By Carol Buckmann
The frontiers of ERISA litigation keep expanding, and defined benefit plans are the new litigation targets.
Here are some of the cases that have recently been filed. The U.S. Supreme Court will also be reviewing a significant decision on when participants in defined benefit plans may challenge fiduciary breaches.
Challenges to Actuarial Factors.
A number of cases have been filed against large sponsors of defined benefit plans, including MetLife, American Airlines and Pepsi, claiming that the actuarial factors-and specifically the mortality tables and custom factors- used to determine annuity benefits were outdated, so that participants were underpaid. It will be interesting to see how these play out, since selection of actuarial factors is part of plan design, which is a settlor and not a fiduciary function under existing case law. There is some question whether the selection of these factors can be challenged as a fiduciary breach. There are other technical barriers to these suits, including whether the statute of limitations has run on some of these claims. Further, the interest rate used to calculate actuarially equivalent benefits is also relevant, and it may more than cancel out the effect of old mortality factors to result in an appropriate adjustment.
Plan sponsors concerned about these issues may want to review their actuarial assumptions at this time. They should be aware, however, that any change to their factors now will be permanent as to accrued benefits regardless of how these cases are resolved. Under IRS rules, any adverse change in actuarial factors may apply only to future accruals.
The Dow Spinoff.
Participants have also challenged a transfer of sponsorship of the Dow Pension Plan to a new entity called Corteva Agriscience, claiming that the plan’s financial condition was jeopardized by the transfer. The complaint seeks an injunction undoing the transfer of sponsorship. The decision to transfer sponsorship of a plan is also traditionally a settlor decision, though the complaint is couched in terms of fiduciary breach.
The complaint alleges that after the merger of Dow and DuPont, the agricultural business was spun off to Corteva. DuPont’s other businesses remained, but the entire plan, which was underfunded, was transferred. The complaint alleges that the purpose of the transaction was to remove the sponsor from the controlled group to eliminate exposure for controlled group termination liability if Corteva were to terminate the plan.
If this plan is terminated while underfunded within 5 years of this transaction, the allegations in the complaint would justify the PBGC’s instituting a suit under Section 4069 of ERISA. Section 4069 would allow the PBGC to proceed against the prior controlled group for liability. It will be interesting to see if the court finds that Section 4069 is the sole ERISA remedy in this situation and if the PBGC takes any action.
Are You Harmed if the Plan is Overfunded?
The Supreme Court will be reviewing Thole v. U.S.Bank, an appeal from an 8th Circuit decision that found that a participant couldn’t sue for a fiduciary breach relating to investments if the plan was overfunded. The analysis is that because the plan sponsor would have to make up losses under the funding rules, the payment of benefits is not jeopardized by a bad investment as it would be in a defined contribution plan. The participants have therefore not incurred an economic loss.
This is an important issue for fiduciary accountability. In Thole, the plan sponsor had a plan that was originally 84% funded, but made an additional contribution to bring the funded percentage over 100%. Any plan sponsor in good financial condition could use this tactic to defeat participant litigation.
The real concern here is that the drafters of ERISA intended fiduciary responsibilities to be constant, while under the 8th Circuit analysis, fiduciaries would only be accountable for making imprudent investments if the plan was underfunded.
The 8th circuit decision stresses that on plan termination any surplus would go to the employer, not the participants. However, plan funding is not static, and a plan in surplus condition today could have a funding deficit tomorrow. Investment losses are amortized over a period of years, and current funding doesn’t necessarily predict whether the plan will be able to pay all benefits in the future. Further, not all plan sponsors will be in a financial position to make up losses.
If this decision is upheld by the Supreme Court, plan sponsors unable to fully fund their plans would be held to different standards than those who could. It is hard to believe the drafters of ERISA intended that result.