Bankruptcy Effects on Equity Retirement Plans

The following was sent to the Obama administration’s “Strong Middle Class” web site. No response was received. The actual airline discussed in the message as been renamed XYZ to protect the “innocent:.

Subject: Equity Annuity Plans in chapters 11 and 7. Employees and retirees devastated by bankruptcy laws and lack of enforcement by the Department of Labor and ERISA.

Current bankruptcy law permits employee funded equity annuity plans (EAPs) to be terminated and annuity contracts be broken.  These funds belong to the employee/retiree and are not supposed to be a part of the corporate estate.  Yet the courts allow the raiding of these plans to cover expenses.  The trustee is permitted to charge exorbitant fees for his/her services while plan participants suffer the loss of their income.

Employees that have been retired for many years and have life annuity contracts have had those contracts abrogated.  The payments were promised for life. With plan termination they are forced to cash out and purchase a new annuity.  The cash value will likely be very low and, under current market conditions. could be nearly zero. New actuarial tables will further reduce their income.  Most retirees will  lose much of their monthly income.

The XYZ Airlines case is an excellent example.  I would be happy to provide related documentation.

XYZ’s defined benefit plans had  been transferred to the PBGC. Many retirees saw drastic cuts in the distributions due to  PBGC limits. Now, the defined contribution plan, which contains only employee money, and is supposed to  be totally separate from company assets, is under attack.

The switch from defined benefit plans to equity plans such as 401ks has exacerbated the situation and has put many retirees welfare at risk of financial ruin.

Below are pertinent points from the XYZ Airlines case in Hawaii:

1. Meetings were held behind closed doors concerning the employees defined contribution retirement plans.  There was no communications to plan members during the process. The financial future of employees and retirees was determined without  their knowledge or participation. Zero transparency.

2. The trustee refused to provide transcripts or minutes of the meetings to plan members.

3. The assets of the plan were supposed to be protected and not part of the company estate, yet the court appointed  “Retirement Board” asked the bankruptcy judge for permission to raid the assets to cover expenses. The request was approved.

4. Former XYZ management employees were appointed as members  of the Retirement Board at outrageous salaries and their names were not disclosed to the plan members.

5. The latest plan statement available to plan members was dated 1994, which violates an ERISA  requirement.

6. The “Board” has elected to terminate the plan instead of continuing it under a new sponsor.

Termination will cause extreme financial hardship, particularly  to older retirees who have elected an  annuity. Their guaranteed indexed payments, which contractually were supposed to be for life will be  abrogated and reduced to a fraction. These annuities are a contract between the financial institution  and the retiree. Arbitrarily distributing the balances to older retirees will drastically reduce their  income as they attempt to purchase a new annuity.

7. ERISA exists to protect employee retirement benefits. Plan participants have no knowledge of any  activity in this area, again due to lack of communication. The employees have a right to know the full complement  of board members and their affiliation.

8. The department of labor and ERISA have been unresponsive to written requests for information.

9. Current satus. The IRS will be making a determination as to the qualification of the plan prior to its termination.

The economic condition of the middle class cannot be improved without an overhaul of the bankruptcy code. Employees with twenty,  thirty or more years of service need protection from actions which abrogate financial agreements, particularly those dealing with their own funds such as annuities.


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