The U.S. Supreme Court is gearing up to hear oral arguments Jan. 13 in a case accusing
A ruling in favor of the bank would mean that pension plan participants can “virtually never” sue to rectify plan mismanagement, even if plan fiduciaries “bet $750 million on black,” plaintiff James Thole told the court in December.
But a victory for Thole would benefit no one but his lawyers, who have requested $31 million in fees, U.S. Bank said.
“Win or lose, Plaintiffs will receive the exact same pension payments for the rest of their lives,” the bank told the court in November.
The case asks whether a pension plan participant’s ability to sue the plan’s fiduciaries over alleged mismanagement varies based on how well the plan is funded.
“Thole has the potential to be a pivotal case,” Nancy G. Ross, a partner in Mayer Brown LLP’s Chicago office and co-chair of the firm’s ERISA litigation practice, told Bloomberg Law.
No Harm, No Foul?
U.S. Bank is accused of mismanaging its pension plan by over-investing in high-risk equities and funds offered by a bank subsidiary, leading to $750 million in losses.
The U.S. Court of Appeals for the Eighth Circuit rejected Thole’s proposed class action after the bank made additional contributions that brought the plan into compliance with the Employee Retirement Income Security Act. Because the plan was adequately funded, Thole couldn’t show that he’d been injured by the bank’s conduct and therefore lacked standing to sue, the Eighth Circuit reasoned.
Thole says this is all wrong, because it turns pension plan participants into mere “bystanders” to their own plans.
The federal government supports Thole’s position, arguing that a pension plan participant’s ability to sue over fiduciary misconduct doesn’t depend on how well the plan is funded. According to the government’s September brief, a pension plan fiduciary’s breach of duty is an “invasion of a private legal right held by the beneficiary,” which supports standing to sue without the need to demonstrate additional injury.
The federal appeals courts are split on the question.
Determining standing based on how well a pension plan is funded could put participants in a tough position, said David Pratt, a professor at Albany Law School who specializes in employee benefits and tax law. That’s because by the time a large shortfall emerges, it may be too late to properly address the situation.
“The idea that people in a defined benefit plan don’t have standing until you get to the point where they’ve actually lost benefits really gives them insufficient protection, because by that stage, the risk is that it’s not going to be possible to remedy the underfunding,” Pratt told Bloomberg Law.
According to Pratt, funding a pension plan is a “long-term project” that becomes increasingly difficult as the shortfall grows.
“If participants didn’t have standing unless and until they’d actually been denied benefits, by that stage it may not be possible to make the plan whole, because the plan sponsor may have gone bankrupt or be in dire financial straits,” Pratt said.
“If you have an issue relating to adequate funding, in my mind that’s an issue that should be addressed at the earliest moment it can be detected,” he said.
Pratt is Albany Law School’s Jay and Ruth Caplan Distinguished Professor of Law. He’s among a group of eight law professors who filed a brief supporting Thole in the case.
Allocation of Risk
Others frame the issue differently, pointing to the fundamental differences between defined benefit pension plans and defined contribution plans like 401(k)s, which have become more prevalent in recent years.
In a defined contribution plan, workers typically receive a set amount of money from their employers and must then assume the risk of investing that money to save for retirement. In a defined benefit plan like U.S. Bank’s, workers are promised a specified retirement benefit, and the employer is responsible for investing appropriately and ensuring there’s enough money to pay benefits.
“A material difference between a DC and a DB plan is that with a DB plan, the employer bears the risk of insufficient funding to provide benefits,” said Mayer Brown’s Ross. “Where that risk is not present, plan participants have not been harmed.”
Ross, who filed a brief supporting U.S. Bank on behalf of the U.S. Chamber of Commerce, said the private retirement system has been threatened by “decades of lawsuits to which there is no end in sight.”
Denying standing to participants who have suffered no harm would “go far in recalibrating and setting upright the protections that Congress intended in enacting ERISA for both the provider and the recipient of such programs,” she said.
The case is Thole v. U.S. Bank, NA, U.S., No. 17-1712, oral arguments 1/13/20.