Lawsuit Slams Puerto Rico Catholic Schools'Pension Plan

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By Jacklyn Wille

June 14 — A new lawsuit accuses those running the pension plan for Catholic school teachers in Puerto Rico's capital city of mismanaging the plan to the point of insolvency and then retroactively claiming an exemption from federal worker protections ( Martinez-Gonzalez v. Catholic Schools of the Archdioceses of San Juan Pension Plan , D.P.R., No. 3:16-cv-02077, complaint filed 6/13/16 ).

According to the lawsuit, the plan's administrators told participants for years that the plan was funded and federally insured in compliance with the Employee Retirement Income Security Act. The participants allege that they were informed earlier this year that the insolvent plan was an ERISA-exempt “church plan” and that it would be terminating, with the plan's remaining assets largely reserved for those participants who were already receiving pensions.

More than 250 school employees have joined the lawsuit against the Catholic Schools of the Archdioceses of San Juan Pension Plan. They “conservatively” estimate that their vested pension benefits total more than $50 million.

The Catholic schools of San Juan aren't the only entities in Puerto Rico experiencing pension woes. A recent audit of the commonwealth's Employees' Retirement System revealed that this plan for municipal employees had less than 1 percent of the assets needed to cover the $30.2 billion in benefits it had promised current and future retirees.

Allegations of Mismanagement

In their 108-page complaint, the teachers contend that the Catholic Schools plan was established in 1979 as an ERISA-governed pension plan. The plan's governing documents specifically referenced ERISA's protections, as did communications sent to participants in the intervening years, the teachers claim.

Around 2009, those in charge of the pension plan stopped relying on actuarial studies or financial audits to monitor the plan's looming insolvency, the teachers allege. They also failed to inform plan participants of these financial woes until the plan became insolvent in early 2016, according to the teachers.

The teachers attribute this insolvency to the inappropriate investment strategy employed by the plan's fiduciaries. According to the teachers, more than 80 percent of the plan's assets were invested in Puerto Rican government bonds, which lost about three-fourths of their value over the past decade.

The teachers also take aim at the plan fiduciaries—whom they accuse of merely "rubber stamping" the judgment of outside advisers—for lacking the "educational backgrounds, experience, skills and knowledge" to make sound investment decisions.

Decision to Terminate

This alleged mismanagement came to a head in early 2016, the teachers allege, when the Catholic Schools publicly announced that the plan was an ERISA-exempt church plan and that it would be terminating without sufficient assets to pay all promised benefits.

The teachers claim that the Catholic Schools “indicated in an extremely general manner” that the remaining plan assets would be distributed “principally among the pensioned participants.”

According to the teachers, additional details about the termination and distribution plan haven't been forthcoming. They claim that their inquiries to plan officials have gone unanswered.

Representatives of the Catholic Schools didn't immediately respond to Bloomberg BNA's request for comments.

Amundaray Villares & Associates filed the complaint June 13 in the U.S. District Court for the District of Puerto Rico. Although it lists more than 250 plaintiffs, the lawsuit wasn't filed as a class action.

High Stakes for Church Plans

This lawsuit underscores the big financial consequences surrounding a pension plan's decision to claim church plan status.

Pension plans offered by private companies must submit to a host of federally mandated worker protections, including funding requirements, participant disclosures and a government-run pension insurance program that protects participants' benefits in the event of a plan termination. ERISA-exempt church plans aren't required to comply with any of these protective measures.

After decades with little attention paid to it, ERISA's church plan exemption has come under increasing scrutiny in recent years.

More than 30 lawsuits have been filed against religiously affiliated hospitals that have run their pension plans as ERISA-exempt church plans. The lawsuits argue that the church plan designation has allowed the plans to become underfunded by hundreds of millions of dollars.

So far, two federal appellate courts have barred these hospitals from relying on the church plan exemption. Court filings indicate that the hospitals intend to appeal these questions to the U.S. Supreme Court by mid-July.

To contact the reporter on this story: Jacklyn Wille in Washington at

To contact the editor responsible for this story: Jo-el J. Meyer at