Defined benefit (DB) pension plans used to be the prevalent form of retirement benefit offered by American employers to their employees. By 2015, though, only 3% of Fortune 500 employers offered such plans, a drastic drop from data showing that DB plans accounted for 85% of employer-sponsored retirement plans in the early 1980’s. [1] Defined contribution (DC) plans, popularly known as “401(k) plans,” have now become the most frequently offered retirement plan by employers. A major reason for the shift is that DB plans represent a promise by employers to employees that they will receive a specified payment lasting from the date of their retirement through the remainder of their lives. Employers thus had a binding obligation to make good on their promises and would be required to fund the benefit payments even if their plans were underfunded. DC plans, on the other hand, shift the risk of default to employees who are offered no guarantees that their retirement benefits will last through their lifetimes. DC plans also place the burden on employees who may be lacking in financial literacy to make their own investment decisions which may lead to imprudent choices that reduce their retirement funding.
Despite the shift from DB to DC plans, millions of Americans, many of them already retirees, continue to receive DB benefits from their employers. However, many of the largest employers in the U.S. still administering DB plans are seeking to transfer their pension funding risk to insurers who then offer annuities to retirees. Once such a transfer occurs, not only are employers relieved of any further liability for underfunding, but the pensions are no longer backstopped by the Pension Benefit Guaranty Corporation, a quasi-governmental agency that insures pensions against default. The term “de-risking” has been coined to describe the transfer of DB plans off the employers’ books; and as the de-risking trend has accelerated, it has led to a great deal of controversy.
The controversy stems from the collapse of Executive Life Insurance Companies of California and New York in the early 1990’s. Executive Life’s collapse was the largest insurance failure in American history and resulted from the insurers’ large investments in junk bonds that proved to be valueless. The failure of Executive Life affected many retirees whose pensions had been annuitized. As a result of Executive Life’s collapse, which then led to a Congressional investigation, the U.S. Department of Labor issued Interpretive Bulletin 95-1 [2] to offer guidance to employers on fiduciary standards under ERISA that needed to be meet when selecting an annuity provider to take over their pension plans.
With the passage of nearly 30 years since the issuance of Interpretive Bulletin 95-1, along with a marked increase in de-risking transactions, in the SECURE 2.0 Act of 2022, Congress asked the Department of Labor (DOL) to re-examine its guidance, consult with the Advisory Council on Employee Welfare and Pension Benefit Plans (ERISA Advisory Council) and report back to Congress on whether revisions to Interpretive Bulletin were needed. [3] The DOL issued its report to Congress in June 2024.[4] The report concluded that the DOL’s 1995 guidance remained relevant and did not require modification; however, DOL advised that ongoing pension risk transfers required monitoring; and thus the controversy continues.
This article will describe the contents of Interpretive Bulletin 95-1, explain the current controversy over pension risk transfers, discuss DOL’s position, and describe recent litigation challenging de-risking transactions and offer a prediction as to where that litigation may be headed.
Table of Contents
Interpretive Bulletin 95-1
The Employee Retirement Income Security Act of 1974 [5] (ERISA) is a comprehensive federal law that governs employee benefits. A key aspect of ERISA is that it sets out fiduciary standards of conduct for plan fiduciaries. ERISA defines a “fiduciary” with respect to a plan as a person who
(i) … exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) … renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) … has any discretionary authority or discretionary responsibility in the administration of such plan. [6]
ERISA fiduciaries are required to –
discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and—
(A) for the exclusive purpose of:
(i) providing benefits to participants and their beneficiaries; and
(ii) defraying reasonable expenses of administering the plan;
(B) with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims…[7]
The DOL made it clear in Interpretive Bulletin 95-1 that the selection of an annuity provider is a fiduciary decision governed by the foregoing statutory requirements. To meet ERISA’s fiduciary obligations, fiduciaries are required to “take steps calculated to obtain the safest annuity available,” and “at a minimum, … [to] conduct an objective, thorough and analytical search for the purpose of identifying and selecting providers from which to purchase annuities.” [8] Interpretive Bulletin 95-1 adds the following:
In conducting such a search, a fiduciary must evaluate a number of factors relating to a potential annuity provider’s claims paying ability and creditworthiness. Reliance solely on ratings provided by insurance rating services would not be sufficient to meet this requirement. In this regard, the types of factors a fiduciary should consider would include, among other things:
