Recently, the Third Circuit held that withdrawal liability triggered after a bankruptcy filing date may be apportioned to pre- and post-petition service for the debtor, and that the withdrawal liability attributable to post-petition service may be entitled to priority over general unsecured claims under the Bankruptcy Code. Employers that participate in a multiemployer pension plan should determine the claims impact of withdrawal in light of this court decision and also assess whether filing for bankruptcy protection outside of the Third Circuit is appropriate.
On June 14, 2011, the Pension Benefit Guaranty Corporation (PBGC) issued final regulations that apply to single-employer pension plans maintained by employers in bankruptcy. These regulations implement a change made by the Pension Protection Act of 2006 (PPA). The change affects the amount of benefits payable by the PBGC to participants.
If an underfunded pension plan terminates during the plan sponsor’s bankruptcy, the termination date is either agreed to by the plan administrator and the PBGC, or the date is set judicially. Before the PPA, the plan termination date was used to determine both the amount of and eligibility for benefits guaranteed by the PBGC to participants.
The PPA amended the Employee Income Retirement Security Act of 1974 (ERISA) to substitute the bankruptcy filing date for the plan termination date for these two important purposes: determining the amount of participants’ guaranteed benefits under Section 4022 of ERISA and determining whether benefits are guaranteed under Section 4044 of ERISA.
The new PBGC regulations include these provisions:
Guaranteed benefits are based on the amount of a participant’s service and compensation as of the bankruptcy filing date.
The maximum guaranteed benefit, the phase-in limit, and the accrued-at-normal limit are all determined as of the bankruptcy filing date.
Only nonforfeitable benefits as of the bankruptcy filing date are guaranteed.
Subsidized early retirement benefits (or disability or other benefits) to which a participant becomes entitled between the bankruptcy filing date and the actual termination date of the plan will continue in pay status (or may go into pay status), but the amount of the benefit is reduced to reflect that the subsidy (or other benefit) is not guaranteed.
Benefits in priority category 3 under Section 4044 of ERISA are benefits in pay status or that could have been in pay status three years before the bankruptcy filing date (priority category 3 benefits are guaranteed by the PBGC).
If a plan has more than one contributing sponsor and all contributing sponsors did not file for bankruptcy on the same date, PBGC will determine the bankruptcy filing date based on the individual facts and circumstances.
Importantly, under PPA the bankruptcy filing date was not substituted for the plan termination date for all purposes. The termination date still controls for purposes of determining both the amount of a plan’s unfunded liabilities and the parties responsible for those liabilities under Section 4062 of ERISA.
The regulations have an effective date of July 14, 2011, but the PPA change applies if bankruptcy proceedings were initiated on or after September 16, 2006. Plan sponsors that have filed for bankruptcy or are considering such a filing should contact their regular McDermott attorney to discuss the effect of the new regulations.
The Supreme Court of the United States in the CIGNA decision confirms, in what may be hailed as a victory for plan sponsors, that information contained in a summary plan description does not itself constitute the “terms” of a benefit plan for purposes of filing claims for benefits. However, the majority’s assertion that participants have a vast arsenal of equitable relief under ERISA section 502(a)(3) will likely invigorate both participants and plaintiffs’ attorneys. Because the surcharge remedy is one of the few equitable remedies that provide monetary relief, a likely increase in claims alleging notice violations and seeking a surcharge to plan participants is anticipated.
In response to an Executive Order from the White House to identify opportunities to make government regulations less burdensome and more effective, the Pension Benefit Guaranty Corporation (PBGC) recently published its Preliminary Plan for Regulatory Review. Most notably, PBGC noted that it had begun implementing the Executive Order by reconsidering several rules it has recently proposed:
Reportable Events: PBGC announced it was already planning to re-propose regulations regarding reportable events under Section 4043 of the Employment Retirement Income Security Act (ERISA).
ERISA Section 4062(e): PBGC announced it will also reconsider its proposed rule regarding the substantial cessation of operations by employers that maintain defined benefit pension plans in light of public comments. As previously noted by our Firm and several industry groups, the proposed rule had the potential to impose unexpected and extensive liability for employers who undertake routine corporate actions.
In addition, according to the Preliminary Plan, PBGC intends to review the following rules:
Voluntary Correction Programs: PBGC will consider whether to expand its current voluntary correction program for errors related to filings and other requirements.
Premiums: PBGC will review the premium payment requirements for small plans to determine whether changes could be made that would enable small plans to streamline their premium and funding valuation procedures.
ERISA Section 4010: PBGC will review ERISA Section 4010 (Annual Financial and Actuarial Information Reporting) and the filing application to determine whether the burden on employers can be reduced.
PBGC also intends to review various other sections of Title IV of ERISA to delete obsolete regulations or incorrect references, fill-in gaps where additional guidance would be helpful and simplify language.
President Obama’s Executive Order called for an "open exchange" of information among government officials, experts, stakeholders and the public. Accordingly, the PBGC is accepting public comments on its Preliminary Plan. For more information regarding submitting comments, click here.
Pension plans use swaps to manage interest rate risks and other risks and to reduce volatility with respect to funding obligations. The Dodd-Frank Act established a comprehensive regulatory framework for swaps. The legislation was enacted to reduce risk, increase transparency and promote market integrity within the financial system, including the comprehensive regulation and required registration of swap dealers and major swap participants.
The Dodd-Frank Act has introduced new challenges in managing risks and liabilities of pension plans by subjecting ERISA plans to new requirements under the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC). If pension plans are unable to use swaps, plan costs and funding volatility could rise sharply. This would undermine participants’ retirement security and would force employers to reserve, in the aggregate, billions of additional dollars to address increased funding volatility. In order to meet the rulemaking objectives specified under the Dodd-Frank Act, regulators and Congress have introduced significant changes that may impact how pension plans manage their funded status.
