Berkshire Hathaway Sued Over Retirement Plan Design Changes

September 5, 2014 (PLANSPONSOR.com) – Participants of retirement plans sponsored by Acme Building Brands Inc., a subsidiary of Berkshire Hathaway Inc., have sued their employer over changes to benefits.

Two present employees and one former employee filed the suit in the U.S. District Court for the Northern District of Texas challenging the firms’ decision to freeze accruals to Acme’s defined benefit plan and reduce the company matching contribution rate in its 401(k) plan. The plaintiffs contend that the acquisition agreement by which Berkshire Hathaway acquired Acme approximately 14 years ago requires Acme to permit participants to accrue additional defined benefits indefinitely, at the same rate that benefits were being accrued at the time of the acquisition, and to make additional 401(k) matches forever, at the same rate as the matches at the time of the acquisition.

The complaint seeks restitution for participants because “Berkshire Hathaway’s agreement is either an amendment to the retirement plans, in which case the employees are entitled under [the Employee Retirement Income Security Act] to the enforcement of the retirement plans in accordance with their terms, or, in the alternative, it is a contract for the benefit of the employees, and its breach entitles the employees to damages.”

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In a press release related to the suit, Berkshire Hathaway says it “strongly believes this interpretation of the acquisition agreement is clearly wrong and expects that its actions will be upheld by the courts.” The press release quotes an extended section of the acquisition agreement at issue in the suit:

“For purposes of all employee benefit plans (as defined in Section 3(3) of ERISA) and other employment agreements, arrangements and policies of Parent under which an employee’s benefit depends, in whole or in part, on length of service, credit will be given to current employees of the Company for service with the Company prior to the Effective Time, provided that such crediting of service does not result in duplication of benefits. Parent shall, and shall cause the Company to, honor in accordance with their terms all employee benefit plans (as defined in Section 3(3) of ERISA) and other employment, consulting, benefit, compensation or severance agreements, arrangements and policies of the Company (collectively, the “Company Plans”); provided, however, that Parent or the Company may amend, modify or terminate any individual Company Plans in accordance with the terms of such Plans and applicable law (including obtaining the consent of the other parties to and beneficiaries of such Company Plans to the extent required thereunder); provided, further, that notwithstanding the foregoing proviso, Parent will not cause the Company to (i) reduce any benefits to employees pursuant to such Plans for a period of 12 months following the Effective Time, (ii) reduce any benefit accruals to employees pursuant to any such Plans that are defined benefit pension plans, or (iii) reduce the employer contribution pursuant to any such Plans that are defined contribution pension plans.

“The Company shall amend its Supplemental Executive Retirement Plans to provide that, effective as of the Closing, participants who have been ( or would have been) employed by the Company for 10 years or more as of the later of the Closing Date of December 31, 2000, shall be entitled to benefits under such plan upon termination of employment, if terminated within 12 months after the Effective Time, as if such participant was 55 years old at the date of such termination, subject to the other provisions of such plan.”

The complaint in Hunter v. Berkshire Hathaway is here.

Employees Need Help Planning for Retirement Health Care Costs

September 5, 2014 (PLANSPONSOR.com) - An individual departing the workforce today will see out-of-pocket health care costs grow 7% annually throughout retirement, an analysis from J.P. Morgan suggests.

While the rate of cost increases for health care shows signs of slowing, J.P. Morgan analysts say individuals retiring without an effective plan in place to meet growing health care costs could face serious financial hardship late in life. Increasing health care expenses are a challenge for participants in both defined contribution (DC) and defined benefit (DB) retirement plans, the analysis shows. DC participants without adequate savings can easily deplete their retirement accounts paying for health care, while those lucky enough to have a lifetime pension can see their income stream outpaced by ballooning expenses.

Sharon Carson, a retirement strategist at J.P.  Morgan Asset Management, tells PLANSPONSOR the financial advisory industry is starting to pay closer attention to health care and other specific costs clients face in retirement. She says it’s an encouraging trend in terms of improving participant retirement outcomes, but more engagement and innovation is clearly required to ensure retired plan participants will be able to pay for the health care they’ll inevitably need.

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Carson says advisers can help participants understand their retirement savings will face huge pressure from things like health care costs. For example, advisers could help impart the message that even solidly middle class retirement plan participants will likely see lifetime retirement health care costs exceed the total value of their anticipated Social Security benefits.

According to the Retirement Health Care Cost Index from HealthView Services, retirement health care costs will increase from 69% of Social Security benefits for a couple retiring in one year to 98% of Social Security benefits for a healthy couple retiring in 10 years. For couples retiring in 20 years, 127% of Social Security benefits will be required to cover health care costs, and couples retiring in 30 years will need 190% of their Social Security benefits to cover lifetime health care costs, should current trends hold.

 

For an average healthy couple retiring in 2015, index data shows retirement health care costs will amount to approximately $366,599 in today’s dollars. In another 10 years, reflecting estimated health care cost inflation and Social Security cost-of-living adjustments, lifetime costs will rise to approximately $421,083 in today’s dollars.

These are the key lessons to impart to retirement plan participants, Carson says. One piece of good news to share, however, is while health care expenses will almost certainly rise as life goes on, other expenses fall, especially things like mortgage debt and the costs of supporting children.

“For younger participants, it’s about helping them to save early and save as much as possible,” she explains. “You must make the case that Medicare and the other programs are too far away and could change substantially by the time this group hits retirement. So it’s a message of personal accountability and not relying on the government or an employer to support the health care costs in retirement.”

For participants who are older and closer to the retirement date, it’s time to become more detail oriented. “The older client group requires more specific spending plans that look at what expenses will be there in retirement,” she says. “Maybe in a few years the participant will have their mortgage paid off, the kids will be out of college, maybe some other debt will be paid off, suggesting the growth in health care costs may not be so devastating. Or the participant may find their outlook is bleak, so they will need help budgeting and figuring out how they can invest more and better time their retirement.”

Helping participants effectively time Social Security is another big need, but Carson says this can be challenging. An adviser can also help identify the discretionary expenses that can be pushed down as health care costs go up.

“The important thing … is to help individuals think ahead about these issues—much of the hardship can be reduced by effective planning, especially when the individuals are younger and have a lot of time to prepare,” Carson says. 

 

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