U.S. Supreme Court Rules on Defined Benefit Plan Litigation
By Mark Johnson, Ph.D., J.D.
"Courts sometimes make standing law more complicated than it needs to be," writes Associate Justice Brett M. Kavanaugh in the Supreme Court's June 1, 2020 decision on Thole et. al. v. U.S. Bank N.A. et. al.
The plaintiffs in Thole claimed that the plan sponsor mismanaged the defined benefit plan when it lost $1.1 billion in 2008 during the time of the Great Recession. Specifically, the plaintiffs claimed that the plan sponsor violated its duties of loyalty and prudence based on a poor return on investment for plan assets. The suit was brought under the Employee Retirement Income Security Act of 1974 (ERISA).
Among other items, the plaintiffs demanded that the defendant repay approximately $750 million in plan losses as well as replacement of the plan fiduciary. Additionally, they sought $31 million in attorney's fees.
Plaintiffs James Thole and Sherry Smith are retired participants in a defined benefit retirement plan sponsored by U.S. Bank. Mr. Thole receives $2,198.38 in monthly benefits and Ms. Smith receives $42.26 per month. Both participants have received all their benefits to date and are entitled to receive those benefits every month for the remainder of their lifetime.
Participants in a defined benefit plan receive a specific monetary benefit on a monthly or similar payment schedule, based on employment factors such as their salary history and years of service. A defined contribution plan like a 401(k) is an alternate form of pension plan where the participant receives a payment that will vary based on the amount they contribute to the plan, their investment choices, and how the funds performed.
The original case was dismissed by the U.S. District Court for the District of Minnesota. The U.S. Court of Appeals for the Eighth Circuit upheld the lower court's ruling on the grounds that the plaintiffs lacked statutory standing, meaning that they were not eligible to have the court decide the merits of the dispute.
At the time the original case was filed in 2013, the plan was underfunded. However, the plan sponsor made additional contributions that resulted in an overfunded status by 2014. At that point the element of mootness also was a consideration.
The U.S. Supreme Court affirmed the judgment of the U. S. Court of Appeals for the Eighth Circuit, also on the grounds that the plaintiffs lack standing. The Supreme Court ruled that a plaintiff must demonstrate three conditions in order to establish standing under Article III of the Constitution:
(1) That he or she suffered an injury in fact that is concrete, particularized, and actual or imminent,
(2) That the injury was caused by the defendant, and
(3) That the injury would likely be redressed by the requested judicial relief.
In Thole, the Court noted that the plaintiffs did not suffer an injury because the amount of benefits they are owed did not and will not change based on the plan performance. Even if a defined benefit plan fails due to mismanagement, the plan participants are protected through the Pension Benefit Guaranty Corporation (PBGC) up to a certain level of benefits.
The plaintiffs put forward four reasons why they should have standing in the matter, relating to the following arguments:
(1) Injuries to the plan are injuries to the plan participants,
(2) They have standing as representatives of the plan itself,
(3) ERISA affords defined plan participants and others specified parties a cause of action to sue for losses, and
(4) If plan participants don't sue, no one will regulate plan fiduciaries.
The Court did not consider these arguments to qualify for standing in the matter and noted that defined benefit plans are regulated in many ways.
The Thole decision was 5-4, with Justice Roberts, Justice Thomas, Justice Alito and Justice Gorsuch joining Justice Kavanaugh. Justice Sotomayor wrote the dissent, with whom Justice Ginsburg, Justice Breyer, and Justice Kagan in agreement.
About Pension and ERISA Expert Mark Johnson
Mark Johnson, Ph.D., J.D., is an experienced pension and ERISA expert. As a former ERISA Plan Managing Director and plan fiduciary for a Fortune 500 company, Dr. Johnson has practical knowledge of plan documents as well as an in-depth understanding of ERISA obligations. He works as an expert consultant and witness on 401(k), ESOP and pension fiduciary liability; retiree medical benefit coverage; third party administrator disputes; individual benefit claims; pension benefits in bankruptcy; long term disability benefits; and cash conversion balances. He can be reached at 817-909-0778 or www.erisa-benefits.com.
ERISA Benefits Consulting, Inc. by Mark Johnson provides benefit consulting and advisory services and does not engage in the practice of law.
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