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(Article from Securities Law Alert, June 2020)

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On June 1, 2020, the Supreme Court held that participants in a defined-benefit plan lacked Article III standing to assert ERISA claims for alleged mismanagement of their plan. Thole v. U.S. Bank, 2020 WL 2814294 (2020) (Kavanaugh, J.). The Court held that plaintiffs had “no concrete stake in [their] lawsuit” because even if they won, “they would still receive the exact same monthly benefits that they are already slated to receive, not a penny more.”

Plaintiffs alleged that defendants breached their fiduciary duty of loyalty by investing plan assets in their own mutual funds and collecting excessive management fees. Plaintiffs did not allege that they had “sustained any monetary injury,” as they had “received all of their monthly benefit payments” under the plan.[1] Plaintiffs’ primary theory of standing was that “an ERISA defined-benefit plan participant possesses an equitable or property interest in the plan, meaning in essence that injuries to the plan are by definition injuries to the plan participants.” In plaintiffs’ view, “a plan fiduciary’s breach of a trust-law duty of prudence or duty of loyalty itself harms ERISA defined-benefit plan participants, even if the participants themselves have not suffered (and will not suffer) any monetary losses.”

The Court found “[t]he basic flaw in the plaintiffs’ trust-based theory of standing is that the participants in a defined-benefit plan are not similarly situated to the beneficiaries of a private trust or to the participants in a defined-contribution plan.” The Court noted that “[i]n the private trust context, the value of the trust property and the ultimate amount of money received by the beneficiaries will typically depend on how well the trust is managed, so every penny of gain or loss is at the beneficiaries’ risk.” The Court explained that “a defined-benefit plan is more in the nature of a contract,” and the plan participants’ “benefits are fixed and will not change, regardless of how well or poorly the plan is managed.” The Court found it particularly significant that “the employer, not plan participants, receives any surplus left over after all of the benefits are paid.” The Court held that “plan participants possess no equitable or property interest in the plan,” and thus “[t]he trust law analogy . . . does not support Article III standing for plaintiffs who allege mismanagement of a defined-benefit plan.”

The Court also rejected plaintiffs’ contention that “defined-benefit plan participants must have standing to sue” because “if defined-benefit plan participants may not sue to target perceived fiduciary misconduct, no one will meaningfully regulate plan fiduciaries.” The Court explained that “employers and their shareholders often possess strong incentives to root out fiduciary misconduct because the employers are entitled to the plan surplus and are often on the hook for plan shortfalls.” Moreover, the Court pointed out that “[w]hen a defined-benefit plan fails and is unable to pay benefits to retirees, the federal Pension Benefit Guaranty Corporation is required by law to pay the vested pension benefits of the retirees, often in full.” Consequently, “the Department of Labor has a substantial motive to aggressively pursue fiduciary misconduct, particularly to avoid the financial burden of failed defined-benefit plans being backloaded onto the Federal Government.”

In a dissenting opinion, Justice Sotomayor—joined by Justices Ginsburg, Breyer and Kagan—stated that “petitioners have alleged a concrete injury to support their constitutional standing to sue.” The dissent opined that “petitioners have an interest in their retirement plan’s financial integrity, exactly like private trust beneficiaries have in protecting their trust.” The dissent argued that “[p]recisely because petitioners have an interest in payments from their trust fund, they have an interest in the integrity of the assets from which those payments come.” The dissent also opined that “a breach of fiduciary duty is a cognizable injury, regardless of whether that breached caused financial harm or increased a risk of nonpayment.”