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Pension Law

The Overfunded Defense

28Jun

In a landmark decision, the U.S. Court of Appeals ruled that participants and beneficiaries can't sue the sponsor of an overfunded defined benefit plan, even if the plan's trustees breached their fiduciary duties by making bad investments.


The decision could be far-reaching. Forty-eight percent of corporate pension plans are overfunded, according to a 2002 survey by Plan Sponsor.


Plan participants filed the case against 3M Co. over losses the conglomerate's defined benefit plan suffered as a result of a $20 million investment in the hedge fund Granite Corp., which filed for bankruptcy in 1994. The plaintiffs contend that 3M did not properly investigate or monitor the fund, thereby breaching its fiduciary responsibilities under the Employee Retirement Income Security Act of 1974. The court ruled that because the plan was overfunded, the losses did not jeopardize its ability to provide retiree benefits to employees.


Critics of the ruling suggest the matter isn't settled. "It's hard to imagine that the decision will stand," says Sherwin Kaplan, counsel in the Washington, D.C., office of law firm Phelan Reid & Priest LLP. "The only technical issue decided in this case is who has standing to sue." He says the decision doesn't mean that sponsors of overfunded plans are off the hook: the Secretary of Labor and fiduciaries can still sue them. Kaplan argues that removing participants from the equation will only put more strain on the Department of Labor, which, due to budgetary and time constraints, relies on beneficiaries to bring suits in some cases.


For his part, plaintiffs' attorney Alan Sandals, of Philadelphia-based Sandals & Langer LLP, filed a petition for a rehearing. If that fails, he says, the case could go all the way to the Supreme Court.


Lynn Dudley, vice president and senior counsel of the American Benefits Council, hailed the ruling, however. "The company did everything within the law it was allowed to do to protect the participants," she says. "Offering defined benefit plans is voluntary, and we should protect the fiduciary's right to select investments. Without that flexibility, employers won't offer the plans anymore."

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