In the wake of investment losses from the 2008 market downturn, many fiduciaries of employee benefit plans faced lawsuits brought by plan participants. Most cases involved defined contribution plans, in which participants sought to recover investment losses that had directly reduced their individual benefits. In contrast, fewer cases were brought against fiduciaries of defined benefit plans, largely because plan sponsors bear the investment risk in the defined benefit context–which means investment losses do not directly affect participants’ individual benefits. Courts have generally held that participants lack standing to sue defined benefit plan fiduciaries for investment losses–until now.
Adedipe v. U.S. Bank, No. 13-cv-02687 (D. Minn. Nov. 21, 2014). In 2007 and 2008, the U.S. Bank defined benefit plan lost $1.1 billion. The plan went from being significantly overfunded to being significantly underfunded. Participants sued, alleging that plan fiduciaries had failed to act prudently or reasonably when they invested 100% of the plan’s assets in equity securities, including company-affiliated mutual funds and toxic subprime mortgages.
Plan fiduciaries argued that the participants did not have standing to sue because they had not been injured by the losses. The fiduciaries noted that the participants were all entitled to the same benefit amounts they would have received without the losses. The plan sponsor was obligated to make up any shortfall, and everyone agreed the sponsor had ample financial resources to do so. Moreover, the participants’ individual benefits were insured by the Pension Benefit Guaranty Corporation.
Several cases supported the plan fiduciaries’ argument. Binding case law from a federal appeals court made it clear that defined benefit plan participants do not have standing when a plan is overfunded. There was no binding precedent for underfunded plans, but other federal courts had held that participants in underfunded plans do not have standing unless they show a genuine risk that the plan sponsor will not meet its funding obligations to the plan.
The district court judge rejected this view, concluding that participants had been injured solely by the “increased risk of default” arising from the substantial change in the plan’s funding status–even though there was no actual or imminent financial loss to any individual participant.
What This Means for Plan Fiduciaries. The standing issue discussed in this post concerns only the threshold question of whether participants can sue. It does not address whether a lawsuit would succeed or fail on the merits. Furthermore, the decision in Adedipe comes from a single district court in Minnesota and therefore is not binding precedent that other courts must follow.
Nevertheless, this case is important to plan fiduciaries. Future plaintiffs will no doubt cite Adedipe as persuasive precedent, which courts can choose to follow or reject. Courts will likely give more weight to Adedipe in cases where the circumstances are similar, for example, where a plan is underfunded and/or where large investment losses caused a sudden and dramatic shift in the plan’s funding level. But courts will still need to grapple with how to measure damages if the plan sponsor is making all legally required contributions and the plan is paying benefits when they are due.