Author: jfortenberry@fortenberrylaw.com

From Bloomberg: “Argentines Decry State’s `Disastrous’ Record as Pensions Seized.” Excerpt:

Fourteen years ago, Raul Zimmermann opted to contribute to one of Argentina’s new private pension funds because he didn’t trust in the state retirement system. Now he’s outraged by government plans to seize his savings and take responsibility for paying his monthly benefit.

“The history of the pensions managed by the state is disastrous,” said Zimmermann, 69, who started drawing a pension two years ago. “It’s not reasonable that they transfer my account without even asking me if I want to.”

On Oct. 21, President Cristina Fernandez de Kirchner announced plans to take over $29 billion of private pension accounts, saying a state-run system would protect retirees from fluctuations in financial markets. Roque Fernandez, an economy minister and central bank president in the 1990s, said the move is a “confiscation” of people’s savings. . .

More links:

“Argentinean Lawyers Seek To Protect $ 30 Billion Pension Funds From Being Used By State To Repay National Debts

A video from Reuters here.

Also, see this OpEd from Investors Business Daily: “Argentina Spreads the Wealth.” Excerpt:

U.S. Democrats in Congress are mulling like-minded moves to scrap 401(k)s and transfer them into government-managed “guaranteed retirement accounts” with a 3% return, according to James Pethokoukis of U.S. News & World Report (full disclosure: Pethokoukis is a former IBD reporter).

Before they charge ahead, they should look at what happened since Argentina’s announcement: Its stock market lost 23% of its value in two days, for a 57% loss since January. The losses spread to other markets in Brazil, South Africa and Spain.

Markets don’t like expropriation of private property

Thanks to ERIC for this link to the CNBC interview with House Education and Labor Committee Chairman George Miller where he gives his view that the 401(k) plan system has failed and needs replacing.

Excerpt from the ERIC Press Release:

Using the current financial crisis as a starting point, the House Education and Labor Committee expressed concern over the retirement assets of American workers at an October 7 hearing. Although fewer than 10 Democrats and only one Republican member of the committee attended, the hearing garnered major media attention in national newspapers and on television and radio. While the intent of the hearing was to examine the effect of the financial crisis on retirement savings, the hearing ranged far afield as witnesses and Members called for significant reforms that would fundamentally change the vehicles in which employees can save for retirement.

At the end of the day, Committee Chairman George Miller (D-CA) made it clear that he did not believe that 401(k) plans were intended as a primary means to provide retirement security and, in fact, that they were not fulfilling that objective. Miller, who is also holding a second hearing in his home town of San Francisco on October 14, signaled his intention to open up the retirement debate next year on how best to provide retirement security.

Access previous posts on the subject here.

Thanks to Roy Harmon for alerting me to this very interesting Seventh Circuit opinion written by Judge Posner : Orth v. Wisconsin State Employees Union Council 24, et al.

The facts as paraphrased from the first of the two lower District Court opinions (no link unfortunately):

The case involves a retiree who retired from a job with the Wisconsin State Employees Union (“WSEU”) Council 24, which was the union representing employees of the State of Wisconsin. The WSEU’s employees were themselves represented by a union, called the Council Employees Union, or CEU. The CEU and WSEU were governed by a collective bargaining agreement (“CBA”). Since 1973 the CBA had provided that, upon retirement, an employee’s unused sick leave would be used to pay insurance premiums: “At the time of retirement, any unused sick leave shall be used to pay Blue Cross–Blue Shield premiums for the employee and spouse and /or dependents.” It also provided that “[p]ayment of premiums will be on the same basis as the benefit is currently paid for employees.” 90% of employees’ premiums were paid by the employer.

Between the time that this clause was added to the CBA and Orth’s retirement in 1998, only two individuals retired from the WSEU. Each retiree had his full premiums paid for out of unused sick leave funds–that is, the WSEU did not cover any portion of the premiums. When Orth retired, the same happened. No one seemed to notice until 2006, when Orth received a letter from the WSEU informing him that his sick leave funds (which had totaled some $42,000) had dried up. If he wished to continue funding his health insurance, he would have to pay the monthly premium of $1109.44 out of pocket. After attempting to work out the dispute with his former employer, Orth brought a lawsuit alleging breach of the CBA, which he believed required the WSEU to pay 90% of his health insurance premiums after he retired.