In December of 2010, the CFTC released proposed regulations outlining business conduct standards for swap dealers and major swap participants. The regulations highlighted the issue that swap dealers engaging in typical business activities with respect to “special entities” could be treated as ERISA fiduciaries. (The Dodd-Frank Act provides that a special entity includes an employee benefit plan.) ERISA provides that, generally, any transaction between a fiduciary and the ERISA plan with respect to which it owes fiduciary duties is prohibited. Therefore, in effect, the proposed regulations may preclude swap dealers from entering into swap transactions with employee benefit plans subject to ERISA. Additionally, the Department of Labor’s proposed rule relating to the definition of the term “fiduciary” under ERISA may include advisors that perform plan asset valuations, which is an activity conducted by swap dealers under the CFTC proposed regulations.
On April 12, 2011, the CFTC issued proposed regulations establishing minimum initial and variation margin requirements for non-cleared swaps entered into by CFTC-regulated swap dealers and major swap participants. Under the proposed rules, pension plans would be included in the category of high-risk financial entities, subject to the most stringent requirements. Such high-risk financial entities are required to post collateral and are limited to the type of assets that may be used to post margin. This change could significantly increase the cost of managing pension plans.
On May 4, 2011, the U.S. House of Representatives Agriculture Committee approved H.R. 1573, legislation providing the CFTC and SEC with 18 additional months to finalize many of the rules relating to swaps. The rules defining swaps-related products and participants and the rules relating to reporting recordkeeping, however, are to be finalized by July 15, 2011. The CFTC also recently released a notice reopening the comment period for many of the proposed regulations related to the Dodd-Frank Act.
Plan sponsors should continue to monitor the regulatory and legislative activity surrounding pension plans’ ability to use [...]
On April 11, 2011, a divided Seventh Circuit panel reversed summary judgment in favor of Kraft Foods Global, Inc. in a class action ERISA breach of fiduciary duty case involving “excessive fees” claims in connection with Kraft’s 401(k) plan. The main take away from the decision is that fiduciaries must continue to be diligent and thoroughly consider plan administration issues and document why decisions were made or not made or practices followed, even on decisions and practices once thought to be routine or common industry standards. By following such a prudent practice, fiduciaries will substantially increase their ability to defend challenges concerning fiduciary conduct.
In Kraft, plaintiffs alleged three primary claims considered on appeal: that the use of a unitized company stock fund as an investment option was improper; that the plan’s recordkeeping fees were too high and imprudently monitored; and that the fiduciaries imprudently allowed the plan trustee to retain interest income from “float.”
In a 2-1 decision, the panel ruled that the plaintiffs could proceed to trial on their theory that the unitized company stock fund was imprudently designed because of “investment drag” and “transaction drag” that is inherent with the widely popular unitized funds. Like most company stock funds, Kraft plan participants held units of the fund rather than directly holding shares of company stock. The plaintiffs alleged that the fiduciaries should have considered the “drag” that unitized funds cause on gains (and losses). The Seventh Circuit ruled that there was no evidence that the fiduciaries ever consciously decided in favor of a unitized plan finding that the benefits of a unitized fund outweighed the downsides, or whether they just ignored the issue. According to the majority, that was sufficient to proceed to trial. In a strongly worded dissent, Judge Cudahy called the plaintiffs’ theories on this, and others in the case, an “implausible class action based on nitpicking with respect to perfectly legitimate practices of fiduciaries.”
The majority further reversed summary judgment for the defendants on whether the recordkeeping fees were too high. The plaintiffs argued that the fiduciaries should have solicited competitive bids from other recordkeepers about every three years. Kraft had used the same recordkeeper since 1995, without a competitive bid, although Kraft received advice from several third-party independent consultants that the fees were reasonable. The plaintiffs submitted an opinion from an expert finding that the fees were excessive. In a decision with potentially wide-sweeping ramifications, the Seventh Circuit held that while the defendants’ reliance on the contemporaneous opinions of outside independent consultants that the fees were reasonable may be enough to prevail at trial, it was not enough to overcome the plaintiffs’ contrary admissible expert opinion at summary judgment which created a genuine issue of fact. The use of a consultant cannot “whitewash” otherwise unreasonable fees and a trier of fact could conclude that the defendants did not satisfy their duty solely through the use of independent consultants to ensure that the recordkeeping fees were reasonable. [...]
On October 14, 2010, the U.S. Department of Labor (DOL) issued final regulations that require enhanced fee disclosures to participants in 401(k) plans and other defined contribution plans subject to the Employee Retirement Income Security Act (ERISA) with participant-directed investments. The DOL believes that participants previously did not have sufficient information to make informed investment decisions, and believes these new requirements provide enhanced and necessary investment information to participants. The new regulations are effective on January 1, 2012, for plans with a calendar year plan year.
The new regulations require disclosure of two major categories of information: “plan-related information” and “investment-related information. Some of these mandatory disclosures were previously included in ERISA 404(c) regulations. However, compliance with ERISA 404(c) regulations is voluntary, and thus, not all participants have previously received the information required under this new guidance.
Implementation of these new disclosure rules will require significant effort from plan administrators and plan service providers. Plan administrators should familiarize themselves with these new disclosure regulations and start working with service providers and investment issuers to ensure a smooth transition.
For more information on the timing of the new disclosures and the types of information that are considered plan-related information and investment-related information click here.
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