Pension Plan Participants Can’t Sue Funded Plan for ERISA Violations


U.S. Supreme Court

Pension plan participants didn't have the right to sue the plan's fiduciaries for allegedly mismanaging funds because they continued to receive their full monthly payments, the Supreme Court found in a ruling that limits the ability of pensioners to bring such suits.

The two plaintiffs in Thole v. US Bank are retired participants in U. S. Bank's defined-benefit plan. They filed a class-action complaint alleging that the plan's fiduciaries violated the Employee Retirement Income Security Act (ERISA) by making poor investment decisions that led to about $750 million in losses from 2007 to 2010The plan's sponsors later made a substantial contribution to the plan that resulted in it being overfunded.

In a 5-4 ruling, the Supreme Court found that the participants didn't have a legal right to sue because they didn't establish that they were harmed. "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," wrote Justice Brett Kavanaugh for the majority. "Winning or losing this suit would not change the plaintiffs' monthly pension benefits."

He noted that a defined-benefit plan is different than a defined-contribution plan, like a 401(k) plan, through which "the retirees' benefits are typically tied to the value of their accounts, and the benefits can turn on the plan fiduciaries' particular investment decisions."

Chief Justice John Roberts Jr. and Justices Samuel Alito Jr., Neil Gorsuch and Clarence Thomas joined the majority. Justice Sonia Sotomayor, joined by Justices Ruth Bader Ginsburg, Elena Kagan and Stephen Breyer, dissented.

Accountability for Fiduciary Breach Debated

Michael Klenov, a plaintiffs' attorney with Korein Tillery in St. Louis, said the Supreme Court "gutted ERISA's fiduciary duty requirements as they apply to defined-benefit plans, which were the overwhelmingly predominant types of pension plans at the time ERISA was enacted." He added that the ruling "implies that decades of jurisprudence in this area was in error, because the thousands of plaintiffs who have filed cases--many of whom prevailed—never had standing."

The case isn't just about money, according to Klenov. The plaintiffs also sought to replace the plan's fiduciaries who they said continued to make improper decisions. ERISA imposes strict standards of conduct on the people who are responsible for managing the plan's assets. Fiduciaries must act prudently and loyally and act solely for the best interest of plan participants and beneficiaries.

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

"If a fiduciary flouts these stringent standards, ERISA provides a cause of action and makes the fiduciary personally liable," Sotomayor said in her dissenting opinion.

Among other claims, the plaintiffs alleged that the plan's fiduciaries breached their duty of loyalty by investing plan assets in the employer's own mutual funds and paying themselves excessive management fees.

In the majority opinion, Kavanaugh noted that defined-benefit plans are regulated by the U.S. Department of Labor, which has the authority to enforce ERISA's fiduciary obligations. Additionally, he said, "employers and their shareholders often possess strong incentives to root out fiduciary misconduct because the employers are entitled to the plan surplus and are often on the hook for plan shortfalls."

Sotomayor disagreed with the majority's position that the Constitution "forbids retirees to remedy or prevent fiduciary breaches in federal court until their retirement plan or employer is on the brink of financial ruin.

"The court does not explain how the pension could satisfy its monthly obligation if, as petitioners allege, the plan fiduciaries drain the pool from which petitioners' fixed income streams flow," she said.

Ruling May Curb ERISA Litigation

The opinion may be welcome news for employers that sponsor retirement plans.

"In recent years, courts have been swamped by lawsuits alleging that retirement plan fiduciaries breached their duties" noted Brian Netter, an attorney with Mayer Brown in Washington, D.C.

Many cases have involved defined contribution plans, such as 401(k) plans. In so-called stock-drop cases, for example, 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. In a 2014 opinion, however, the Supreme Court placed stringent standards on employees who bring stock-drop cases. Other defined-contribution lawsuits allege that retirement plan participants were charged excessive fees and fiduciaries made imprudent investment decisions.

The ruling in Thole limits the ability of participants to sue defined-benefit plan fiduciaries before their benefit amount is directly impacted. Fiduciaries for such plans are still bound by ERISA's requirements and their investment decisions remain subject to suit by the Department of Labor, said Adam Cohen, an attorney with Eversheds Sutherland in Washington, D.C.

"A decision in favor of the plaintiffs could have opened the floodgates to lawsuits challenging particular investments in defined benefit plans–similar to lawsuits often filed against defined contribution plans–even though the benefits of the participants are not affected," said Lynn Dudley, senior vice president of global retirement and compensation policy for the American Benefits Council in Washington, D.C.

Cohen noted that the ruling "leaves the door open a small crack" for pension plan participants who can reasonably allege that a plan's mismanagement substantially increased the risk that future benefits would not be paid.

"This appears to be a high bar, but for employers with chronically underfunded plans, it could be a relevant consideration," he said.


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