July 16, 2019

Does ERISA’s prudence requirement only apply to under-funded retirement plans?

Does the Employee Retirement Income Security Act allow participants in a defined benefit pension plan to sue sponsors for mismanagement of assets even when a plan is fully funded?

The Trump administration’s Solicitor General, Noel Francisco, and the Labor Department’s top lawyers say the answer is unambiguous: ERISA absolutely does.

Earlier this year, the Supreme Court invited the Solicitor General to file a brief in Thole v. U.S. Bank, a class action brought by U.S. Bank retirees in 2013 that alleged the plan’s trustees violated ERISA by mismanaging plan assets. The Supreme Court agreed to hear the case during its upcoming fall session.

Between September of 2007 and the end of 2010, the plan was solely invested in equities, including individual stock holdings and mutual funds managed by a U.S. Bank subsidiary.

At the outset of that period, the plan was over-funded by more than $850 million. But by 2008, as the financial crisis took hold, the plaintiffs allege the plan lost more than $1.1 billion, dramatically reducing the plan’s funded status to 84 percent.

The plaintiffs alleged that equities-only strategy was unduly risky and caused the plan unnecessary losses, and was a violation of by ERISA’s prohibited transaction provisions and its prudence provisions, which specifically include adequate diversification of assets as a necessary practice.

. . .

Solicitor General

In recommending the Supreme Court review the case, the Solicitor General said the question of whether or not participants in an over-funded defined benefit plan have standing to sue under ERISA has “generated tension, if not an outright conflict,” among courts of appeals, and said most lower courts have decided the issue “incorrectly.”

The plaintiffs in the U.S. Bank case are “squarely within the class of plaintiffs Congress has authorized to sue under ERISA,” the Solicitor General’s brief said. “Nothing in the text of ERISA conditions a fiduciary’s duties to beneficiaries on whether the plan is a defined-benefit or defined-contribution plan, or whether the plan is overfunded or underfunded.”

That the Trump administration’s Solicitor General has come down so clearly on the side of participants in a class action speaks to the strength of their case, said Michelle Yau, a partner at Cohen Milstein and a lead attorney for the plaintiffs in the case.

“It’s a big deal,” said Yau of a Republican administration siding with plaintiffs in a class-action claim, “but not surprising, given how clear ERISA is that standing is not tied to a plan’s funded status.”

The Solicitor General’s brief supports the Labor Department’s longstanding position on the question of ERISA’s fiduciary requirements, irrespective of a plan’s funded status, said Yau.

“They completely got it right and that underscores the strength of our case,” she told BenefitsPRO. “This is a black and white question—ERISA says nothing about funded status and prudence.”

Yau concurred, unsurprisingly, with the Solicitor General in that lower courts have issued misguided rulings on the question of funded status, standing, and injury to pensioners.

“Lower courts have been essentially saying that until your pension check comes in short, you don’t have standing. But ERISA certainly doesn’t say that. Court after court has been getting this wrong—so wrong, that our belief all along has been this will get reversed. It’s just a matter of time,” said Yau.

The conservative justices on the High Court, whom Yau called “some of the brightest minds in our country,” are bound to agree with the Solicitor General’s brief. “I have a hard time imagining them disagreeing with it,” she said.

A date has not been set, but the Supreme Court will hear arguments in Thole v. U.S. Bank during the fall session.

The complete article can be viewed here.