The union tried to argue that there was either a latent or patent ambiguity in the terms of the CBA, or in the alternative, that there had been a modification of the CBA. However, both the District Court and the Seventh Circuit disagreed. (For those who enjoy the old 1864 Peerless case which you probably studied in law school, both the District Court opinion and the Seventh Circuit opinion include a discussion of this case.)

The result? The Seventh Circuit upheld the District Court’s award of $36,000 restored to Mr. Orth’s sick leave account ($40,000 minus 10 percent) plus $7,200 in premium reimbursement, and upheld the defendant’s payment of the plaintiff’s attorneys fees in the amount of $41,000. In addition, Judge Posner chided the defendants and their lawyers:

The defendants challenge the district judge’s awarding attorneys’ fees to the plaintiffs. They argue that the judge was mistaken to think that there had been no reasonable basis (or, equivalently, as the Supreme Court noted in Pierce v. Underwood, 487 U.S. 552, 565-66 (1988), “substantial justification”) for the defendants’ position. . . The judge made no mistake. No careful lawyer could have thought this a case of latent ambiguity or valid modification. And for the defendants to use their deceptive conduct toward the retired employees as a basis for trying to duck liability was shabby. The only questionable aspect of the district judge’s opinion is his statement that the defendants were acting throughout in good faith.

There are some really great lessons for all from the District Court and the Circuit Court opinions:

(1) Statements in collective bargaining agreements can give rise to unintended ERISA plans. The district court opinion includes a discussion of this issue:

An ERISA “plan” is not an entity or a piece of paper, but a more inchoate group of rights, benefits and procedures (literally, a “plan”) set up by an employer to create pension or welfare benefits. See Pegram v. Herdrich, 530 U.S. 211, 223, 120 S.Ct. 2143, 147 L.Ed.2d 164 (2000) (noting that a plan is merely a “scheme decided upon in advance” for the provision of benefits). The plan may be evidenced by a summary plan description (SPD) and any other documents, such as a CBA, that describe the rights of beneficiaries or such things as how the plan is administered, how premiums are collected, etc. In other words, the fact that the plaintiff’s dispute may arise solely from a clause in a collective bargaining agreement does not mean that the dispute does not also implicate the terms of an ERISA plan. In fact, hybrid ERISA/LMRA claims are commonly asserted, even when the dispute is resolved by reference to a CBA rather than merely a plan–specific document.

(Read about another interesting case here which held that a merger agreement acted as a plan amendment to an ERISA retiree medical plan.)

(2) The clause that states “[p]ayment of premiums will be on the same basis as the benefit is currently paid for employees” or similar language occurs in a lot of retiree medical plan language and should be promptly reviewed and revised, if necessary. Normally, such language is meant to portray exactly what the defendant’s lawyers tried to argue in the case:

The defendant also suggests patent ambiguity because the clause refers to both benefits and premiums: “Payment of premiums will be on the same basis as the benefit is currently paid for employees.” In the defendant’s reading, this means only that retirees will receive the same level of benefits as active employees–not that they will have their premiums paid at the same level.

However, with judges reading such language to mean that the employer, by making that statement, is committing to the same level of premiums for retirees as it has for active employees, employers should make sure that they review such language and clarify it to say exactly what they mean. Normally, such language can be revised to make it more clear, but if the language is in a benefits booklet or SPD prepared by an insurance company, you may have more of a challenge getting it revised.

(3) These types of programs should be clearly communicated to active employees and retirees. When changes are made, those changes should also be communicated. One of the things that was sadly absent from the facts of the case, from an employer’s standpoint as well as the employee’s standpoint, was the communication aspect. Excerpt from the district court opinion:

WSEU is a small organization with little experience providing retirement benefits, and thus the issue only emerged from under the radar after Orth, who had no doubt thought he was set for life, found himself with no benefits. Rather than establishing some sort of clear understanding between the employees’ union and the WSEU, the evidence only shows that the parties were not fully cognizant of what the CBA actually provided.

