Pension & Benefits News Fully vested retirees lacked concrete stake sufficient for standing to sue fiduciaries of fully funded DB plan
Tuesday, June 23, 2020

Fully vested retirees lacked concrete stake sufficient for standing to sue fiduciaries of fully funded DB plan

By Pension and Benefits Editorial Staff

Retirees in a defined benefit plan who had received all of their vested monthly payments lacked standing to sue plan fiduciaries for fiduciary breach as they lacked a “concrete stake” in the lawsuit, according to the United States Supreme Court. In affirming a ruling from the Eighth Circuit, the Court stressed that the retirees would continue to receive the same amount of monthly benefits, regardless of the outcome of the litigation.

Standing to sue for investment loss in DB plan requires harm to participant or beneficiary. A threshold inquiry in determining whether a plan participant or beneficiary has sufficient standing to bring a breach of fiduciary duty claim based on a plan’s investment losses is whether the participant or beneficiary has been harmed by the plan’s loss. This issue is problematic with respect to defined benefit plans because, as the United States Supreme Court explained in Hughes Aircraft Co. v. Jacobson (522 U.S. 432), if a decline in a DB plan’s assets does not deplete the plan’s assets so as to prevent the payment of accrued or accumulated benefits, plan participants have not suffered an injury. The loss to the plan under such circumstances would be only to the plan’s surplus, to which participants and beneficiaries are not entitled. In order to prove a loss providing a cause of action, plan participants or beneficiaries (and not the plan sponsor or employer) must prove that the plan (as a result of the alleged fiduciary breach) no longer had adequate surplus (under a reasonable valuation method) to satisfy accrued benefits.

Fiduciary breach challenge to fully funded plan by vested participants. In the present case, two retirees receiving monthly benefits from a defined benefit plan filed a class action suit in 2013 against the plan’s sponsor and trustee alleging breach of fiduciary duty and violation of prohibited transaction rules under ERISA Sec. 404, ERISA Sec. 405, and ERISA Sec. 406. Specifically, the retirees alleged that, as of 2007, plan fiduciaries breached their fiduciary duty of loyalty by investing pension plan assets in respondents’ own mutual funds and by paying themselves excessive management fees. According to the complaint, the fiduciaries also made imprudent investments that allowed them to manipulate accounting rules, boost their reported incomes, inflate their stock prices, and exercise lucrative stock options to their own (and their shareholders’) benefit.

By 2007, the investment manager had invested the entire plan portfolio in equities. As a result, following the Great Recession in 2008, the plan went from being significantly overfunded in 2007 to being 84 percent underfunded in 2008.

However, both the retirees continued to receive all payments under the plan to which they were entitled and, thus, had not sustained any monetary injury. Further, while the plan was underfunded at the commencement of litigation in 2013, by 2014 the plan was once again overfunded, as the result of a voluntary contribution by the plan sponsor. Despite these facts, the retirees sought to recover $750 million in loses that the plan allegedly suffered.

In rejecting the retirees’ claims, the Eighth Circuit explained that ERISA Sec. 502(a)(2) and ERISA Sec. 502(a)(3) require the showing of an actual injury to a plaintiff’s interest in the plan under (a)(2) and to the plan itself under (a)(3). Given that the plan was now overfunded, the court reasoned, there was no actual injury to the plan that could cause injury to the retirees’ interest in the plan. Thus, the retirees were not authorized by ERISA to bring the action (see Pension Plan Guide ¶24,021Y).

In June 2018, the Supreme Court agreed to review the standing issue. The Court has now affirmed the Eight Circuit, ruling the participants did not have a concrete stake in the lawsuit sufficient for Article III standing.

Retirees lacked equitable or property interest in plan. In attempting to establish Article III standing, the retirees initially argued that, because an ERISA defined benefit plan participant possesses an equitable or property interest in the plan, injuries to the plan are by definition injuries to the plan participants. Thus, the retirees averred, a plan fiduciary’s breach of a trust-law duty of prudence or duty of loyalty itself harms ERISA defined benefit (DB) plan participants, even if the participants themselves have not suffered (and will not suffer) any monetary losses.

The Court, however, stressed that participants in a DB plan are not similarly situated to the beneficiaries of private trust or to participants in a defined contribution plan, and possess no equitable or property interest in the plan. Accordingly, the retirees’ putative trust law analogy did not apply and could not support Article III standing for plaintiffs who allege mismanagement of a defined benefit plan.

Retirees did not suffer injury in fact. The retirees attempted to assert standing as representatives of the plan. However, this argument failed because, as the Court explained, in order to claim the interests of others, the litigants must have suffered an injury in fact that gives them a sufficiently concrete interest in the outcome of the issue in dispute. The retirees not only did not have a concrete stake in the suit, but they also not been legally or contractually appointed to represent the plan.

Right to sue under ERISA does not confer standing absent injury. The retirees next stressed that they had a right under ERISA to sue for restoration of plan losses and other equitable relief. However, the Court explained, a statutory right to bring suit does not automatically satisfy the injury-in-fact standing requirement. Article III standing, the Court emphasized, requires a concrete injury, even in the context of a statutory violation.

Plans fiduciaries will remain subject to regulation. Finally, the retires argued that, if defined benefit plan participants are not allowed standing to sue for perceived fiduciary misconduct, plan fiduciaries will not be subject to meaningful regulation. The Supreme Court, however, has long rejected the retirees’ argument as a justification for Article III standing. Moreover, the Court explained, the argument rests on a “faulty premise” as DB plans remains subject to regulation and monitoring by the Department of Labor, Pension Benefit Guaranty Corporation (PBGC), plan fiduciaries, and plan sponsors.

Complaint did not allege egregious mismanagement. Briefs in support of the retirees attempted to establish that DB plan participants would have standing to sue if the mismanagement of the plan was so egregious that it substantially increased the risk that the plan and the employer would fail and be unable to pay the participants’ future pension benefits. However, the retirees did not assert that theory of standing and did not plausibly and clearly claim that the alleged mismanagement of the plan substantially increased the risk that the plan and the employer would fail and be unable to pay the retirees' future pension benefits. A “bare allegation” of plan underfunding did not, the Court noted, demonstrate a substantially increased risk that the plan and the employer would both fail.

Dissent. A lengthy dissent by Justice Sotomayor (joined by Justices Ginsburg, Breyer, and Kagan) charged that the Court’s conclusion, that pensioners may not bring a federal lawsuit to stop or cure retirement plan mismanagement until their pensions are on the verge of default, conflicts with common sense and longstanding precedent. According to the dissent, the retirees had standing to bring suit because: (1) the retirees had a financial interest in the plan, which suffered an alleged $750 million loss; (b) a breach of fiduciary duty is a cognizable injury, regardless whether that breach caused financial harm or increased a risk of nonpayment; and (3) the retirees were empowered to sue on behalf of the plan.

Source: Thole v. U.S. Bank N.A. (U.S. Sup. Ct.).


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