The US Court of Appeals for the Eighth Circuit said that, although the plan lost the entire $20-million investment, the plan remained in surplus throughout the period.
Plaintiffs alleged that 3M, the employer, violated the prudent-man standard of care when it invested plan assets in the hedge fund without adequate investigation and monitoring.
In 1990, 3M and its defined benefit pension plan administrator invested $20 million of the plan’s assets in Granite Corp., a hedge fund that invested primarily in collateralized mortgage obligations (CMO).
Initially the investment fared well, rising to $34 million. But rising interest rates led to a collapse in the CMO market, Granite’s bankruptcy, and a total loss of the plan’s investment.
A number of plan participants sued 3M alleging that it breached its ERISA fiduciary duties by failing to investigate and monitor the investment in Granite.
The US District Court for the District of Minnesota dismissed the participants’ claims.
Citing the US Supreme Court in Hughes Aircraft Co. v. Jacobson, the district court noted that plan had incurred no loss and that the plaintiffs had no standing to recover on a loss that had not occurred.
Quoting the Supreme Court, the decision noted ‘T]he employer typically bears the entire investment risk and — short of the consequences of plan termination — must cover any underfunding as the result of a shortfall that may occur from the plan’s investments. . . .Given the employer’s obligation to make up any shortfall, no plan member has a claim to any particular asset that composes a part of the plan’s general asset pool. . . . Since a decline in the value of a plan’s assets does not alter accrued benefits, members similarly have no entitlement to share in a plan’s surplus. “
On appeal, plaintiffs and the Secretary of Labor both challenged the district court’s conclusion that there was no loss to the Plan.
The Labor Department cautioned that a holding that “an employer-fiduciary is not liable for losses caused by fiduciary breaches when a defined benefit pension plan is overfunded will have a substantial impact on the ability of the Secretary to enforce the statute.”
The Eighth Circuit agreed that the district court improperly focused on losses to the plan as the essential element of the fiduciary’s liability. The court also found the determination that the plan had not suffered a loss contrary to the plain meaning of (ERISA) § 1109(a).’
However, the appellate judges relied on the US Supreme Court’s characterization of the unique features of a defined benefit plan in Hughes.
Specifically, the Eighth Circuit noted that plaintiff’s had no claim on a pension plan’s surplus and that “..the reality is that a relatively modest loss to Plan surplus is a loss only to 3M, the Plan’s sponsor.”
In deciding in favor of the plan sponsor, the court noted that although the plan lost money, the plaintiffs did not – and therefore the appellate court found they had no standing to bring suit.
Secondly, the court noted that the primary purpose of ERISA is the protection of individual pension rights – and that the basic remedy for a breach of fiduciary duty would be to restore participant/beneficiaries to where they would be but for the breach of that duty.
In this case, since the pension plan had a surplus both before – and after – the investment loss, there was no restoration required.