WASHINGTON (CN) — The Supreme Court closed the book Monday on a suit claiming that managers of U.S. Bank’s retirement plan made investment decisions that broke federal law.
Led by James Thole and Sherry Smith, two retired U.S. Bank employees claimed in a federal class action that managers of the bank’s retirement plan’s exposed their funds to unnecessary risk by investing entirely in equities.
That strategy led to losses of $1.1 billion in the 2008 financial crisis, some $748 million more than the plan would have suffered had its portfolio been more diversified. The employees say the fiduciaries did this because it benefitted the bank, as a significant portion of the money was invested in a subsidiary.
After the employees brought the lawsuit, the fiduciaries dropped hundreds of millions of dollars into the plan, bringing it over the minimum funding requirement under the Employee Retirement Income Security Act.
But the Supreme Court ruled 5-4 Monday that Thole and Smith do not have a “concrete stake in the lawsuit” because the outcome of their case would not change the amount of benefits.
“If Thole and Smith were to lose this lawsuit, they would still receive the exact same monthly benefits that they are already slated to receive, not a penny less,” Justice Brett Kavanaugh wrote for the majority (emphasis in original). “If Thole and Smith were to win this lawsuit, they would still receive the exact same monthly benefits that they are already slated to receive, not a penny more.”
Justice Sonia Sotomayor wrote in dissent, however, that the majority’s opinion went against “common sense and longstanding precedent” and cut off relief for millions of people seeking to ensure their retirement plans are well-managed.
“After today’s decision, about 35 million people with defined-benefit plans will be vulnerable to fiduciary misconduct,” Sotomayor wrote. The court’s reasoning allows fiduciaries to misuse pension funds so long as the employer has a strong enough balance sheet during (or, as alleged here, because of) the misbehavior.” (Parentheses in original.)
She blasted the majority’s holding as “overruling, ignoring, or misstating centuries of law.”
The plan to which Thole and Smith belong is a defined-benefit plan, meaning participants receive the same amount of money each month regardless of how much the plan is worth at any given point in time.
Kavanaugh, who was joined in the majority by Chief Justice John Roberts and Justices Clarence Thomas, Samuel Alito and Neil Gorsuch, wrote Thole and Smith did not present compelling alternative reasons why they have standing even without suffering an economic injury themselves.
Even though ERISA includes a cause of action for the restoration of plan benefits, Kavanaugh said plaintiffs need to show a concrete injury to pursue a lawsuit under that cause.
Kavanaugh also dismissed arguments that suits from people like Thole and Smith are vital to ensuring oversight of defined benefit plans.
The Trump appointee noted the Department of Labor can enforce ERISA’s requirements and that, because employers and shareholders are “on the hook” for any shortfalls in a plan, they have a strong incentive to crack down on mismanagement.
Sotomayor on the other hand wrote that Thole and Smith have a clear interest in how their retirement plan is being managed if the court assesses their standing as they would in a trust-law case.
To hold otherwise would mean only the fiduciaries of the plan would be able to vindicate its interests with a lawsuit, a seemingly unlikely outcome considering the fiduciaries would be the defendants in any such dispute.
“Does the Constitution compel a pension plan to let a fox guard the henhouse?” the Obama appointee wrote, joined by Justices Ruth Bader Ginsburg, Stephen Breyer and Elena Kagan.
A short concurrence penned by Thomas, which Gorsuch joined, argues that the court has tangled up the analysis of ERISA cases by using analogies to trust law.
Peter Stris, a Los Angeles, Calif., attorney with the firm Stris and Maher who represented Thole and Smith, did not immediately return a request for comment.
A spokeswoman for U.S. Bank said the company “is pleased with the court’s decision and to have the matter resolved.” Joseph Palmore, an attorney with Morrison & Foerster who represented the bank, did not return a request for comment.