Earlier today, a federal district judge rejected an attempt by two Verizon retirees to block the $7.5 billion transfer of pension liabilities to Prudential (Lee v. Verizon, N.D. Tex.). The court denied plaintiffs’ request for a temporary restraining order or preliminary injunction, finding that the plaintiffs did not establish a substantial likelihood of success on their claims that the transaction would violate ERISA.
As we previously discussed, Verizon’s management pension plan will purchase a group annuity contract under which Prudential, instead of the plan, will pay retirees’ pensions. Retirees will continue to receive the same pensions, in the same form, from the insurance company. Plaintiffs argued that the transaction would violate ERISA’s fiduciary duties and ERISA’s disclosure requirements. They also argued that the transaction is not permitted under the terms of the Verizon pension plan and violated ERISA’s anti-discrimination rules. The court found no merit in any of the plaintiffs’ arguments.
1. Deciding to annuitize is a settlor act, not a fiduciary act: The court recognized that ERISA permits a pension plan to purchase an annuity contract and transfer liabilities to an insurance company, thereby removing the transferred benefits from ERISA’s regulatory regime. The court concluded that, like a plan termination, “the decision to amend a plan to purchase an annuity does not implicate a plan fiduciary’s duties.”
2. Annuity purchase is not subject to ERISA’s duty to diversify: The plaintiffs claimed that transferring $7.5 billion of pension liabilities to a single insurer would violate ERISA’s duty to diversify plan investments. The court concluded, however, that an annuity purchase that transfers liabilities from a plan to an insurer is not a plan investment. Instead, it is a plan distribution. Accordingly, the annuity purchase is not subject to ERISA’s duty to diversify plan investments.
3. Possibility that the plan could purchase an annuity did not need to be disclosed in the SPD. The plaintiffs argued that the plan’s summary plan description (SPD) should have disclosed that pension benefits could be removed from ERISA’s regulatory regime through an annuity purchase. The court concluded that the possibility of an annuitization did not need to be disclosed because it does not cause any loss of benefits. The court reasoned that Verizon’s annuity contract “will provide for the continued payment of the participant’s pension benefit in the same form that was in effect under the Plan … with the same rights to future benefits.” The court also concluded that the SPD did not need to disclose the annuitization transaction before the plan was amended to require it. Because Verizon promptly disclosed the plan amendment after the amendment was adopted last October, the court concluded that, even if the amendment needed to be disclosed, ERISA’s disclosure rules had been satisfied.
Plaintiffs further alleged that the decision to annuitize the benefits of some but not all retirees was intended to interfere with their ERISA rights in violation of ERISA section 510. The court, however, concluded that the plaintiffs failed to rebut Verizon’s “legitimate, nondiscrminatory reasons for defining the group of retirees for the annuity contract,” which included retirees who were in pay status since at least January 1, 2010. The court also concluded that the transaction complied with the terms of the Verizon plan.