Secrets of the DOL and PBGC

July 5, 2005

Three items are presented below.

A Union’s Strategic Initiative

In a June 20th letter from the Aircraft Mechanics Fraternal
Association (“AMFA”), a union representing 16,000 airline
ground workers, to U.S. Secretary of Labor Elaine Chao and
Bradley Belt, executive director of the Pension Benefit
Guaranty Corporation (“PBGC”), AMFA requested that the PBGC
conduct a forensic audit of the pension plans of bankrupt
United, a subsidiary of UAL. While the PBGC has taken over
the pension plans of many bankrupt corporations in the
past, the April estimated $6.6 billion bailout of the
United plans is the largest in history. Participants in
these plans and labor unions representing these
participants have been struggling to find means of
protecting their interests as the corporation and
government agencies with jurisdiction over its pensions
privately negotiate the terms under which United will be
permitted to walk away from its pension obligations.

As we wrote last month, we were astounded to learn from the
Department of Labor and the PBGC that neither of these
agencies has ever conducted a forensic review of any
terminated plans to determine whether the sponsors or any
vendors to the plans may have engaged in wrongdoing. Under
current procedures, when the government and the taxpayers
assume the burden of the unfulfilled pension obligations of
America’s corporations, any party that may have contributed
to the demise of these funds is freed of any risk regarding
potential liability for past malfeasance. Everyone involved
with the pension, i.e., deep-pocketed Wall Street
investment firms as well as the bankrupt corporate sponsor,
can rest assured that there will be no final day of
reckoning. So to analogize to common wisdom among personal
injury lawyers: if you’re going to harm a pension, best to
kill it altogether.

As O.V. Delle-Femine, AMFA’s national director stated in
the June letter below, “The PBGC and responsible plan
fiduciaries should, as a matter of course, undertake
forensic audits of any distressed plans in order to
determine whether any of the parties providing financial
services to the plans may have contributed to their
demise.” Indeed, with respect to the United plans, there
was an obvious conflict of interest involving the
consultant to the plans also serving as an investment
manager to at least one plan. Consultant conflicts of
interest have recently surfaced as a concern shared by both
the Securities and Exchange Commission and the DOL. These
agencies have advised pension boards to thoroughly
investigate conflicts related to consultants that are
involved in the brokerage and money management businesses,
in addition to providing objective advice to plan sponsors.

We applaud AMFA’s action. This is the first example we have
seen of a union effectively entering into the debate
surrounding the fate of the nation’s ailing defined benefit
plans. Strikes and other tactics that may have worked for
unions in the past have no place here. Every union should
seek to identify initiatives that will go to the heart of
the problem. And “the problem” is: if corporations cannot
or will not honor their pension promises, what procedures
should be followed in letting them off the hook? AMFA has
correctly concluded that forensic audits can be a
significant part of the solution.

Who can argue that before taxpayers assume the obligations
of corporations that have mismanaged their pensions (let us
not forget these are companies that made promises to their
employees they later decided they could not keep—that’s
mismanagement!) a forensic audit should be undertaken to
ensure there has been no wrongdoing? If a recovery is
available from parties that have harmed a fund, those
parties should be made to pay before the taxpayers
contribute one cent. Republican fiscal conservatives, as
well as union-friendly Democrats should agree that sound
public policy mandates forensic audits.

Furthermore, what is the likely effect of requiring
forensic audits before corporations are allowed to dump
their pensions? Do you think corporations will be more or
less likely to choose to dump, knowing there will be a
final forensic review? We think the answer is obvious.

AMFA subsequently sent a letter requesting a forensic audit
of the distressed Northwest pension. We await a response to
both letters from the various parties and understand that a
draft response is circulating within the PBGC at this time.

The Ohio Bureau of Workers Compensation Scandal

However, our position is even broader than that enunciated
by AMFA in its letter. We believe that all pensions,
whether they appear to be distressed or not, should
regularly conduct forensic audits of their operations in
order to ferret out conflicts of interest, undisclosed
financial arrangements and malfeasance. In our experience,
many plans in apparent good health and plans that believe
they are trouble-free, have lurking problems. For example,
from 2001 through 2005, we annually offered to undertake
reviews of consultants, money managers and other parties
providing services to the Ohio Bureau of Workers
Compensation. Each year we were told there were no matters
officials at the fund wished to have reviewed—not even
those specific instances of wrongdoing we brought to the
fund’s attention. A few of the many problems of the fund
have begun surfacing recently; many of the fund’s losses
that are being uncovered today could have been avoided had
the fund been receptive to regular forensic reviews as a
matter of “good house-keeping.” We hope that despite the
politically charged atmosphere surrounding the fund at this
time, a full forensic investigation will eventually be
undertaken. The public deserves to know the depths of the
wrongdoing and the better the understanding of past
mistakes, the greater the likelihood that they will not be
repeated. In our experience we have found that funds that
fail to fully investigate wrongdoing are doomed to repeat
their mistakes. For example, funds with wirehouse brokers
posing as consultants often fire these conflicted
consultants (and sometimes even bring lawsuits alleging
wrongdoing) but then replace them with other equally
conflicted wirehouse broker-consultants.

