The Supreme Court ruled last week that individual participants in 401(k) retirement plans can sue under ERISA to recover their losses, stirring anxiety amongst insurers and others serving as plan advisors.
Specifically, the Court held in a 9-0 decision that the Employee Retirement Income Security Act permits an individual account holder to sue plan administrators for breaching their fiduciary duties.
The case revolved around interpreting language in ERISA that refers to recovering money for the retirement “plan,” rather than an individual participant in the plan suing solely on his own behalf.
However, an industry lawyer cautions that a detailed reading of the decision implies the road to the courthouse may be long–and the potential liability to the money management industry may be less than meets the eye.
“The court has decided that an individual can sue under ERISA (the Employee Retirement Income Security Act) for alleged fiduciary breaches in defined contributions plans and recover monetary damages,” said Ken Cohen, deputy general counsel and senior vice president at MassMutual, based in Springfield.
MassMutual was cited in the court’s opinion in the case, LaRue v. DeWolff Boberg & Associates, Inc., et al, No. 06-856, because the prior precedent on the issue was made through a 1985 case, Massachusetts Mutual Life Ins. Co. v. Russell, , which held that ERISA provides remedies only for entire plans, not for individuals.
“Having said that, the concurring opinion, by Chief Justice John Roberts suggests that the suit should be brought under another section of ERISA relating to claims denial for benefits,” Cohen said. “And the implications of that are yet to be determined because the courts will have to interpret that.”
Cohen said that section requires plaintiffs to file an administrative claim with the plan and have that claim reviewed before they sue, “which would give fiduciaries a chance to rectify mistakes before a lawsuit was filed.
Secondly, he said, based on prior Supreme Court decisions, “a carefully considered claims review is given great deference by the courts, making it more difficult to recover in a subsequent lawsuit.”
He added that “the long and short of it is that, you’re going to get differing views from expert benefit lawyers on the long-term implications of this case because of the contrast between the courts’ opinion and the concurring opinion of Justice Roberts.”
The American Council of Life Insurers, which submitted a friend of the court brief in the case, reacted by saying, “We respectfully disagree with the court’s ruling.”
Steven Brostoff, a spokesman, added that the concern of the industry is that the decision “could lead to increased litigation and higher costs, which would reduce benefits to all plan participants.”
Jay Dorsch, chair of the employee benefits and executive compensation practice at Cozen O’Connor in Philadelphia, said, “The LaRue decision may make it easier to bring, and therefore increase the number of individually filed breach of fiduciary duty actions under defined contribution plans that are subject to ERISA.”
The LaRue decision, Dorsch said, “may also provide plan participants with additional leverage to bring about settlements on their claims.”
In the main opinion of the court, Justice John Paul Stevens said such lawsuits are permissible. “Fiduciary misconduct need not threaten the solvency of the entire plan to reduce benefits below the amount that participants would otherwise receive,” he wrote.
The decision reverses a ruling by the 4th U.S. Circuit Court of Appeals, based in Richmond.
In its amicus brief, the ACLI cautioned that providing plan members with the authority to sue independently could “have legal and practical ramifications extending far beyond the parties to this case.”
In its brief, the ACLI through its lawyers warned that supporting the plaintiff “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.”
The ACLI brief contended that, “Allowing erosion of the statutory limits to ERISA remedies may have significant adverse consequences for ACLI members.
“These include increased costs for employer-sponsored plans and a concomitant decrease in the number of employers able and willing to sponsor and administer them–thereby decreasing the number of employees participating in these plans,” the brief contended.