So-called stock drop cases, in which defined contribution plan participants sue employer plan sponsors for breach of fiduciary duty when the market value of company stock or other equity options in 401(k) investment menus declines severely, have become common. But for defined benefit sponsors, this threat is less onerous. A ruling the U.S. District Court for the Western District of Washington handed down illustrates why actuaries of DB plans don’t have as much to worry about.
Plaintiffs rarely win these lawsuits against 401(k) trustees due to judicial precedents favoring certain fiduciary shields. Nonetheless, DC plan sponsors and their investment managers actively work to limit their exposure to the litigation sure to follow when major investment losses are incurred by employees who have entrusted them with their retirement savings.
DB beneficiaries are effectively guaranteed a fixed set of benefits and the performance of the plan’s investments or meeting of actuarial assumptions does not increase or decrease those.
Facts of the Case
The decision in Palmason v. Weyerhaeuser Co., No. 2:2011-cv-00695, U.S. Dist. Ct., W.D. Washington (Aug. 23, 2013) reminds pension plan sponsors why DB plan participants generally are barred from suing a plan sponsor, although it does give participants an opportunity to seek equitable relief.
In Palmason, plaintiffs alleged that their employer plan sponsor invested a majority of the plan assets in “alternative investments,” including hedge funds, private equity investments and real estate funds, which exposed the plan to “excessive risk and, ultimately, significant losses.” During the 2008 financial crisis, the plan recorded a loss of nearly $2.4 billion in its portfolio value.
The participants, part of the plan from Jan. 1, 2006, until the present, claimed in the suit filed in 2011 that timber company Weyerhaeuser and investment manager Morgan Stanley through their investment policy breached their fiduciary duties under ERISA.
The court on April 26 denied Morgan Stanley’s motion to dismiss the case. In its Aug. 23 ruling, the court granted in part and denied in part the Weyerhaeuser defendants’ motion to dismiss, allowing plaintiffs’ claims for equitable relief to proceed. But, at the same time, U.S. District Judge Robert S. Lasnik found:
Misconduct by the administrators of a defined benefit plan will generally have no effect on an individual’s payments under the plan. In order to establish the requisite personal injury to pursue an award of monetary damages, the participants in such a plan must show that the alleged breaches of fiduciary duty created an appreciable risk that the defined benefits would not be paid. In other words, plaintiffs must show that the challenged investment policy and other fiduciary breaches “create[d] or enhance[d] the risk of default by the entire plan.
In other words, according to a Sept. 4 blogpost about the Palmason ruling by R. Timothy Muth, a longtime actuary defense attorney and the chairman of the financial litigation practice at Reinhart, Boerner, Van Deuren law firm, “a participant cannot sue just because someone working for the defined benefit plan erred; that error has to actually cause the promised benefits of that participant to decrease.”
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