Magazine article Risk Management

Managing Corporate Liabilities under ERISA

Magazine article Risk Management

Managing Corporate Liabilities under ERISA

Article excerpt

WHEN THE PILGFIMS LANDED ON Plymouth Rock in 1620, they came in pursuit of security and a better quality of life. Almost four centuries later, the Employee Retirement Income Security Act of 1974 (ERISA) and related legislation have turned these goals and aspirations into reality.

ERISA was thrust into existence by the 1963 demise of the Studebaker Corp. The failures of the company's pension plan, and the consequent upset of the 6,000 workers who were promised pensions, created a public outcry. The money to provide future retirement payments simply wasn't around. ERISA was intended to prevent a recurrence of this type of monetary disaster.

Although pension plans have existed since the Civil War, their real growth began with the Taft-Hartley Act of 1948, which authorized the organization of multiemployer plans with an equal number of trustees from both management and labor. ERISA was the next great leap forward. Today, there are more than 900,000 singleand multi-employer pension plans, from both the private and public sectors, with combined fund balances in excess of $3 trillion, and there are 4.5 million health plans. About half the funds are invested in equities. Because the market value of New York Stock Exchange securities is approximately $3 trillion, it is clear that pension funds hold a substantial chunk of corporate America. There are about 65 million beneficiaries involved.

Establishing effective labor relations was the incentive for the passage of the Taft-Hartley Act. This act was passed when America's intense experience with labor-management committees during both world wars augmented the government's interest in employment conditions. More than ever, management and labor were concerned with future security, the health and welfare of the labor force and, consequently, pension and welfare benefits.

Fiduciary Responsibility

The increasing size and impact of pension plans has brought tougher enforcement of fiduciary rules relating to plan trustees and all parties-in-interest, which include the officers and directors of plan-sponsors. The "normal" rules governing trusteeship have always been stringent; ERISA trusteeship rules are even more severe.

For many years, plan trustees and corporate officers and directors have operated as though they were exempt from scrutiny by virtue of the interposition of named fiduciaries" to carry out the functions of their plans. However, according to the U.S. Department of Labor, which is responsible for ERISA enforcement, they are not exempt. Since March 1990, the Department of Labor and Pension Benefits Guaranty Corp. (PBGC) has maintained that the purchase of insurance company annuities by employee pension plans ended these agencies' pension responsibilities. However, the recent junk bond-related failure of First Executive Life Insurance Co. has led to Department of Labor lawsuits against two companies whose pension funds bought annuities from Executive Life. "The lawsuits, filed against Maxxam Inc. and Magnetek Inc., were intended as a signal to all companies that they must select the safest available option whenever buying an annuity to finance retirement benefits," according to a June 14 New York Times article. In April, the General Accounting Office reported to Congress that "Millions of former participants in defined benefit plans are now receiving their pensions in the form of insurance annuities. Without any required notification, they have lost the federal guarantee promised by ERISA. Although these annuitants are protected in general by the state guarantee system, some of them could lose part or all their pension benefits should the insurance companies providing their annuities fail."

In the event of an insurer's financial trouble, and the failure of a state guarantee fund to make up pension losses suffered by annuitants, the only recourse of disappointed pension holders is to the company, its plan and the trustees who purchased the annuities. …

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