(1) The quality and diversification of the annuity provider’s investment portfolio;
(2) The size of the insurer relative to the proposed contract;
(3) The level of the insurer’s capital and surplus;
(4) The lines of business of the annuity provider and other indications of an insurer’s exposure to liability;
(5) The structure of the annuity contract and guarantees supporting the annuities, such as the use of separate accounts;
(6) The availability of additional protection through state guaranty associations and the extent of their guarantees. Unless they possess the necessary expertise to evaluate such factors, fiduciaries would need to obtain the advice of a qualified, independent expert. A fiduciary may conclude, after conducting an appropriate search, that more than one annuity provider is able to offer the safest annuity available.[9]
The annuity provider selected may not necessarily have to offer the safest available annuity if “the safest available annuity is only marginally safer, but disproportionately more expensive than competing annuities, and the participants and beneficiaries are likely to bear a significant portion of that increased cost.” [10] Nonetheless, “increased cost or other considerations could never justify putting the benefits of annuitized participants and beneficiaries at risk by purchasing an unsafe annuity.” [11] Nor may a fiduciary “purchase a riskier annuity solely because there are insufficient assets in a defined benefit plan to purchase a safer annuity. The fiduciary may have to condition the purchase of annuities on additional employer contributions sufficient to purchase the safest available annuity.” [12] Finally, if the fiduciary is faced with a conflict of interest in its choice of an annuity provider, it may “ need to obtain and follow independent expert advice calculated to identify those insurers with the highest claims-paying ability willing to write the business.” [13]
SECURE 2.0 and the Department of Labor’s Response
Between 2000 and 2022, the number of pension risk transfer annuity purchases increased substantially, with the number of plans purchasing annuities doubling annually and reaching an all-time high in 2022, with transactions that year involving $52 billion in premiums. [14] That trend was coupled with an increasing involvement by private equity entities that have purchased insurance companies and taken over management of insurance company assets. In March 2022, U.S. Senator Sherrod Brown of Ohio, Chair of the Senate Banking Committee, expressed concern regarding potential risks to policyholders and to the economy associated with private equity controlled insurers. [15] In response to an inquiry from Senator Brown, the Treasury Department also expressed concern that “a potential misalignment may exist between the shorter term objectives/strategy of the alternative asset manager investment model and the long-term commitment necessary for fulfilling annuity/life insurance policyholder interests,” and raising other issues of concern such as non-domiciled offshore private equity affiliated reinsurers. [16] The Treasury Department advised Senator Brown that it was particularly focused on “liquidity, credit risk, capital adequacy, offshore
reinsurance, and conflicts of interest. [17]
Input received by the Department of Labor from over 40 stakeholders offered a range of viewpoints from those who expressed a view that Interpretive Bulletin 95-1 required significant revision and others who held the opposite view. [18] A host of specific concerns were also raised, including a growing amount of illiquid and non-traditional investments held by insurers involved in pension risk transfers. [19] Other issues raised related to the rapid growth in reinsurance activity, [20] lowering of risk-based capital ratios maintained by insurers as a metric used to identify creditworthiness, [21] and the loss of the protections afforded by the PBGC and whether state guaranty funds were adequate to make up for pension default protection provided by the PBGC. [22]
After taking the stakeholders’ concerns into consideration, the Department of Labor determined that Interpretive Bulletin 95-1 remains relevant by offering “principles-based” guidance. [23] However, it was also clear to the Department that as further developments in the life insurance industry that may affect insurers’ claims-paying ability occur, changes to the guidance may be warranted. The Report concluded that it would continue to monitor the issue, and that other concerned agencies such as the Department of the Treasury or the Pension Benefit Guaranty Corporation may decide to issue regulations on the issues of concern to various stakeholders or further developments might impact the Department of Labor’s approach to the issue. [24]
De-Risking Litigation – The Allegations
The purchase of annuities by pension plans is not a new development; and there has been prior litigation over annuitization of pensions. In 2012, Verizon transferred a portion of its pension liability to Prudential for approximately 41,000 of its retirees who were already receiving pension benefits, while approximately 50,000 remained in the plan. Verizon paid $8.4 billion in premiums to Prudential to transfer $7.4 billion in pension plan liabilities.