(By the way, you can access a number of links here at Benefitsblog which reference Judge Posner’s court opinions impacting the benefits world.)

From the Washington Times: “Kennedy secretly crafts health care plan.” Excerpt:

From his sickbed, Sen. Edward M. Kennedy has secretly been orchestrating meetings with lobbyists and lawmakers from both parties to craft legislation that would greet the new president with a plan to provide affordable medical coverage to all Americans, a measure he has called “the cause of my life.” . . .

Among those who are receptive to a bipartisan plan and who have participated in the initial talks is Sen. Michael B. Enzi of Wyoming, the ranking Republican on the Senate health committee, which Mr. Kennedy leads. . .

Mr. Kennedy’s goal, his aides say, is to introduce a universal health care bill as soon as the new Congress convenes next year and to push quickly for its passage – a much-accelerated timetable compared with the last time that a health care overhaul was on the agenda, at the start of the Clinton administration.

Yesterday, in San Francisco, there was a second hearing of the House Education and Labor Committee entitled “The Impact of the Financial Crisis on Workers’ Retirement Security.” You can access the testimony here. As there was in the first hearing (discussed in a previous post here), there was testimony advocating a government take-over of the 401(k) system as well as a promise from Chairman Miller that the “Democratic Congress will continue to conduct this much-needed oversight on behalf of the American people.”

A more rational approach was advocated by Tif Joyce:

First, after they calm down, people view the recent financial turmoil as the latest in an ongoing string of challenges that must be overcome. We need to fix our problems because we have no choice.

At times like this, both investors and government alike need to be concerned about overreaction and trying to create permanent solutions for temporary problems.

If you ask most voters what they think of “a new national defined benefit plan” I strongly believe they would say, “Please fix Social Security first.”

On October 7th, a witness testified before this committee stating that our nation’s pain and chronic financial anxiety is caused by the corrosive effects of 401k plans…

People understand that life is not always fair and they don’t expect government to legislate certainty. Let’s also keep in mind that huge numbers of people have successfully used retirement plans exactly as they were intended to be used.

Eyeing Your Pension: Are 401(k)s safe from congressional Democrats? Excerpt:

If you have a 401(k) or equivalent retirement plan, you’ve probably been watching nervously the past few weeks as your nest egg has shrunken owing to the current turmoil in the markets.

Well, it could be worse. But don’t take heart, for what we mean is it could get worse. The market turmoil has some politicians on Capitol Hill eyeing the end of the 401(k) as we know it. . .

A 55-year-old who lost 20% of his 401(k) because of the recent stock market decline was investing more aggressively than he should have, given his age. Ghilarducci proposes to reward this imprudence in exchange for dramatically limiting everyone’s ability to take risks (and enjoy the corresponding rewards) and for greatly increasing government control of Americans’ retirement funds.

It is by no means a certainty that Congress or a President Obama would embrace such a proposal, but this is a direction in which things may move if the Democrats make big gains next month.

See previous posts on this topic here, here, and here.

UPDATE: Also, from US News & World Report: “Would Obama, Dems Kill 401(k) Plans?“:

I hate to use the “S” word, but the American government would never do something as, well, socialist as seize private pension funds, right? This is exactly what cash-strapped Argentina just did in the name of protecting workers’ retirement accounts (Efharisto, Fausta’s Blog). Now, even Uncle Sam isn’t that stupid, but some Democrats might try something almost as loopy: kill 401(k) plans.

Greenspan today testified before the House Committee of Government Oversight and Reform and called the recent economic crisis a “once-in-a century credit tsunami.” The American Benefits Council has issued a warning, indicating a coming benefits tsunami:

The following is an internal report from the chief actuary of one defined benefit plan service provider:

“Our projections are showing DB plans due to get slaughtered in their next round of actuarial valuations. Lest we forget, asset smoothing has all but been eliminated so their unfunded liability will see a $1 for $1 increase for their investment losses this year….I haven’t heard this consistent level of concern from plan sponsors in 20 years. Just to throw a real example out there, a large [organization] has gone from 114% funded for the 1/1/2008 year down to restricted (i.e., below 80% funded) as of yesterday….You have to assume we’ll be doing a lot of freezing amendments next year.”

