The US Department of Labor has filed "friend of the court" briefs in two Fifth Circuit cases where the issue is whether employees who participate in 401(k) plans can obtain money damages from fiduciaries whose alleged imprudent conduct causes the participants to lose money. First, a little background. ERISA opens two roads for a plaintiff to travel. By the first road, the plaintiff can try to get a court to order a fiduciary to pay money to the plan to restore losses suffered by the plan as a whole. Plaintiffs traditionally traveled this road when fiduciaries did not live up to their responsibilities when making investment decisions or administering the plan. Call this road Route 409/502(a)(2).
Traveling on the second road, plan participants can sue fiduciaries for decisions that caused some harm to the individual, but not necessarily to the plan as a whole. Call this road Route 502(a)(3). The problem for plaintiffs is that Route 502(a)(3) gets too narrow at the end of the road. Route 502(a)(3) limits individuals to "equitable relief" and the Supreme Court has made it clear that equitable relief does not include monetary damages. So, for example, when a fiduciary gives the participant wrong information (such as bad tax advice) that costs the participant some money, many courts will find that the participant cannot recover her losses from the fiduciary.
In the two cases where the DOL has intervened, the defendants argue that the 401(k) plan participants are limited to traveling along Route 502(a)(3) either because (1) the plan participants, not the plan itself, assumed the risk of investment losses, (Langbecker v. EDS) or (2) because only a subset of participants were harmed by the fiduciary misconduct, but not every single participant (Milofsky v. American Airlines, Inc.). The DOL contends that ERISA treats 401(k) plans like any other pension plan so that when fiduciaries make imprudent decisions, participants can obtain remedies through payment of damages to the plan, which then can be allocated as appropriate to the accounts of individuals who suffered losses.
Langbecker was filed as a class action after EDS stock suffered a steep decline in value following the EDS's disclosure of some adverse financial information in September 2002. The plaintiffs claimed that because the plan fiduciaries had access to company information about certain previously undisclosed risks, the fiduciaries should have known that EDS stock was overvalued and an imprudent investment and should have taken action to protect the 401(k) participants, most of whom were invested in company stock. The district court agreed with the plaintiffs that the case could be certified as a class action because their claims were on behalf of the plan as a whole. The defendants contend on appeal that a 401(k) plan is merely a collection of individual accounts so that the individual participants do not have "standing" to file a suit on behalf of the plan -- i.e. they cannot follow Route 409/502(a)(2). In other words the fiduciary does not have plan wide responsibilities, but only responsibilities to each individual participant. So, in the defendants' view, the participant's only remedy, if there is one at all, is for equitable relief via Route 502(a)(3).
The DOL says that this is nonsense. ERISA sections 409 and 502(a)(2) do not exempt 401(k) or other defined contribution plans. Moreover, the plaintiffs are not bringing individual benefit claims. Instead, they are challenging the fiduciaries' decision to retain EDS stock as an investment option and to permit the company the continue to make matching contributions in form of EDS stock. By these decisions, the fiduciaries made an allegedly imprudent investment choice available to virtually all participants.
I think DOL has the better argument here. ERISA specifically permits participants to file a lawsuit on behalf any plan, and the plaintiffs' allegations go to the management of the plan itself: disclosure of information to participants and the prudence of certain investments options. Moreover, virtually all participants were invested in EDS stock, so the fiduciary misconduct, as a practical matter, affected the plan as a whole. Interestingly, the ERISA Industry Committee ("ERIC") offers a compromise in its brief filed in support of the defendants. ERIC suggests that class action suits under section 502(a)(2) are appropriate in cases of corporate failure such as Enron and World Com, but not when the plan sponsor remains viable and the employer stock remains a sound investment for at least some participants (presumably those participants who bought the stock when after bad news depressed the price).
The other case, Milofsky, involved the claims of 218 pilots who participated in a 401(k) plan offered by a company that was acquired by American Airlines. The transfer of their plan assets was allegedly botched and they sued American Airlines and others, alleging that they were misled about the transfer process and that because of fiduciary breaches regarding the timeliness of the transfer, the value of their accounts -- and thus the overall value of the plan -- decreased. The pilots sought to recover their actual damages suffered through a payment to the plan that would then be allocated to their individual accounts. The pilots lost at the district court and on appeal to a Fifth Circuit panel. They now are seeking "en banc" review of the panel's decision and DOL is supporting the request for rehearing.
The Fifth Circuit panel ruled in a 2-1 decision that the pilots could not sue under section 502(a)(2) because their claim was essentially about a particularized harm that targeted only a specific subset of plan participants and the remedy they sought would benefit only themselves, not the plan. The panel relied heavily on the Supreme Court's 1985 decision in Russell that recoveries under sections 409 and 502(a)(2) must benefit the plan as a whole. DOL contends, however, that because all of a participant's investments in a 401(k) plan are "plan assets," any imprudent fiduciary decision that diminishes plan assets can be remedied through monetary damages even if only some plan participants were harmed. The panel's contrary reasoning would leave participants without a remedy even in cases of blatant misconduct such as a fiduciary diversion of employee contributions, as long as only some, but not all participants are harmed.
DOL correctly argues, in my view, that a distinction between remedies (or roads traveled) based on the number of participants harmed unduly limits ERISA's protections. The plaintiffs are not seeking "extra-contractual" relief: they want what their plan promised them: prudent management. The Sixth Circuit and at least one district court have ruled that a subclass of participants may follow Route 409/502(a)(2) as long as the claim seeks damages payable to the plan. If the Fifth Circuit reverses Langbecker or fails to overturn Milofsky after en banc review, the Supreme Court may have another ERISA case on its agenda next Term.
Both DOL briefs can be found here and the ERIC brief is here.
