Which Retirement Plan Participants Can Sue?

Fiduciaries should consider who would have a stake in litigation

By Michael Barry © October Three June 21, 2022
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Which Retirement Plan Participants Can Sue?

A number of recent lawsuits brought under the Employee Retirement Income Security Act (ERISA) have addressed the issue of which retirement plan participants have "standing" to bring an ERISA action against their plan's fiduciaries. 

These cases generally focus on the issue of whether the participant-plaintiffs who brought the suit have a "concrete stake" in the dispute, as in two recent cases involving participant-plaintiffs in 401(k)-type defined contribution plans who did not invest in all the funds with respect to which they are suing.

Boley v. Universal Health Services

On June 1, 2022, the Third Circuit Court of Appeals upheld a lower court decision in favor of the suing plan participants in Boley v. Universal Health Services, a "typical" 401(k) plan fiduciary case challenging the prudence of fees paid with respect to fund management and recordkeeping.

The plaintiffs alleged that "Universal breached its fiduciary duty by including the Fidelity Freedom Fund suite [the plan's default target date fund (TDF)] in the plan, charging excessive recordkeeping and administrative fees, and employing a flawed process for selecting and monitoring the plan's investment options, resulting in the selection of expensive investment options instead of readily-available lower cost alternatives."

The plaintiffs had, however, invested in only seven of the plan's 37 funds. The default TDF—a particular focus of plaintiffs' allegations—consisted (per the court) of 13 separate funds. Each of plaintiffs invested in at least one of these 13 funds but did not invest in all of them.

Defendants challenged plaintiffs' standing (under Article III of the U.S. Constitution) to sue with respect to "funds in which they did not personally invest."

The Third Circuit (affirming a decision of the lower court) found that:

"[T]he Named Plaintiffs … have a concrete injury flowing from the challenged conduct. The Named Plaintiffs each invested in at least one of the Fidelity Freedom Funds. Importantly, the Named Plaintiffs' allegations in the Complaint are that all of the funds in the suite were imprudent for the same reasons – they were all excessively expensive funds, because they invested in high fee actively managed funds rather than low-cost index funds. If the Named Plaintiffs' allegations are true, each class representative suffered a concrete injury traceable to Universal's imprudent choice to include the Fidelity Freedom Fund suite in the Plan, rather than a suite consisting of target date funds that invested in less expensive index funds. The Named Plaintiffs have standing to bring this claim."

Similarly, with respect to other funds in the plan's fund menu, the court found that "Because each class representative invested in at least one fund with allegedly excessive fees, the Named Plaintiffs adequately alleged they suffered injury from Universal's imprudent investment evaluation process, and, accordingly, have standing to bring this claim."

Bottom line: if plaintiffs invested in at least one fund that had excessively high fees because of an (allegedly) imprudent fund selection process, they may bring a claim with respect to all funds selected by that process.

Brown v. Mitre

On April 28, 2022, the U.S. District Court for the District of Massachusetts entered an order dismissing claims brought by a plaintiff (as a class representative) in Brown v. Mitre (No. 1:21-cv-11605, electronic order). The plaintiff claimed that defendant plan fiduciaries caused the plan to pay "unreasonably high administrative and recordkeeping expenses to the detriment of the participants. According to the plaintiff, MITRE's plans paid these fees through a revenue sharing approach, by handing over 'a percentage of the assets in the plans.'"

The court found, however, that "Brown had invested only in a single fund in the relevant time period. That fund belonged to the lowest cost class, and critically, paid no revenue-sharing fees (facts not disputed in Brown's opposition). Brown's theory of damages, premised on the revenue sharing model, cannot explain how he was personally injured by MITRE's allegedly unreasonable fee practices. Accordingly, Brown has not established Article III standing to sue individually or on behalf of others."

Bottom line: a participant who has suffered no concrete injury from the alleged imprudent conduct may not bring an ERISA fiduciary lawsuit premised on that imprudent conduct.

No Standing to Sue

Both the Boley v. Universal Health Services and Brown v. Mitre courts cite the U.S. Supreme Court's June 5, 2020, decision in Thole v. U.S. Bank, which involved a defined benefit pension plan.

In Thole, a divided (5-4) Court found for defendant defined benefit plan sponsor-fiduciaries, holding that plaintiff plan participants did not have standing to bring the lawsuit.

Fiduciaries of U.S. Bank's defined benefit plan for its own employees invested plan assets in mutual funds managed by a U.S. Bank subsidiary, FAF Advisors, Inc. Plaintiff-participants sued U.S. Bank, as a sponsor-fiduciary, claiming that those investments violated ERISA's prohibited transaction rules.

Justice Brett Kavanaugh, who wrote the majority opinion, summarized the Court's ruling as follows:

"Courts sometimes make standing law more complicated than it needs to be. … [U]nder ordinary Article III [of the United States Constitution] standing analysis, the plaintiffs lack Article III standing for a simple, commonsense reason: They have received all of their vested pension benefits so far, and they are legally entitled to receive the same monthly payments for the rest of their lives. Winning or losing this suit would not change the plaintiffs' monthly pension benefits. The plaintiffs have no concrete stake in this dispute and therefore lack Article III standing."

Takeaway for Plan Sponsors

These issues go (generally) more to litigation strategy than to rules for sponsor fiduciary conduct. But fiduciaries will want to consider who will have a stake in litigation (and how big that stake might be) over, e.g., a decision to retain or replace an individual fund. And it is interesting (at a minimum) to note that defined contribution plans present litigation issues that do not exist for defined benefit plans.

Michael Barry is an attorney with more than 40 years' experience in the benefits field at law and consulting firms. He is a senior consultant at Chicago-based retirement plan advisory firm October Three and president of O3 Plan Advisory Services LLC, which provides retirement plan regulatory analysis targeted at plan sponsors and those who provide services to them. © 2022 October Three Consulting LLC. All rights reserved. Reposted with permission.


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