Supreme Court Will Decide If Overfunded Pension Plans May Be Sued

Allen Smith, J.D. By Allen Smith, J.D. August 23, 2019
Supreme Court Will Decide If Overfunded Pension Plans May Be Sued

​An overfunded—rather than underfunded—pension plan is desirable, but does overfunding block plan participants' claim of breach of fiduciary duty? The U.S. Supreme Court will consider that question in its next term, which starts Oct. 7. Depending on the court's ruling, defined-benefits plan sponsors may expect a spike in such claims.

In the case before the high court, Thole v. U.S. Bank, a defined-benefits plan was invested exclusively in stocks. During the Great Recession, the plan lost $748 million, according to the plaintiffs. While it was underfunded, plan participants sued, alleging a breach of the duty of loyalty and prudence in violation of the Employee Retirement Income Security Act. The plan sponsors then made a substantial contribution to the plan, resulting in it being overfunded.

The district court dismissed the case and the appeals court affirmed, determining that when a plan is overfunded "there is no actual or imminent injury to the plan itself."

The plaintiffs appealed to the Supreme Court, which agreed to hear the case.

Solicitor General Supports Plaintiffs

In a brief, Solicitor General Noel Francisco supported the plaintiffs' argument that an overfunded plan may be sued. Even though being overfunded sounds like a good thing, "the risk of underpayment does not vanish the instant a plan crosses the threshold from underfunded to overfunded under a statutory formula," Francisco said.

He noted that statutory-funding status and minimum-funding requirements are based on actuarial tables, inflation, interest rates, and other economic factors and predictions. "Given normal fluctuations in those bases and assumptions, it is easy to imagine a plan toggling somewhat frequently between overfunded and underfunded," he said. "It would be bizarre to tether a plaintiff's standing—and thus a federal court's power to hear a case—to such a volatile and arbitrary metric."

A plan's funded status is just a snapshot of the plan's position and based on expected results. "A market shift, a change in assumptions or an updated valuation of liabilities can change the funded position significantly, even over the course of one day," said Joanne Jacobson, J.D., principal in Buck's Compliance Consulting Center in Washington, D.C.

When a pension plan becomes underfunded, the plan sponsor will have to pay additional premiums to the Pension Benefit Guaranty Corp. If a pension plan becomes less than 80-percent-funded during a plan year or less than 90-percent-funded for three consecutive years, the plan sponsor must make a cash payment to the pension plan trust, explained Nicole Bogard, an attorney with Barnes & Thornburg in Atlanta.

Increase in Litigation Feared

If the Supreme Court reverses the appeals court decision, "there most definitely will be a spike in defined-benefits [plan] litigation, and it could propel even more employer sponsors to terminate their defined-benefits plans," Jacobson predicted.

Pension plans already are becoming scarce. "Many employers are freezing the defined-benefits pension plan and taking steps to de-risk the pension plan liability by partnering with a reputable insurance company for retiree buyouts and other de-risking strategies," Bogard said.

"Defined-benefits plan litigation until recently was not that common, though there has been a spate of lawsuits recently alleging breach of fiduciary duty for using out-of-date actuarial factors," Jacobson said.

[SHRM members-only toolkit: Defining and Administering Defined Benefit Retirement Plans]

Defined-contribution plan litigation, by contrast, had been common until the Supreme Court decided Fifth-Third v. Dudenhoeffer, establishing tough "stock-drop" litigation pleading standards, she noted. In so-called stock-drop cases, participants in employee stock ownership plans sue plan fiduciaries when company stock prices drop, and they usually argue that the company should have sold the stocks based on information it had about the stock's value.

"With defined-benefits plans, the fiduciary's response is simple," Jacobson said. "The funding of a plan can be changed by additional employer contributions."

Plan participants bear the risk of not being able to receive full benefits if a company defaults on its defined-benefits plan obligations. "As a practical matter, when a company defaults, the Pension Benefit Guaranty Corp. takes over the plan, and participants and beneficiaries usually receive reduced benefits," noted Lowell Walters, an attorney with Carlton Fields in Tampa, Fla. "So, the risk outlined by the plaintiffs could have been real if the company was not healthy enough to make up for losses."

Investment-related litigation is the most common form of benefits plan litigation. "In general, plans that have established investment committees that monitor investments throughout the year and try to balance costs with returns and diversifications win these lawsuits," he said. "If Thole v. U.S. Bank is allowed to proceed, the company may be in a good position to come out victorious if it had a prudent process in place for monitoring its investments."



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