Hughes Aircraft Co. v. Jacobson
1999 U.S. LEXIS 753, 525 U.S. 432, 142 L. Ed. 2d 881 (1999)
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Rule of Law:
An employer who amends an overfunded defined benefit pension plan to add a new benefit structure using the plan's surplus does not violate ERISA. Amending a plan is a settlor function, not a fiduciary one, and employees in a defined benefit plan are only entitled to their specified accrued benefits, not a share of the plan's surplus assets.
Facts:
- Since 1955, Hughes Aircraft Company provided a defined benefit retirement plan for its employees, which required contributions from both Hughes and participating employees.
- By 1986, as a result of contributions and investment growth, the Plan's assets exceeded its accrued benefit liabilities by nearly $1 billion, creating a large surplus.
- In 1987, due to the surplus, Hughes suspended its own contributions to the Plan, though employee contributions continued as required by the Plan's terms.
- In 1989, Hughes amended the Plan to establish an early retirement program, using surplus assets to provide additional benefits to certain eligible active employees.
- In 1991, Hughes amended the Plan again, creating a new noncontributory benefit structure for new employees and allowing existing members to opt in, with this new structure also funded by the existing Plan's surplus assets.
Procedural Posture:
- Five retired beneficiaries filed a class action lawsuit against Hughes Aircraft Company and its retirement plan in the U.S. District Court.
- The District Court granted Hughes' motion to dismiss the complaint for failure to state a claim.
- The beneficiaries, as appellants, appealed to the U.S. Court of Appeals for the Ninth Circuit.
- A divided panel of the Ninth Circuit reversed the District Court's dismissal, allowing the claims to proceed.
- Hughes Aircraft Company, as petitioner, successfully petitioned the U.S. Supreme Court for a writ of certiorari.
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Issue:
Does an employer violate the Employee Retirement Income Security Act (ERISA) by amending an overfunded, contributory defined benefit pension plan to use the surplus to fund a new, noncontributory benefit structure for other employees?
Opinions:
Majority - Justice Thomas
No. An employer's decision to amend a pension plan is not a fiduciary act that implicates ERISA's fiduciary duties, and employees in a defined benefit plan have no vested right to a plan's surplus. The Court's reasoning is threefold. First, employees in a defined benefit plan have a right only to their 'accrued benefit'—a fixed payment upon retirement—not to any particular asset in the plan's general pool. Unlike a defined contribution plan, where employees own their individual accounts, here the employer bears the investment risk and is entitled to any surplus. Therefore, using the surplus to fund new benefits did not illegally touch the employees' nonforfeitable vested benefits. Second, the anti-inurement provision was not violated because the surplus assets were used exclusively to provide benefits to other plan participants, not for the employer's own benefit. The amendment did not create a second plan; it merely added a new benefit structure to the existing single plan. Third, based on the precedent set in Lockheed Corp. v. Spink, amending a plan is a settlor function (analogous to the creator of a trust), not a fiduciary function involving plan administration. Therefore, Hughes's decision to alter the plan's structure and benefits did not trigger ERISA's fiduciary duties.
Analysis:
This decision solidifies the precedent from Lockheed Corp. v. Spink, clarifying that an employer's role as a plan's 'settlor' is functionally distinct from its role as a 'fiduciary.' The ruling gives employers significant flexibility in managing overfunded defined benefit plans by confirming their broad authority to use surplus assets for plan modifications, such as creating new benefit structures for different classes of employees, without triggering fiduciary scrutiny. This case reinforces the fundamental legal distinction between defined benefit and defined contribution plans, affirming that employees in the former have no ownership interest in plan surpluses, which in turn limits the grounds on which they can challenge plan amendments.
