A Supreme Court decision this week on employer pensions? Yes, indeed.
The ruling itself
Earlier this week, the Supreme Court handed down its decision in Thole v. U.S. Bank, a case in which two retirees in the U.S. Bank pension plan contended, as part of a class action, that U.S. Bank had violated its fiduciary duty in mismanaging its pension plan from 2007 to 2010, causing its assets to crash. (See Reason and 401K Specialist for summaries.) The plaintiffs wanted the company to be forced to pay into the plan the $750 million in losses that they alleged had been the result of this mismanagement — but the reality is that, right now (or, rather as of the date of the last Schedule B, in 2018), the plan is/was overfunded, so that any deficiencies that existed a decade ago are a non-issue. (Yes, the plan’s funded status is worse now after the corona-crash, but different management in the earlier period would not have meant a larger surplus now; instead, the plan remedied deficits in the intervening years.)
And the court’s decision, in a 5-4 ruling written by Justice Kavanaugh, was that these retirees simply didn’t have standing because they could not point to any actual harm they experienced, because plan sponsors are required to rectify any deficits as, in fact, occurred. The dissenting opinion, by Justice Sotomayor, rejected the notion that a plaintiff in such a lawsuit must be able to show actual harm; it is instead sufficient that they were wronged because the company had a duty to manage the trust appropriately. The Pension Rights Center’s director Karen Ferguson had this to say:
“Those of us committed to protecting the retirement security of American workers and retirees are shocked by the Court’s decision . . . . The Court has shredded a key protection of the federal private pension law. No longer will workers and retirees be able to police the management of their pension funds. Plan trustees now have a green light to invest pension money recklessly and to use it to further their personal and corporate interests.”
Now, the actual decision hinges on complexities of ERISA law, trust law and fiduciary responsibilities, and whether the court got this right depends on these elements rather than on whether the decision is “fair” or not. I am not a lawyer, and will not comment on these aspects.
To a large degree, this is a matter of ambulance-chasing lawyers, and nothing more. Those lawyers have already been finding their way into large sums of settlement fees through lawsuits alleging that employers/plans had mismanaged 401(k) assets, with excessive fees or poor fund management — an early 2020 tally by Willis Towers Watson calculated a running total of 50 settlements and $774 million; over 40 suits remain pending. Separately, attorneys have been filing class action lawsuits alleging that employers have been calculating optional forms (for instance, a “joint and survivor” election with spouse’s benefits) wrongly, though none of these have been decided. For the Supreme Court to have decided in favor of the plaintiffs in the U.S. Bank case would have opened up the floodgates with new legislation that would have provided no actual benefits to the named plaintiffs but would have been very lucrative indeed for their lawyers — in this case, seeking $30 million in attorneys’ fees. How could courts draw reasonable distinctions between the diversity of investment practices in pension funds and fiduciary-violating actions?
A single-employer pension trust, in ERISA legislation, is an odd duck.
Legal analysis, analogies, etc., aside, in practical terms, a pension fund it operates differently than other sorts of entities labelled “trusts”: among other issues, it is solely at the employer’s discretion to manage assets aggressively or conservatively. In the case of U.S. Bank, the plaintiffs alleged that the assets were managed too aggressively; many other employers are now making the decision to manage their funds very conservatively, following what’s called a glide path, with lower anticipated returns but also lower risk. Plan participants could conceivably allege that this is a form of mismanagement, if this results in the decision to freeze benefits because contributions become more costly. In fact, one could imagine that, if employees were given control over assets and investment policies, they might well choose to be more aggressive, rather than more conservative, with investments, in a “heads I win, tails you lose” manner, given that it has been a common enough occurrence in the past that employers must make up for funding shortfalls but that well-funded pension plans pay out 13th checks or ad hoc cost-of-living adjustments, especially for union plans.
And remember that the Pension Protection Act of 2006 requires that plans remedy any funding shortfalls on an accrued-benefits basis (that is, without including projected future pay increases in the calculation) in seven year’s time, but gives plans, that is, employers, the discretion to accelerate the funding or even over-fund the plan up to 150% of the “current liability” funding measure. Certainly, company decisions on funding policy affect the funded status of the plan every bit as much as investment policy, but this is clearly acknowledged to be up to the employer.
And, regardless, the funded status, and any associated risk of insolvency, is simply not relevant to workers because they are protected by the PBGC in the case of bankruptcy — with the sole exception of those workers whose high benefits (that is, due to very high pay and years of service) would exceed PBGC benefit guarantees. But Kavanaugh notes that the plaintiffs did not include this consideration among their arguments.
A brief multi-employer digression
At the same time, the story is somewhat different with respect to multiemployer pensions. There have been several noteworthy instances in which pension officials were tried in federal court: Central States Teamsters pension ended up under a consent decree in 1982 due to ongoing mismanagement, including loans to Detroit and Chicago mob figures (the fund managers were found not guilty in part because the jury believed the pension board were aware of the mismanagement so could not have been defrauded strictly speaking) in the early 1970s, and officials of the Central States Joint Board/Midwest Pension Plan were convicted of fraud in 2001.
And there’s more at stake for participants in the case of multi-employer pensions. Of course, in the extreme of insolvency, PBGC protections are considerably lower, so that a far larger share of participants would stand to see their benefits cut (not to mention the current pending insolvency of the multiemployer PBGC fund). But even beyond that, the funding levels of a single employer plan are financial decisions about risk and cost made by a company which is on the hook one way or the other; in a multiemployer plan, all such participating employers pay more and have a stake in the proper management of the fund, and, in the end, it is the workers who pay contribution increases to reduce deficits, by the fact that contributions to pensions on their behalf are negotiated in their contracts and increases come at a direct sacrifice of other benefits or increased cash compensation.
Pension funds are simply designed this way
In the end, the function of the pension trust, regardless of the legal nicities, is to ensure that plan assets are wholly segregated from company assets, and protected in case of bankruptcy. One might argue, in fact, that it is the PBGC, not participants, that has something at stake in requiring more prudent financial management of pensions. But here, too, Congress could have chosen to mandate specific practices with respect to investments but did not, and has, in fact, been considerably more concerned in the past with overfunding (that is, using a pension plan as a tax shelter) than with underfunding. Indeed, until 1994, employers could not build up any overfunding as a provision for future stock market crashes, and, from 1994 until 2006, they were only permitted to build a cushion not directly but with an indirect approach of an alternate funding measure using a lower discount rate, only in 2006 permitting cushion-building to a 140% overfunding level.
The bottom line
Lawyers and judges can debate the legal structure all they like. But no pension plan participant has a moral right for the employer to fund the plan in a certain way, or to make decisions about risk one way or the other. Their right consists in the obligation of the employer to follow federal funding rules and to be the ultimate guarantor of benefits, and in the promises of the federal government to back-stop those funds with the PBGC, and that’s not changed at all.
In fact, remember those ambulance-chasers? Had the Court given them their chance to second-guess employers, the end result would not have been more retirement security by compelling employers to boost contributions to their pension plans. It would have been employers running for the door, and accelerating even further their departure from providing pension plans in the first place.
As always, you’re invited to comment at JaneTheActuary.com!
— to www.forbes.com