A trend appears to be developing in which defined benefit plan sponsors are using pension plan assets to purchase group annuity contracts from insurers who then assume the obligation to make future annuity payments to the company’s retirees. Employers view these transfers as “de-risking” their pension plans while improving the company's longer-term financial profile.

Recently, retiree participants of the Verizon Communications, Inc. defined benefit plan filed a putative class action in a federal district court claiming that the company's plan to transfer $7.5 billion in pension assets to Prudential Insurance Co. to purchase annuities violates Verizon’s fiduciary duties under ERISA and interferes with the retirees' protected rights. (Lee v. Verizon Communications, Inc., No. 3:12-cv-04834, (N.D. Tex., complaint filed 11/27/12)). The matter came to light as a result of Verizon’s filing a Form 8-K with the SEC announcing the contract with Prudential and issuing a press release stating that Prudential, rather than Verizon, will be responsible for making the monthly payments to retirees.

The participants assert that the plan asset transfer will eliminate all ERISA protections to which the retirees are entitled because Prudential will not be subject to ERISA's fiduciary duties standards, minimum funding standards and disclosure requirements. The participants also claim that the transfer will effectively eliminate all of the transferred retirees' ERISA protections for their pensions, including the financial security provided by the PBGC.

One of the plaintiffs’ claims alleges that Verizon violated ERISA by failing to issue a summary plan description that discloses all circumstances that may result in the participants’ ineligibility for or loss of plan benefits. The plaintiffs  also allege that Verizon breached fiduciary duties by failing to comply with plan documents, i.e., that Verizon's plan to transfer the participants out of the plan is an attempt to evade a standard termination of the plan.  A third claim alleges that Verizon violated ERISA §510 by interfering with the participants' rights by seeking to expel them from the plan before they have received all vested benefits to which they are entitled. The plaintiffs seek injunctive relief under ERISA §502(a)(2) and (3) to prevent Verizon from proceeding with the plan asset transfer to Prudential.

Do the plaintiffs have a case here? Are their concerns as to the continued security of their benefits from a large insurer versus the employer justified?  

--Mark Wolf

Compensation Planning Group