The plaintiffs and putative class representatives brought suit against the Bank of America Corporation, BOA’s Corporate Benefits Committee, and members of the Committee, alleging that the defendants engaged in prohibited transactions and breached their fiduciary duties by investing the assets of BOA’s defined benefit pension plan and its defined contribution 401(k) plan in BOA-affiliated mutual funds which, the plaintiffs alleged, offered poor performance and charged high fees.
The United States District Court for the Western District of North Carolina held that the pension plan participants had failed to prove an injury-in-fact sufficient to grant them standing to bring suit under Article III of the Constitution. The Fourth Circuit agreed, even though it was undisputed that the plaintiffs had statutory standing to assert claims under ERISA, which authorizes claims by participants on behalf of a plan to remedy a breach of fiduciary duty.
Notwithstanding their statutory standing, the Fourth Circuit noted that the plaintiffs must also have constitutional standing under Article III, which requires, among other things, an injury in fact. The Fourth Circuit held that the pension plan participants could not show an injury in fact because, by the very nature of a defined benefit plan, their level of benefits “is unaffected by the performance of the Plan’s underlying investments.” The court also found it significant that the pension plan was overfunded when the participants filed their claims.
The court first addressed the plaintiffs’ argument that they had “representational status,” pursuant to the Supreme Court’s decision in Sprint Communications Co. L.P. v. APCC Services, Inc., 554 U.S. 269 (2008). In Sprint, the Supreme Court reaffirmed that assignees – i.e., one to whom contractual rights had been assigned – had sufficient standing to bring a cause of action. The plaintiffs argued that they had that type of representational standing to bring a claim on behalf of the plan by operation of ERISA. The Fourth Circuit rejected this argument, finding that that there was no contractual agreement assigning the pension plan’s injuries and interests to the plaintiffs and there was no history of extending assignee/assignor theories of standing to the ERISA context.
The plaintiffs further argued that they had standing claiming that trust law had “long-recognized that a beneficiary has standing to sue the trustee for breach of the duty of loyalty even if the beneficiary does not claim the trustee’s breach caused pecuniary harm to the trust.” The court rejected the claim that these trust law principles extend to provide Article III standing to ERISA plan participants, at least where the plan is overfunded and any surplus funding as a result of any potential litigation recovery would only add to the overfunded status of the plan.
The plaintiffs and amici also argued that they had suffered a direct, personal injury based upon the pension plan’s investments which, they argued, increased the risks that the pension plan would fail, thereby compromising their retirement benefits. The Fourth Circuit rejected these arguments “because they rest on a highly speculative foundation lacking any discernible limiting principle.” The Court noted that the Supreme Court had previously held that a participant in a defined benefit plan has an interest only in his/her future benefits, not in the assets of the plan. See Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 439-40 (1999).
The Court noted that if benefits became underfunded, BOA would be required to make additional contributions. If, and only if, BOA was unable to make those contributions, the participants’ vested benefits were guaranteed by PBGC up to a statutory minimum. The plaintiffs would only be injured if those unlikely events occured, and they eventually received less from the PBGC than the benefits to which they were entitled under the terms of the Pension Plan. Thus, the court held that the risk that the plaintiffs’ benefits would be adversely affected was too speculative to give rise to Article III standing.
Finally, the plaintiffs argued that the deprivation of their statutory right to have the pension plan operated in accordance with ERISA’s fiduciary obligations was sufficient to create an injury-in-fact that gives rise to their Article III standing. Once again, they relied upon ERISA as granting participants a statutory right to ensure that the pension plan is operated in compliance with ERISA. The court held that this was simply conflating statutory standing with constitutional standing, and that a plaintiff must have both to bring suit.
While the most significant holdings of the case relate to the pension plan, the Fourth Circuit also held that similar claims relating to the 401(k) plan were subject to the statute of limitations. There were no issues regarding standing with respect to the 401(k) plan because obviously fee claims, if true, do create an injury for participants in defined contribution plans by reducing the amount of their benefits by the fees that were charged.
Even though the challenged investments had been in place for years prior to the filing of the action, and outside the three-year limitations period provided by ERISA, the plaintiffs alleged that they could still bring an action because they alleged that every time the Committee met and did not remove the affiliated funds from the 401(k) plan’s offerings, they created a new prohibited transaction and breach of fiduciary duty. The court rejected this theory because the plaintiffs did not allege that at some point after the initial selection of the affiliated funds, the investment in those funds became imprudent.
Rather, the plaintiffs alleged that the initial selection of those funds was imprudent. Accordingly, the court held that the claim was not one truly alleging failure to remove an imprudent investment, but rather was simply a challenge to the initial selection of those funds, for which the statute of limitations had already expired.
This case has the potential to have far-ranging consequences with respect to both defined benefit and defined contribution plans, depending upon how it is interpreted and whether it is adopted by other circuits and/or the Supreme Court. Taken to its extreme, the case could be interpreted as effectively foreclosing participant claims based upon how a well-funded defined benefit pension plan is invested. It remains to be seen whether the Fourth Circuit would take a different view in a case involving a plan that was significantly underfunded.
At various points, the court placed significant emphasis on the fact that the pension plan was overfunded. Plaintiffs may argue that a significantly underfunded plan reduces the attenuation between a plan’s investments and the possibility that a participant’s benefits are at risk. Moreover, the Fourth Circuit noted that even where participants lack standing, the Department of Labor remains empowered to investigate ERISA plans and to bring suit to enforce ERISA.
The Fourth Circuit’s holding with respect to the 401(k) plan could significantly harm “continuing breach” theories to get around the statute of limitations. However, again, ongoing interpretation of this decision will dictate its ultimate breadth. In this case, the court held that the “continuing breach” of failing to remove the affiliated funds was simply a consequence of the initial selection of those funds.
It is not clear how the court would view a situation where the plaintiffs produced evidence that not only was a plan investment imprudent when initially selected, but that it allegedly became increasingly imprudent as time went on (for example, due to decreasing performance and/or increasing fees). Would the court again consider that to be a consequence of the initial selection of the allegedly imprudent investment, or would instead the increasing imprudence be deemed to be a separate breach that creates a new limitations period? Time will tell.
The case is David v. Alphin, No. 11-2181 (4th Cir. Jan. 14, 2013).
Richard Siegel is a senior associate in Alston & Bird’s ERISA litigation group. He can be reached at
This alert is intended for general information and should not be taken as specific legal advice.
