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Supreme Court limits ability of DB plan participants to sue for fiduciary breach

Health and Benefits|Retirement
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By Stephen Douglas , William (Bill) Kalten and Maria Sarli | June 22, 2020

The court’s decision in Thole v. U.S. Bank significantly protects DB plan fiduciaries against participant claims of mismanagement of plan assets.

In a 5-4 decision, the U.S. Supreme Court ruled in Thole v. U.S. Bank that two retired participants in a defined benefit (DB) pension plan did not have the legal right to bring a lawsuit against plan fiduciaries for alleged mismanagement of plan assets. According to the majority, because of the nature of DB plans, the participants had not suffered any individual financial loss. They would receive the same exact pension benefit whether they won the case or not, and therefore lacked standing to sue.

The Thole decision significantly protects DB plan fiduciaries against participant claims of mismanagement of plan assets and will likely result in a drop in DB plan fiduciary litigation. This is particularly helpful to sponsors now as many plans are experiencing COVID-19-related investment losses.

Background

In a DB plan, participants are generally guaranteed a fixed periodic payment upon their retirement. This benefit does not depend on the value of plan assets at any particular time. Absent a distress or involuntary plan termination, the employer must cover any funding shortfall. As a result, participants will generally get the benefits promised by the plan and typically suffer no actual economic harm due to allegedly improper fiduciary conduct that leads to diminished plan assets (e.g., poor investment decisions, excessive plan fees).

In Thole, two retired participants in U.S. Bank’s DB plan filed a lawsuit alleging that the defendants breached their fiduciary duties and violated ERISA’s prohibited transaction rules by adopting an overly risky and undiversified investment strategy resulting in significant plan losses and causing the plan to become underfunded.

During the litigation, however, the value of the plan’s assets increased (in significant part through additional contributions) so that the plan became overfunded, meaning there was a surplus of funds available to cover current and future retirement benefits. As a result, the district court dismissed the participants’ claims as moot. The Eighth Circuit affirmed the dismissal on grounds that plan participants did not have ERISA statutory standing to assert breach of fiduciary duty claims when a plan is overfunded, because there is no “actual or imminent injury.”

The Supreme Court agreed to review the Eighth Circuit’s ruling and directed the parties to also address whether the plaintiffs had demonstrated Article III standing under the U.S. Constitution — a prerequisite to commencing any action in federal court.

The Thole Decision

Under Article III, a plaintiff must demonstrate (1) that he or she suffered an injury in fact that is concrete, particularized, and actual or imminent; (2) that the injury was caused by the defendant; and (3) that the injury would likely be redressed by the requested judicial relief.

The Supreme Court held that the two participants had no concrete stake in the lawsuit because they had not sustained any monetary injury and therefore lacked standing to sue under Article III.

The court rejected the four arguments the participants made to demonstrate Article III standing:

  1. By analogy to trust law, an ERISA participant has an equitable or property interest in the plan, and injuries to the plan are therefore injuries to the participants. The court deemed this analogy inappropriate because in the private trust context, the ultimate amount of money beneficiaries receive typically depends on how well the trust is managed. By contrast, DB plan participants’ benefits are fixed, regardless of how well or poorly the plan is managed.
  2. They had standing as representatives of the plan itself. The court rejected this assertion because the participants themselves had not “suffered an injury in fact,” or been legally or contractually appointed to represent the plan.
  3. ERISA specifically provides participants in a DB plan with a general cause of action to sue for restoration of plan losses. Citing Spokeo v. Robins (2016), the court indicated that, even with the existence of a statutory cause of action, the participants still need to demonstrate an injury in fact, which they had not done.
  4. Participants and beneficiaries need to be able to bring fiduciary breach claims to constrain fiduciary misconduct. The majority opinion called this a “faulty premise,” as DB plans are regulated and monitored in multiple ways. For example, employers have strong incentives to root out misconduct because they are entitled to plan surpluses and are often on the hook for plan shortfalls. In addition, the Department of Labor has motive to avoid the financial burden of failed DB plans, which are backstopped by the Pension Benefit Guaranty Corporation (PBGC).

Going forward

The protection provided by the Thole decision for DB plan fiduciaries may be greatest where the plan in question is overfunded; however, the Supreme Court majority opinion suggested that the holding would apply even if the plan had been underfunded, unless the participants could show that plan mismanagement substantially increased the risk that the plan and the employer would fail and be unable to pay the plaintiffs’ future pension benefits.

It also appears that the risk of nonpayment would need to be “imminent” to confer Article III standing. The court further indicated that even if a DB plan is mismanaged and fails, resulting in the PBGC taking it over, participants might have no standing where the PBGC fully guarantees their benefits.

It is important to note that this decision likely does not have any bearing on the recent lawsuits alleging that DB plans used outdated actuarial factors to calculate benefits. These suits allege that benefits are currently being underpaid, which is a direct individual financial loss.

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Senior Director, Retirement and Executive Compensation

Senior Director, Retirement and Executive Compensation

U.S. Retirement Resource Actuary

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