(June 19, 2013) — When shifting from a defined benefit (DB) plan to an annuity or a defined contribution (DC) plan, sponsors must make absolutely sure to follow a well documented and pre-prescribed process to avoid litigation, according to experts. Brian Ortelere, partner and co-chair of the Employee Retirement Income Security Act (ERISA) litigation practice at Morgan Lewis, spelled out potential issues sponsors faced in this regard to delegates at a summit on corporate risk by rating agency Moody’s this week. If a company’s pension fiduciaries fail to thoroughly consider all the merits of possible options they leave themselves opened to lawsuits. However, participates are not allowed to sue when companies act solely in the interests of their shareholders as long as these actions do not directly conflict with previous DB obligations, according to Ortelere. Ortelere examined why communications company Verizon was successful in defending itself against claims of fiduciary misconduct. Section 102 (b) and 404 (a) of ERISA calls for the sponsor to warn participants of possible changes in the structure of the plan and for there to be no change in the payment of accrued benefits. Verizon complied with these two statutes and took proper due diligence while selecting an annuity provider, Prudential, according to panelists. The panel turned its attention to how to avoid ligation while investing in alternative investments. Ortelere suggested the easiest way not to lose a court case was to make sure the court never hears it. Under Article III of the US Constitution, a plaintiff cannot sue in federal court if there is not clear harm to the benefits of the participants, ergo participants cannot sue simply because they dislike the fees being paid to hedge fund managers and private equity groups. The question that needs to be answered is where does the court draw the line in terms of funding status in assessing a participate ability to sue, the panelists suggested. The Government Accountability Office has stated that alternatives are not problematic if the fiduciaries are sufficiently sophisticated and funded, according to Ortelere. As long as proper procedures are reasonable and documentation is properly filed, courts have held that there is nothing wrong with either annuitizing DB plans or investing in alternative investments.
…and Ideas on How to Avoid Litigation while De-Risking
Alternative investing and annuitization were major topics at Moody’s summit on corporate risk.