The U.S. Supreme Court later this year will address the question of whether defined benefit plan participants can sue for fiduciary breaches even if a plan is overfunded and participants have not experienced a monetary loss.
While U.S. Bancorp, the plan sponsor, and groups like the Chamber of Commerce think the answer should be "no" if there is no harm, a broader question is whether participants can legally challenge investment decisions that could potentially harm them.
Overfunding "doesn't make the prohibited transactions go away," said Susan Rees, an ERISA attorney with Wagner Law Group in Washington. "It's pretty black-letter law for defined contribution plans that fiduciary breaches cause injury to the whole plan. The participants here are entitled to the same legal redress — they want their fiduciaries to obey the fiduciary rules," Ms. Rees said.
The Supreme Court accepted the case, Thole vs. U.S. Bank, after it was dismissed by a lower court and the 8th U.S. Circuit Court of Appeals in St. Louis. Both courts said participants did not have statutory standing to assert fiduciary breach because the participants had not suffered any individual financial harm and there were enough plan assets to cover benefits.
Both the plaintiffs and the U.S. solicitor general's office, on behalf of the Department of Labor, asked the Supreme Court to revisit the standing question. The case has far-reaching implications for participants in defined benefit plans, said Michelle C. Yau, a partner at Cohen Milstein Sellers & Toll PLLC, co-counsel for the plaintiffs. "Plan participants should be able to hold fiduciaries accountable for reckless practices that put their retirement security at risk," Ms. Yau said.
The case began in 2013, when some participants in the U.S. Bancorp Pension Plan filed suit, claiming that plan fiduciaries engaged in prohibited transactions, including failing to diversify investments and investing in an affiliate's mutual funds. When the participants questioned the investments involved, U.S. Bank replaced those amounts.
According to the participants' Supreme Court petition, the plan 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 claim was $748 million more than a diversified portfolio would have lost, and caused a once-overfunded plan to drop to 84% funded. The sponsor contributed $339 million, restoring the plan to its overfunded status.
U.S. Bancorp declined to comment on litigation.
U.S. Bancorp.'s brief to the Supreme Court counters that the plan is now 115.3% funded and the company had $86 billion in liquid assets when the case was filed, enough to meet pension obligations "many times over." The bank noted that the plan became overfunded due to contributions, investment returns and other factors.
The bank's brief does acknowledge the questioned investment decisions made "more than a decade ago," including an equities strategy that through 2008 made the plan significantly overfunded, and "a substantial portion" of plan assets invested in equity-backed mutual funds managed by FAF Advisors, a U.S. Bancorp affiliate at the time. Those investments were permitted by an ERISA class exemption for in-house plan mutual funds, the brief said, and because it is a defined benefit plan, past or future losses "will have no effect" on the plaintiffs.
The Supreme Court's decision, which could simply include remanding the case back to the lower courts to reconsider the question of standing, has broad implications. In its amicus brief, the U.S. Chamber of Commerce warned that plan participants as well as sponsors could be harmed if uninjured plaintiffs can sue.
To plaintiff co-counsel Peter K. Stris, who will argue the case this fall before the Supreme Court, it is about courts denying defined benefit plan participants the right to hold fiduciaries accountable "for even the most egregious misconduct" unless a plan was underfunded. Congress explicitly authorized these legal remedies through ERISA, said Mr. Stris, founding partner of Stris & Maher LLP in Los Angeles, and there are "centuries of precedent" that allow trust beneficiaries to sue for fiduciary misconduct, he said.