In a 9 – 0 decision, the U.S. Supreme Court decided on Wednesday of this week that individual participants in 401(k) retirement plans can sue plan fiduciaries to recover losses that result from mishandling of their individual retirement accounts.  Until the decision in LaRue v. DeWolff, Boberg & Associates, Inc., No. 06-856, (Feb. 20, 2008) courts and commentators disagreed over whether an individual account holder could bring an ERISA action against plan fiduciaries or whether only the plan itself had standing to bring those lawsuits.  In reaching the Court’s decision, Justice John Paul Stevens, writing for the majority, distinguished between defined-contribution plans and defined-benefit plans.  In the former, individuals have individual accounts that are susceptible to individual losses.  Whereas defined-benefit plans are generally not comprised of individual accounts.  That critical difference lead the majority to conclude that plan participants in a defined-contribution plan could sue for individual losses in their individual accounts.

In a separate opinion, Chief Justice John Roberts and Justice Anthony Kennedy held that the particular wording of the 401(k) plan would dictate whether individual plan participants were limited in their ability to recover losses to their individual accounts.  Meanwhile, Justices Antonin Scalia and Clarence Thomas took a broader view than the two other decisions by holding that the Plaintiff, Mr. LaRue, was entitled to pursue his individual remedy under the very terms of ERISA – regardless of either the wording of the plan or “trends” in retirement savings plans.  The case was remanded for trial.

The LaRue decision paves the way for an increase in individual account holder litigation where plan participants’ investment instructions are ignored or their accounts are otherwise mishandled.  With an estimated 70 million people in the U.S. holding roughly $3 billion in 401(k) investments – much of which is now held in defined-contribution plans – we anticipate that this decision will lead to an initial increase in  individual claims and ultimately a potential increase in class action claims.  Moreover, while severity of the initial individual claims will likely be low, we anticipate that  at the outset they may be of a relatively high volume that could impact fiduciary/ERISA coverage, and in some circumstances, both errors and omissions and directors and officers policies.

For a copy of the Supreme Court’s decision in LaRue v. DeWolff, Boberg & Associates, Inc., click here.