Shortly thereafter, the transferees sued Verizon for breach of fiduciary duty alleging a failure to disclose an amendment to the pension plan adopting the transfer; and they also sued for breach of fiduciary duty, maintaining Verizon did not act exclusively in the retirees’ interest. A district court in Texas dismissed the lawsuit, and the U.S. Court of Appeals affirmed the dismissal – Lee v. Verizon Communic., Inc. [25] The Court of Appeals upheld the district court’s determination that the disclosures were adequate; and the Fifth Circuit also ruled the plaintiffs failed to state a claim for breach of fiduciary duty for multiple reasons. First, the court found the decision to alter the plan was not a fiduciary act. The court also held that ERISA did not prohibit the transfer. Moreover, following the transfer, the retirees were no longer plan participants who had standing to sue. The court also rejected several other arguments, finding the plaintiffs were continuing to receive the identical benefits provided for under the pension plan and thus had not experienced any losses. Those who remained in the plan were also found to lack standing since they were unable to show any injury in fact, only a speculative injury.
More recently, two class actions lawsuits have been brought against AT&T, [26] with another suit targeting Lockheed Martin. [27] Two of the three lawsuits were filed by the same law firm, Schlichter Bogard LLP, which has gained renown for its success challenging excessive fees charged by defined contribution plans which had the effect of eroding retirees’ savings. The AT&T cases allege that that AT&T “offloaded” over $8 billion in pension plan liability for 96,000 plan participants to Athene Annuity and Life Company and Athene Annuity & Life Assurance Company of New York. The suit against Lockheed also involved Athene, which took over $9 billion in pension obligations for 31,000 pension plan participants. Athene is controlled by Apollo Global Management, a publicly traded private equity firm, and is alleged to have a shaky financial structure by investing in lower quality and higher risk assets which put the long-term obligations that were assumed at risk.
Learning a lesson from the Lee v. Verizon case, the plaintiffs in the newly filed cases do not challenge the legality of “offloading” of pension obligations. Instead, they maintain that ERISA’s fiduciary obligations were breached because the defendants did not select the safest annuity available in accordance with Interpretive Bulletin 95-1. The plaintiffs also accused the defendants, which included the plan’s independent fiduciary, State Street Global Advisors Trust Co., of putting their own financial interests ahead of the participants’ interest in retirement security, resulting in a substantial risk of default causing a reduction or loss of promised benefits if Athene were to fail.
Plaintiffs alleged that the selection of an annuity provider for a pension risk transfer was a fiduciary act and expressed their concern that following the transfer, employees lost their status as plan participants with a consequent loss of the protections afforded by ERISA, which include the protection against default provided by the Pension Benefit Guaranty Corporation. Instead, the only financial protection that retirees’ retained was the protection afforded by state guaranty associations where the amount of such protection varies from state to state.
The plaintiffs also raised the specter of Executive Life’s failure in the 1990s, and complained about the consequences of insurance companies’ use of high-risk assets to fund their obligations to policyholders. Plaintiffs asserted in their complaints that even though Executive Life maintained A+ and AAA ratings from financial rating organizations until shortly before its failure, Executive Life was unable to meet its obligations when the junk bond market collapsed, and its investment portfolio was purchased out by Leon Black, who is coincidentally a co-founder of Athene’s parent company, Apollo Global Management, at a 50% discount. The estimated loss experienced by policyholders was $3.9 billion.
After relating the story of Executive Life’s collapse, the allegations in the AT&T cases discuss the increasing involvement of private equity in pension risk transfers. Private equity firms have been purchasing life insurance companies while also serving as third party asset managers for those companies, allowing them to earn significant fees for such services in addition to deriving premium income from the sale of insurance policies and annuities. Insurance companies purchased by private equity firms are also likelier to have greater exposure to high risk, high yield investment strategies according to the plaintiffs’ complaints.
One such company, Athene, has completed 45 pension risk transfers totaling over $50 billion, which covers over 500,000 plan participants according to published sources. Athene has also established captive reinsurers in Bermuda to reinsure the risks it has undertaken, which does not have the same regulatory oversight as U.S. domiciled reinsurers or the same capitalization requirements. The complaints further allege that Athene’s financial structure creates outsize risk of not being able to meet its obligations. The complaints also cite studies identifying Athene as a “questionable candidate” to serve as an annuity provider to be used in a pension risk transfer due to questions about its creditworthiness.
Further, although State Street was hired to be an independent fiduciary, the complaints point out State Street’s financial relationship with AT&T and also observe that State Street is also a large institutional investor in Apollo, holding over 10 million shares valued at over a billion dollars. Plaintiffs further alleged that State Street served as the independent fiduciary in other pension risk transfers and has repeatedly recommended Athene.
