Participants in overfunded pension plan lacked constitutional standing to bring claims under ERISA

Participants in overfunded pension plan lacked constitutional standing to bring claims under ERISA

Participants in an overfunded defined benefit plan maintained by a bank lacked Article III standing to bring claims under ERISA because the alleged fiduciary breach did not cause them a redressable, pecuniary injury, according to the United States Court of Appeals in Richmond (CA-4). In addition, the court ruled that participants in the bank’s 401(k) plan could not challenge the continued imprudent inclusion of employer-affiliated mutual funds among the plan’s investment options because the initial selection of the funds occurred more than six years before the suit was filed. The fiduciaries were under no continuing duty to remove the allegedly imprudent investment choices absent a material change in circumstances.

Bank-affiliated mutual funds in DB and 401(k) plans

A bank sponsored a pension plan and a 401(k) plan. Decisions with respect to adding, monitoring, removing or replacing investment options in the plans were made by the bank’s Corporate Benefits Committee (CBC). Pension plan assets were invested in mutual funds affiliated with the bank. Participants in the 401(k) plan were further allowed to invest in bank–affiliated and unaffiliated funds.

Several years after the selection and inclusion of the affiliated funds among the plans’ investment options, plan participants brought suit against the bank and individual members of the CBC (in their fiduciary capacity), alleging that the investment of plan assets in bank-affiliated funds breached the duties of loyalty and prudence under ERISA §404 and the ERISA §406 prohibition on self-dealing, resulting in the loss to the plans of tens of million of dollars in excessive or improper fees. Specifically, the participants charged that the fiduciaries effectively applied higher standards for the removal of the bank’s funds than were used for the removal of nonproprietary funds, even though the funds performed poorly and had significantly higher fees than other viable options.

A federal trial court dismissed the claims related to the pension plan, accepting a report from a federal Magistrate that the employees lacked constitutional standing to pursue the pension plan claims. Relying on the fact that the plan was overfunded at the time the suit was filed (and surplus funds would revert to the plan) the trial court agreed with the Magistrate that the employees failed to plead any cognizable injury-in-fact that was likely to be redressed by a favorable outcome in the litigation.

In a subsequent proceeding, the trial court also dismissed the participants’ 401(k) claims as being time-barred under ERISA’s six-year statute of limitations. The court acknowledged that fiduciaries are obligated to monitor funds included among the plan’s investment options, but found no “continuing obligation” to remove, revisit, or reconsider funds based on allegedly improper initial selection, absent a material change in the funds.

Article III standing

The initial issue addressed on appeal was whether the pension plan participants had constitutional standing under Article III to assert claims under ERISA, when the plan was fully funded and they would suffer no redressable injury, as their benefits would not be affected by the plan’s underlying investments. Article III standing, the court explained, requires: (1) injury in fact (“concrete and particularized” invasion of a legally protected interest); (2) a causal relationship between the alleged injury and the alleged misconduct; and (3) redressability (i.e., the likelihood and not mere speculative possibility that the alleged injury will be redressed or remedied by the requested relief).

The participants argued that they had representational standing to sue on behalf of the pension plan because ERISA authorizes participants to pursue redress of injuries to plan interests. The Appeals Court, however, focused on the lack of a contractual agreement assigning the plan’s injuries to the participants. Absent such an assignment, as well as any history of extending assignee/assignor theories of standing in the ERISA context, the court could not accord the participants’ representational standing. Without actual injury, the court found little to be gained from an “abstract challenge to alleged fiduciary misconduct at the cost to the plan and those participants who did not bring (and may not approve of) the suit.”

The participants argued that they suffered personal economic injury because the fiduciaries’ improvident investment decisions diminished the assets of the pension plan, increasing the risk that the plan would fail and the promised retirement benefits would not be paid. According to the participants, the alleged injury to their interests in the plan was sufficient to confer standing, even without an actual reduction in benefits.

The Appeals Court found the risk-based theories of standing unpersuasive, explaining that they rest on a “highly speculative foundation, lacking any discernible limiting principle.” The court relied on statements from the U.S. Supreme Court that a participant in a DB plan has an interest in his fixed future payment only, and not in the assets of the pension fund, and that misconduct by administrators of a DB plan will not affect an individual’s entitlement to a defined benefit unless it creates or enhances a risk of default by the entire plan.

The Fourth Circuit concluded that alleged risk was insufficiently concrete and particularized to constitute an injury-in-fact for purposes of Article III standing. The risk that plan participants’ benefits will at some point in the future be adversely affected as a result of the presently alleged ERISA violations, the court reasoned, was too speculative to give rise to Article III standing.

Statute of limitations

The next issue before the Appeals Court was the trial court’s determination that the 401(k) plan participants’ claim that mutual funds included in the plan’s investment menu were imprudent and represented a prohibited transaction (PT) were barred under ERISA’s statute of limitations because the funds were first selected over six years prior to filing the ERISA claims. Initially, the court explained that ERISA §413 prescribes a six-year limitations period, which is shortened to three years in the event a party has actual knowledge of the breach. The limitation period begins immediately upon the last action which constituted a part of the breach or violation.

The 401(k) plan participants argued that the fiduciaries violated ERISA’s PT provisions by failing to remove or replace the bank-affiliated funds at each of the CBC meetings that occurred during the class period. Under the participants’ theory, the limitations period, thus, began to run anew at each CBC meeting at which the fiduciaries failed to remove the funds.

The court rejected the participants’ argument, noting that the alleged PT and fiduciary breach could only be based on the initial selection of the funds. A decision to continue certain investments, or a party’s failure to act, cannot constitute a “transaction” for purposes of ERISA §406, the court explained. Accordingly, the court found untenable the suggestion that the fiduciaries’ failure to remove the affiliated funds at every committee meeting constituted a new PT and, thus, a breach of fiduciary duty.

The trial court concluded that, while ERISA fiduciaries are required to monitor funds contained in the plan lineup for material changes, they are under no continuing obligation to remove, revisit, or reconsider funds based on allegedly improper selection. In affirming the trial court, the Fourth Circuit further noted that the participants did not allege that the funds became imprudent during the limitations period because of poor performance or increased fees, but were imprudent at the time of their initial selection. Accordingly, the claim was essentially another challenge to the initial selection of the funds, and time barred.

Source: David v. Alphin (CA-4).

For more information, visit http://www.wolterskluwerlb.com/rbcs.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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