Funded Status Not a Good Measure for Whether DB Plan Participants Can Sue

The U.S. Solicitor General and the Pension Rights Center have filed briefs of Amicus Curiae with the Supreme Court in Thole v. U.S. Bank, a pension-focused case arising under the Employee Retirement Income Security Act (ERISA).

Specifically, the Supreme Court will weigh the following questions: Whether defined benefit (DB) plan participants and beneficiaries may seek relief under 29 U.S.C. 1132(a)(3) when the plan is overfunded; whether defined benefit plan participants and beneficiaries may seek relief under 29 U.S.C. 1132(a)(2) when the plan is overfunded; and whether petitioners have demonstrated Article III standing. 

Participants in the U.S. Bancorp Pension Plan filed the lawsuit in 2013. In October 2017, the U.S. 8th Circuit Court of Appeals upheld a lower court’s dismissal of the case based on the fact that, despite some significant investment losses suffered by the plan after investments in affiliated investment funds, the court believed the plan had enough money left over to keep paying benefits. Thus the participants could not prove, in the court’s eyes, that they had the sufficient standing to move ahead on fiduciary breach claims.

Both the U.S. Solicitor and the Pension Rights Center argue that current funded status of a defined benefit (DB) plan is not a proper measure for whether the participants have a right to sue for breaches of fiduciary duties and prohibited transactions under ERISA.

This is the second brief filed for the case by the U.S. The first was requested by the Supreme Court and in it, the Solicitor General recommended the high court take up the case. In the current brief, the Solicitor General notes that the Supreme Court has recognized that ERISA builds on the traditional law of trusts. “By analogy to traditional trust law, a beneficiary of an overfunded defined benefit plan has Article III standing to sue for breach of fiduciary duty (a) on behalf of the plan in a representative capacity; (b) on his own behalf for the invasion of a private legal right; and (c) when the breach results in a materially increased risk of monetary harm,” the brief says.

U.S. Solicitor General Noel J. Francisco points out that under a well-established principle of trust law, a beneficiary may bring such a suit when the trustee is unable or unwilling to do so. ERISA expressly incorporates that principle, assigning to beneficiaries the right to bring such suits. “Because a defined-benefit pension plan suffers a cognizable injury when a fiduciary breach reduces plan assets—whether or not the plan is overfunded—it follows that a plan beneficiary has standing to bring suit to seek recompense for that injury,” he argues.

He adds that such suits are all the more important under ERISA than under traditional trust law because ERISA expands the universe of persons subject to fiduciary duties, making it more likely that a trustee will hold interests adverse to the plan and thus be unwilling or unable to bring suit on behalf of the plan. Francisco also points out that traditionally, courts would entertain suits by trust beneficiaries alleging fiduciary breach with no further inquiry into whether the breach caused any harm other than the breach itself. By analogy, an ERISA beneficiary likewise may maintain a suit for fiduciary breach without demonstrating additional injury beyond the breach. “ERISA expressly incorporates that principle in Section 502(a), bolstering the historical case for standing with congressional judgment,” the brief says.

An ERISA beneficiary also has standing to sue for breach of fiduciary duty when the breach results in a materially increased risk of monetary loss, the brief states. “Whether a breach results in a materially increased risk does not depend on the plan’s funding status; a plan that is underfunded by a dollar has virtually the same risk of future insolvency as a plan that is overfunded by a dollar,” it says. Francisco adds that an ERISA beneficiary of a defined benefit plan also has standing to assert claims based on a future risk of nonpayment or underpayment of promised benefits.

“Nothing in the text or structure of ERISA purports to limit such suits based on the type or funding status of the plan. Section 502(a)(3)expressly authorizes ‘participant[s]’ and ‘beneficiar[ies]’ to bring suit for injunctive and ‘other appropriate equitable relief’ without any limitation based on the type or funding status of the plan,” Francisco says.

In its brief, the Pension Rights Center argues there can be little dispute that the plan itself suffered an injury when it lost hundreds of millions of dollars in value allegedly due to fiduciary breaches. In suing to recover these losses on behalf of the plan, as ERISA expressly permits them to do, the participants have representational standing to assert the plan’s interest in recovering these losses.

The plaintiffs also have standing to assert their own interests, the Pension Rights Center adds.  “As the intended beneficiaries of both the plan and ERISA’s remedial scheme, their interests in the proper management of the plan are harmed when plan fiduciaries, who are charged with protecting their interests, act imprudently, disloyally and in a self-interested manner. In granting them the power to sue plan fiduciaries in such circumstances, ERISA draws from venerable trust law principles. This judgment of Congress, grounded as it is in historic practice, suffices to establish injury in fact,” the brief says.

The Pension Rights Center argues that when the DB plan in which a plaintiff is a participant suffers a loss, here alleged to be at least $748,000,000, the participants’ assurance of receiving the full benefit promised becomes less secure, even in a plan considered fully funded under ERISA’s minimum funding standards.

The center points out that a DB plan’s funding status is a difficult and controversial determination.  It not only may be calculated on several different bases, but is also subject to numerous micro- and macro-economic factors that can quickly turn a fully funded plan into a severely underfunded one whatever funding measure is used.  “For these reasons, funding status is a particularly bad metric of Article III standing, which is meant to answer the simple question whether the parties that have brought suit have a sufficiently concrete interest in the outcome of the suit. The answer to this question should not turn on a calculation that can confound actuaries and a status that can change significantly and numerous times over the course of a lawsuit, much less over the lifetime of a plan. Such a calculation is not a good measure of whether a plan and its participants have been harmed by fiduciary mismanagement,” the brief says.

The Pension Rights Center also points out that the participants have standing to sue for injunctive and other equitable relief, such as an order requiring divestiture of non-diverse or other improper investments and the removal of the fiduciaries. It says this kind of relief is not dependent on a showing of economic harm, and the same is true for a claim seeking restoration of profits to prevent a fiduciary from benefiting from a breach.  “When plan fiduciaries violate their statutory and trust-based duties to the plan and its participants, those participants have a sufficient injury under ERISA to sue to correct these breaches,” the brief states.

Michelle Yau, with Cohen Milstein Sellers & Toll, who is one of the leading attorneys representing the plaintiffs, said, “We are very pleased with the amicus briefs supporting our position. The Solicitor General’s brief explains that ERISA participants’ ability to sue for fiduciary breach is rooted firmly in the common law of trusts, endorsed by Congress, and consistent with Supreme Court precedent. And the brief filed by the Pension Rights Center makes clear why a plan’s funded status ‘is not a sensible measure of injury in fact.’”