The U.S. Supreme Court's decision, Thole v U.S. Bank, on June 1, 2020, has limited the right of defined benefit plan participants to sue for fiduciary violations to situations in which the defined benefit plan is unable to pay the defined benefit to the participant or beneficiary when such benefit becomes due.
As a result, defined benefit plans will have an added degree of protection from the excessive fee and self-dealing cases that have been so prevalent with respect to defined contribution plans. Now there is a greater likelihood that a fiduciary breach complaint against a defined benefit plan sponsor by participants in pay status (or where plan benefits are fully funded) will be dismissed for lack of standing.
The Court indicated that until the claimant has suffered an injury in fact, the claimant has not suffered an injury sufficient for standing under Article III of the U.S. Constitution. The Court left open a possible narrow exception—where a defined benefit plan's mismanagement is so egregious that it substantially increases the risk that both the plan and the employer would fail and would be unable to provide the future benefits promised under the terms of the plan.
In the Thole case, because the plaintiffs were in pay status and were receiving the promised benefit, without reduction, the Court held that the case was properly dismissed for lack of Article III standing. The Court indicated that lower courts have made standing more complex than it needs to be—there is simply no ERISA exception to Article III standing and the requirement to show an injury in fact.
Thole and Smith were two retired participants who continued to receive their retirement benefit, as promised, without reduction. They alleged that the defined benefit plan fiduciaries, nevertheless, breached their duty of loyalty by investing pension plan assets in their own mutual funds and by paying themselves excessive management fees.
In 2008, the retirement plan lost $1.1 billion, allegedly $748 million more than a properly managed defined benefit plan. Faced with a lawsuit, U.S. Bank contributed $311 million to the plan to fully fund the plan's benefits.
According to the plaintiffs, this amounted to a restoration of less than one half of the loss and none of the profits that U.S. Bank had gained through the utilization of their own mutual funds. The plaintiffs' attorneys were requesting $31 million in attorney fees.
The Court's Decision
Win or lose, the Court determined that Thole and Smith would receive the exact same benefit from the plan. Therefore, the Court found that the plaintiffs did not have a stake in the lawsuit to create standing under Article III of the Constitution. While their attorneys had a stake in the outcome of the lawsuit, the interest of the attorneys does not create Article III standing for the plaintiffs.
The Court rejected the plaintiffs' standing argument on four different grounds:
First, the Court found that a defined benefit plan is not similar to a private trust in that the defined benefit plan participants do not have an interest in the earnings of the trust. The participant's rights are in the nature of a contract right to receive a specific benefit from the plan.
Second, the Court further rejected the argument that the plaintiffs can sue as a representative of the plan itself, as Article III requires that the plaintiffs themselves suffer a concrete injury. Third, while ERISA does have a general cause of action to seek equitable relief, that statutory right does not satisfy the need to also have Article III standing.
Finally, finding that defined benefit plans are monitored and regulated in a number of ways, the Court rejected the argument that such a lawsuit is necessary to monitor fiduciary misconduct in the defined benefit plan context.
After Thole, employers faced with fiduciary violations in a defined benefit plan will face a significant likelihood that the complaint will be dismissed on the pleadings for lack of Article III standing, either based on the plan's funding or the prospect that it will be able to pay all benefits. This is good news for employers but it will not help ease the funding concerns of anxious retirees.