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CCH® PENSION AND BENEFITS — 2/22/08

Individuals had standing to sue fiduciary for breach of duty to recover 401(k) losses

Individual participants in a defined contribution retirement plan had standing to sue a plan trustee for breach of fiduciary duty under ERISA despite seeking recoveries for their individual accounts and not the plan as a whole, according to the U.S. Court of Appeals in Cincinnati (CA-6).

Two physicians who were participants in a 401(k) plan learned that brokers working for the plan’s investment advisor had been engaging in fraudulent activities. The fraud resulted in significant losses to their accounts: over $582,000 in losses to one participant’s account and over $1,192,000 in losses to the other.

The two participants brought a lawsuit in district court against the trustee of the plan. The participants alleged that the trustee breached its fiduciary duty to them under ERISA §409 by failing to inform them of the fraudulent investments, which the trustee was aware of, and by misrepresenting the true balances in their individual accounts.

Standing denied

The district court dismissed the claims on the basis that the participants did not have standing under ERISA §502(a)(2) to bring a suit for damages to their individual accounts and not the plan as a whole. The lower court, citing the 2006 Fourth Circuit decision in LaRue v. DeWolff, Boberg & Associates, Inc. (CCH Pension Plan Guide ¶23,996L ; certiorari granted by the U. S. Supreme Court in 2007), emphasized that ERISA §409 imposed liability for “losses to the plan resulting from each such breach” (emphasis added),and ruled that the participants only had standing to sue in a representative capacity on behalf of the plan.

Loss to participant was loss to plan

Upon appeal, the participants, supported by an amicus curiae brief submitted by the Secretary of Labor, argued that individual participants do have standing under ERISA §502(a)(2) to bring claims on their own behalf. The appellate court agreed, stating that the logic of LaRue relied upon by the lower court was “not convincing.” A decision which denies standing and precludes relief because it benefits an individual and not the plan as a whole, the appellate court continued, frustrates a fundamental purpose of ERISA, which is to afford relief for fiduciary breaches.

ERISA §502(a)(2) should be read to authorize a plan participant to bring suit for relief for any fiduciary breach, not only breaches which cause losses to all participants. The court continued: “We are unable to think of any reason why the ability to sue to recover losses should turn on the number of plan participants allegedly affected by the breach; whether one, ten or 1,000 participants are affected, the loss occurs to the plan.” The argument that a breach must harm all participants in order to give rise to liability would insulate fiduciaries who breach their duty, so long as the breach does not harm all of a plan’s participants, the court stated. Consequently, the appellate court reversed the lower court’s ruling regarding standing.

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