by Adam Hudoba
Pension fund trustees have a fiduciary duty to act in their fund’s best interest. If they do not, there can be adverse consequences. As illustrated by the United States Court of Appeals for the Seventh Circuit in a case arising out of a private pension fund, that may include losing one’s seat on the Board of Trustees.
A fiduciary is one who is required to act for the benefit of another person or entity. The fiduciary duty is the highest standard of care known to law. It requires those taking on a fiduciary duty to act reasonably and impartially for the sole benefit of the members, retirees, and beneficiaries of a pension fund.
So, what happens when one violates a fiduciary duty? Very. Bad. Things. Public pension trustees can be held personally liable for any losses attributable to their bad acts. 40 ILCS 5/1-114. Misbehavior can also result in removal from their position. Id.
Su v. Johnson, 68 F.4th 345 (7th Cir. 2023), is a perfect example, even though it arises in the context of a private pension fund. There, Sherrod established a defined-benefit retirement plan for herself and her employees in 1987. She named herself as trustee of the plan. After selling her business in 2008 and after amending the plan to make herself responsible for the plan’s investment and administration in 2010, Sherrod lost a breach of contract action against the business’ buyer in 2011. She wanted to appeal but could not do so unless she posted an appeal bond. So, Sherrod withdrew $250,000 from the pension plan. Over the next five years, she withdrew over $1 million.
The plan documents barred Sherrod from paying benefits without authorization from the plan administrator. However, Sherrod often withdrew funds from the plan unilaterally.
The United States Department of Labor learned of Sherrod’s withdrawals and sued her, alleging both past and ongoing violations of fiduciary and other duties.
On appeal, Johnson, a co-defendant, argued that he did not breach his duty to follow the plan documents because he had a system in place for administration and his plan included relying on professionals. On appeal, Sherrod argued that she did not breach her duty to follow the plan documents because they only required her to follow the plan administrator’s direction when he gave it.
The Seventh Circuit was not persuaded by Sherrod’s interpretation of the plan and found the administrator was required to “authorize and direct” every payment. And, because Sherrod did not refute that she didn’t strictly follow the plan documents, the Court affirmed Sherrod had breached her fiduciary duty.
Separately, the Seventh Circuit found that Sherrod had violated her duty of loyalty to the pension plan because she withdrew $250,000 from it for a personal bond payment. Sherrod did not even try to defend her other withdrawals as proper.
Given the blatant violations of Sherrod’s fiduciary duties, the court removed her from her position as a plan trustee. It further issued an injunction barring Sherrod from ever serving as a fiduciary for any private pension fund again. Sherrod will likely now face another lawsuit from the plan’s successor trustee seeking to recoup the money the plan has lost.
Although Su doesn’t arise in the context of a public pension fund, its lessons are directly applicable. If pension fund trustees act in contravention of the Illinois Pension Code or convert money, they will be violating their fiduciary duties. As illustrated in Su, therefore, violating a fiduciary duty can result in devastating consequences. If you are a trustee that has a question about how to handle business related to your pension fund, we therefore recommend you seek legal guidance immediately.