DoL Accuses Insurance Brokerage of Fleecing Pension

The lawsuit claims a Pennsylvania brokerage arranged a kickback scheme with an insurance company, resulting in a hospital pension being overcharged for an annuity purchase.

(September 19, 2012) – The United States Department of Labor has filed a lawsuit against Dietrich & Associates, a Pennsylvania-based insurance brokerage, for alleged “for violations of ERISA [Employee Retirement Income Securities Act] in connection with the purchase of a group annuity for a pension plan…sponsored and administrated by Memorial Hospital.”

The complaint, officially filed by Secretary of Labor Hilda Solis, claims Dietrich rigged the bidding process for Memorial Hospital’s annuity purchase, presenting false final bids to ensure Hartford Life Insurance Company’s bid came in lowest and won. Hartford, in turn, had allegedly struck a kickback deal with Dietrich: the insurance company would pay a portion of the annuity’s purchase price to the brokerage, provided Hartford won.

A total of six final submissions came in from insurance companies, and Hartford’s $26.1 million bid was the second highest. The complaint asserts that Dietrich increased the other bids by 2%, rendering Hartford the lowest bidder—even though its offer included an extra 2% kickback for Dietrich.

In December 2003, Memorial Hospital selected Hartford to provide the annuity for its pension plan, which was in the process of closing. Roughly two months later, Dietrich allegedly received $522,047 from Hartford for “expense reimbursements” related to the annuity purchase.

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Kurt E. Dietrich, the sole owner of his eponymous brokerage, has testified to elements of this account of events, according to court documents. His firm, under contract to arrange the bidding process, was prohibited from accepting compensation from insurance companies.

The Department of Labor is suing Dietrich & Associates for violating ERISA. The prosecution is seeking $522,047 plus interest, a ban on Dietrich & Associates from acting as fiduciaries, and any other “such relief as may be just and equitable.”

Attorneys for both parties failed to respond to requests for comment.

The highway bill, signed by President Obama in July, should have substantially lowered aggregate pension funding obligations, yet the picture isn't entirely rosy.

(September 19, 2012) — Pension stabilization in the recently passed highway bill—more formally known as the Moving Ahead for Progress in the 21st Century Act (MAP-21)—will lower required contributions for single-employer pension plans substantially, according to a research report by Towers Watson.

However, it’s not all good news for pension funds.

“In some ways it makes plan sponsors happy, but it’s not entirely good for them,” Alan Glickstein, a senior retirement consultant at Towers Watson, asserts.

This may be a bad time for the Pension Benefit Guarantee Corporation (PBGC) to put pressure on plan sponsors, who are already facing difficulties. “Hitting them with more PBGC premiums sends a mixed message,” he says.

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While the implications of the bill include a change in the interest rate used to measure funding obligations, consequently lowering liabilities as well as contributions, plan sponsors must also battle a large increase in PBGC premiums, which will kick in over the next few years, Glickstein says. He added that the PBGC reiterates that it is currently able to pay what it needs to in order to aid struggling schemes, yet the independent reviews of the PBGC that Congress is demanding suggests that Congress isn’t fully convinced of the need for additional premium revenue.

Meanwhile, under the highway bill, the lowered contributions for plan sponsors will be most acute for plan years 2012 and 2013. Unless interest rates rise, however, required contributions will return to pre-MAP-21 levels in a few years, the Towers Watson report stated. “Before MAP-21, minimum required pension contributions were projected to nearly double between plan years 2011 and 2013—rising from $39.7 billion to $71.7 billion. Had interest rates continued to decline, the funding obligation for 2015 would have reached $105.8 billion,” the consulting firm explained.

Under MAP-21, aggregate pension funding obligations should be substantially lower, with aggregate minimum required contributions projected at $2 billion in 2012 with MAP-21 versus $54.2 billion without it. “Lower pension plan contributions generally imply lower funded levels for the future,” according to the report. “Plan sponsors need to carefully consider their own forecast of interest rates and whether contributing much less for the next few years is in their long-term best interest.”

Read Towers Watson’s full report here.