Supreme Court Limits Participant Rights to Bring Actions for Investment Losses in Pension Plans

The plaintiffs were retired participants in U.S. Bank’s defined-benefit pension plan, and each received set monthly payments from the plan. In a class action, the plaintiffs alleged that the fiduciaries of the plan had breached their duties of loyalty and prudence by poorly investing the plan’s assets, resulting in significant losses and causing the plan to become underfunded (with liabilities exceeding the value of the plan’s assets). The plan sponsor subsequently made additional contributions restoring the funded status of the plan. The district court had dismissed the case for lack of standing, and the Eighth Circuit affirmed.

The plaintiffs’ primary argument for standing relied on traditional trust law, where beneficiaries typically have an interest in trust assets. That argument is typically successful in litigation involving investments in defined-contribution plans such as 401(k) plans and ESOPs, where participants have individual accounts that are directly affected by investment performance. In his majority decision in the Thole case, however, Justice Kavanaugh rejected this argument saying that “a defined-benefit plan is more in the nature of a contract” and that the plaintiffs “have not suffered (and will not suffer) any monetary losses” that would afford them standing. Justice Kavanaugh also rejected arguments that the plaintiffs were assigned to represent the plan, that ERISA alone gave them sufficient standing, and that a lack of standing for participants would fail to give meaningful oversight over investment fiduciaries for defined benefit plans.

The majority opinion leaves some unanswered questions. Most significantly, it does not directly address whether the funded status of a defined-benefit plan could affect the standing analysis. One of the amici briefs filed with the Court had argued that participants should have standing to sue if “the mismanagement of the plan was so egregious that it substantially increased the risk that the plan and the employer would fail and be unable to pay the participants’ future pension benefits.” However, because the plaintiffs did not specifically assert this theory before the Court (most likely because the U.S. Bank plan was not significantly underfunded by the time the Court was reviewing the case), the Court felt no need to address this theory.

As the majority decision relies heavily on its analogy of defined-benefit plans to contracts, the decision is unlikely to deter investment-related class actions against fiduciaries of defined-contribution plans, such as 401(k) plans or ESOPs, which rely on the trust theory for standing. Fiduciaries of defined-benefit plans, however, should take considerable comfort in the Court’s decision, knowing that it creates a significant obstacle to class actions over investment performance.

Of course, this does not mean that investment fiduciaries for defined-benefit plans are exempt from oversight. The U.S. Department of Labor (DOL) is empowered to bring regulatory and court actions to enforce ERISA’s fiduciary requirements even when participants would not have standing to bring an action, and other federal and state agencies oversee various other aspects of investment management and trading. In his majority opinion, Justice Kavanaugh suggested the DOL has both the authority and motivation to rigorously enforce ERISA’s fiduciary requirements for defined-benefit plans. It remains to be seen whether the DOL will increase its enforcement efforts in this area in light of the Thole decision.

Please contact an attorney on our Executive Compensation and Benefits teams if you have any questions about the Thole decision or ERISA’s fiduciary requirements generally.