What a SCOTUS Vacancy Means for the Retirement Plan Industry

The late Supreme Court Justice Antonin Scalia had a direct (but not necessarily pivotal) role in shaping many of the SCOTUS decisions tracked in recent years by the retirement planning industry. 

Making predictions about upcoming political events is always tenuous, but the dramatic pressure of the presidential election season often makes matters a little more predictable.

That’s certainly the case with the pending replacement of Supreme Court Justice Antonin Scalia, a Reagan-era appointee who died this month without public warning, still occupying one of nine highly coveted SCOTUS seats. Ask supporters of Democratic President Barack Obama, and the Senate has a clear and obvious duty to immediately consider any nominee the executive puts forward. Ask the opposition Republicans in Congress and the opposite position is found: It would be better to wait until after the election, for the next president to replace Scalia according to a referendum of the people.

As noted by Nancy Ross, an ERISA specialist and partner in Mayer Brown’s litigation and dispute resolution practice in Chicago, “it seems pretty likely, at least at this point, that our political leaders will fail to fill the SCOTUS vacancy any time soon.” For one, Republican members of the Senate Judiciary Committee have all already pledged to have no hearings whatsoever as it pertains to a new Supreme Court Justice nomination from President Obama.” Ross points to an open letter that was sent by the Republican committee members to Senate majority leadership, noting that “Article II, Section 2 of the Constitution is clear.”

The Republican members write: “The President may nominate judges of the Supreme Court. But the power to grant, or withhold, consent to such nominees rests exclusively with the United States Senate. This is not a difficult or novel constitutional question. As Minority Leader Harry Reid observed in 2005, ‘The duties of the Senate are set forth in the U.S. Constitution. Nowhere is that document does it say the Senate has a duty to give the Presidential nominees a vote. It says appointments shall be made with the advice and consent of the Senate. That is very different from saying every nominees receives a vote.'”

Ross takes that language to be clear enough: Until such a time that Republicans on the committee feel they are losing more politically by withholding a vote than from giving one, up or down, no vote will occur. Leaning on this logic, the Judiciary Committee letter goes on to suggest the Republican majority will “exercise its constitutional authority to withhold consent on any nominee to the Supreme Court submitted by this President to fill Justice Scalia’s vacancy.”

NEXT: What a lasting SCOTUS fight means for advisers and their clients 

Ross feels the volume of Supreme Court decisions that have impacted retirement plans has clearly been significant in recent years (and decades), and just by virtue of that fact alone, one can see Justice Scalia had an important influence on the employer-sponsored retirement plan industry. He was known generally for holding conservative political views, but his tendency towards understanding the Constitution and other laws as “dead” documents, meant to be interpreted according to the original intention of the writers and framers, sometimes led to surprising votes.  

For example, there was the recent Montanile decision, which did not gain much attention before reaching the top federal court. In that matter, Scalia sided with an eight-member majority that effectively moved to limit the ability of insurance plans to recover money from a beneficiary in a settlement. It may sound like an esoteric issue, but Ross and other experienced ERISA compliance professionals say the matter comes up quite a lot across a wide variety of employee benefit plans. On the surface, Scalia's vote would seem to go against his conservative roots (in limiting the ability of a business to collect money it has a legal right to), but Ross importantly points out that the Montanile decision “is better understood as having strengthened the interpretation that ERISA is not a piece of law meant to be used primarily as a means of collecting legal damages.” She concludes that Montanile, like most other Supreme Court decisions impacting employee benefits plans, would not have come down differently without Scalia's input.  

And who could forget Tibble vs Edison? The 2015 decision was the final chapter in a long-running dispute between utility company Edison International and participants/beneficiaries in the Edison 401(k) Savings Plan. The initial suit was filed in 2007, eventually earning a SCOTUS review that seems to solidify the “ongoing duty to monitor” investments as a fiduciary duty that is separate and distinct from the duty to exercise prudence in selecting investments for use on a defined contribution plan investment menu. In that case, Justices Sotomayor and Scalia expressed similar skepticism about whether the court was in an appropriate position to define something like ERISA’s duty to monitor—especially whether such matters are better determined through case law and the trial courts. But in the end, the Justices all moved unanimously in vacating and remanding the case.

In other cases, SCOTUS decided not to review matters of importance to plan sponsors and advisers, actions which Scalia certainly influenced but could not have determined alone. For example, SCOTUS passed recently on Tussey vs ABB, after the 8th U.S. Circuit Court of Appeals agreed with a district court’s finding that fiduciaries at employer ABB breached their duties to an ERISA retirement plan by failing to diligently investigate and monitor plan recordkeeping costs. SCOTUS, in the end, agreed with Fidelity and ABB that the district court inappropriately relied on hindsight in its ruling that the switch from certain Vanguard funds to Fidelity Freedom funds violated ERISA. Fidelity was also found not liable for breaches concerning its use of “float” income.

Ross says the important detail to take from these cases (and many others) is that the Supreme Court has in the last decade moved with a “pretty remarkable sense of unity and cohesion on issues pertaining to the employer-sponsored retirement planning space. You really have to search to find examples of cases that split along party lines.” As such, the potential for a long-term vacancy is not likely to be as pressing in the employer-sponsored retirement planning arena as it may be in more overtly political settings.   

NEXT: A tentative look ahead 

Ross prefaces her forward-looking commentary with a healthy dose of skepticism, but she’s willing to read the teas leaves insofar as she’s willing to predict President Obama will have an “exceptionally hard timing filling this seat. Replacing a deceased Supreme Court justice is a very difficult matter when you have a well-functioning Congress, let alone in the current environment.”

Whether or not Obama manages to fill the seat, the impact for retirement plans will likely be modest. “To be honest, I’m puzzled as to what issues the court may be willing to take up in the next year or two, while this vacancy could remain open, just looking at what is before the district courts and circuits right now,” Ross explains. “It probably will not be an employee stock ownership plan (ESOP) matter, given that they just recently sent Amgen back down, for example, which followed Dudenhoeffer, giving a stern warning to the court that the plaintiffs hadn’t pled what SCOTUS said needed to be pled.”

Ross further notes that she “can’t really imagine what kind of stock drop issue the court would think needs clarification,” but there’s a better chance that a church plan issue could get a top court review before the Scalia vacancy is filled. 

“There are more than a few church plan cases working their way through district and appellate courts right now, covering a few different issues,” Ross says. “But you have to ask yourself again, if a church plan case comes up, would the political leanings of the court have a big influence, such that it’s likely there would be a four-four tie decision? Frankly I don’t think that is likely, even in this case that has more overt political overtones, because the justices all have demonstrated a similar belief that you can't hide behind ERISA as a shield.”