Alert December 18, 2014

Federal District Court Dismisses “100% Equity Strategy” Claims on Statute of Limitations Grounds

Summary

A federal district court held that participants in a defined benefit plan had standing to challenge plan fiduciaries’ strategy of investing 100% of the plan’s assets in equities, but dismissed those claims based on ERISA’s six-year statute of limitations.

In Adedipe v. U.S. Bank, N.A., No. 13-cv-2687 (D. Minn. Nov. 21, 2014), the case involved a defined benefit plan sponsored by a bank for its employees. In 2004, plan fiduciaries determined that an asset allocation strategy of investing all of the plan’s assets among various categories of domestic and international securities was appropriate. When the stock market crashed in late 2007 and 2008, the plan lost over $1 billion.

In 2013, Plan participants sued the fiduciaries in federal district court in Minnesota, alleging (among other claims) that the 100% equities strategy violated the duties of prudence, diversification, and loyalty imposed on the fiduciaries by ERISA Section 404(a), and constituted prohibited transactions under ERISA Section 406. In their complaint, the participants asserted that the strategy exposed the plan to inordinate risk, and was adopted by plan fiduciaries to benefit the bank by permitting it to assume a higher rate of return on plan assets, thereby reducing its contribution obligations to the plan and boosting its stock price.

The defendant plan fiduciaries moved to dismiss the complaint, arguing (among other things) that the participants lacked constitutional standing to bring their claims. Asserting that the participants had not demonstrated the “injury in fact” necessary for constitutional standing, the defendants pointed out (i) that the plan’s investment losses had not resulted in the failure to pay any benefits to plan participants, (ii) that the bank was fully capable of meeting its obligations to fund the plan, and (iii) that if for some reason in the future the bank could not meet those obligations, the participants’ benefits would be paid by the Pension Benefit Guaranty Corporation.

The court disagreed and held that the plaintiffs did have constitutional standing. The court observed that, while the plan was overfunded in 2007 by more than $850 million, by 2012 its liabilities exceeded its asset value by more than $1 billion. In light of this, the court concluded that the plaintiff participants had sufficiently demonstrated an “injury in fact” of an increased risk of the plan defaulting on its benefit obligations. The court also held that the participants had adequately alleged that this injury was caused by the defendants’ fiduciary breaches and would be redressed by the relief requested by the complaint (e.g., by requiring defendants to make the plan whole for its losses).

However, the court granted the defendants’ motion to dismiss the 100% equity strategy claims based on the six-year statute of limitations in ERISA Section 413(1). The court reasoned that the complaint indicated that the strategy had been adopted in 2004, more than six years before the filing of the complaint. Rejecting the plaintiffs’ argument that their claims were timely because the fiduciaries had caused the plan to purchase equity securities during the six-year period, the court noted that the complaint challenged only the fiduciaries’ decision to adopt and maintain the 100% equity strategy, not their decision to purchase any particular security.

Although the court dismissed the claims relating to the 100% equity strategy, certain other claims in the complaint survived the motion to dismiss (e.g., a claim that the defendant fiduciaries had improperly caused the plan to invest in mutual funds advised by an affiliate of the bank).