Academic journal article Monthly Labor Review

The Law at Work

Academic journal article Monthly Labor Review

The Law at Work

Article excerpt

Pension plans

Reversing a ruling by the U.S. Court of Appeals for the Ninth Circuit, the U.S. Supreme Court held that a corporation does not violate the Employee Retirement Income Security Act (ERISA) by amending its defined-benefit pension plan, as long as those workers who participated in the plan before it was amended remain entitled to the same level of benefits. In Hughes Aircraft Co. v. Jacobson,(1) the High Court found that the addition of new, noncontributing participants to the defined-benefit plan did not affect the rights of previous participants who were required to contribute, Thus, the company's action was deemed to be an amendment, rather than a termination of the existing pension plan.

Hughes Aircraft decided to use a surplus of more than $1 billion to add a new set of participants to its defined-benefit pension plan, except that the corporation did not ask the new participants to contribute to the plan, as previous participants had been required to. The appellees claimed that the surplus should have been distributed only to those employees who made contributions. The ninth circuit had ruled that the employees had an actionable claim, because, assuming that the company's action qualified as a termination of the plan, ERISA required the plan's assets to be distributed to contributing members and a new plan established for new participants.

The appellees brought six causes of action in their complaint. First, they alleged that Hughes had violated ERISA'S prohibition against using employees' vested, nonforfeitable benefits to meet its obligations by depleting the surplus to fund the new noncontributory pension plan. They also alleged that Hughes had violated ERISA's "anti-inurement" prohibition by benefiting itself at the expense of the pension plan's surplus. Three other claims related to alleged breaches of fiduciary duties by the company. Finally, the employees claimed that the corporation had failed to distribute the residual assets of the pension plan upon its termination--which the employees claimed occurred when the noncontributory employees were brought under the plan's scope.

Justice Clarence Thomas' unanimous opinion for the Court rejected the appellees' arguments with respect to vested benefits and anti-inurement. The Court found that the rights of the earlier participants in the plan had not been affected by the changes in it and that the company did not use the surplus money for its own benefit. The surplus money in the defined-benefit plan did not belong to members who had contributed to the plan; thus, it was appropriate for Hughes to use the surplus to fund benefits of other employees who had never contributed. The key factor behind this determination was the difference between defined-benefit and defined-contribution pension plans. Defined-benefit plans, regardless of whether they require employee contributions, provide employees with a fixed benefit amount. In contrast, employee pensions in a defined-contribution plan are based on the contributions made by both the employer and employee to the plan. Justice Thomas' opinion noted that employers who fund defined-benefit plans bear the entire investment risk and must cover any underfunding of the plan resulting from a poor investment performance, because employees covered by such plans are entitled to a specific benefit. Individual members of the plan cannot claim a particular portion of the fund used to pay the benefit--that is, the contributions that the individual made. The employees did not claim that they had been denied their accrued benefits.

The Court rejected the claims regarding breach of fiduciary duty, relying on a previous decision that employers who alter the terms of a pension plan do not fall into the category of fiduciaries. The Court noted that the type of plan being offered did not affect this finding, as the ninth circuit had thought. Generally, the Court said, an employer's decision to amend a pension plan concerns the design of the plan itself and does not implicate the employer's fiduciary duties. …

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