The benefits system has never seen this level of concern before. Unless something is done — quickly — massive funding obligations will trigger benefit freezes on an unprecedented scale. And freezing does not eliminate current funding shortfalls, so companies will be forced to direct huge resources to their plans, which will cost many jobs and prevent companies from making essential investments in their businesses.

Some evidence of this in today’s news: “GM Suspending Benefits.”

The Third Circuit Court of Appeals has issued a decision, in Sinacole v. iGate Capital which agrees with the 2d, 7th and 11th Circuits in invalidating a DOL regulation concerning FMLA leave. In the case (which has been deemed “Not Precedential”), the Third Circuit held that the Department of Labor regulation was invalid to the extent it deemed an employee “eligible” for FMLA leave even if the employee did not work at least “1250 hours in the past 12 months.” Excerpt:

It is the sole province of the Congress to establish the scope of employees who have rights under the FMLA.

From the Boston Herald.com:

A staggering $3.2 billion IOU to pay off health and other benefits lavished on city worker unions has come due in Boston as the city grapples with a budget crisis that’s raising fears of massive layoffs and service cuts and even tax hikes for Hub residents and businesses.

The huge payout – much of it incurred during the 15-year tenure of Mayor Thomas M. Menino – is forcing the city to more than double its spending on benefits over the next five years, to $220 million, or roughly one-tenth of its current $2.4 billion budget. . .

The $3.2 billion covers the current cost of health care and life insurance benefits promised to present and future city retirees. The tab is high because health care costs are soaring, which caused the IOU to grow more than $500 million in the past two years.

From the CorporateCounsel.net Blog:

“At our “3rd Annual Proxy Disclosure Conference” yesterday, Corp Fin Director John White delivered an important speech – entitled “Executive Compensation Disclosure: Observations on Year Two and a Look Forward to the Changing Landscape for 2009” – during which John talked briefly about how the TARP’s executive compensation provisions could potentially spill-over and impact the many companies not directly subject to TARP. Specifically, John addressed the TARP provision that requires participating financial institution’s compensation committees to meet with the senior risk officers of the institution to ensure that the incentive compensation arrangements do not encourage the senior executive officers to take “unnecessary and excessive risks that threaten the value of the financial institution.” Here is an excerpt from John’s remarks on this topic:

Most of you are not from financial institutions, so let’s talk for a moment about non-participating companies. This new Congressionally-mandated limitation on having compensation arrangements that could lead a financial institution’s senior executive officers to take unnecessary and excessive risks that could threaten the value of the financial institution obviously applies on its face only to participants in the TARP.

But, consider the broader implications and ask yourself this question: Would it be prudent for compensation committees, when establishing targets and creating incentives, not only to discuss how hard or how easy it is to meet the incentives, but also to consider the particular risks an executive might be incentivized to take to meet the target — with risk, in this case, being viewed in the context of the enterprise as a whole? I’ll let you think about what Congress might want. We know what our rules require. That is, to the extent that such considerations are or become a material part of a company’s compensation policies or decisions, a company would be required to discuss them as part of its Compensation Disclosure and Analysis. So please consider this carefully as you prepare your next Compension Discosure and Analysis.

Also, more broadly speaking, I expect that current market events are already affecting many companies’ compensation decisions and thus should be affecting the drafting of their upcoming Compensation Disclosure and Analysis. Regardless of whether your company participates in the TARP and consequently finds itself having to make new material disclosures, you should not merely be marking up last year’s disclosure. Instead, you should be carefully considering if and how recent economic and financial events affect your company’s compensation program.

For example, have you modified outstanding awards or plans, or implemented new ones? Have you reconsidered the structure of your program, or the relative weighting of various compensation elements? Have you waived any performance conditions, or set new ones using different standards? Have you changed your processes and procedures for determining executive and director pay, triggering disclosure under Item 407? These questions and more should be addressed as you consider disclosure for 2008.”