Client Service January 15, 2016

Addressing the High Cost of Maintaining a DB Plan

DB plan sponsors are freezing their plans and changing accounting methods; what can be done about ballooning costs for these plans?
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Ford Motor Co. recently announced that its change to mark-to-market accounting for its defined benefit (DB) plan will add $1.5 billion to its earnings, and Baystate Health announced that freezing its pension plan provided $69.7 million in revenue, preventing it from recording an operating loss.

These are not new trends. Other DB plan sponsors have switched accounting m,ethods, and reports of pension freezes have become common in the last 10 years.

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Alexa Nerdrum, a senior retirement consultant in Willis Towers Watson’s Southfield, Michigan office, says the move to mark-to-market accounting means pension gains or losses are recognized immediately rather than amortized over several years. By adopting that accounting method, plan sponsors move prior year losses from current results. She tells PLANADVISER this is a more true measure of a DB plan sponsor’s financials. Removing amortization removes long-term market fluctuations and when DB plan sponsors use this accounting to project into the future, it improves their ability to budget for the plan, she adds.

Other than for financial reasons, Nerdrum says Will Towers Watson has seen clients move to mark-to-market accounting to align with international accounting standards or to align their measures with their competitors’.

Freezing a pension plan can help plan sponsor company’s financials by removing the liability of future benefits yet to be earned off the balance sheet, which is required to be reported under current rules, Nerdrum explains.

NEXT: Why have pension plans become so costly?

Nerdrum notes that when the Employee Retirement Income Security Act (ERISA) was passed, there were different ways required contributions for DB plans were calculated and liabilities recorded than now. “Accounting rules have changed, and some of operational costs have skyrocketed,” she says, noting that Pension Benefit Guarantee Corporation (PBGC) premiums have “increased exponentially” over the last decade.

Legislative rules for valuing the cost of DB plans have changed as have funding rules; in the past employers could take a contribution holiday, which may have led to lower funding in subsequent years, according to Nerdrum. She adds that market uncertainty also drives increased costs for DB plans.

Nerdrum admits that DB plans are complex and require sound governance as it relates to managing the cost, but Willis Towers Watson sees many employers still committed to maintaining active DB plans. “We’ve done research and found 20% of Fortune 500 companies still offer a DB plan to new employees, and 29% of Fortune 100 companies do. They believe in [DB plans’] value,” she says.

DB plan sponsors can manage the cost of their plans with sound governance and funding and investment policies, Nerdrum asserts. And, they need to understand risk and establish an investing policy that will consider the lifetime of the plan.

DB plan sponsors can also take advantage of opportunities to change to a less costly plan design, and they can get rid of some of their liability by transferring some to an insurance company or offering a lump-sum window to certain participants.

“There is constant discussion in the industry and Congress about how to make these plans more sustainable, and I think those discussions will continue. The industry and Congress wants to see reform,” Nerdrum concludes.

Compliance January 15, 2016

SCOTUS Passes on ERISA Plan Lawsuit Venue Case

The Supreme Court has denied a petition to review a case about restriction-of-venue clauses in retirement plan documents related to ERISA challenges—based not on the weakness of appellees’ arguments but on a lack of conflict among the circuit courts. 
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The U.S. Supreme Court will not take up Smith vs. Aegon Companies Pension Plan, despite the opinion of the U.S. Solicitor General that the district and appellate courts erred in allowing the enforcement of a plan document’s venue-restriction clause in the case.

Somewhat paradoxically, the Solicitor General did in fact urge SCOTUS to wait on the issue and pass up this particular case—despite strongly arguing against the stances of the district and appellate courts, which both tossed the case because of the restriction-of-venue clauses in plan documents. More important than the perceived legal error, the Solicitor General says, is following the proper process for choosing which cases SCOTUS will hear, and since there has not yet arisen any conflict among the appellate courts on this issue, it’s not the proper time for the Supreme Court to weigh in.

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As it stands, the 6th U.S. Circuit Court of Appeals decision to toss the case will be enforced. Last November, a panel of circuit court judges ruled the venue selection clause in the Aegon Companies Pension Plan is not in conflict with the Employee Retirement Income Security Act (ERISA)—a finding now in effect confirmed by SCOTUS. In so finding, the appellate court refused to give deference to a brief filed in the case by the Department of Labor (DOL), saying the agency’s interpretation, which was more favorable to the plaintiffs, was not made with the force of law.

