Published in NH Bar News (4/15/2020)
Timing has always been a key element in my life. I have been blessed to have been in the right place at the right time. - Buzz Aldrin
Although none of the Justices of the United States Supreme Court have walked on the moon like astronaut Buzz Aldrin, the Justices’ decision to hear three cases involving retirement plan participants’ right to sue under the Employee Retirement Income Security Act of 1974 (“ERISA”) could not have been more well timed. The Court’s decisions will impact the extent to which employers and retirement plan fiduciaries will face ERISA claims as a result of 2020 stock market loses by retirement plans.
Claims Against Fiduciaries Failing to Act on Inside Information
Retirement Plans Committee of IBM v. Jander (No 18-1165) involves a claim that IBM fiduciaries violated their ERISA fiduciary duty by continuing to invest employee stock ownership plan (ESOP) assets in IBM common stock despite knowing that the stock’s market price was artificially inflated due to IBM’s failure to disclose losses incurred by one of its business units. The case raises the inherent conflicts between ERISA and federal securities laws when a fiduciary is aware of nonpublic information that he or she knows will reduce the value of employer stock, but is prevented from disclosing such information by securities law. In a 2015 case, the Court held that in order to state a claim under ERISA for breach of the fiduciary duty of prudence based on inside information, a plaintiff must plausibly allege that a prudent fiduciary in the defendant's position could not have concluded that an alternative action would do more harm than good to the plan. The decision at the Court of Appeals for the Second Circuit had subverted that pleading standard and opened a circuit split by permitting a claim based on typical allegations that the harm of an eventual disclosure of an alleged fraud typically increases the longer the fraud continues.
On January 14, 2020, the Court vacated and remanded the case back to the Second Circuit because new arguments were raised at the Court including IBM’s argument that ERISA imposes no duty on an ESOP fiduciary to act on inside information. Because the Second Circuit did not consider the new arguments, the Court vacated the judgment of the Second Circuit and remanded the case back for the Second Circuit to determine whether it will hear the merits of the new arguments.
Although the case involves an ESOP that is designed to invest primarily in employer stock, the case has broad implications for any retirement plan subject to ERISA in which employer stock is an investment option. Unless the Second Circuit reverses itself, the case could be back before the Supreme Court in the future.
Actual knowledge Required for ERISA Three Year Statute of Limitations
In an opinion released on February 26, 2020, the Court ruled against Intel Corporation in, Intel Corporation Investment Policy Committee v. Sulyma (No. 18–1116), a case with potentially far reaching implications to employers who maintain Section 401(k) retirement plans. A class action lawsuit was brought alleging that various Intel fiduciaries had breached their fiduciary duties under ERISA by offering two investment funds that were imprudently overinvested in “alternative investments” such as hedge funds and private equity and failed to disclose relevant facts about those allocations to plan participants. The Supreme Court decision focused solely on the time a plaintiff has to bring such a claim. ERISA Section 413 allows a plaintiff as long as six years to file suit following an alleged ERISA breach or violation, but if a plaintiff has “actual knowledge” of a breach or violation, that period is reduced to three years.
Mr. Sulyma received numerous ERISA mandated investment disclosures while an Intel employee from 2010 to 2012, some explaining the extent to which the retirement plans were invested in alternative assets. In October 2015, he sued alleging that the plans had been managed imprudently. Intel argued that the claims were untimely as suit was brought after the three-year mark and his lawsuit should be dismissed. Intel’s position was that the ERISA disclosures gave the plaintiff “actual knowledge” of all information necessary to challenge the plans’ investments. Although Mr. Sulyma had received the mandated notices and visited the website that hosted some of the disclosures many times, he testified at the trial court that he did not remember reviewing the relevant disclosures and had been unaware of the allegedly imprudent investments while working at Intel.
The Supreme Court ruled that a plaintiff does not necessarily have “actual knowledge” of the information contained in disclosures that he receives but does not read or cannot recall reading. The Court read the ERISA “actual knowledge” requirement to mean that the plaintiff must in fact have become aware of that information and it would be inappropriate to impute knowledge based on the disclosures. The case now goes back to the District Court where the plaintiffs can try and prove the allegations.
If an employer wants to avail itself of the shorter three-year statute of limitations for many ERISA allegations, steps should be taken to ensure that participants acknowledge or otherwise affirmatively demonstrate that they have read the various plan and investment disclosures.
Pension Plan Participants Standing to Sue without Suffering Losses
The Court heard oral argument on January 13, 2020 in Thole v. U.S. Bank (No. 17-1712) on whether ERISA plan participants have standing to sue even if a defined benefit pension plan is fully funded. Participants in the U.S. Bank’s pension plan filed a class action seeking injunctive relief under ERSA Section 502(a)(3) and restoration of the plan's losses under Section 502(a)(2). The plan fiduciaries allegedly breached their fiduciary duties causing a $750 million loss. Because U.S. Bank, which bore the investment risk in the defined benefit plan, subsequently contributed the necessary funds to fully fund the plan, the Eighth Circuit Court of Appeals held that there was no actual or imminent injury to the plan that caused injury to the participants’ and the participants no longer had standing to sue. In so holding, the Eighth Circuit departed from holdings of other circuits and rejected the long-held position of the U.S. Department of Labor that ERISA provided remedies even though plan participants had not yet suffered any individual financial harm and the plan did not (yet) face a risk of default.
A decision against U.S. Bank, coupled with the stock market losses in 2020, could cause the start of a wave of pension plan fiduciary litigation similar to that faced by large 401(k) plans over the past two decades.
John E. Rich, Jr. chairs the Tax Department at McLane Middleton, Professional Association. He specializes in employee benefits, pension, ERISA and tax-related matters. He can be reached at [email protected] or (603) 628-1438.