When is a fiduciary breach not a fiduciary breach?  When the complaining retiree-participants do not have standing because they have not missed receiving a defined benefit pension plan payment, according to Justice Kavanaugh writing for the majority opinion of the U.S. Supreme Court in James J. Thole et al. v. U.S. Bank NA et al., decided June 1, 2020.  In a 5-4 decision, the majority ruled that defined benefit participants, who were receiving their pensions and had not missed an installment, did not have constitutional standing to bring a lawsuit challenging the actions of the plan fiduciaries under ERISA when the plan was overfunded.  The High Court upheld the decision of the United States Court of Appeals for the Eighth Circuit.

The fiduciary action complained of was plan fiduciaries investing in U.S. Bank’s own mutual funds and paying themselves excessive management fees.  Additionally, it was alleged the fiduciaries manipulated accounting rules to boost income and inflate stock prices allowing the fiduciaries to exercise lucrative stock options.  The plaintiff’s alleged those actions breached the fiduciary duties of loyalty and prudence.  Additionally, the plan lost $1.1 billion from the investments in 2008 which plaintiffs alleged was $738 million higher than a properly managed plan would have lost.  These losses cause the plan to be severely underfunded.  The complaint sought a return to the plan of the losses and removal of the current fiduciaries.  However, before the case got to trial, U.S. Bank contributed another $311 million to the plan which made it overfunded.

The gist of the ruling was that because the plan is now overfunded, there is no threat that the plaintiffs won’t continue to receive their pension payments, whether they win or lose the lawsuit.  Kavanaugh found it “of decisive importance” that the plan involved was a defined benefit plan where the risk of investment is upon the employer and a participant’s benefit does not fluctuate with the good or bad investments of fiduciaries.  He noted that the plaintiffs did not allege that the mismanagement of the plan was so egregious that it substantially increased the risk that the plan and employer would fail. Additionally, he wrote that even if the plan were mismanaged into termination, the PBGC would take over the plan and the plaintiff’s level of benefits are fully guaranteed.

Kavanaugh wrote that defined benefit participants do not have an equitable interest in a defined benefit plan similar to that of a defined contribution plan or beneficiaries of a private trust.  Writing a scathing dissent, Justice Sotomayor took issue with this conclusion, reasoning that ERISA’s requirement that plan assets be held in a trust for the exclusive benefit of participants gives participants an equitable interest under traditional trust law, regardless of whether the plan is defined benefit or defined contribution.  Further she reasoned that a beneficiary has a concrete interest in a fiduciary’s loyalty and prudence regardless of whether the breach of these duties caused a personal financial injury to the beneficiary.  By holding the plaintiffs don’t have standing because the outcome of the suit would not change their pension benefit, the Court denies standing without examining all claims for relief.

She also maintained that even if the plaintiffs did not have personal standing they have standing to sue for restitution and disgorgement on behalf of the plan.  She said that even though ERISA and the plan document require fiduciary loyalty and prudence, the majority opinion suggests that participants should endure disloyalty, imprudence and mismanagement as long as the PBGC will guarantee the benefits.  However, ERISA was enacted with fiduciary duties to prevent plans from failing in the first place.

Sotomayor concludes that the majority opinion will encourage the very mischief that ERISA was enacted to prevent, “misuse and mismanagement of plan assets by plan administrators”.  “The Court’s reasoning allows fiduciaries to misuse pension funds so long as the employer has a strong enough balance sheet during (or, as alleged here, because of ) the misbehavior. Indeed, the Court holds 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. . .Only by overruling, ignoring, or misstating centuries of law could the Court hold that the Constitution requires beneficiaries to watch idly as their supposed fiduciaries misappropriate their pension funds.”

Conclusion.  This case will likely chill participant suits alleging fiduciary duty breaches in defined benefit pension plans.  Even if the plan is underfunded, provided the employer can afford to contribute to the plan to cause the plan to be overfunded before trial, the fiduciaries will be able to have the suit dismissed.  More importantly, and disturbing, is the fact that the case appears to enable (if not encourage) defined benefit plan fiduciaries to ignore their duties of loyalty and prudence without concern for personal liability as long as the employer can cure any underfunding caused by the breaches.  However, the U.S. Department of Labor still has standing to bring a suit against such fiduciaries, but this decision removes the private cause of action by participants in this context that is an essential part of the ERISA scheme.