ERISA “protects the interests of employee benefit plan participants and their beneficiaries. It requires plan sponsors to provide plan information to participants. It establishes standards of conduct for plan managers and other fiduciaries. It establishes enforcement provisions to ensure that plan funds are protected and that qualifying participants receive their benefits, even if a company goes bankrupt.”
While this sounds like important protections for Retirees and their families, recent developments in the pension risk transfer arena, new Federal laws that allow plan sponsors to deliberately understate liabilities, and the recent Supreme Court decision in Thole v. US Bank have gutted ERISA of virtually all of its intended protective purposes.
Since 2012 when off-loading pension liabilities became fashionable, more than $178 billion in retiree benefits have been transferred to a handful of insurance companies through the purchase of group annuity contracts and reinsurance. In these pension de-risking transactions, retirees lose all of the uniform protections intended by Congress under ERISA and once de-risked, Retirees become subject to non-uniform state laws.
The Pension Benefit Guaranty Corporation (PBGC) is a U.S. government agency that protects the retirement incomes of American workers in private sector defined benefit plans. The PBGC does this not through the use of tax dollars, but rather by collecting insurance premiums from companies that have defined benefit pension plans. If a company with a defined benefits pension plan goes belly-up, the PBCG takes over the pension plan and steps in to cover the pension benefits owed to the Retirees. For pension plans taken over in 2021, the maximum annual benefit for someone who retired at age 65 is $72,409.68 for a straight life annuity and $65,168.16 for a joint and 50% survivor annuity (which continues to provide reduced benefits to surviving spouses for their lifetime). PBGC guaranteed benefits increase each year as a function of age and for a Retiree aged 75, annual benefits in 2021 are $220,123.56 for a straight life annuity and $198,111.24 for a joint and 50% survivor annuity. These benefits are approved by Congress annually.
Contrast these benefits with state insurance company guarantee association coverage amounts and Retirees are usually shocked by the difference. First of all, guarantee association coverage amounts range from $250,000 to $500,000 per individual per lifetime. And, perhaps most importantly, guarantee associations are post-insolvency assessment vehicles (they only assess members post-insolvency) and the amounts they can assess members is capped by statute at a small percentage of premiums written in the state. The ability of the state guarantee association safety net to withstand the insolvency of one of the large insurance companies in the pension risk transfer business is speculative at best.
Strong markets in the 1990s coupled with a much higher interest rate environment fueled growth in defined benefit plan assets and in turn reduced minimum required contributions. When the markets plummeted in the early 2000s, not only were plan assets reduced but interest rates fell dramatically at the same time. This caused a number of defined benefit plans to become seriously underfunded. To fix this underfunding problem, Congress passed laws that allowed corporations to use artificially high discount rates over a 25 year average period or “segment” so the funded status of a given plan would look better and the minimum required contributions would be less burdensome on employers. The basic premise was that interest rates would rise over time and that the short-term underfunding would take care of itself as interest rates started to steadily rise again. Of course, that has not happened and defined benefit plans are much more underfunded than they may appear. ERISA needs to be amended to address the critical underfunded status of the declining number of defined benefit plans that have yet to be de-risked.
Once plans are de-risked, it is imperative that insurance companies be held to a fiduciary standard and prevented from padding executive pockets at the expense of retirees. Transparency and accountability for de-risked pensions is the only way to restore peace of mind to retirees. That means retirees need to insist upon legislation at the state level to require annual statements regular disclosures and fiduciary standards for insurance companies managing retiree assets.
One of the key benefits of ERISA was supposed to be ready access to the Federal Courts to enforce ERISA’s strict fiduciary duties. However, in June of 2020 the Supreme Court of the United States ruled in what we refer to as “the death of ERISA” case – Thole v. US Bank – that plan participants did not have standing to sue under Article III of the Constitution unless they suffered current economic harm in the form of a reduction or loss of a periodic payment even when plan fiduciaries breached their duties and caused the plan to suffer losses. Justice Kavanaugh, writing for the majority reasoned that just because a plan loses money doesn’t mean that it cannot make payments to plan participants.
With the stroke of Justice Kavanaugh’s pen, retirees lost the right to challenge or seek redress for any improper actions taken by a plan fiduciary turning ERISA on its head! Of course, by the time a retiree has suffered an actual economic loss due to a plan failure, or in the case of a de-risked pension an insurance company failure, the time for any sort of challenge under ERISA will have become time barred. The Thole case encourages bad acts at the corporate level and guts ERISA to the point where it no longer has any teeth.
ERISA can be amended to address many of the concerns identified above and state legislatures can pass laws to protect Retirees and their families from onslaught of attacks against retirees earned benefits. But make no mistake, corporate America is pleased to see ERISA’s protections eroded. It will be no easy feat introducing appropriate legislation in Congress, let alone getting the currently divided Congress to pass such legislation.
Retirees for Justice was formed to shed light on these important issues that have made it difficult for retirees and their families to feel secure in their economic future.
Join Retirees for Justice and help us work to protect what is yours.