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U.S. Supreme Court vs. Benefit Plan Administrators by Thomas M. Blumenthal

By October 15, 2013May 29th, 2018Articles, Thomas Blumenthal Featured


James LaRue vs. DeWolff, Boberg & Associates, et al., Appeal No. 06-856,
Decided February 26, 2008

The U. S. Supreme Court changed 23 years of precedent on the legal issue of whether an individual could sue a plan administrator in a benefit plan that was controlled by the Employee Retirement Income Security Act of 1974 (ERISA).

In LaRue vs. DeWolff, Boberg & Associates, the U. S. Supreme Court ruled that an individual could bring suit against a plan administrator under 29 U.S.C. §1132(a)(2) of the ERISA law for failing to make certain changes in the investments in Mr. LaRue’s self-directed 401K retirement savings plan. LaRue claimed that DeWolff’s failure to follow requests for changes in 2001 and 2002, cost Mr. LaRue $150,000.

The case summarily had been dismissed at the trial court and appellate court level before the U.S. Supreme Court agreed to take the case. The lower courts had followed the previously accepted position that suit could only be brought to protect the entire plan, not just the rights of an individual beneficiary.

Justice Stevens, writing for the Court in a judgment joined by all nine Justices, found that there had been a great shift in the time since the enactment of ERISA from “defined benefit plans,” where the plan promises the participant a fixed level of income based on years of service – not amount of contribution, and the more currently common “defined contribution plans,” which promises the participant the value of an individual retirement account as a function of the amounts contributed by the participant and the employer.

The statute in question allows the Secretary of Labor, a plan participant, a beneficiary or a fiduciary to bring a lawsuit on behalf of the plan to recover for violations of the obligations of the plan administrators which “relate to the proper management, administration, and investment of funds.” When individuals were suing in reference to “defined benefit plans,” injuries to individuals were not injuries to the “plan,” because the “plan” by definition addressed all participants. Under “defined contribution plans,” an injury to one person’s IRA account may not have any relation to another plan participant’s account. As a result, the Court found that individuals may now sue to address breaches of duty that just affect themselves and no others.

What this means is that parties designated as plan administrators must set up procedures to make sure that all directions issued by individual plan participants are properly recorded and promptly acted upon. The case has opened up an area which has been closed to employees and their lawyers before now. The test for liability now will be whether the conduct of the fiduciary reduced the benefits below the amount that the individual would otherwise receive. Documentation of all communication between plan participants and administrators will be the only way to track whether a breach has occurred, and who caused the situation to exist.
Fiduciaries will still be exempt from liability “for losses caused by participants’ exercise of control over assets in their individual accounts.”

The Court also suggested that the procedures afforded participants will be important. So if there is an administrative procedure for lodging complaints against administrators, and a strict timetable for doing so, participants will be held to those procedural requirements of a plan before they can bring suit against an administrator.

All of this argues that small businesses should not try to administer their 401K plans themselves, but should insure they have professional plan administrators in place to assist them in any employee directed retirement plans.

Paule, Camazine & Blumenthal, P.C.’s estate planning department will be more than happy to review plans and discuss with you the impact of this case and how it might affect your business.

By: Thomas M. Blumenthal

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