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CCH® PENSION — 05/5/11

Union's endorsement, aggressive marketing of TSAs did not create an ERISA plan

A teachers union did not establish or maintain an employee pension benefit plan under ERISA by endorsing and aggressively marketing certain tax-sheltered annuities, the U.S. Court of Appeals in San Francisco (CA-9) has ruled in Daniels-Hall v. National Education Association. As a result, the appellate court upheld the dismissal of an employees' lawsuit against the union. The employees "have only themselves to blame for trying to fit the square peg of defendants' alleged misconduct into the round hole of an ERISA suit," suggesting that these annuity contracts are not regulated by ERISA but by the securities laws, according to the appellate court.


After choosing the insurers, the union designed certain annuities with them, negotiating the terms of the annuities, exclusively endorsing the annuities as favorable retirement savings vehicles, and aggressively marketing the annuities to union members. The union also monitored and managed the annuities for its participants. In exchange for the union's role in marketing the annuities, the insurers paid royalties of about $2 million per year to the union, took on the salaries of the union's member benefit corporation, a wholly owned subsidiary of the union, and contributed to the union's charitable foundations. The insurers also received fees from investment companies whose mutual funds were made available through the annuities. The union did not fully disclose to its members the nature or amount of the payments it received from the insurers or the fact that the insurers received payments from the investment companies whose mutual funds were included in the annuities. Instead, the union marketed the annuities as the most favorable retirement option for its members, despite the fact that the annuities charged fees that were as much as ten times those charged on comparable annuity contracts. The school employees, who say that they chose these annuities, instead of other available annuities, because of the union's enthusiastic endorsement, purported to represent a class of over 57,000 similarly situated union members on whose behalf public school district employers purchased annuities totaling more than $1 billion.

According to the employees, by negotiating, endorsing, marketing, and promoting the annuities, the union established or maintained an employee pension benefit plan under ERISA 3(2)(A) and the union was an ERISA fiduciary that should have ensured that fees charged in connection with the annuities were reasonable. In fact, the employees claimed that the union "knowingly duped them into purchasing unattractive annuities by 'creating an atmosphere of trust and confidence that was exploited by defendants for their financial gain.' " The union and the insurers, however, contended that ERISA does not cover 403(b) plans, which, as a matter of law, cannot be established or maintained by employee organizations such as the union. The district court concluded that, because the 403(b) annuities were not plans under ERISA, it lacked subject matter jurisdiction over claims arising out of those annuities and it dismissed the lawsuit against the union and the insurers.

Appellate court's analysis

Before a court can determine whether a plan is an ERISA employee pension benefit plan, it must first figure out exactly what the plan is, a fact that the appellate court called the central difficulty in this case. According to the court, though the employees claimed that the union communicated with plan participants about the plan and its assets and its benefits, endorsed and aggressively marketed and promoted the plan, the employees utterly failed to explain what the plan was. The employees suggested that "the plan" could be (1) the marketing campaign the union created for the annuities, (2) the 403(b) plan administered by the various school districts, or (3) the specific annuities offered by the insurers. A marketing campaign is not a plan, the court pointed out.

With regard to the claim that "plan" referred to the 403(b) plans administered by the various school districts, as the court pointed out, ERISA 4(b)(1) exempts governmental plans, that is, those plans established or maintained for its employees by the government of any state or political subdivision thereof, from ERISA's regulatory sphere. Thus, the issue, the court noted, was whether the school districts established or maintained the plans. According to the employees, the school district employers did not establish or maintain the 403(b) plans --and thus they were not governmental plans --because the plans were exempted under the safe harbor in ERISA Reg. 2510.3-2(f). Under this safe harbor, in certain situations, employer-sponsored 403(b) plans are not, as a matter of law, established or maintained by the employer. However, according to the appellate court, the safe harbor applies to private tax-exempt employers under Code Sec. 501(c)(3), other than churches, and was never intended to apply to 403(b) plans provided by public school districts.

With regard to the claim that the plan referred to the specific annuities offered by the insurers, the appellate court also rejected the employees' assertion that the annuity contracts themselves were an ERISA employee pension benefit plan. The court cited the union's website as indicating that the annuities were flexible purchase payment deferred variable annuities issued by, and distributed by, other entities. The union website also directed teachers to obtain a prospectus from the distributor before investing. The prospectus indicated that the union was not registered as a broker-dealer and did not distribute the annuity contracts or provide securities brokerage services. As a result, the court said, it was satisfied that the union did not establish or maintain the annuity contracts and thus, these contracts were not employee pension benefit plans covered by ERISA.

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For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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