If you’re paying into a retirement fund—or just wish you were—you might think that its managers invest wisely, listen to advisers, and follow the law. And you’d probably expect that the fund managers would face the consequences if they’re shifty and put your benefits at risk.
But it ain’t necessarily so. Or so said counsel for US Bancorp (USB) on Jan. 13 at the Supreme Court, where justices heard oral arguments in a case that pits the bank against beneficiaries of its retirement fund.
The beneficiaries sued for $748 million to restore their pension fund after discovering that, in 2008, managers mishandled money, violating the Employee Retirement Income Security Act (ERISA) and leaving their plan underfunded. Managers ignored investment guidance. They lost $1.1 billion after plowing nearly half of the assets into Bancorp’s own mutual funds—which is self-dealing and illegal—and all fund assets into high-risk equities.
But the bank’s lawyer urged the Supreme Court to find the beneficiaries can’t sue.
USB argued that the pensioners have no standing because they didn’t suffer any actual injury. No income was lost. The bank said that because it contributed nearly $400 million to restore the plan to its previous overfunded status, there’s no more risk.
Counsel also noted that his client is particularly well-funded. Thus, there’s no concern about the plan ever really failing to fulfill financial obligations to pensioners. However, the suggestion that a financial institution could still be considered too big to fail seemed to cause the even-tempered chief justice John Roberts to bristle a bit. “Well, we’ve had in the not too far off past,” Roberts interjected, interrupting the attorney’s arguments. “There have been situations where people were surprised by some of the companies that turned out not to have enough money to go forward.”
Roberts asked USB’s lawyer a hypothetical question. “[L]et’s say that the person running the trust…loses $100 million in the first month and 100 in the second and 100 in the third, and although there is no significant harm to the beneficiaries in the terms that you’ve discussed, they look and say: Well, this guy is going to continue to lose a lot of money…[C]an they bring a suit in that case?”
Counsel conceded that this would be an actionable injury but only under certain circumstances. “If they could show he’s going to continue to lose a lot of money and it will result in an impairment of their only interest, which is the stream of payments from the pension plan, then yes.”
The chief justice and his colleagues were considering just how problematic a fund must be in order for its beneficiaries to be able to intercede. After all, it’s the trustees who are meant to represent the beneficiaries. When they betray the trust that is built in their name, surely there must be some recourse for beneficiaries?
The justices must decide whether an Eighth Circuit Court of Appeals decision is right. The circuit court found that beneficiaries couldn’t sue because they had no injury once USB refunded the pension plan (albeit not in full). Based on statements made at the Jan.13 hearing, the justices could well reverse the lower court.
The trouble with this case
Justice Sonia Sotomayor in particular sounded baffled by the fact that the bank was claiming the pensioners had no “property” or “representational” interest in the fund.
The beneficiaries lost no money but plan managers mishandled their commonly-held assets. This suffices for standing. The injury, Sotomayor said, is the trustees’ failure to uphold the fund’s financial integrity. Moreover, managers substantially invested the pension plan’s assets in USB products contrary to ERISA. And they didn’t even refund the full amount lost to the fund in the end!
“So I guess what I’m having trouble with in this case is that they’re right,” she told the bank’s attorney in reference to the beneficiaries. “Whether they have a property interest or they have a representational interest, they still have standing.”
USB’s position basically amounts to “no harm, no foul.”
Its lawyer argued that the structure of the defined benefits plan is at issue here. The pensioners are promised a specific payout upon retirement, a defined revenue stream rather than an interest in the whole fund. Therefore, the pensioners can only sue if they lose some of that defined revenue. Losses to the fund don’t count.
But Brett Kavanaugh rejected the bank’s contention that the specific structure of this pension plan was relevant. He suggested all the beneficiaries needed to do to be able to sue under USB’s theory was to “allege a sufficiently increased risk of harm that [their] benefits won’t be paid.”
How much risk is enough, Kavanaugh asked, hinting at the fact that he didn’t think this was quite the right measure. “What do you have to allege? Well, [the plan] is underfunded…and the company may go belly up and, therefore, that’s enough. That’s just going to be a whole mess, isn’t it?”
Of course, the tough questions for Bancorp are not a guarantee that the beneficiaries will emerge victorious. Kavanaugh also kept returning to the fact that pension plan is insured by the federal government, suggesting this mitigates the alleged risk of future harm.
And it’s fair to say the pensioners have already lost something precious, whatever happens in this case. That is, the ability to believe in people they entrusted with their common wealth.
But if the hearing was any indication, the justices feel the pensioners’ pains and may yet force Bancorp to feel them too. They’ll issue a decision by late June.