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Justices Appear to Slam Door on Most Pension Plan Litigation

June 4, 2020, 3:37 PM

A Supreme Court decision this week may have essentially put an end to lawsuits that allege corporate pension plans are being mismanaged.

The court’s 5-4 decision set the bar so high for future cases challenging how defined-benefit pension plans are run that attorneys say litigation seems unlikely, leaving beneficiaries with no way to recoup plan losses unless those losses are so great that it jeopardizes how much they’re getting each month in retirement.

“If you have a fiduciary who’s doing something, whether it is outright theft or just that they have not managed the plan well, and even if they are stealing from the plan, what the decision says is you the participant cannot sue to remedy that wrong unless you can show a sufficient risk to benefit payments,” said R. Joseph Barton, a partner at Block & Leviton LLP who represents plan participants in class litigation.

The court said participants of the U.S. Bank NA’s defined-benefit plan lacked a concrete injury to sue for repayment of $750 million in plan losses due to alleged mismanagement and for $31 million in attorneys’ fees under the Employee Retirement Income Security Act.

Because the participants’ benefits “are fixed and will not change, regardless of how well or poorly the plan is managed,” Justice Brett Kavanaugh wrote for the majority that “winning or losing this suit would not change the plaintiffs’ monthly pension benefits.”

Defined-Benefit Plans

Defined-benefit plans, also known as pensions, have dwindled in the U.S. over the years from 103,346 in 1975 to 46,698 in 2017, according to data the Department of Labor released in September 2019. But Barton said they still cover millions of Americans and many of those Americans are older.

In a defined-benefit plan, retirees receive a fixed payment each month, and the payments don’t fluctuate with the value of the plan or because of the plan fiduciaries’ good or bad investment decisions, Kavanaugh explained in his ruling.

The court seems to think most fiduciaries that run retirement plans are good at heart, but the justices ignore that some in fact are crooks, Barton said.

Until a fiduciary’s actions actually affect the plan such that it can no longer afford to pay benefits, no one can sue, but “when does it become too late?” he asked.

If the court had ruled the other way, attorneys for plan sponsors say participants would have been given the green light to sue any time a fiduciary made a new investment decision and the plan lost money, making it difficult for fiduciaries to manage pension plans.

“The court’s decision should put a stop to entrepreneurial plaintiff lawyers looking to enrich themselves by suing defined-benefit pension plans for alleged mismanagement,” said Sean Marotta, a partner at Hogan Lovells US LLP.

Dwindling Cases

These types of cases were already dwindling in recent years due to a deep split among the federal appeals courts over whether a participant’s ability to sue varies based on how well the plan is funded.

If the situation with U.S. Bank’s plan had been more dire for the participants, some attorneys wonder if the case would have turned out differently.

The court’s decision invites a very interesting and challenging line-drawing exercise, but it gives no guidance on how to figure out when a pension plan is in enough trouble to give participants standing to sue over a fiduciary decision that caused losses to the plan, said Josh Lichtenstein, a partner in the ERISA group at Ropes & Gray LLP who represents fiduciaries and plan sponsors.

“There’s no way to know at any given time whether the plan will actually be able to satisfy its future obligations to plan participants,” he said. “Even a decision that’s made at a time when the company seems comparatively strong could wind up surprisingly becoming disastrous for the plan participants if the company suffers a sudden downturn.”

PBGC Cited as Backstop

In its majority ruling, the high court noted that pension participants are protected by the Pension Benefit Guaranty Corporation.

“Even if a defined-benefit plan is mismanaged into plan termination, the federal PBGC by law acts as a backstop and covers the vested pension benefits up to a certain amount and often in full,” Kavanaugh said in a footnote in the ruling.

The PBGC’s insurance program for single-employer pension plans like U.S. Bank’s plan protects 24.7 million workers and retirees in about 24,000 pension plans, according to its 2019 annual report.

Its insurance program for multiemployer pension plans protects 10.8 million workers and retirees in about 1,400 pension plans, but the program will “more likely than not” run out of money by the end of 2025, PBGC said in its 2017 projections report.

The court seems to have left a tiny door open for litigation where the alleged mismanagement of the pension plan is so severe that the plan is being run into the ground and can’t be made whole by the PBGC, Marotta said.

The court, however, explicitly noted the ruling only applies to litigation over the mismanagement of defined-benefit plans, leaving litigation over other types of retirement plans untouched.

“The good thing from a participant perspective is the court was very clear and carefully distinguished that this did not apply to defined-contribution plan litigation,” Barton said.

“Most of the suits that are being brought involve 401(k) plans, profit-sharing plans, and ESOPs [employee stock ownership plans]—those are all defined-contribution plans,” he said. “Today, the majority of employees are in those plans.”

—With assistance from Warren Rojas

The case is Thole v. U.S. Bank N.A., U.S., No. 17-1712, 6/1/20.

To contact the reporter on this story: Lydia Wheeler in Washington at lwheeler@bloomberglaw.com

To contact the editors responsible for this story: Fawn Johnson at fjohnson@bloomberglaw.com; Brent Bierman at bbierman@bloomberglaw.com

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