LaRue v. DeWolff, an ERISA retirement case

This is one of those cases to which you respond, "Gosh, I wish the world worked this way," but unfortunately it may not. But, then again, it raises some important issues regarding what remedies a person has when someone who is "in charge" of his money screws thing up. Read on.

Mr. LaRue's Problem

LaRue works for DeWolff, Boberg ("DW"). DW has set up a 401(k) retirement plan for its employees. The name (401(k)) derives from the section of the Internal Revenue Code where these plans are described. This type of retirement plan has only been around about 25 years, but plans of this sort already have assets of more than $3 trillion, or more than half of all private pension assets in America. These plans are "defined contribution" plans; in many of them a person who puts money into the plan is permitted to manage his/her own account by selecting a menu of various investment options. The older plan, still in existence for many people, a "defined benefit" plan, gave participants a predictable amount of money (benefit) each month upon retirement (the model for this was Social Security).

Mr. LaRue has such a 401(k) plan, set up and administered by his employer. As he alleged in his June 2004 complaint, he had asked his employer in 2000 and 2001 to change the menu of investment options. His employer never did so. As a result, LaRue calculates that he lost $150,000 in retirement savings. Anyone who is familiar with the stock market in 2000-2001 knows that it declined considerably. The NASDAQ index, for example, lost more than 50% of its value in a short period of time. Because his employer administered the plan and didn't follow his wishes, LaRue wants to sue them to "make him whole."

Before we even look at the relevant law in this case, we should pause for a moment. Let's take this out of the employer/employee context for a moment and ask about the world of private financial advisors. What do you do, in general, if your investment advisor doesn't follow your wishes regarding investments? Is s/he liable to you for the resultant decline in market value of your investments? I don't know the answer to that one, but I think you not only have a cause of action against your advisor but you can report him/her to the National Association of Securities' Dealers and s/he will get a firm spanking, at the least.

But does LaRue have a cause of action against his employer, who is the fiduciary of his retirement plan? Just think, if he does, then everyone who feels aggrieved by an employer not responding quickly enough to his/her investment choices, might be able successfully to bring suit against the company. It is this "horrible" that may, actually, be the decisive factor in the Supreme Court's decision, even though they will doll up their decision in the appropriate legal dress. What, you ask, is that legal dress? It happens to be the ERISA dress, one of the most complex federal statutes ever enacted. Even though I won't be able to delineate its complexity here, we can make a start.

ERISA--1974

The Employee Retirement Income Security Act (29 USC sec. 1001 et seq.) was passed 33 years ago to regulate employee benefit plans. What concerns us here are the "civil enforcement" provisions of the Act, i.e, how you can bring suit if you are aggrieved by the actions of a "fiduciary," like your employer. They are laid out in sec. 502 of the Act (29 USC sec. 1132). LaRue appeals to two provisions of these remedies to contend that his employer is responsible to him. Let's quote those sections and then move on to how his case was handled below.

"Section 502(a)(2), 29 U.S.C. 1132(a)(2), provides that a “civil action may be brought *** by a participant *** for appropriate relief under section 1109 of this title.” 29 U.S.C. 1109 states that “a fiduciary with respect to a plan who breaches any *** duties imposed upon fiduciaries *** shall be personally liable to make good to such plan any losses to the plan resulting from each such breach.”

Then, another section provides:

"Section 502(a)(3) of ERISA, 29 U.S.C. 1132(a)(3), provides that a “civil action may be brought *** by a participant *** to obtain other appropriate equitable relief *** to redress *** violations” of the statute."

The legal question before the US Supreme Court in this case is whether either of these provisions permits LaRue to bring suit against his employer. What did the Court below say?

LaRue at The Fourth Circuit (450 F3d 570 (2006))

Both the district court and the Fourth Circuit held that LaRue couldn't sue his employer/fiduciary. With respect to the first section, (a)(2), the Fourth Circuit explained:

"Recovery under this subsection must “inure[ ] to the benefit of the plan as a whole,” not to particular persons with rights under the plan. Russell, 473 U.S. at 140; see also Coyne & Delany Co. v. Blue Cross & Blue Shield of Va., Inc., 102 F.3d 712, 714 (4th Cir.1996). “A fair contextual reading of the statute makes it abundantly clear that its draftsmen were primarily concerned with the possible misuse of plan assets, and with remedies that would protect the entire plan, rather than with the rights of an individual beneficiary.” Russell, 473 U.S. at 142... It is difficult to characterize the remedy plaintiff seeks as anything other than personal," 450 F3d at 573-74.

Thus, no go on the first argument. The second section, (a)(3), gave the court more difficulty. Since Mr. LaRue was asking for "appropriate equitable" relief, the court asked what kind of relief was, in fact, equitable. It concluded that equitable relief, historically, was either an injunction, restitution, mandamus, or like remedies. In contrast, what LaRue sought here was straightforward money damages--which is as "judicial" and not "equitable" as can be. Hence, no luck for LaRue.

Conclusion

So, the Supreme Court will determine if ERISA should be read as narrowly as the 4th Circuit reads it. Though there is good reason to read it narrowly, one wonders if it really is very fair, then, to say that an individual really has no recourse against his employer-fiduciary for improper investment of personal funds. That issue, indeed, may stick in the craw of more than one Justice...

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