The complaints also offer a litany of allegations as to why Athene was not the safest annuity provider available, pointing out its financial structure, its creditworthiness, and reinsurance with captive, offshore affiliates create outsized risks. Plaintiffs further maintained that market reports describe Athene as 14% riskier than traditional insurers such as New York Life and Prudential, and that the selection of Athene was not the result of an impartial selection process that comported with Interpretive Bulletin 95-1’s fiduciary considerations. The plaintiffs maintain they have suffered harm due to the increased risk that they will not receive the benefits they would have received had the plaintiffs remained in the plan.
De-Risking Litigation – Responses to Plaintiffs’ Allegations
Motions to dismiss have been filed by the defendants in the lawsuits challenging annuitization of pension benefits with Athene. The motions filed by AT&T and Lockheed zero in on the same point – that none of the plaintiffs have suffered any actual harm. Citing cases that include Thole v. U.S. Bank N.A. [28] defendants maintained that the plaintiffs’ allegations as to the risk of a potential default are too speculative to give the plaintiffs Article III standing to pursue their claims; and claims of statutory violations are not enough to sustain a claim in the absence of concrete harm. As Lockheed pointed out in its memorandum seeking dismissal, Plaintiffs “do not allege that they have suffered – or will imminently suffer – any loss of benefits.” [29]
Lockheed Martin also pointed out that pension risk transfers are not a new phenomenon and are by no means prohibited by ERISA, and that since 2012, there have been over 450 pension annuitizations of over $268 billion without a single failure. Defendants also make the point that annuity companies are backstopped by state guaranty associations, while pensions are protected by the Pension Benefit Guaranty Corporation which is not itself backed by the full faith and credit of the U.S. government and which has, out of necessity on occasion, reduced payouts from pensions that have failed.
Lockheed Martin argued strenuously that the Supreme Court’s Thole ruling is dispositive since it rejected similar allegations that fiduciary breaches leading to a pension plan’s underfunding increased the risk of non-payment of benefits. Because not a single participant or beneficiary had suffered any monetary loss, however, the Supreme Court in Thole found that plaintiffs lacked standing and upheld the dismissal of their complaint. Defendants also pointed out that the complaints lack any assertion that the assets which were transferred would not cover the outstanding pension obligations that were assumed.
AT&T’s motion to dismiss made essentially the same arguments and added that AT&T cannot be held responsible for breach of fiduciary duty because it had appointed State Street Global Advisors Trust Company as an independent fiduciary responsible for choosing the safest available annuity. AT&T also maintained that plaintiffs failed to allege any fiduciary impropriety committed by AT&T in selecting State Street. Moreover, AT&T cited the Lee court’s finding that the decision to annuitize pensions is not a fiduciary act, but is rather an act of plan design that ERISA does not interfere with. Both defendants also pushed back on allegations of Athene’s financial structure by citing filings with insurance regulators showing Athene’s financial soundness.
No rulings have been issued yet in any of the lawsuits challenging pension risk transfers.
What Does the Future Hold for Pension De-Risking
The future of pension de-risking is uncertain pending the outcome of the AT&T and Lockheed Martin cases and perhaps other cases that have yet to be filed, although one thing is clear – no one is asserting that pension risk transfers are per se unlawful. What appears to have gotten the attention of (at least one segment of) the plaintiffs’ bar are pension risk transfers to one insurer in particular – Athene. Athene has been singled out because of its association with private equity, which has raised broad concern that Athene’s assets may not provide sufficient capital to satisfy all of their obligations to policyholders and creates a greater risk of default than if the pension risk transfers had been made to more traditional insurers that invest with a longer term focus.
The biggest question asked by the current litigation is whether pension plan participants need to wait for a default before they can expect to receive any relief? These cases involve hard-earned retirement savings that employees count on when they retire from their employment. ERISA was passed in no small measure due to the failure of the Studebaker car company in 1963 and the workers’ resultant loss of their pensions. [30] While state guaranty associations provide some amount of backstop for annuity failures, the amount of protection varies from state to state and the National Association of Insurance Commissioners Life and Health Insurance Guaranty Association Model Law specifies protection of only f $250,000 of the present value of annuity benefits. [31]
The protections offered by the Pension Benefit Guaranty Corporation are significantly higher, especially for workers who are approaching retirement age or who have already retired.[32] While the failure of Executive Life Insurance was a singular event involving the life insurance industry, this country has witnessed multiple large bank failures, including the savings and loan crisis in the 1980s [33] and the financial crisis of 2008. [34] Thus, plaintiffs’ concerns about pension risk transfers are not wholly unwarranted but are also by no means certain to occur.
