A recent action against three New York City pension funds illustrates the important interplay of ERISA with state fiduciary laws that I discussed in last month's Law 360 article.
In Wayne Wong v. NYCERS, TRS and BERS (NY Supreme Court, Index No. 652297/2023, 5/11/2023), four participants of three New York City pension funds brought an action against the New York City Employees' Retirement System ("NYCERS") (a $77.5 billion defined benefit plan); the $64 billion Teachers' Retirement System of the City of New York ("TRS"); and the $5.9 billion Board of Education Retirement System of the City of New York ("BERS") for violating their fiduciary duty to administer the plans "solely in the interests of the Plans' participants and beneficiaries and for the exclusive purpose of providing retirement benefits" by divesting the Plans of approximately four billion dollars of holdings in companies involved in the extraction of fossil fuel.
According to the participants, energy company investments "shunned" by the Plans during the 2022 divestment period delivered exceptional returns outperforming the S&P 500 index by an order of magnitude of 58%. The complaint also argued that in contrast to the trustees in this case, the trustees of two other New York City pension funds rejectedproposals to divest from fossil fuel-related holdings, specifically because doing so would conflict with their fiduciary obligations. In addition, the complaint emphasized that public plans in California , Maine , Seattle, and Colorado have refused to divest from fossil fuels as inconsistent with fiduciary duties.
The participants asked the New York Supreme Court to declare that the Plans and their respective Boards of Trustees have breached their fiduciary duties to Plan participants through their divestment actions, and to order the Plans and Trustees to rescind their divestment policies and remediate the harm caused by those policies to the participants and retirees.
Fiduciary Arguments in the Complaint
New York Laws. The complaint reviewed the New York laws that protect retirement security , both through the common law of trusts and section 136-1.6 of New York's regulatory standards for actuarily funded public retirement systems. These impose "rigid fiduciary duties" on the public employee retirement systems in New York and require that its fiduciaries act "solely in the interests of the [participants] and beneficiaries of the systems they administer" (N.Y. Comp. Codes R. & Regs. tit. 11, section 136-1.6(a)). The complaint also cited the New York Retirement and Social Security Act ("NYRSSA"), which provides that Plan investments must be "for the exclusive benefit of the participants and beneficiaries," and "with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims" (N.Y. Retire. & Soc. Sec. Law Section 177 (9)(b) emphasis added). Although not pointed out in the complaint, the phrase "familiar with such matters" is an adoption of ERISA's fiduciary standard of care which has resulted in the development of a judicial "prudent expert rule" that has helped safeguard the rights of plan participants.
New York Case Law. The complaint also cited New York Court of Appeals decisions such as In re Est. of Wallens (9 N.Y. 3d 117, 122) which emphasized that it is well settled that "a fiduciary owes a duty of undivided and undiluted loyalty to those whose interests the fiduciary is to protect" (Birnbaum vBirnbaum, 73 NY2d 461, 466, citing Meinhard v Salmon, 249 NY 458, 463-464 in which Chief Judge Cardozo famously stated, "[a] trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior"). "). A "trustee is under a duty to the beneficiary to administer the trust solely in the interest of the beneficiary" (Matter of Heller, 6 NY3d 649, 655, quoting Restatement [Second] of Trusts Section 170[1]). Thus, the Plans and their trustee fiduciaries must manage the Plans with a "singular focus" on what best serves the retirement interests of participants and beneficiaries. Anyone familiar with ERISA, will immediately recognize that those principles are embodied in ERISA fiduciary jurisprudence.
