November 30, 2011
--- A court has ruled that a defined contribution plan must repay a former participant funds that were wrongly transferred to an account of his ex-spouse, even though the plan has not recouped those assets. ---
In affirming a lower court decision, the 2nd U.S. Circuit Court of Appeals said undistributed funds held in trust for the members of a defined contribution pension plan do not constitute “benefits” within the meaning of the anti-alienation provisions of the Employee Retirement Income Security Act (ERISA), and the anti-alienation rule does not prevent pension plan assets from being used to satisfy a judicial judgment that has been entered against the plan itself. The plan sponsored argued repaying Robert W. Milgram, M.D. before first recouping the assets would violate ERISA’s anti-alienation provision by taking away assets from other plan participants.
The plan also argued a close examination of the distinctions between defined contribution and defined benefit plans compels the conclusion that enforcement of a judgment against the former poses anti-alienation problems that enforcement against the latter does not. It suggests that the plan's failure to recognize those dangers in previous cases is not because they do not exist, but because the historical dominance of defined benefit plans has prevented the issue from being litigated previously.
The appellate court found this argument unpersuasive, saying it is the distinctive feature of defined contribution plans that they require the employee rather than the employer to bear the pension risks associated with investment instability, underfunding, and beneficiary longevity, as well as litigation. “By design, participants in a defined contribution plan bear the risk that the value of their accounts will be reduced as a result of actions taken by the plan administrator; just as the anti-alienation provision does not protect participants against poor investment decisions by the plan administrator, it does not protect them against the risk that poor management decisions will expose the plan’s assets to liability,” the court wrote in its opinion, adding “it could well be argued that it is the failure to pay Milgram the money to which he is entitled as a plan participant that would violate the administrator’s fiduciary duties.”