With 70 million people holding about $3 trillion in 401(k) investments, the 9-to-0 decision was one of the most important rulings in years on the meaning of the federal pension law known as Erisa.
There was no dispute that the law, the Employee Retirement Income Security Act of 1974, imposes fiduciary responsibilities on employers and other sponsors of retirement plans. But the wording of the statute left substantial disagreement about whether the obligation it imposed extended beyond the health of the plan itself to responsibility for mishandling an individual account.
The case was brought by an employee of a Dallas-based consulting firm that administered its own 401(k) plan. The employee, James LaRue, gave instructions to shift his investment from one mutual fund to another. The instruction was ignored, costing Mr. LaRue $150,000 in lost profits.
Two lower federal courts, while agreeing with Mr. LaRue that the administrator had breached its duty, dismissed his lawsuit on the ground that Erisa permitted suits only on behalf of the plan itself, not on behalf of individual account holders. That analysis was based on a 1985 Supreme Court decision that rejected individual lawsuits by participants in defined benefit pension plans, the once-popular plans that promised a fixed retirement income.
However, “that landscape has changed,” Justice John Paul Stevens wrote for the court in the decision on Wednesday that reinstated Mr. LaRue’s lawsuit. Participants in the old defined benefit plans do not have individual accounts and consequently depend completely on the health of the plan as a whole, Justice Stevens said, while a defined contribution plan like a 401(k) consists of individual accounts, whose owners face individual losses.
Therefore, he said, the law should be applied differently in the two situations, and individuals with defined contribution plans should be able to sue to recover lost assets.
While the vote was 9 to 0, the decision, LaRue v. DeWolff, Boberg & Associates Inc., No. 06-856, was not unanimous.
Chief Justice John G. Roberts Jr., in a separate opinion that Justice Anthony M. Kennedy joined, expressed considerable doubt about the analysis of the majority. While agreeing that the United States Court of Appeals for the Fourth Circuit, in Richmond, Va., had incorrectly dismissed the lawsuit, the two justices said that depending on the wording of the specific 401(k) plan, Mr. LaRue might be limited to pursuing a narrower remedy under a different section of Erisa.
And two other justices, Clarence Thomas and Antonin Scalia, also declined to sign the opinion of Justice Stevens. They said that Mr. LaRue was entitled to pursue his claim under the “unambiguous text” of Erisa. The case was “not contingent on trends in the pension plan market,” the two justices added.
Because the case was never permitted to go to trial, Mr. LaRue’s allegations have not been proved. Justice Stevens said that on remand, the plan sponsor would have a chance to raise various defenses.
He said these might include the argument that Mr. LaRue had not given proper investment instructions in the first place, or that he had failed to pursue administrative remedies before going to federal court. These warnings were reminders of the complexity of the Erisa statute, which during the last 34 years the court has not managed to simplify.