Sometimes you appreciate confirmation that actions – you always thought were permissible – continue to be viable options.  We have just received confirmation from the U.S. Court of Appeals for the Fifth Circuit that the long-standing practice of de-risking by purchasing annuities from insurance companies remains permissible.

In 2012, Verizon decided to annuitize the benefits of current retirees by purchasing annuities from Prudential.  A group of those retirees attempted  to stop the transaction from going forward, and when that failed, proceeded to attempt to undo the transaction on the grounds that it involved fiduciary breaches and violated various provisions of ERISA.

The plaintiffs lost repeatedly at the district court level, which ruled that they had no causes of action, but they kept coming back.  Remaining participants in the plans were even added as another potential class of plaintiffs to challenge the impact of the purchase on the ongoing plan.  Readers of this blog know that I have predicted that the plaintiffs would likely lose because their claims were inconsistent with existing interpretations of ERISA.  In an unpublished opinion, the U.S. Court of Appeals for the Fifth Circuit  agreed, upholding the district court’s dismissal of all of the claims of both groups of plaintiffs after de novo review.

The court made the following rulings in rejecting the plaintiffs’ claims:

  • The decision to annuitize was not a fiduciary act.  The court cited longstanding authority going back to the common law of trusts that the decision to purchase annuities was a settlor, not a fiduciary activity.
  • The possibility of annuitization was not required to be disclosed in the summary plan description (SPD).   The court  concluded that ERISA does not require advance disclosure of  events which are contingent on a plan amendment, and noted that the possibility of plan amendment had been clearly disclosed.  The plaintiffs also claimed that annuitization was required to be disclosed because it was an event reducing or resulting in loss of their benefits, but the court found no basis for concluding that a loss of PBGC insurance was a reduction in benefits.  (Nonetheless, it may be a good practice to include notice that annuity contracts may be distributed in satisfaction of benefit obligations in an SPD.)
  • Participant consent was not required for annuitization of their benefits.  There was no precedent for requiring consent.
  • Section 510 of ERISA, which prohibits discrimination against participants for asserting protected rights, was not violated merely because the plaintiffs did not have rights to continued plan participation, ERISA coverage or PBGC insurance.
  • Paying $1 billion in fees and expenses as part of  the $8.4 -billion annuitization was not a fiduciary breach.  The plaintiffs did not plead with any specificity as to why the amount was unreasonable, and the court would not assume that the total fees were unreasonable solely from the amount.
  • It was not imprudent to purchase one group annuity contract from Prudential rather than from multiple insurers.
  • Current participants had no standing to challenge the transaction.  Because there are no individual accounts in a defined benefit plan and the plan sponsor must make trust losses, they suffered no current harm.  They could not bring suit as a quasi-representative of the plan

It should be noted that Verizon did not make lump sum offers to the retirees, a practice which the Internal Revenue Service has announced will no longer be permitted, and that issue was not before the court.

Hopefully, this decision is final and will end whatever legal uncertainty had surrounded annuitization under current law, though unpublished opinions are technically not precedent.  While no appeals court  has ruled that employers do not have the  right to annuitize benefits,  as I stated in a recent post, new controls on de-risking practices are under consideration, and the possibility of future changes in the law should be part of the decision tree for employers considering de-risking.