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On June 28, 2019, the Supreme Court granted certiorari in Thole v. U.S. Bank, agreeing to review whether a plan participant can bring an ERISA claim against a defined benefit plan sponsor-fiduciary where the plan is overfunded. The case is important because a Supreme Court decision in favor of plaintiffs could lead to expanded DB fiduciary litigation, similar to the DC fiduciary litigation we have seen proliferate over the last two decades.
In this article we briefly review the case and consider what is at stake for plan sponsors in it.
Legal issue – the unique and difficult questions raised by a DB participant ERISA fiduciary lawsuit against a sponsor-fiduciary: Generally, under ERISA, certain persons, including, e.g., the Department of Labor, co-fiduciaries, and plan participants, may sue a retirement plan fiduciary for violations of ERISA’s fiduciary rules, e.g., ERISA’s prudence and prohibited transaction provisions. And, generally, whether that lawsuit may be brought does not depend on whether the plan is a DB plan or whether the DB plan is overfunded or underfunded.
Fiduciary lawsuits by DB plan participants, however, present a couple of basic questions. First – and this is generally the issue raised in Thole– where the DB plan is “overfunded,” the participant will generally suffer no damage. The participant – except in the extreme case of an employer-plan sponsor liquidation in bankruptcy – will still get the benefit she was promised. That is because, in a DB plan – and in contrast to the situation in a DC plan – the amount a participant is entitled to does not depend on the amount of assets in the plan.
Putting the issue that way, however, begs at least a couple of sets of questions, discussed (to some extent) in the Solicitor General’s brief (see below). What does it mean for a DB plan to be overfunded? By what standard, e.g., what interest rate do you use to value liabilities? And, why should it matter if the plan, “at the time of the lawsuit,” is overfunded by $1 – a change in interest rates or a marginal drop in plan asset value could change that condition overnight.
Second, ERISA already imposes on employer-plan sponsors a relatively strict funding regime that requires them to make up any plan shortfall, regardless of whether that shortfall is the result of an ERISA fiduciary violation – their own or someone else’s – or contribution policy or asset or liability performance or simply because the Society of Actuaries adopted new mortality tables. Generally, the employer-plan sponsor can escape this obligation only by fully liquidating in bankruptcy. Why should we create a separate and in nearly all cases redundant cause of action under ERISA’s fiduciary rules?
These issues take on more-than-academic significance when we consider the possibility that if – without regard to funded status or the sponsor’s ultimate obligation to make up funding shortfalls – the Supreme Court allows participant fiduciary lawsuits against DB sponsor-fiduciaries, we face the prospect of a new DB fiduciary litigation industry replicating the one that already exists for DC plans, driven largely by plaintiffs lawyers.
Let’s now turn to the specifics of Thole.
Background: Fiduciaries of U.S. Bank’s “in-house” DB plan invested plan assets in mutual funds managed by a U.S. Bank subsidiary, FAF Advisors, Inc. Plaintiff-participants sued U.S. Bank, as a sponsor-fiduciary, claiming that those investments violated ERISA’s prohibited transaction rules.
When litigation commenced, the plan was underfunded. During litigation, however, the plan became overfunded. At that point, defendants moved for dismissal, arguing that, because participants had sustained no financial loss, they did not have standing to sue. The district court rejected that standing argument and instead dismissed plaintiffs’ case as “moot.”
The Eighth Circuit Court of Appeals rejected the district court’s standing theory but affirmed the judgment in favor of defendants on statutory grounds, holding that the relevant section of ERISA “does not permit a participant in a defined-benefit plan to bring suit claiming liability … for alleged breaches of fiduciary duties when the plan is overfunded.”
There is considerable confusion over which theory should be applied to these sorts of cases – standing, mootness, or simply the limits of ERISA’s remedy – but in all cases the issue boils down to the question: when a plan is overfunded, can a DB plan participant bring an ERISA lawsuit for breach of fiduciary duty? The Eighth Circuit answers this question “no” – and rejects these sorts of claims – because in these circumstances the participant-plaintiff has not sustained any financial loss – he will still receive his promised DB benefit.
Solicitor General recommends review: In its amicus brief in favor of granting certiorari, the U.S. Solicitor General argued that “[n]othing in the text of ERISA conditions a fiduciary’s duties to beneficiaries on whether the plan is a defined-benefit or defined-contribution plan, or whether the plan is overfunded or underfunded.”
The SG identified three theories under which this sort of ERISA fiduciary lawsuit could be brought by a plan participant against a DB plan sponsor-fiduciary: (1) in a representative capacity, arguing that a participant who “has no individual claim to a plan’s general asset pool… still could maintain a suit alleging that the trustee had improperly used an overfunded plan’s surplus funds;” (2) on his own individual behalf, “because a breach of fiduciary duty constitutes an invasion of his own legal right;” and (3) “because of an increased risk of monetary harm resulting from a breach of fiduciary duty.”
With regard to the counter-argument that a participant in an overfunded DB plan has suffered no “tangible” financial harm, the Solicitor argued:
[T]he risk of underpayment [of the participant’s benefit] does not vanish the instant a plan crosses the threshold from underfunded to overfunded under a statutory formula. A plan that is underfunded by a dollar has virtually the same risk of future insolvency as one that is overfunded by a dollar. That marginal difference cannot affect standing; if the risk is sufficiently non-speculative in the one case, it is equally non-speculative in the other.
Finally, the Solicitor noted that different circuits have taken different positions on this issue. Thus, “[i]n light of the tension among the courts of appeals, and given that several courts have decided the issue incorrectly, this Court’s review is warranted.”
What is at stake for plan sponsors: The proliferation of participant fiduciary litigation in DC plans has been driven, in part, by the fact that, in a DC plan, plan losses drop to the participants’ bottom line. As we discussed at the top, where a DB plan participant is suing the sponsor as a fiduciary, that logic generally does not hold (except in extreme cases, e.g., in the event of a bankruptcy/liquidation of the sponsor). Any losses to the plan will generally have to be made up (ultimately) by the sponsor itself. Thus, generally, where a sponsor is compelled, as result of a fiduciary lawsuit, to make additional contributions to a DB plan, all that will happen is that the sponsor’s future funding obligation will be reduced. No participant’s benefit will be increased.
In this regard, a critical feature of the Eighth Circuit’s decision in Thole was that plaintiffs’ lawyers were denied attorneys’ fees.
If the Supreme Court reverses in Thole, and the Thole plaintiffs’ attorneys are ultimately awarded attorneys’ fees, plaintiffs’ attorneys may begin targeting DB plan sponsor-fiduciaries for litigation, very much including litigation targeting any fees paid out of plan assets. The DC litigation “contagion” could, in effect, spread to DB plans.
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We will continue to follow this issue.