Although defined benefit pension plans like the U.S. Bank Pension Plan are now rare, the expansion of the rationale for limiting retirement plan participants’ right to sue for fiduciary breach is concerning. The theory of the plan sponsor’s position is similar to the defensive reasoning used by 401k plan sponsors who face lawsuits over financial self-dealing and other forms of investment mismanagement.
THOLE V. U.S. BANK, N.A.
James Thole and Sherry Smith were participants in the defined benefit plan maintained by U.S. Bank. Disregarding the warnings of the plan’s investment consultants, the plan administrator invested all of the plan’s assets in high-risk stocks, including the bank’s own proprietary mutual funds. These investments were more expensive than similar alternatives and violated basic ERISA fiduciary principles of prudence and loyalty. When equity markets crashed in 2008, the plan lost $1.1 billion dollars. Virtually overnight, the plan went from significantly overfunded to 84 percent underfunded.
Thole and Smith filed a lawsuit, seeking to:
- stop the investment misconduct;
- remove the fiduciaries;
- have an independent fiduciary appointed; and
- restore $748 million in losses.
In light of the new funding, the District Court dismissed the lawsuit, a decision that the Eighth Circuit affirmed. The Eighth Circuit split, however, on the question of petitioners’ standing to seek injunctive relief that would affect future management decisions. The majority held that they lacked standing to sue because they had not suffered individual monetary harm. Thole and Smith argue that the harm suffered was not the loss of money, but the mismanagement of investments.
DEFINED BENEFITS, TRUST LAW AND 401K PLANS
Defined benefit plans are different from 401k plans as dolphins are different from tuna fish – which is to say, profoundly. The strangest thing may be that they both swim in the same sea.
- Defined benefit plans fund toward a future promise. At its simplest, a plan might promise $X, payable monthly for life, beginning at age 60. Calculating how much money will be necessary to pay that promised benefit can be complicated, though. It depends, among other things, on how long a pensioner can be expected to live after retirement. Not to be callous, but financing a benefit for someone who lives for only a few years after retirement is cheaper than financing a benefit for someone who lives to the age of 111.
- In most defined benefit plans, the legal obligation to put money into the plan falls entirely on the employer. Employers must, under ERISA, ensure that benefits are adequately funded based on reasonable assumptions about mortality rates and the potential for investment earnings. There are serious penalties for failing to do so. Employees do not contribute anything to their anticipated pension benefit, out of salary reduction or in any other way.
- There are no individual accounts in defined benefit plans. Each participant is considered to have an undivided interest in the entire pension fund. This money must be held in trust for the benefit of all participants until it begins to be paid out to individual pensioners.
Another angle on the dispute may be to see how it relates to recent lawsuits concerning 401k investment management.
THE SAME RETIREMENT SAVINGS SEA
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Because of the structural differences between defined benefit plans and 401k plans, the legal holdings in one set of lawsuits do apply directly to the other. Nonetheless, a Supreme Court decision that weakens the trust law-based fiduciary protections afforded one set of participants should be concerning to all.