Fiduciaries of defined benefit pension plans should not to be lulled into comfort by a recent federal court decision that participants could not sue the fiduciaries of a defined benefit plan for a claim of poor investments and excessive investment fees. In David v. Alphin, (4th Cir. January 14, 2013), participants in a Bank of America pension plan sued plan committee members for breach of fiduciary duty and prohibited transactions caused by selecting and retaining Bank-affiliated mutual funds as plan investments. The participants alleged that many better investment options were available, and that most of the Bank’s affiliated mutual funds offered participants poor performance and high fees, causing multimillion dollar losses to the plan.

The court found that the participants lacked standing to sue because the defined benefit pension plan was overfunded and the plan would retain any surplus plan assets. The court concluded this was unlike a defined contribution plan, where excessive fees cause direct harm to participant accounts, because “the risk that ... benefits will at some point in the future be adversely affected as a result of the alleged ERISA violations is too speculative.” For support, the court cited a U.S. Supreme Court decision, stating that “misconduct by the administrators of a defined benefit plan will not affect an individual’s entitlement to a defined benefit unless it creates or enhances a risk of default by the entire plan.” La Rue v. DeWolff, Boberg & Associates, Inc., 552 U.S. 248, 255 (2008).

For the following reasons, defined benefit pension plan fiduciaries should not assume that the David decision protects them from potential liability for poor investment management or excessive investment fees:

  • This decision addressed a plan that was overfunded when the claim was filed. Very few defined benefit plans are currently overfunded.
  • The court acknowledged that the U.S. Department of Labor (DOL) would have standing to sue for a breach of ERISA, even if the participants would not. ERISA section 408(b)(2) fee disclosure and review requirements could provide basis for DOL enforcement action in this type of case.
  • This decision did not consider a plan where funding more directly affects participant costs or benefits, such as (a) a contributory pension, where excessive plan expenses may lead to an increase in required employee contributions, or (b) a pension COLA or other benefit that is directly related to plan funding.

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