Can you sue if your 401(k) nest egg is mishandled?

Like millions of American workers, James LaRue was counting on his 401(k) retirement savings plan to provide a financial cushion when he stopped working. He made regular contributions to it, and hegave instructions to the plan manager on how to invest his portion of the funds.

But on at least two occasions, the manager allegedly ignored Mr. LaRue's investment instructions, keeping the money in less lucrative investments. As a result, LaRue's retirement account was deprived of $150,000 in potential profits.

LaRue sued the plan manager in federal court for alleged breach of fiduciary responsibilities. But the case was thrown out.

On Monday, LaRue takes his case to the US Supreme Court, where the justices must decide whether the federal law regulating retirement plans allows LaRue to sue his plan manager to recover the $150,000. Previously, an appellate panel, in dismissing LaRue's complaint, said the law provides remedies only for fiduciary breaches that cause losses to an entire retirement program rather than merely to one individual's account.

The case will define the scope of remedies available to prospective retirees who discover fiduciary misconduct related to their 401(k) or other retirement accounts. It arises at a time when most companies have abandoned traditional pension plans in favor of retirement investment accounts.

"This is something that really affects nearly every worker," says Paul Montuori, a Westbury, N.Y., lawyer who filed a friend of the court brief on behalf of 11 law professors who are specialists in retirement benefits law.

An estimated 50 million private-sector employees have invested $5.5 trillion in retirement plans regulated by the federal government. The Employee Retirement Security Act of 1974 (ERISA) provides remedies to safeguard employees and their retirement savings plans.

But it is not clear how expansively or narrowly Congress meant ERISA to be read in cases like LaRue's. The trend at the Supreme Court in recent years has been to adopt a narrow reading of remedies available under ERISA in other contexts.

LaRue's lawyers say the appeals court misread the law. "ERISA nowhere requires that plan losses must affect more than one participant," says Peter Stris, a Whittier Law School professor, in LaRue's brief to the court. "To the contrary, the statute makes clear that any plan losses will do."

On the other side of the case is LaRue's former employer, DeWolff, Boberg & Associates, a national management consulting firm based in Dallas. The administration of the firm's 401(k) plan is at the center of the controversy. The firm disputes LaRue's version of the facts. It says he made only one investment request, and that he rescinded the request because of market fluctuations.

On the law, DeWolff's lawyers argue that Congress intended a narrow interpretation of ERISA remedies. ERISA does not try to provide a remedy for every conceivable wrong, says DeWolff lawyer Thomas Gies of Washington, D.C., in his brief.

"LaRue just claims to have asked someone to make a change in his investment accounts that now, in hindsight, he thinks would have been a good one," Mr. Gies writes. "This is precisely the kind of 'heads I win, tails you lose' damages claim that Congress could reasonably believe should not be permitted."

The Bush administration filed a friend of the court brief siding with LaRue. "A holding that [LaRue] is not entitled to sue here would seriously undermine the protection ERISA provides for the retirement savings of millions of Americans," writes Solicitor General Paul Clement.

He adds, "ERISA is a complicated statute. But it is neither so complicated nor so counterintuitive that it leaves someone in [LaRue's] position without a remedy."

Industry groups are applauding the Fourth Circuit's ruling, warning that a victory for LaRue might trigger a flood of litigation related to individual accounts within broader retirement plans. That, in turn, might discourage employers from establishing retirement plans, or cause employers to reduce benefits to avoid potential liability, they say.

"[LaRue's] attempt to rewrite [ERISA] would have adverse consequences to the millions of private sector Americans who receive employee benefits from ERISA plans," states a friend of the court brief filed on behalf of the Chamber of Commerce of the United States.

Other analysts say ERISA's primary purpose is to protect workers and their retirement funds, not employers or account managers who mismanage retirement plans. "This case is about a plan that has directly ignored the request of a plan participant," says Rebecca Davis, a staff lawyer with the Pension Rights Center in Washington. "ERISA can't leave people with nothing."

Ms. Davis adds: "ERISA is not about erasing remedies. It was written to make sure that participants are receiving the benefits they earned and that promises are kept."

A decision in the case, LaRue v. DeWolff (06-856), is expected by June.