In Beck v. PACE International, the U.S. Supreme Court ruled that a plan merger is not a method of plan termination, so in choosing whether to merge plans or to undergo a standard plan termination, the sponsor is not making a fiduciary decision. The ruling confirms that choices about a plan’s future — such as changing the plan design, freezing or terminating the plan and recovering excess assets — are not fiduciary decisions subject to ERISA.

In this case, the employer filed for bankruptcy in March 2000, and the Pension Benefit Guaranty Corporation (PBGC) filed claims against the estate for liabilities it might have to assume. After the employer determined that terminating its single-employer plans would create a $5 million reversion, the PBGC agreed to drop its claims. PACE International Union, which represented some of the covered employees, urged the employer to terminate its single-employer plans by merging them into PACE’s multiemployer plan, thereby adding the excess assets to the multiemployer plan.

The employer instead terminated the plan by purchasing annuity contracts. PACE sued, claiming that merging the plans was one way to terminate a plan, so choosing between purchasing annuities and merging plans was a fiduciary decision. If the merger/annuity decision were subject to ERISA’s fiduciary standards — which require that such decisions be made for the exclusive benefit of participants — it would be difficult for the fiduciary to justify not choosing the merger, because it would enrich the multiemployer plan and thereby benefit its participants. Both the bankruptcy court and the Ninth Circuit Court of Appeals agreed with the union, but the employer appealed to the Supreme Court.

The Supreme Court agreed with the employer and the PBGC that a plan merger is not a permissible method of terminating a plan under ERISA, because the assets and liabilities of the former plan remain subject to ERISA. Rather, it is an alternative to plan termination. While that distinction might be subtle, it means that the choice between annuitizing and merging is a sponsor’s decision (sometimes called a “settlor function”) rather than a fiduciary decision. Had the Court’s verdict gone the other way, any employer seeking to terminate an overfunded plan could be forced to merge with a multiemployer plan sponsored by a union representing any of the sponsor’s employees.