The other dilemma is that if the defendants are successful in dismissing the de-risking litigation, Interpretive Bulletin 95-1 is rendered somewhat meaningless. If a pension plan chose an annuity provider without complying with the guidelines set forth in the Bulletin, it may be irremediable after a loss has occurred if the annuity provider lacks sufficient assets and the employer can successfully evade fiduciary liability or is no longer in existence. The advantage of bringing an immediate challenge to an imprudent selection of an annuity provider is that it can prevent a future failure rather than try to remediate a failure that has already occurred.
Unfortunately for pension plan participants, since they have not suffered any losses to date nor do they face immediate financial harm, the lawsuits they have brought are likely to be dismissed on standing grounds even though the pension risk transfers to Athene appear to have lessened their retirement security. There is a tremendous irony at work here – ERISA is an acronym that stands for the Employee Retirement Income Security Act. Yet, if the motions to dismiss the lawsuits brought against AT&T and Lockheed Martin are granted, it would mean that the ERISA law has failed in its primary mission since those companies’ pension plan participants will no longer have the retirement income security they were promised by their employers
Mark DeBofsky is a shareholder at DeBofsky Law Ltd.
This article was first published by Bender’s Labor & Employment Bulletin on September, 2024.
1. Langbein, “ERISA’s Role in the Demise of Defined Benefit Pension Plans in the United States,” 31 Elder Law Journal 1 (2023), available at https://theelderlawjournal.com/wp-content/uploads/2023/09/Langbein.pdf
2. 29 C.F.R. § 2509.95-1, 60 Fed. Reg. 12328 (March 6, 1995).
3. Pub. Law 117-328,136 Stat. 4459, 5378 (2022).
4. Department of Labor Report to Congress on Employee Benefits Security Administration’s Interpretive Bulletin 95-1 (DOL Report); available at https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/laws/secure-2.0/report-to-congress-on-interpretivebulletin-95-1.pdf.
5. 29 U.S.C. § 1001 et seq.
6. 29 U.S.C. § 1002(21).
7. 29 U.S.C. § 1104(a)(1).
8. Interpretive Bulletin 95-1, 29 C.F.R. § 2509.95-1(c).
9. Interpretive Bulletin 95-1, 29 C.F.R. § 2509.95-1(c).
10. Interpretive Bulletin 95-1, 29 C.F.R. § 2509.95-1(d).
11. Interpretive Bulletin 95-1, 29 C.F.R. § 2509.95-1(d).
12. Interpretive Bulletin 95-1, 29 C.F.R. § 2509.95-1(d).
13. Interpretive Bulletin 95-1, 29 C.F.R. § 2509.95-1(e).
14. DOL Report at 5.
15. DOL Report at 6.
16. DOL Report at 7-8.
17. DOL Report at 8.
18. DOL Report at 8.
19. DOL report at 11-16.
20. DOL Report at 16-18.
21. DOL Report at 18.
22. DOL Report at 24-25.
23. DOL Report at 27.
24. DOL Report at 28.
25. Lee v. Verizon Communc. Inc., 632 Fed.Appx. 132 (5th Cir. 2015); 837 F.3d 523 (5th Cir. 2016).
26. Piercy v. AT&T Inc., No. 24-cv-10608 (D. Mass.) (filed March 11, 2024) and Schloss v. AT&T Inc., No. 24-cv-10656 (D. Mass) (filed March 15, 2024).
27. Konya v. Lockheed Martin Corp. No. 24-cv-750 (D. Md.) (filed March 13, 2024).
28. Thole v. U.S. Bank N.A., 590 U.S. 538 (2020).
29. Lockheed Martin Memorandum in Support of Motion to Dismiss filed May 3, 2024 [Doc. 26-1] at 11 (emphasis in original).
30. Wooten, “’The Most Glorious Story of Failure in the Business’”; The Studebaker-Packard Corporation and the Origins of ERISA, 49 Buff. L. Ev. 683 (2001).
31. American Council of Life Insurers, “Guaranty Associations;” available at https://www.acli.com/about-the-industry/guaranty-associations#OLE_LINK1.
32. See “Present Value of PBGC Maximum Guarantee,”at https://www.pbgc.gov/prac mortalityretirement-and-pv-max-guarantee/present-guarantee.
33. See “Savings and Loan Crisis” at https://www.federalreservehistory.org/essays/savings-and-loan-crisis.
34. See “The Great Recession and Its Aftermath,” at https://www.federalreservehistory.org/essays/great-recession-and-its-aftermath.
