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Game Changer? Challenge to Pension Plan Could Bring More Lawsuits

If the Supreme Court backs beneficiaries over US Bank’s overfunded program, look for more actions against company retirement funds.

Art by Vinnie Neuberg


Can retirement fund participants sue their employer’s pension plan if it lost money but, because it was overfunded, they did not see their benefits curtailed? That’s the momentous issue before the US Supreme Court as it starts its new term in October.

Should the defined benefit plan members win before the court, expect more challenges to corporate pension plans whose investment performance has suffered, or perhaps even those with a questionable strategy.

“This could be a game changer” if the plaintiffs prevail, said Theresa Gee, a partner who specializes in retirement plan law at Miller & Chevalier, which is not part of this case. Should the justices rule for the plan beneficiaries in Thole vs. US Bank, she said, the matter would be sent back to lower courts for re-litigation.

In the past, courts have held that, for a pension fund to violate its fiduciary duty, its investments had to cause actual harm to participants—that is, be in danger of not paying them because, thanks to poor investing, the fund could not cover its obligations.

Retirees James Thole and Sherry Smith accuse the banking company’s pension program of violating its fiduciary duties because in 2007 it invested all of the plan’s assets in stocks, instead of a more diversified mix that is standard among investment pools. The plan had been fully funded, but then the financial crisis hit the next year and it lost $1.1 billion. Suddenly, its funded status fell to 84%.

When beneficiaries squawked, the plan sponsor, US Bank, contributed $339 million, which restored the program to 115% funding. Thole and Smith filed their lawsuit anyway, and US Bank argued that the plaintiffs had not suffered any financial loss and moved to dismiss the action. Plus, the company pointed out that Thole and Smith had received their full benefits every month since their retirements, hence they suffered no harm.

To the plaintiffs, however, the mere fact that the US Bank plan adopted a risky all-equities asset allocation showed a breach of fiduciary responsibilities. Due to that, they want to exact a punishment. And besides, the plan arguably would be even better funded had it not taken the $1.1 billion drubbing in the crisis.

So the lawsuit seeks to bar anyone involved with the 2007 asset allocation from serving in the pension program—and also to inject more money into its coffers, perhaps the $748 million that it claims a properly diversified plan would have avoided losing.

The lawsuit charges that “under the dominant view among the circuits, fiduciaries can brazenly mismanage ERISA plans without the fear of liability, so long as they stop short of putting the plan at imminent risk of default,” a result they claim “contravenes ERISA’s goals.”

According to Karen Handorf, a partner at Cohen Milstein, which is representing the Thole plaintiffs, the pension plan invested “money into US Bank’s own mutual funds.” The bank later sold its fund subsidiary, FAF Advisors (that stands for First American Funds), to Nuveen Investments. That deal covered $28 billion in assets and 41 mutual funds. The bank couldn’t be reached for comment.

Up to now, the governing ruling in such cases has been the Court of Appeals for the 8th Circuit’s 2002 decision, concerning a similarly overfunded pension plan. Employees at Minnesota Mining & Manufacturing sued because the plan had  invested $20 million in a hedge fund that went bust.

Yet since the 3M plan was not underfunded as a result, the 8th Circuit ruled for 3M. Upshot: The plan participants had no standing to sue as they had not suffered financially. The appeals court ruled that the “plaintiffs must show actual injury—to the plaintiffs’ interest in the plan and to the plan itself—to fall within the class of plaintiffs whom Congress authorized to sue.”

In light of the 3M decision and the US Bank plan’s overfunded status, the bank plaintiffs lost before the US District Court in Minnesota, which the 8th Circuit upheld. Three other circuits have ruled essentially the same way.

At the heart of the case is the Employee Retirement Income Security Act of 1974, or ERISA, which established standards for retirement plans, both traditional defined benefit (DB) ones and defined contribution (DC) offerings, like 401(k)s.

The lawsuit charges that “under the dominant view among the circuits, fiduciaries can brazenly mismanage ERISA plans without the fear of liability, so long as they stop short of putting the plan at imminent risk of default,” an outcome that they contend “contravenes ERISA’s goals.”

Helping the Thole plaintiffs is that the Trump administration’s Solicitor General filed an amicus brief opposing US Bank in this matter. The US Bank plaintiffs, the government’s brief read, are “squarely within the class of plaintiffs Congress has authorized to sue under ERISA. Nothing in the text of ERISA conditions a fiduciary’s duties to beneficiaries on whether the plan is a defined-benefit or defined-contribution plan, or whether the plan is overfunded or underfunded.”

The Thole issue is the third ERISA matter that the Supreme Court will consider in its 2019-2020 term. One of the other cases headed for the high court is against IBM, where employees complained that the company’s 401(k) was unwisely invested in Big Blue’s stock, which they say was artificially inflated, so they lost out when the shares eventually dropped. The company disagrees with the plaintiffs’ assessment of its investment strategy.

The third action also is a 401(k) case, concerning a timing question involving a plan sponsored by Intel. Here, a plan participant filed his lawsuit after ERISA’s three-year statute of limitations had elapsed. The plaintiff claims he was unaware of any deadline and that the tech firm had engaged in questionable investing activities that lost the plan large sums.

If the Thole plaintiffs win, the downside is that it could encourage “a proliferation of litigation against plans where there is no actual impact on participants’ benefits,” a commentary from the law firm of McDermott Will & Emery warns.

On the other hand, it points out, “denying participants standing to sue where a plan is overfunded undermines their ability to hold fiduciaries accountable for their conduct.”

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