The federal appeals court in Richmond, Va., answered no to the question in a decision last year that the Supreme Court, based on the questions and comments of justices during Monday’s argument, now appears likely to overturn.
The appeals court’s view was that the 1974 law governing employee retirement and benefit plans allows lawsuits only for losses caused by improper management of the plan itself, not of individual accounts. It upheld the dismissal of a suit brought by an employee of a consulting firm who had instructed the plan administrator to switch his investments from one mutual fund to another. The instruction went unheeded, costing the employee, James LaRue, some $150,000 in lost profit by the time he discovered the error.
Mr. LaRue’s lawyer, Peter K. Stris, argued that the appeals court had misunderstood how the Employee Retirement Income Security Act, or Erisa, applies to 401(k) plans and had imposed a false distinction between the plan itself and the individual accounts comprising it. Because the plan is simply the aggregation of the individual accounts, Mr. Stris said, a loss to a single account is a loss to the plan, covered by the section of Erisa that authorizes recovery of “any losses to the plan.”
Mr. Stris’s argument was bolstered by the participation of the federal government on his client’s behalf. An assistant to the solicitor general, Matthew D. Roberts, representing the views of the Department of Labor, said “the crux of the matter here is that the plan has suffered a loss” when an individual account suffers one.
“The appropriate remedy is to get the money back in the plan,” Mr. Roberts said. The money would then be allocated to the individual’s account.
Several justices pressed the lawyer on the other side, Thomas P. Gies, to explain what relief an employee in Mr. LaRue’s position might receive if he could not bring an individual lawsuit. Mr. Gies said that under a different section of Erisa, an employee could seek a court order for the mishandled trade to be executed.
“But it’s much too late,” Justice Ruth Bader Ginsburg objected. “It’s over and done. It wasn’t made.”
That might be true, Mr. Gies acknowledged, but “Erisa is a statute that provides for limited remedies.”
“We think it’s unlikely,” he said, “that Congress intended every one of these ‘he said/she said’ cases to give rise to a cause of action for damages. There would be no end to the kinds of claims that one could imagine.”
Mr. Gies, representing DeWolff, Boberg & Associates, the Dallas consulting firm that sponsored Mr. LaRue’s 401(k), said that the reference to “losses to the plan” in the statute “connotes something collective” rather than a failure to execute a trade in an individual account.
He noted that a plan’s “choice of an imprudent investment” in the sponsoring company’s stock might represent “something systemic that affects the interests of the plan as a whole” and might provide the basis for a lawsuit. Such cases are often called stock-drop suits.
After the collapse of Enron, in which employees’ 401(k) accounts were wiped out because of heavy investments in Enron shares, many employers are careful not to steer their employees toward company stock. The DeWolff, Boberg plan gives participants a range of options.
Several justices said it would not be easy to draw a distinction between individual and collective losses. Justice Stephen G. Breyer offered a hypothetical example. Suppose, he said, that a 401(k) plan consisted of 1,000 diamonds, and a corrupt trustee ran off to Martinique with half of them. Why should it matter, Justice Breyer asked Mr. Gies, whether the diamonds came from one central safe deposit box or 500 individual ones labeled with participants’ names?
The case is LaRue v. DeWolff, Boberg & Associates Inc., No. 06-856.