Which participants can sue?

A number of recent cases have addressed the issue of which participants have “standing” to bring an ERISA fiduciary action against plan fiduciaries. The cases generally focus on the issue of whether the participant-plaintiffs have a “concrete stake” in the dispute.

In what follows, we discuss two recent cases involving participant-plaintiffs in defined contribution plans that did not invest in all the funds with respect to which they are suing. We then briefly review the Supreme Court’s 2020 decision in Thole v. U.S. Bank, which involved a defined benefit plan.

Boley v. Universal Health Services – participant-plaintiffs invested in some but not all “imprudently selected” funds may sue

On June 1, 2022, the Third Circuit upheld a lower court decision for plaintiffs in Boley v. Universal Health Services – a “typical” 401(k) plan fiduciary case challenging the prudence of fees paid with respect to fund management and recordkeeping.

Plaintiffs alleged that “Universal breached its fiduciary duty by including the Fidelity Freedom Fund suite [the plan’s default target date fund] in the plan, charging excessive recordkeeping and administrative fees, and employing a flawed process for selecting and monitoring the Plan’s investment options, resulting in the selection of expensive investment options instead of readily-available lower cost alternatives.”

Plaintiffs had, however, invested in only seven of the plan’s thirty-seven funds. The default TDF – a particular focus of plaintiffs’ allegations – consisted (per the court) of 13 separate funds. Each of plaintiffs invested in at least one of these 13 funds but did not invest in all of them.

Defendants challenged plaintiffs’ standing (under Article III of the US Constitution) to sue with respect to “funds in which they did not personally invest.”

The Third Circuit (affirming a decision of the lower court) found that:

[T]he Named Plaintiffs … have a concrete injury flowing from the challenged conduct. The Named Plaintiffs each invested in at least one of the Fidelity Freedom Funds. Importantly, the Named Plaintiffs’ allegations in the Complaint are that all of the funds in the suite were imprudent for the same reasons – they were all excessively expensive funds, because they invested in high fee actively managed funds rather than low-cost index funds. If the Named Plaintiffs’ allegations are true, each class representative suffered a concrete injury traceable to Universal’s imprudent choice to include the Fidelity Freedom Fund suite in the Plan, rather than a suite consisting of target date funds that invested in less expensive index funds. The Named Plaintiffs have standing to bring this claim.

Similarly, with respect to other funds in the plan’s fund menu, the court found that “Because each class representative invested in at least one fund with allegedly excessive fees, the Named Plaintiffs adequately alleged they suffered injury from Universal’s imprudent investment evaluation process, and, accordingly, have standing to bring this claim.”

Bottom line: if plaintiffs invested in at least one fund that had excessively high fees because of an (allegedly) imprudent fund selection process, they may bring a claim with respect to all funds selected by that process.

Brown v. Mitre – where participant-plaintiff suffered no damage, no standing to bring a claim

On April 28, 2022, the United States District Court for the District of Massachusetts entered an order dismissing claims brought by a plaintiff (as a class representative) in Brown v. Mitre. Plaintiff claimed that defendant plan fiduciaries caused the plan to pay “unreasonably high administrative and recordkeeping expenses to the detriment of the participants. According to the plaintiff, MITRE’s plans paid these fees through a revenue sharing approach, by handing over ‘a percentage of the assets in the Plans.’”

The court found, however, that “Brown had invested only in a single fund in the relevant time period. That fund belonged to the lowest cost class, and critically, paid no revenue-sharing fees (facts not disputed in Brown’s opposition). Brown’s theory of damages, premised on the revenue sharing model, cannot explain how he was personally injured by MITRE’s allegedly unreasonable fee practices. Accordingly, Brown has not established Article III standing to sue individually or on behalf of others.”

Bottom line: a participant who has suffered no concrete injury from the alleged imprudent conduct may not bring an ERISA fiduciary lawsuit premised on that imprudent conduct.

Supreme Court decision in Thole v. U.S. Bank – participants in a DB plan that have received all benefits due have no “concrete stake” in the dispute and therefore no standing to sue

Both the Boley v. Universal Health Services and Brown v. Mitre courts cite the Supreme Court’s June 5, 2020, decision in Thole v. U.S. Bank. In Thole a divided (5-4) Court found for defendant defined benefit plan sponsor-fiduciaries, holding that plaintiff plan participants did not have standing to bring the lawsuit.

Fiduciaries of U.S. Bank’s DB plan for its own employees 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.

Justice Kavanaugh, who wrote the majority opinion, summarized the Court’s ruling as follows:

Courts sometimes make standing law more complicated than it needs to be. … [U]nder ordinary Article III [of the United States Constitution] standing analysis, the plaintiffs lack Article III standing for a simple, commonsense reason: They have received all of their vested pension benefits so far, and they are legally entitled to receive the same monthly payments for the rest of their lives. Winning or losing this suit would not change the plaintiffs’ monthly pension benefits. The plaintiffs have no concrete stake in this dispute and therefore lack Article III standing.

Takeaway for sponsors

These issues go (generally) more to litigation strategy than to rules for sponsor fiduciary conduct. But fiduciaries will want to consider who will have a stake in litigation (and how big that stake might be) over, e.g., a decision to retain or replace an individual fund. And it is interesting (at a minimum) to note that, as we have discussed in the past, DC design presents litigation issues that do not exist for DB plans.

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We will continue to follow this issue.