According to the Solicitor General, the court of appeals erred in affirming the dismissal of petitioner’s benefits suit under ERISA based on the plan’s venue-selection clause. Still, “although the enforceability of such clauses in ERISA plans is a question of substantial practical importance, the Supreme Court’s review is not warranted at this time. The Sixth Circuit in this case is the first appellate court to resolve the question presented, and its decision does not squarely conflict with any decision of [the Supreme Court] or another court of appeals … Nor does petitioner’s concern that the enforceability issue often arises in an interlocutory posture justify [SCOTUS] review before any other court of appeals has addressed that issue. The petition should therefore be denied.”

NEXT: A detailed Solicitor General brief 

According to the high court’s docket sheet on the case, a district court had initially dismissed the challenge because it “was not filed in the federal district court dictated by the plan document.” The appellate court, and now SCOTUS in a roundabout way, affirmed the dismissal.

The text of the brief field by the Solicitor General dives into the complexity that carried this case up the Supreme Court’s attention, showing the plaintiff was an employee of Commonwealth General Corporation (CGC) in Louisville, Kentucky, and a participant in an ERISA-covered pension plan that CGC sponsored. Following CGC’s merger with AEGON USA, Inc., the plaintiff became a participant in a successor ERISA plan, the AEGON Companies Pension Plan. CGC offered some employees, including the plaintiff, enhanced retirement benefits if they remained with the company during the merger, the brief explains. The plaintiff agreed and, upon retiring, began receiving $2,189.51 in monthly retirement benefits under the plan.

In 2007, seven years after petitioner retired and started receiving benefits, the AEGON company amended the plan to include a clause stating certain restrictions on venues for challenges under ERISA, as follows: “A participant or beneficiary shall only bring an action in connection with the plan in Federal District Court in Cedar Rapids, Iowa.” Four years after the plan amendment, AEGON informed the plaintiff that it determined in a recent audit that it had been overpaying him by $1,122.97 per month for the previous 11 years, demanding he repay more than $150,000 in overpayments and that, if he failed to do so, his monthly benefit would be eliminated until the amount of the alleged overpayment was recouped.

The petitioner initially filed state-law claims in a Kentucky court against CGC, which removed the case to federal court based on preemption under ERISA and Aegon moved to dismiss. The district court granted the motion, and the court of appeals affirmed. While his appeal from the dismissal of that suit was pending, petitioner sued respondent in the United States District Court for the Western District of Kentucky, seeking to recover plan benefits under ERISA. Respondent moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), arguing that the plan’s venue-selection clause required petitioner to bring suit in Cedar Rapids, Iowa.

NEXT: Tough day for plaintiff

AEGON argued in its reply memorandum that the Western District of Kentucky was not a proper venue under ERISA’s venue provision, 29 U.S.C. 1132(e)(2), because no breach had taken place in that district and the plan was administered and could be found only in Iowa. The district court then granted respondent’s motion to dismiss, ruling that the venue-selection clause in the plan was “enforceable and reasonable.”

The courts collectively reasoned that, although the clause had been added after petitioner began receiving benefits, AEGON was free under ERISA and the plan terms to modify the plan at any time so long as the amendment did not reduce the amount of benefits to which petitioner was entitled under plan documents.

“The court also concluded that the clause was consistent with ERISA’s venue provision because it specified a location—Cedar Rapids, Iowa—where the plan is administered and resides,” the Solicitor General’s brief explains. “The court did not address respondent’s suggestion that venue was not proper [for a plaintiff] in the Western District of Kentucky.”

Also important, according to the Solicitor General, the courts “reasoned that ERISA plans may be amended at any time, that the venue-selection clause fell within the ‘large leeway’ afforded employers in adopting amendments, and that such clauses are presumed valid under precedents ‘even when they are not the product of an arms-length transaction.’”

The courts acknowledged the petitioner’s concern that enforcing such clauses could lead to an excessive burden on plan participants and beneficiaries “forced to litigate in distant forums,” but they explained that litigants “may always challenge the reasonableness” of a clause in individual cases.

The full brief from the U.S. Solicitor General is here.

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