Supreme Court weighs in on fiduciary duty in pension fund management

On June 1st, the Supreme Court Ruled in the case Thole vs US Bank N.A., with important implications for pensions that could help shape future retirement investment.

The plaintiffs were James Thole and Sherry Smith, both retirees that were invested in US Banks’ defined benefit retirement plan. They alleged that US Bank violated the Employee Retirement Income Security Act’s (ERISA) fiduciary duties of loyalty and prudence by unwisely investing the plan’s assets and causing the plan approximately $750 million in losses from 2007-2010.

The defendants, US Bank, claimed that neither plaintiff ever experienced a concrete injury because US Bank continued to deliver the Plan’s benefits regularly, even though they had sustained the $750 million loss. Additionally, the defendants maintained that the ERISA duties are “generalized” and “wholly abstract” concerns that shouldn’t be grounds to sue, and that any risk that was created during 2007-2010 went away when the plan became overfunded in the following years.

The Court held in a 5-4 decision in favor of the defendants, saying that “Participants in a defined-benefit retirement plan who are guaranteed a fixed payment each month regardless of the plan’s value or its fiduciaries’ investment decisions lack Article III standing to bring a lawsuit against the fiduciaries under the Employee Retirement Income Security Act of 1974.”

This ruling is very timely because the COVID-19 pandemic caused a large-scale economic downturn that could create the basis for similar suits. The ruling in this case is decisive and defined, in particular about what kind of plan can sue under ERISA’s fiduciary duties. Because of the defined nature of the ruling, future cases about ERISA and the Third Article will be fewer and farther between and much more limited in scope. This is partly because more cases will now be decided at lower levels due the precedent this case provides.

More broadly, the ruling in Thole vs US Bank N.A. has serious implications for pensions. New uncertainty surrounding the financial situation of current retirees could influence their decisions about how to retire. Regarding defined benefit pension plans, like the ones Thole and Smith were receiving benefits from, this ruling seemingly allows for heavy losses that could potentially permanently damage the plan, or even push it into closure. Future reform could help curb or eliminate the worry this ruling causes, but for the time being uncertainty and a lack of accountability prevails.