On August 17, the US Court of Appeals for the Fifth Circuit affirmed the dismissal of an action brought by a company’s pension plan participants against the company and the plan's fiduciaries. The dismissed action alleged that the company's decision to de-risk its pension plan by transferring approximately $7.4 billion in pension obligations to a third-party insurer through the purchase of a single-premium group annuity contract ran afoul of various ERISA rules and requirements.
Among other allegations, the company’s plan participants asserted that the plan, plan sponsor, and plan fiduciaries violated ERISA by (1) failing to obtain participants' consent to the annuitization transaction, (2) failing to disclose to participants (in the plan's summary plan description or otherwise) that the transaction might result in a “loss of benefits” (e.g., the loss of Pension Benefit Guaranty Corporation (PBGC) guarantees and other ERISA protections), and (3) using $1 billion of plan assets to pay the third-party insurer and other third-party providers for administrative costs associated with the annuity transaction.
The Fifth Circuit’s decision uniformly dismissed all of the participants’ claims, noting that (1) the related decision to settle pension obligations through an annuity purchase is a settlor decision that is immune from fiduciary obligations; (2) the plan was amended appropriately to allow for the annuity purchase; (3) the plan fiduciary timely communicated the annuity purchase-related changes to plan participants through a summary of material modifications; (4) ERISA does not provide an absolute entitlement to PBGC protections, and there was no loss of benefits associated with the annuity purchase; and (5) the type of expenses paid from the plan did not raise ERISA concerns, and the participants provided no information to support the conclusion that the amount of the expenses was unreasonable.
All in all, the court's decision should provide additional comfort to plan sponsors and plan fiduciaries (particularly in the Fifth Circuit) that pension de-risking initiatives implemented through an annuity purchase do not run afoul of ERISA.