The Final ESG Rule. Finally, the complaint states that the "blunderbuss divestments" by the Plans also conflict with the standards for fiduciary conduct laid out in the 2022 final DOL rule regarding ESG investing by private pension plans. In the Preamble to the final Rule, the DOL said the duties of prudence and loyalty require "fiduciaries to focus on relevant risk-return factors and not subordinate the interests of participants and beneficiaries (such as by sacrificing investment returns or taking on additional investment risk) to objectives unrelated to the provision of benefits under the plan." " (Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights, 87 Fed. Reg. 73822, 73827, Dec. 1, 2022). While the DOL final rule which is regarded as favorable toward ESG-investing only applies to ERISA-covered plans rather than governmental plans like the Plans here, "it illustrates how far the Plans strayed from widely recognized standards of retirement plan management ..." Plaintiffs argued that no responsible private plan fiduciary would have behaved like the politically motivated trustees here.
Lack of Standing
Despite the complaint's well thought out fiduciary arguments, a flaw in this case is a lack of standing for Plan participants. In Thole v. U.S. Bank N.A., 140 S.Ct. 16 15 (2020), the U.S. Supreme Court held that participants in an ERISA plan cannot sue for a fiduciary breach if their own benefits have not been affected. Although the complaint claimed that that one of the three Plans is under 80% funded, this should not establish standing since no individual benefits have been terminated or otherwise altered. The plaintiffs in Thole similarly alleged that the plan fiduciaries violated ERISA's duties of loyalty and prudence by poorly investing the assets of the Plan resulting in a loss of $750 million. The case was dismissed by the lower courts on the ground that the plaintiffs lacked standing to sue under ERISA for breach of fiduciary duties because they had no "concrete stake in the Thole lawsuit." The Supreme Court affirmed, finding that participants do not have a "concrete stake in the lawsuit" when winning or losing the suit does not affect their benefits. The Thole precedent was adopted by the Supreme Court of Kentucky in Overstreet v. Mayberry, as Member and Beneficiary of Trust Funds on behalf of the Kentucky Retirement Systems, No. 2019-SC-000041-TG (July 9, 2020) in a case relating to the Kentucky Retirement Systems which faced an appreciable risk of running out of plan assets. The New York courts might find the reasoning persuasive but are not bound to follow the decision.
No Context-Specific Pleading
It is not sufficient in an ERISA lawsuit to simply allege that the divestiture of oil investments lost money for the plan. Put another way, it is not a fiduciary obligation to just pick "winners." The obligation of an ERISA fiduciary under the "prudent expert" rule is to establish and implement a documented robust procedural process that the plan and its trustees follow in determining and monitoring the prudence of selecting or divesting investments, utilizing the services of an independent expert if necessary and looking at a longer time frame than 2022. Further, the Supreme Court in Hughes v. Northwestern (U.S.S.Ct. No. 19-1401, Jan. 24, 2022) held that courts deciding motions to dismiss in ERISA fee-and-investment cases must engage in a "context-specific inquiry" that gives due regard to the range of reasonable judgments a fiduciary may make based on their experience and expertise. Since Hughes, Courts of Appeals have required pleadings by plaintiffs that show the specifics of how a bad process was involved in fiduciary choices about vendors or investment vehicle offerings (see, e.g., Smith v. CommonSpirit Health, 37 F.4th 21160 (6th Cir. 2022), Forman v. TriHealth Inc., 40 F.4th 443 (6th Cir. 20022) and Albert v. Oshkosh Corp. (No. 1:20-cv-00901 (7th Cir. 2022).
The complaint only alleges investment losses as the result of the divestitures and comparisons to decisions made by other plans. It does not allege context specific defects in the processes followed by the Plans and its trustees in making the investment decisions. As a result, this case may be vulnerable to a motion to dismiss.
Closing Observation
The complaint's fiduciary arguments are very well drafted. They owe their strength to reliance on ERISA principles and the ERISA fiduciary standard of care's prudent expert rule which New York adopted in the NYRSSA to safeguard the rights of plan participants. As pointed out in my Law 360 article, 70% of the U.S. states have similarly adopted this standard.
However, its fatal flaws are a probable lack of standing and no context-specific pleading. Mere allegations alone should not survive a motion to dismiss. An investment that's good for the environment can also be good for the plan and its participants provided it's selected and monitored based on a thoughtful, deliberate and documented process.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
