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.