Hughes Aircraft Co. v. Jacobson, Stanley I., et al. (01/25/1999)

By: Eileen Smith, Medill News Service

Questions presented

Does a group of retired aircraft workers have a right to a portion of the surplus in their former employer's pension fund?

Brief

Since the 1950s, Hughes Aircraft Company, an aerospace and electronics manufacturing company, has provided its employees with a contributory retirement pension plan. The Contributory Plan requires both the employees and the employer to divert funds into the plan; the employees' contributions are deducted from their paychecks.

Due to significant investment growth, the plan's assets exceeded its accrued benefits by close to one billion dollars. Then, in 1987, Hughes was acquired by the General Motors Corporation. Hughes stopped making its contributions.

But Hughes didn't tell this to its employees.

The aircraft workers, being required to do so, continued to contribute to the plan. In 1991, Hughes/GM allegedly terminated the Contributory Plan and created a Non-Contributory Plan, a new defined benefits plan which covered all new employees and any old employees who opted out of the Contributory Plan.

Federal law mandates that some funds from a terminated pension plan be distributed to employees. Hughes/GM contended that the pension plan was never terminated--it was amended.

The old employees contend that the differences between the plans are overwhelming. The former Contributory Plan was optional and required monthly employee contributions. It provided health coverage, cost of living adjustment and unreduced early retirement benefits.

In contrast, the Non-Contributory Plan enrolls new employees automatically and requires no employee contributions. There is no health coverage, cost of living adjustment or unreduced early retirement benefits.

The retirees filed suit, alleging that Hughes/GM improperly used funds from the original plan's surplus, which should have benefited the original plan participants, to finance the new Non-Contributory Plan. Assuming that approximately one half of the billion dollar surplus was generated by employee contributions, the employees argued they had sufficient reason to file claims under the Employee Retirement Income Security Act (ERISA). The district court dismissed the complaint, finding that Hughes/GM, as employer, was allowed to change a plan's structure at any time and for any reason.

A divided 9th Circuit Court of Appeals reversed, finding that Hughes/GM had breached its fiduciary duty under ERISA by taking advantage of the retirement's surplus for its own benefit. ERISA established specific protection for assets generated through employee contributions. The court found that Hughes/GM withdrew funds from the surplus for its own use and the use of new employees who had never contributed to the original retirement plan. The majority held that ""when a plan is funded by both employer and employee contributions, both the employer and the employees are co-settlors of the plan.""

The U.S. Supreme Court granted Hughes' petition for certiorari on April 27, 1998, and granted leave to Hughes Aircraft Retirees, Chamber of Commerce of the United States, ERISA Industry Committee to file amicus briefs.

On Jan. 25, 1999, a unanimous Supreme Court reversed, holding that Hughes Aircraft Co. did not violate ERISA when it chose to stop contributing to the pension fund because of the large surplus already built up. Writing for the Court, Justice Clarence Thomas said retirees' claims ""proceed on the erroneous assumption that they had an interest in the plan's surplus.""

The Court found that given the employer's obligation to make up any shortfall, no member has a claim to any particular asset that composes apart of the plan's general asset pool. Instead, members have a nonforfeitable right to ""accrued benefits,"" which by ERISA cannot be reduced below a particular member's contribution amount. Thus, a plan'sactual investment experience does not affect members' statutory entitlement but instead reflects the employer's risk. Since a decline in the value of a plan's assets does not alter accrued benefits, members have no entitlement to share in a plan's surplus -- even if it is partially attributable to the investment growth of their contributions.