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June 15, 2020 12:00 AM

Pension plan fiduciaries get relief from Supreme Court

Hazel Bradford
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    Karen Ferguson
    Karen Ferguson believes the ruling will reduce participants’ ability to police pension fund management.

    Defined benefit plan sponsors worried about fiduciary breach lawsuits welcomed a June 1 Supreme Court decision that significantly raises the threshold for when participants have standing to sue, while participant advocates fretted over what they see as a loss of long-standing protections.

    The Supreme Court itself was deeply divided over the central question raised in the case, Thole vs. U.S. Bank, of whether participants have standing to sue when a DB plan is not underfunded.

    The Department of Labor, which asked the Supreme Court to settle differences among lower courts, argued in its brief that participants have standing to sue for breach of fiduciary duty even without a monetary loss.

    The issue has come up frequently "and has generated tension, if not an outright conflict, among the courts of appeals," the DOL brief said. "It would be bizarre to tether a plaintiff's standing — and thus a federal court's power to hear a case — to such a volatile and arbitrary metric" as a plan's funded status, and the petitioners "are thus squarely within the class of plaintiffs Congress has authorized to sue under ERISA," the DOL said.

    According to the participants' lawsuit, the U.S. Bank Pension Plan, Robbinsdale, Minn., had $2.8 billion in assets as of 2007, but that changed when plan fiduciaries ignored their investment consultants and invested all plan assets in high-risk equities, including 40% in a proprietary mutual fund, in violation of prohibited-transaction rules. The market crash of 2008 caused the plan to lose $1.1 billion, which the plaintiffs claimed was $748 million more than a diversified portfolio would have lost, and caused a once-overfunded plan to drop to 84% funded.

    When the participants questioned the investments involved, U.S. Bank replaced those amounts, causing the plan to be overfunded. As of Dec. 31, 2018, the latest Form 5500 filing, the plan had $5 billion in assets.

    The Supreme Court did not address the question of whether correcting a plan's underfunding can make a lawsuit go away.


    Plaintiffs lack standing

    Writing for the conservative majority in a 5-4 decision, Justice Brett Kavanaugh said 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."

    That reasoning echoed decisions from a lower court and the 8th U.S. Circuit Court of Appeals in St. Louis dismissing the case because no individual suffered financial harm and there were enough plan assets to cover benefits.

    Unlike those in a defined contribution plan, defined benefit plan participants "possess no equitable or property interest in the plan," Mr. Kavanaugh said, and while ERISA affords participants in both plans a cause of action to sue, standing under the Constitution's Article III "requires a concrete injury even in the context of a statutory violation." He added that participants in such situations don't need the legal recourse because pension funds face "a regulatory phalanx" that includes the Department of Labor as well as legally bound employers, fiduciaries and even shareholders.

    Four Supreme Court justices saw it quite differently. Writing the 25-page dissent, Justice Sonia Sotomayor said pension plan participants also have a "concrete interest" in fiduciary prudence. "Only by overruling, ignoring, or misstating centuries of law could the Court hold that the Constitution requires beneficiaries to watch idly as their supposed fiduciaries misappropriate their pension funds," Ms. Sotomayor wrote. She went on to predict that after the decision, "about 35 million people with defined-benefit plans will be vulnerable to fiduciary misconduct."

    Karen Ferguson, director of the Pension Rights Center in Washington, shares that concern, saying that "no longer will workers and retirees be able to police the management of their pension funds." The Pension Rights Center, AARP and AARP Foundation filed amicus briefs supporting the participants, while a brief supporting U.S. Bank was filed by the U.S. Chamber of Commerce, American Benefits Council and the ERISA Industry Committee, among others.

    There was a lot at stake, said Lynn Dudley, American Benefits Council's senior vice president for global retirement and compensation policy in Washington. "A decision in favor of the plaintiffs could have opened the floodgates to lawsuits challenging particular investments in defined benefit plans — similar to lawsuits often filed against defined contribution plans — even though the benefits of the participants are not affected," Ms. Dudley said.


    ‘It's a huge deal'

    Aliya Robinson, senior vice president of retirement and compensation policy at the ERISA Industry Committee in Washington, agreed that "it's a huge deal for DB plan sponsors" that could have faced many more cases alleging fiduciary breaches if the decision had gone the other way. A plan sponsor's ultimate fiduciary duty "is to make sure that the participant gets the benefit," Ms. Robinson said.

    The decision "does seem to foreclose defined benefit plan participants like these retirees from having any recourse for fiduciary beaches in the management of their plan's assets," said Susan Rees, an ERISA attorney with Wagner Law Group in Washington, who argues that focusing on the plan's funding level to determine whether participants have standing does not address the question of possible fiduciary violations. In this case, the plan was underfunded when the participants filed suit, until U.S. Bank made a substantial contribution during the litigation.

    Ms. Rees noted that the U.S. solicitor general's office, on behalf of the Department of Labor, argued in its Supreme Court brief that ERISA gives participants standing even in overfunded defined benefit plans. "The statute is designed for participants to have standing to sue for breach of fiduciary duty. Participants are an important part of enforcement," she said.

    Ms. Sotomayor also addressed enforcement in her dissent, pointing out that the government's brief acknowledged that the Labor Department does not have adequate resources to monitor or pursue enforcement cases against all defined benefit plans. In cases like the U.S. Bank plan's alleged actions, the other watchdogs cited by Mr. Kavanaugh "have no reason to bring suit because they either committed or profited from the misconduct," Ms. Sotomayor said.

    Ms. Rees of Wagner Law Group, which represents both sponsors and participant plaintiffs in ERISA cases, said the majority set a very high bar by ruling out standing for similar participants unless they do not get their pension checks, or, possibly, where there is a substantial risk of loss due to fiduciary mismanagement and benefits are not guaranteed in full by the Pension Benefit Guaranty Corp.

    "The question will always be, what are the facts? The possible risk of loss will definitely come up in any case involving a defined benefit plan, although the majority opinion said there is a decisive difference with these cases because the participants' individual accounts might fluctuate with mismanagement. The consequences of this decision may take some time to evolve," Ms. Rees said.


    Still bound by ERISA

    Legal experts stress that plan fiduciaries are still bound by ERISA rules on prudence and diversification. Going forward, defined benefit participants considering a lawsuit will have to show injury that is "concrete, particularized, and actual or imminent," according to the majority opinion.

    Standing could also depend on whether a plan sponsor has missed making required minimum contributions or is likely to file for bankruptcy, and sponsors may be able to have lawsuits dismissed by correcting the underfunding, said ERISA lawyer Carol Buckmann, co-founding partner of Cohen & Buckmann PC in New York. "The lower courts will have to grapple with the other issues raised by the Thole decision," Ms.Buckmann said.

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