ill, Ann Kramer and John Berringer
In a year in which the Clinton administration has placed protection of retirement funds as a high priority, the Senate and the Department of Labor have backed legislation that would remove hundreds of billions of dollars of pension assets from the protection of the Employee Retirement Income Security Act. The express purpose of this legislation is to overturn the U.S. Supreme Court's December 1993 ruling in John Hancock v. Harris Trust, holding that a portion of such assets are pension plan assets and subject insurance companies to ERISA's fiduciary rules.
Without benefit of any public hearing, this unprecedented bill may now be on its way to passage, never having been debated outside of "smoke-filled" rooms. The insurance industry's lobbyists, most notably the American Council on Life Insurance, secured passage through the Senate Labor Committee in a "executive session" and circumvented the bipartisan opposition to the bill in the House of Representatives by attaching it to the Small Business Job Protection Act (which in turn is inextricably linked to the minimum wage increase legislation) that has already passed the House.
Thus, the ERISA Clarification Act's fate will be determined behind the closed doors of a conference committee.
In a strongly worded letter to Speaker Newt Gingrich, House Economic and Educational Opportunities Committee Chairman William F. Goodling and House Employer-Employee Relations Subcommittee Chairman Harris W. Fawell criticized both the bill and the process by which it was being rammed through Congress.
"The legislation would create a new, lower fiduciary standard in ERISA and it would insulate insurers from suits by plans, their participants, or their beneficiaries under ERISA - even for past criminal conduct," they noted. "Congress should never even consider changing the fiduciary standards governing our nation's pensions without a full airing of the consequences."
This so-called "ERISA Clarification Act of 1996," now called Section 1461 of H.R. 3448, is no mere clarification. It removes from any federal supervision all pension monies held in insurance company general accounts, estimated at more than $500 billion, through mid-1998.
As explained by Messrs. Goodling and Fawell, "(1) [Section 1461] takes away, both retroactively and prospectively, ERISA fiduciary protections from pension plans, their participants and beneficiaries who invested in insurance company general account contracts; and (2) [Section 1461] takes away from plans, their participants, and their beneficiaries the right to sue for any misuse of their money invested in general accounts over the past 20 years - removing any ERISA remedy, even for criminal misconduct."
Over the past 20 years and especially since Hancock vs. Harris Trust, most plan sponsors have elected to negotiate solutions with insurance companies holding their plan assets. Few elected to sue. Using the threat of ERISA enforcement, many plan sponsors are attempting to negotiate contract amendments that remove plan assets from insurance company general accounts. This legislation will sabotage all such negotiations, perversely penalizing the plans that decided to negotiate rather than sue.
The Clinton administration's support for this unfettered relief for the insurance industry is more than a little surprising. The retroactive relief in this amendment is unprecedented - we are aware of no other instance since ERISA's passage that a party or an entire industry has received retroactive relief from ERISA's fiduciary standards. The prospective relief is also unheard of, allowing the secretary of labor to issue "guidelines" based on a watered-down fiduciary standard.
The ACLI has argued the insurance industry is entitled to this unprecedented relief because it was mislead by the Department of Labor since 1975 into believing that insurance companies had no ERISA fiduciary obligations as to any general account contracts. Although this claim is demonstrably untrue, it has remarkable tenacity.
In a recent letter to Sen. Nancy Kassebaum, the secretary of labor wrote that "insurance companies have understandably relied on the department's longstanding interpretation of ERISA." This is a reference to the DOL's Interpretive Bulletin 75-2, which has been determined by several courts, including the Supreme Court, to relieve insurance companies only from technical violations of ERISA - 406(a).
The words and actions of the ACLI over the more than 20 years since ERISA's enactment belie this claim. The minutes of the ACLI Pension Committee meeting of Sept. 16, 1976, explain the reach of IB 75-2, "an IRS/Labor Dept. exemption [IB 75-2], although legally more reliable, can deal only with the prohibited transaction provisions and not the general fiduciary status of the life insurance company."
Clearly, the insurance industry knew, as soon as its leaders read IB 75-2, that the industry could not rely on the bulletin for anything more than technical violations -
406(a) breaches. As a result, the ACLI for more than 20 years repeatedly and unsuccessfully attempted to secure Labor Department support for the relief that is now contained in Section 1461. In fact, as late as 1992, the Department of Labor itself wrote to the federal appeals court in New York that it had no position on whether ERISA governed insurance company general accounts.
The insurance industry has failed to comply with more than a decade of federal court decisions requiring insurance companies to manage pension plan assets held in general accounts in a manner consistent with ERISA's fiduciary rules. Starting with the Peoria Union decision in 1983 and capped by the Supreme Court's Hancock vs. Harris Trust decision in 1993, the insurance industry has simply thumbed its nose at the law.
Rather than make an effort to comply, the industry simply turned again to the Department of Labor and Congress for relief. ERISA is supposed to protect the interests of pension plans, their participants and beneficiaries, not protect the insurance industry from claims of malfeasance in handling of pension plan assets.
Section 1461 carves out breaches of fiduciary duty which also constitute criminal activities, but only if such malfeasance is prosecuted by the secretary of labor - the same secretary of labor who has already supported unqualified retroactive relief for the insurance industry.
Lawrence Kill, Ann Kramer and John Berringer are partners at Anderson, Kill, Olick & Oshinsky PC, New York, which represented Harris Trust & Savings Bank for more than 10 years in litigation with John Hancock Insurance Co., including the landmark Supreme Court appeal.