Listen to this article
You might assume that retirement plan participants cannot sue their plan provider if they have not lost money. A case in front of the US Supreme Court could, however, challenge such an apparently common-sense argument.
While the legal action may result in greater protection for participants in a range of US retirement savings vehicles, such a win could further threaten the willingness of US employers to offer defined benefit schemes — a type of pension plan already in steep decline.
James Thole and others were members of a defined benefit plan managed by US Bank. Mr Thole sued its managers in 2008 because the plan had lost money after what the participants claimed was mismanagement by US Bank.
Yet, by 2014, the bank had injected enough funds to tip the plan back into the black. This did not satisfy Mr Thole and others and they continued their suit, saying they wanted their day in court to press their claims of mismanagement.
US Bank argues that Mr Thole and his co-petitioners have no right to take the bank to court. It admits the plan was underwater during the financial crisis but says subsequent overfunding means that participants are not out of pocket.
Mr Thole’s lawyers argue it is not that simple. The fact that the fund was underfunded for so long is proof, they say, that it was being mismanaged and, because of that, the beneficiaries have a right to take the plan managers to task.
Michelle Yau, a partner at Cohen Milstein, has been representing the plaintiffs since the case was filed in 2013.
The ability of participants to take their managers to court “cannot be tied to the plan’s funding, which can be affected by market conditions and interest rates”, insists Ms Yau. The law “is supposed to ensure that plan participants don’t have to wait until the plan sponsors miss a benefits cheque before they can take the fiduciary to court.”
For Professor Maria O’Brien Hylton, who teaches at Boston University law school, the key is the difference between defined benefit plans — where participants are promised specific amounts in their benefits cheque when they retire — and defined contribution schemes such as 401(k)s, where retirement payments are dependent on the balance of an individual’s account.
“In many ways, DB plan participants are at a relative disadvantage to defined contribution scheme participants, because it is hard for them to check on their assets,” says Prof O’Brien Hylton.
“Someone with a 401(k) can check their statements and get a sense of their ability to fulfil their retirement goal but DB participants don’t receive such statements and it is harder for them to individually ascertain their security in the plan.”
Prof O’Brien Hylton argues that federal law allows participants to take a plan to court before actual injury to their savings comes to pass.
US Bank and its lawyers, Morrison & Foerster, declined to comment.
According to Ms Yau: “If you are a fiduciary managing plan assets, then you have to manage it responsibly. Our clients are entitled to seek remediation to protect the assets the plan holds in trust.”
Prof O’Brien Hylton agrees. “The fact that US Bank quickly poured money into the plan to make good indicates to me they were engaged in risky behaviour and realised they needed to fix the situation.”
She says: “You do not want to wait until a full-on catastrophe. If the way the plan is investing the funds is alarming, as it was here, then beneficiaries should be able to seek relief.”
Even Noel Francisco, the US solicitor general, seems to agree, recently filing a brief to the Supreme Court in support of Mr Thole.
“The solicitor general’s position seems to be that even if there is nothing more than a risk to the plan, participants should have standing and the issue is not moot,” explains Prof O’Brien Hylton.
“Waiting — as US Bank suggests — for an injury may in fact put injured participants in a place where no meaningful remedy is available to them.”
Ms Yau believes the case will be significant for retirement savers beyond her client. “If we lose, the detriment will be pretty severe for all American workers and retirees relying on a defined benefit scheme to plan their later years — and people are living longer,” says Ms Yau.
Defined benefit plans face much the same problems as their counterparts in the UK and elsewhere.
In 2006, schemes with thousands of participants began announcing they would stop funding their plans. IBM’s was the first, followed by Lockheed Martin, Motorola and Verizon.
Some protection is offered under the Pension Benefit Guaranty Corporation, established in 1974 as an independent federal agency to rescue insolvent funds.
In 2018 the agency took 58 failed single-employer plans under its wing, bringing the total to 4,919 plans. It paid $5.8bn in benefits to 861,000 pensioners and $151m to 81 multi-employer plans to help 62,300 retirees.
The agency predicts that some 125 more plans covering 1.4m people will run out of money in the next 20 years but it warns that its own multi-employer programme will be out of cash by 2025.
While its single-employer insurance programme, which covers 26m participants, is faring better — and last year emerged from a “deficit” for the first time since 2001 — the agency nevertheless cautions that it is vulnerable to an “unexpected downturn in the economy”.
Congress is also trying to resolve the pensions insolvency crisis with several bills, including two that would let underwater plans top up with loans.
Some pundits, however, believe such protections would not pass muster with conservatives who could oppose taxpayer support for any bailout.
A decision against US Bank could be yet more bad news for DB plan sponsors by adding to their fiduciary burden.
According to a recent government study, 64 per cent of private workers in the country have access to a defined contribution retirement plan through their employer but just 17 per cent have access to a defined benefit plan. In the 1980s, about 60 per cent of the workforce were in DB plans.
“It’s not unreasonable to say DB plans are becoming extinct,” says Prof O’Brien Hylton. “There are plenty of contributing factors that explain this trend and a decision against US Bank in this case will not increase — or decrease — the speed at which DB plans die off.
“However, the decrease in popularity of DB plans is no excuse not to protect the many thousands of workers who are still covered by them.”
Get alerts on Workplace pensions when a new story is published