In October 2012, a defined benefit plan sponsor amended its plan to provide that, effective Dec. 7, 2012, the plan would purchase an annuity to cover the plan’s obligations to make payments to the roughly 41,000 participants who were receiving benefit payments as of Jan. 1, 2010.  Prior to amending the plan, the plan’s fiduciary had retained an independent fiduciary to opine on such a proposed transaction. Before the company amended the plan, the independent fiduciary “provided a written determination of the transaction’s compliance with ERISA.” The sponsor then purchased a single-premium, group annuity contract for $8.4 billion, in settlement of $7.4 billion in plan benefit obligations.

Procedural Posture

Participants of the plan, both those retirees whose pension obligations were transferred to the insurer and participants whose obligations remained with the company, sued the sponsor and certain plan fiduciaries in the District Court for the Northern District of Texas, alleging breach of duty with respect to the transaction. The plaintiffs first sought a temporary restraining order to enjoin the transaction, which was denied. The district court then granted motions to dismiss both the original complaint and an amended complaint. The plaintiffs appealed the dismissal of their claims.

In a per curiam decision, a panel of the Fifth Circuit Court of Appeals affirmed the dismissal of all of plaintiffs’ claims.

No Failure to Disclose

The court first addressed plaintiffs’ claims that the plan’s summary plan description (SPD) did not disclose, prior to plan’s amendment, that the plan’s benefit obligations could be transferred to an insurer via an annuity. It rejected this basis of liability given that an SPD does not need to describe future terms and, in any event, the SPD had identified that the plan could be amended. The court also noted that participants were, in fact, notified of the plan amendment shortly after it was effectuated. The court also rejected plaintiffs’ arguments that the SPD needed to disclose the loss of possible benefits given that the amendment did not reduce the amount of benefits and the loss of ERISA protections is not a loss of benefits, especially where the transaction complied fully with the regulation governing the purchase of annuities.

No Breach of Duty in Implementing the Plan Amendment

The court also affirmed dismissal of the retirees’ claims of breach of fiduciary duty on a number of grounds. For one, the act of amending a plan is not a fiduciary function, and therefore not subject to ERISA’s fiduciary standards. Further, the court observed that, since all the elements of the regulation were met (benefits are guaranteed by and enforceable against the insurer, and proper notice was provided), the retirees were no longer participants of the plan entitled to enforce fiduciary obligations.

The court also affirmed dismissal of claims addressed to plan fiduciaries for implementing the plan amendment, holding that there was no obligation to obtain to obtain the consent of participants or notify them before the plan sponsor amended the plan. Similarly, the court held that, in light of a Department of Labor advisory opinion allowing reasonable expenses to be borne by the plan, “threadbare allegations” that $1 billion was not reasonable in connection with $7.5 billion of pension obligations did not state a claim that the plan fiduciaries improperly allowed the plan to pay the costs of implementing the plan amendment. Finally, the court held that there was no violation of duty by selecting only one annuity provider as opposed to multiple providers, given that the plaintiffs did not plausibly allege a deficient fiduciary process in arriving at that result.

Other Claims Also Rejected

The court also denied other challenges raised by plaintiffs. It held that the transfer of some plan obligations was not an unlawful interference of participants’ rights under ERISA Section 510 absent any allegation of an intent to interfere with a right under the plan. The Court also held that the remaining 50,000 or so participants in the plan for whom the plan did not purchase an annuity did not have constitutional standing to challenge the transaction. While those participants alleged that they suffered harm, in that the plan was underfunded as a result of the transaction at approximately 66% of the actuarial funding, since they alleged no direct harm, they could not maintain their suit. They also could not sue on behalf of the plan where there was no assignment by the plan of any cause of action to them.