Suing Your Pension Plan Got More Complicated

The Employee Retirement Income Security Act of 1974 (“ERISA”) is a federal statute whose purpose is to protect the interests of participants in employee benefit plans by establishing standards of conduct for fiduciaries of the plans and appropriate remedies for breach of those standards.[1]

Under ERISA, plan managers are fiduciaries who owe a duty of loyalty solely to plan participants and are expressly forbidden from engaging in self-dealing transactions. Plan participants may themselves sue trustees for damages, to enjoin any action which violates the fiduciary standards of ERISA and to have fiduciaries removed.[2]

U.S. Bank (the “Bank”), one of the country’s largest banks, offers its 70,000 employees a pension plan covered by ERISA (the “Plan”). The Plan is a defined benefit plan—that is, participants are paid a fixed amount monthly set by contract.

In 2011, participants in the Plan sued the Bank and the Plan’s trustees (and others) on behalf of a class of all Plan participants, accusing the trustees of disloyalty and mismanagement. Their suit describes a tissue of self-dealing that, they claim, led to massive losses. These conflicts of interests continue to this day. The Plan participants sought money damages, an injunction against the continuation of allegedly wrongful acts and removal of the trustees.

The trustees of the Plan were (and are to this day) members of the Bank’s Compensation Committee and Investment Committee. The Plan’s investment manager, FAF Advisors, is a Bank subsidiary. Beginning in 2004, FAF Advisors invested 100% of the assets of the Plan in equities. By comparison, the average asset allocation of the top 100 defined benefit plans in the country included a 60% equity stake. By 2007, the Plan was overfunded as a result of the runup in the stock market.

Since Plan participants have fixed benefits, they could not participate in the upside of an investment in risky assets. The employer, not the Plan, is entitled to any surplus. The upside therefore belonged solely to the Bank, which would have had no share in the participants’ downside risk.

As of 2003, 98% of the Plan’s $2.2 billion in assets were invested in First American Mutual Funds, the Bank’s proprietary funds. FAF Advisors, the Plan’s investment managers, also serve as the investment manager for First American Mutual Funds. Since FAF Advisors acted as investment manager for both the Plan and Bank’s proprietary funds, and as fiduciary of the Plan, it was on both sides of all orders placed for investments and redemptions in connection with the mutual funds.

By December 2007, $2.7 billion of the $2.8 billion of the assets in the Plan was invested in First American Mutual Funds or corporate securities which supported FAF Advisors’s Securities Lending Program. As a result of that allocation—or, according to the Plan participants, misallocation—the Plan lost $1.1 billion during the Great Recession in 2008 and 2009 and became significantly (84%) underfunded. The losses were, according to the Plan participants, $748 million more than an adequately diversified plan would have suffered. At the time they filed their lawsuit in 2011, the Plan was underfunded (80%) to a greater degree.

After commencement of the lawsuit, the Bank contributed $339 million to the Plan, restoring it to overfunded status. Its action appeared to have been a direct result of the complaints of the Plan’s participants who had filed suit.

In Thole v. U.S. Bank, N.A.[3], the United States Supreme Court, in a 5-to-4 decision, affirmed dismissal of the Plan participants’ lawsuit, ruling they had suffered no injury and thus lacked the requisite standing to bring the action. A person has standing to sue when he or she suffers actual injury or injury that is imminent, and the injury could be redressed by the relief requested in the suit. The relief need to be in the form of monetary damages.

The Supreme Court’s chief rationale for its ruling was that, because the Plan was overfunded at the time of the Court’s decision and because the Plan participants were entitled to no more or less than the contracted for benefit, they would receive that benefit, win or lose. Those participants could not assert injury to the Plan if they had not personally incurred an actual monetary loss. Therefore, according to the Court’s reasoning, because the Plan participants had not suffered any financial loss and had no prospect for any relief from their suit, they could not represent a class of Plan participants.

Not quite. What if the Plan’s assets were invested entirely in equities, and the equity markets suffered a sharp decline? What if, as a result, the Plan were underfunded once again? And what if, this time, the Bank failed to backstop the Plan? That’s not a thought experiment. It’s precisely what happened in 2008 and 2009. And unless market cycles are abolished, it will happen again.

The Supreme Court did not mention, much less analyze, the factual background of the suit. If it had, it could not have avoided confronting serious allegations of disloyalty, mismanagement and self-dealing by the trustees of the Plan, in concert with the Bank, the very types of activities ERISA was intended to police.

Furthermore, the Plan participants had also asked that the trustees and the Bank be barred in the future from the alleged wrongful acts and that the trustees be removed. The Court did not adequately explain why those requests for non-monetary relief, which would have protected all of the Plan’s participants, did not support their standing to bring a suit for ERISA violations.

Supreme Court decisions as often as not leave unanswered as many questions as they resolve. This case was no exception. Chief among the open issues under ERISA is this: At what precise point do participants in a pension plan have recourse against disloyal trustees?

In the majority opinion, Justice Kavanaugh hinted at the answer, in pointing out what the Plan participants had not alleged in their suit: that “mismanagement of the plan was so egregious that the plan and the employer would fail and be unable to pay the participants’ future pension benefits.” In other words, perhaps at some later date, when the Plan had failed, or was on the brink of failure, they would have standing.

Sounds like Catch-22, doesn’t it? You can’t sue until your pension plan fails, or is on the brink of failure. By which point it might be too late for a satisfactory remedy.

[1] 29 U.S.C. §1001 et seq.

[2] 29 U.S.C. §1109.

[3] 590 U.S. ____ (2020).