Participants of defined benefit plans that are not underfunded do not have standing to sue plan fiduciaries for mismanagement, the Supreme Court ruled Monday in a 5-4 decision.
The ERISA case, Thole vs. U.S. Bank, was dismissed after a lower court and the 8th U.S. Circuit Court of Appeals said participants did not have statutory standing to assert breach of fiduciary because the participants had not suffered any individual financial harm and there were enough plan assets to cover benefits. The participants in the U.S. Bancorp Pension Plan filed suit in 2013 claiming that plan fiduciaries engaged in misconduct, failed to diversify investments and invested in high-risk equities, including a proprietary mutual fund, that caused $750 million in losses. U.S. Bank later replaced those amounts, causing the plan to be overfunded.
The Supreme Court took the case partly at the urging of the U.S. solicitor general's office to resolve lower court disagreements on the question of standing. Writing for the majority, Associate Justice Brett Kavanaugh said that because the plaintiffs "have no concrete stake in the lawsuit, they lack Article III standing ... Win or lose, they would still receive the exact same monthly benefits they are already entitled to receive." Mr. Kavanaugh also said that "courts sometimes make standing law more complicated than it needs to be."
Writing the dissent, Associate Justice Sonia Sotomayor said: "The Court holds that the Constitution prevents millions of pensioners from enforcing their rights to prudent and loyal management of their retirement trusts. Indeed, the Court determines that pensioners may not bring a federal lawsuit to stop or cure retirement-plan mismanagement until their pensions are on the verge of default. This conclusion conflicts with common sense and longstanding precedent."
The decision was “surprising,” since the Supreme Court typically rules “on the narrowest grounds possible,” said Nancy Hendrickson, a partner with Kaufman Dolowich & Voluck LLPC. By ruling out standing in such cases, “participants in defined benefit plans are essentially left with no way to challenge or seek redress for improper actions taken by plan fiduciaries and could also have implications for other types of class actions, Ms. Hendrickson said in a statement.
The ruling may limit participants’ ability to sue fiduciaries before benefits are directly impacted, but investment decisions are still subject to legal action by the Department of Labor and fiduciaries are still bound by ERISA rules on prudence and diversification, said Adam Cohen, a partner with Eversheds Sutherland.
“The ruling leaves the door open a small crack to participants who can plausibly allege that the mismanagement of the plan substantially increased the risk that future benefits would not be paid, “Mr. Cohen said in a separate statement. “This appears to be a high bar, but for employers with chronically underfunded plans, it could be a relevant consideration.”
