relief is wrong, Roberts said.

Lawyers for the American Council of Life Insurers, Washington, earlier filed a brief contending that letting LaRue win “would expose ERISA fiduciaries to claims for monetary damages by plan participants based on losses allegedly suffered by individuals with respect to their benefit plan accounts.”

Eroding statutory limits on ERISA suits in that way would increase the cost of sponsoring retirement plans and, ultimately, reduce participation, the ACLI contends.

Moreover, LaRue might have profited if the fiduciary’s failure to act had protected LaRue from an unwise investment direction, the ACLI contends.

Many of the justices’ questions centered on the circumstances in which one of many members of a 401(k) plan should or should not have the ability to sue a plan administrator on behalf of the plan as a whole under ERISA Section 502(a)(2).

Justice Stephen Breyer came up with an example involving the trustee of a plan with 1,000 members who invests the plan assets in a cache of diamonds.

The trustee “puts it in a bank deposit vault,” Breyer said. “One day he takes all 500 diamonds and runs off to Martinique. We catch him enjoying the sun.”

In that case, Section 502(a)(2) of ERISA would permit a suit against the trustee, Breyer said.

“That’s what (2) is there for, right?” Breyer asked. “Right. Okay. Now, everything is the same except each of the thousand diamonds was put in individual safe deposit box with the participant’s name on it. Everything else is the same. Why should it matter?”

Justices asked Gies about situations in which a loss to many participants in a 401(k) plan might qualify as a loss for a plan as a whole under ERISA Section 502(a)(2).

“I could imagine a situation where the percentage gets so high that the assets might be held in such a way that they could be more easily seen to be a loss to the plan as a whole,” Gies said.

Justice Antonin Scalia talked about the difficulty of distinguishing between problems that cause losses for individual retirement plan members and problems that, under Gies’s logic, would be broad enough for the participants to sue using ERISA Section 502(a)(2).

“You know, I could understand your case if you said even if there were a hundred diamonds, each of them in an individual plan, there still is no loss to the plan until the plan itself has been held liable to make up for the loss,” Scalia said. “But you’re not willing to say that. You say at some ineffable point it becomes a loss to the plan…. I can’t understand how your system works. You’re telling me it depends on how big the diamond is and–and what kind of a breach it was. How can we write an opinion like that?”

Justices also talked about issues such as the responsibilities of the fiduciary and the plan to compensate participants for mistakes.

“Well,” Souter said at another point, “the argument of the U.S. is that you can’t rob Peter to pay Paul, so that if in fact his account didn’t have the money, the plan didn’t have any place to get the money, and the only way the money could be had would have been from a fiduciary, which again gets you to subsection (2).”

For employers and retirement plan administrators, the best strategy is to wait until the Supreme Court speaks before trying to develop their own approach to coping with the issue, according to Lynn Dudley, a vice president at the American Benefits Council, Washington.

“The court appears to be trying to craft a remedy to this problem,” Dudley said.


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