In Thole v. U.S. Bank, a 5-4 Supreme Court decision issued on June 1, the Court held that retired participants in a defined benefit pension plan lack constitutional standing to sue the plan fiduciaries for alleged breach of their ERISA fiduciary duties. What was key for the Court’s decision is that the retirement plan at issue was a defined benefit plan, not a defined contribution plan, and that the plaintiffs had received (and would continue to receive) from the plan the monthly benefit payments they were entitled to under the plan. This post summarizes the decision and our takeaways.
Plaintiffs’ Claims and Lower Court Opinions
The plaintiffs, fully vested retired participants in U.S. Bank’s defined benefit retirement plan, filed a putative class action against U.S. Bank and the other plan fiduciaries for alleged mismanagement of plan assets, claiming the fiduciaries breached their duties of loyalty and prudence under ERISA. Specifically, the plaintiffs alleged that in 2007 U.S. Bank invested all $2.8 billion of the plan’s assets in high-risk equities, including more than 40% in the bank’s proprietary mutual funds, and paid itself excessive management fees. With the Great Recession in 2008, the plan lost $1.1 billion, which the plaintiffs alleged was $748 million more than a prudently managed plan would have lost.
The district court dismissed the lawsuit, and the U.S. Court of Appeals for the Eighth Circuit affirmed the dismissal on the basis that the plaintiffs lacked statutory standing under ERISA. In rejecting the plaintiffs’ claims, the Eighth Circuit found that the participants had not suffered any actual losses because the plan had recovered to a healthy (i.e., overfunded) financial condition.
Supreme Court Decision
A plan participant seeking to bring a lawsuit under ERISA must establish both statutory standing and constitutional standing. This means that a plan participant must establish that he or she has a statutory basis for the lawsuit under ERISA and can assert a constitutionally sufficient injury arising from the defendant’s breach of a fiduciary duty under ERISA.
To establish constitutional standing to sue, the Supreme Court stated that a plaintiff must show that (1) he or she suffered a concrete injury (actual or imminent), (2) the injury was caused by the defendant, and (3) the injury would likely be redressed by the requested judicial relief. The Court held that the plaintiffs lacked constitutional standing because they had not suffered any concrete injury as a result of the alleged breaches of fiduciary duty. The Court reasoned that, win or lose the lawsuit, the plaintiffs “would still receive the exact same monthly benefits they are already slated to receive,” not “a penny more” or “a penny less.” The Court therefore held that the plaintiffs have no concrete stake in the lawsuit.
In reaching its decision, the Supreme Court rejected the plaintiffs’ argument that, analogous to trust law, participants in a defined benefit retirement plan possess an equitable or property interest in the plan (an argument essentially meaning that injuries to the plan are by definition injuries to its participants, even if the participants have not suffered, and will not suffer, any monetary losses).
The Court also rejected the following arguments made by the plaintiffs:
- That they had standing to sue as representatives of the plan itself.
The Court, citing other Supreme Court decisions, stated that “in order to claim ‘the interests of others, the litigants themselves still must have suffered an injury in fact, thus giving’ them ‘a sufficiently concrete interest in the outcome of the issue in dispute.’ ”
- That ERISA Section 502(a) gives participants, including those in a defined benefit retirement plan, a general cause of action to sue for restoration of plan losses and other equitable relief.
The Court concluded that a statutory right to sue does not automatically confer constitutional standing, stating that constitutional standing requires a plaintiff to show concrete injury to himself or herself, and there is no ERISA exception to constitutional standing.
- That no one will meaningfully regulate defined benefit plan fiduciaries if participants may not sue for alleged fiduciary misconduct.
The Court stated this argument was not sufficient to establish constitutional standing and that plan sponsors and the Department of Labor are substantially motivated to make sure fiduciaries perform their duties appropriately, writing “[A]bout the last thing a rational employer wants or needs is a mismanaged retirement plan . . . [a]nd the Department of Labor has a substantial motive to aggressively pursue fiduciary misconduct, particularly to avoid the financial burden of failed defined-benefit plans being backloaded onto the Federal Government.”
Lastly, the Court acknowledged that participants in a defined benefit retirement plan may have standing to sue if mismanagement of a plan was so egregious that it substantially increased the risk that the plan and the employer would fail and be unable to pay participants’ future benefits. However, the Court noted that the plaintiffs had not asserted this theory of standing and concluded their complaint did not plausibly and clearly claim that the alleged mismanagement rose to that level. The Court wrote: “It is true that the plaintiffs’ complaint alleged that the plan was underfunded for a period of time. But a bare allegation of plan underfunding does not itself demonstrate a substantially increased risk that the plan and the employer would both fail.”
- The fact that the plan at issue is a defined benefit retirement plan, not a defined contribution retirement plan, was key to the Court’s holding. In contrast to defined contribution retirement plans, where a participant’s benefit is tied to the value of his or her account and the benefit can turn on the plan fiduciary’s particular investment decisions, the Court stated that, in a defined benefit retirement plan, retirees receive a fixed monthly payment and such payments “do not fluctuate with the value of the plan or because of the plan fiduciaries’ good or bad investment decisions.”
- The rationale for the Eighth Circuit’s decision to affirm the district court’s dismissal of the plaintiffs’ lawsuit was that, because the plan had become overfunded during the course of the litigation, the plaintiffs lacked statutory standing to sue under Sections 502(a)(2) and 502(a)(3) of ERISA. The Supreme Court, however, did not base its decision on the plan’s funded status; it held that the plaintiffs lacked constitutional standing and that there is no ERISA exception to constitutional standing.
- The Supreme Court’s decision may have a chilling effect on lawsuits filed against defined benefit retirement plan fiduciaries for alleged mismanagement of plan assets, particularly where the facts show all plan benefits have been paid in accordance with plan terms. Nevertheless, retirement plan fiduciaries responsible for the investment of plan assets (for both defined benefit and defined contribution retirement plans) would be well-advised to ensure that procedures are in place and are being followed to document that their actions and decisions comply with ERISA’s fiduciary duties.