Two recent court decisions, one by the United States Supreme Court and the other by the United States Court of Appeals for the Sixth Circuit, which covers Kentucky, offer and allow badly-needed avenues for relief to employees whose retirement accounts have suffered losses or diminution in value due to the negligence or wrongdoing to those responsible for managing the accounts.
First, the Supreme Court ruled in LaRue v. DeWolff, Boberg and Associates, Inc., (decided by the Supreme Court on February 20, 2008), that an employee who claimed that the value of his retirement account had been diminished by approximately $150,000 because of a failure to follow his investment directions could sue to recover this diminution in value. The employee participated in an ERISA-covered defined contribution 401(k) retirement savings plan, which allowed him to direct the investments of his contributions. In accordance plan-specified procedures and requirements, he directed certain changes to the investment in his individual account be made but his directions were never followed and, as a result, the value of his account was diminished by approximately $150,000. In an attempt to recover this loss, he filed suit under ERISA claiming that the failure to follow his directions constituted a breach of fiduciary duty.
The employee’s lawsuit was thrown out first by the district court and that ruling was affirmed by the United States Court of Appeals for the Fourth Circuit. Both relied on an earlier Supreme Court decision, Massachusetts Mutual Life Ins. Co. v. Russell, claiming it established that individuals could not sue under ERISA to recover money for themselves and that only the entire ERISA plan itself could bring a suit to recover its lost assets.
The Supreme Court distinguished Russell by reasoning that an individual bringing suit to recover losses to his account in the ERISA plan was still bringing suit to recover losses for the plan. The court, therefore, concluded that ERISA does “authorize recovery for fiduciary breaches that impair the value of plan assets in a participant’s individual account.”
Some weeks prior to the Supreme Court’s decision in LaRue, the United States Court of Appeals for the Sixth Circuit, in commendable anticipation of the Supreme Court’s subsequent decision on LaRue, ruled in Tullis v. UMB Bank that two physicians could sue to recover losses from a bank that allegedly failed to notify them of fraudulent activities affecting their ERISA-governed pension plans. The doctors were participants in a defined contribution pension plan, more specifically a 401(k) profit sharing plan available to them through the clinic where they were employed. They claimed that the defendant bank, which served as the trustee for the plan, knew of fraudulent activities engaged in by the plan’s investment advisor and failed to inform them. Consequently, the doctors alleged, their investment accounts had suffered losses exceeding $500,000 and $1 million, respectively. They alleged that the bank had breached its fiduciary duty to them by failing to inform them of the investment advisor’s fraudulent activities.
The Sixth Circuit used the same reasoning later in LaRue, observing that “although the number of affected participants differs, the nature of the relief – the payment of money to the plan – is the same regardless of the number of participants to whom the recovered assets are allocated.” Therefore, the court reinstated the lawsuit.
LaRue and Tullis represent a substantial evolution in ERISA law by granting employees a means to obtain redress when persons charged with managing their retirement accounts breach their duties. These decisions serve the overriding purpose of ERISA: the preservation of retirement account funds. Employees who suffer losses from breaches of fiduciary duties, whether because of a failure to follow their directions or a failure to notify them of wrongdoing, may now seek and hopefully obtain full recovery of their vital retirement accounts.
