Compliance

Annuity Contract Termination ERISA Challenge Will Proceed

The plaintiff alleges that the contract’s cancellation was not made with his and the other beneficiaries’ interests in mind, but rather to improve the parent/subsidiary companies’ financial positions and to make them a more attractive target for potential buyers.

By John Manganaro editors@strategic-i.com | August 28, 2017
Page 1 of 2

The latest retirement industry litigation decision comes out of the U.S. District Court for the Northern District of Illinois, Eastern Division, pertaining to an Employee Retirement Income Security Act (ERISA) challenge filed against the company CNA Financial, its subsidiaries and the fiduciaries of its 401(k) plan. 

Plaintiffs alleged various violations of ERISA related to the cancellation of a group annuity contract. Also named as a defendant in the lawsuit is the plan trustee, Northern Trust Company.

The defendant and Northern Trust moved under Federal Rule of Civil Procedure 12(b)(6) to dismiss all claims against them, while the Continental defendants moved to dismiss one claim. With this new decision the motions are all denied, “except as to the plaintiff’s request for damages relief against Continental.”

Important to note, this represents only an interim decision in the case, and in resolving a Rule 12(b)(6) motion the court “assumes the truth of the operative complaint’s well-pleaded factual allegations, though not its legal conclusions … In setting forth those facts at the pleading stage, the court does not vouch for their accuracy.”

Relevant background shared in the decision states the plaintiff is a former employee of CNA Financial, an insurance holding company. The plaintiff was a participant in the CNA 401k Plus Plan, and Northern Trust was the plan’s trustee. One of the plan’s investment options was a fund called the CNA Fixed Income Fund. According to case documents, until the end of 2011, a core investment of the fund was a group annuity contract offered by a company which at that time was a subsidiary of CNA Financial.

According to case documents, the parent company was permitted to discontinue the contract only in limited circumstances, such as the plan’s failure to qualify as a qualified pension, profit-sharing, or stock bonus plan under Section 401(a) of the Internal Revenue Code; the failure of the plan’s trustee to make required contributions; or a decision by the plan’s trustee or sponsor to make other funding arrangements for the plan. The plan itself, by contrast, could terminate the contract at any time, within the confines of the fiduciary duty.

At some juncture, the plan and the parent company added a “Minimum Interest Guarantee Rider” to the contract in question, which guaranteed that the annual interest rate credited to the plan’s investment under the contract would never fall below 4%. According to the text of the decision, the rider remained in place until December 31, 2011, when the contract was discontinued “pursuant to an agreement executed two days earlier between Northern Trust and [the parent company], which provided that at the request of’ the plan’s trustee, the contract would be cancelled.”

The plaintiff alleges that the contract’s cancellation was not made with his and the other beneficiaries’ interests in mind, but rather to improve the parent/subsidiary companies’ financial positions and/or to make them a more attractive target for potential buyers. Details in the case documents suggest that prior to the contract’s cancellation, the contract had earned returns at or above the 4% floor; it earned a 6.5% gross rate of return in 2007 and 2008, 6.25% in 2009, 4.55% in 2010, and 4% in 2011.

“Because interest rates had fallen to much lower than those in place when the rider was executed in 1990, the 4% guarantee represented a favorable rate for the plan,” the decision states. “Had the plan not cancelled the contract, the plan’s overall earnings during … almost certainly would have been higher, because most of the plan’s funds had been invested in the contract with its guaranteed a minimum 4% return … So the contract’s cancellation likely had significant negative financial consequences for the plan.”

NEXT: Plan assets versus guaranteed contracts