Supreme Court to Eye Money-Losing Pension Investments

Question is: Can plan beneficiaries sue over risky asset allocations, despite the plan’s return to full funding? 

The Supreme Court will rule on whether pension beneficiaries can sue a retirement plan that lost money in its investments, even though the plan itself later restored its fully funded status. At issue: Where is the harm in a temporary downdraft?

James Thole and Sherry Smith allege that the US Bancorp Pension Plan violated basic fiduciary responsibilities when it invested all of the program’s assets in high-risk equities. The two filed suit in 2013, claiming the bank’s bid to diversify investments lost $1.1 billion during the 2008 financial crisis. This loss dropped its once-overfunded plan to 84% funded. The plaintiffs believe a better diversified portfolio would have shielded $748 million from the market crash.

When these objections were first raised, the plan sponsor kicked in $339 million and the plan again became overfunded, at 115.3%, with $86 billion in assets under management.

A lower court and the US Court of Appeals for the Eighth Circuit threw out the case, Thole vs. US Bank, saying that the US Bancorp Pension Plan had recovered and was now stable, therefore negating the losses.

However, the Supreme Court didn’t accept this reasoning as sufficient to toss out the lawsuit. The high court aims to explore if a fiduciary breach is enough to let Thole and Smith pursue a remedy.

Last summer, Thole and Smith’s counsels, Cohen Milstein Sellers & Toll and Stris & Maher, asked the Supreme Court to review the 8th Circuit’s decision. The US solicitor general last fall recommended that the high court should indeed look into the matter.

This is the third case this year related to purported violations of the Employee Retirement Income Security Act of 1974 (ERISA). The statute protects pension beneficiaries from losing their retirement assets. The ruling will determine whether Americans in defined benefit pension plans have the right to sue their fund’s fiduciaries for mismanaging assets, regardless of the plan’s funded status. 

The hearing is expected to take place later this year, and if the plaintiffs win, it could change the risk appetites of institutional investors. This would drive more allocators toward passive investing and put more of their assets into safer areas, such as bonds. It could also create problems for hedge funds and other riskier strategies.

“Under the 8th Circuit’s rule, participants could do nothing to stop a fiduciary from betting their retirement savings on horse races until the plan was underfunded,” said Peter K. Stris, a founding partner of Stris & Maher. “Not only is this unconscionable, it conflicts with the remedies Congress explicitly authorized and with centuries of precedent allowing trust beneficiaries to sue for fiduciary misconduct.”

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