Should regular forensic audits become the rule, vendors to
all pensions will be forced to clean up their act. In
summary, regular forensic audits will impose discipline
upon corporate sponsors of, as well as vendors to,
pensions.

Secrets of the DOL and PBGC

While the DOL and PBGC exert tremendous influence over the
more than 34 million workers and retirees in over 29,000
single-employer defined benefit plans, in many respects
these two agencies operate in secrecy. Even finding someone
knowledgeable at either agency to answer a telephone
inquiry is difficult, to say the least. These agencies must
improve their transparency, accountability and
responsiveness. They often seem to hold in contempt
participants in distressed funds that are seeking
information regarding their endangered retirement assets,
as well as a voice in determining how these assets are
handled. Given that workers’ lifetime savings can be erased
by the agreements these agencies make with employer
corporations, less secrecy and greater responsiveness to
the concerns of participants should be demonstrated. These
agencies need to be reminded that they often are destroying
the retirement dreams of workers, as they allow the
nation’s corporations to escape responsibility for promises
made.

The procedures and rules these agencies follow in handling
distressed plans are shrouded in secrecy. As we observed
last month, a handful of private firms, staffed primarily
by former DOL employees, appear to be routinely selected to
serve as independent fiduciaries to distressed pensions.
Are they hired through a competitive bidding process? We’d
like to see a list of all the independent fiduciaries ever
hired by or with the consent of the DOL and PBGC. Do the
same firms turn up time and again?

Who are these firms, how are they hired, how much do they
get paid and what are their duties? We would like to see
the letters of engagement or contracts detailing the duties
of these firms. Are they truly independent firms or are
they related to financial services companies? Do they
manage money and serve as investment consultants to
pensions as well? What conflicts are these firms subject
to? Are they charged with responsibility for investigating
possible past wrongdoing? Can they ignore ongoing conflicts
of interest possibly causing ongoing harm? Do these firms
have expertise regarding the management of pension assets
or are they merely versed in applicable law? These are
questions the participants in distressed pensions, as well
as the general public, deserve to have answered.

We are aware of numerous instances of questionable dealings
occurring under the watch of independent fiduciaries. It is
clear to us that independent fiduciaries often fail to
detect corrupt industry practices and may even be parties
to such wrongdoing. It is not surprising that independent
fiduciaries may be engaged in unsavory industry practices
since often these firms are owned, controlled or have
business relationships with parties involved in financial
services that regularly engage in wrongdoing.

The Employee Retirement Income Security Act of 1974 was
written to protect participants in pensions. Instead it has
become a labyrinth that participants cannot possibly
comprehend. Corporations, on the other hand, can afford to
hire legal experts to navigate them through the statute to
achieve their desired objectives. Finally, a limited number
of DOL and PBGC former insiders have profited handsomely
from landing contracts with corporations wherein they are
retained to supposedly protect the interests of pension
participants from the very corporate plan sponsors that
retain them. It’s absurd and this mess must be cleaned up
immediately, given the likelihood that the number of plans
the PBGC will take over in the not-too-distant future will
mushroom.

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Aircraft Mechanics Fraternal Association
Administration Office: 67 Water Street, Suite 208A •
Laconia, NH 03246
Tel: (603) 527-9212 • Fax: (603) 527-9151

June 20, 2005
Ms. Elaine Chao
Secretary of Labor
Chairperson, PBGC Board of Directors
U.S. Department of Labor
Frances Perkins Building
200 Constitution Avenue, NW
Washington, DC 20210

Mr. Bradley D. Belt
Executive Director
Pension Benefit Guarantee Corporation
1200 K Street, NW
Washington, DC 20005-4026

RE: United Airlines’ Pension Plan

Dear Secretary Chao and Director Belt:

The PBGC and its plan termination insurance are
increasingly called upon to protect and pay the pension
obligations promised by large, troubled corporations. The
PBGC and responsible plan fiduciaries should, as a matter
of course, undertake forensic audits of any distressed
plans in order to determine whether any of the parties
providing financial services to the plans may have
contributed to their demise. Unfortunately at this time
forensic audits of pensions virtually never are undertaken
and wrongdoing related to pension failures has gone
undetected.

As you are aware, an investigation into the pension
consulting industry by the Securities and Commission was
conducted. The conclusion of these agencies was that
business alliances among pension consultants and money
managers can give rise to serious potential conflicts of
interest that, at a minimum, need to be monitored and
disclosed to plan fiduciaries. The Securities Exchange
Commission Staff report raised serious questions about
whether some pension consultants are fully disclosing
potential conflicts of interest that may affect the
objectivity of the advice given to their pension plan
clients. The implication is that tainted advice may cause
avoidable losses or pension under-performance.

It has also been reported that private fraud investigators
have uncovered instances where banks custodying pension
assets have had undisclosed financial arrangements with
money managers handling plan assets.

All of the above referenced revelations are troubling and
should be investigated. While the plan sponsor may be
bankrupt, the parties that have been dealing with the plan
are not and it may be possible to recover assets from these
parties on behalf of the plan’s participants.

“The Employee Retirement Income Security Act (ERISA). ERISA
sets standards of conduct for those who manage an employee
benefit plan and its assets (called fiduciaries).
Fiduciaries have important responsibilities and are subject
to standards of conduct because they act on behalf of
participants in a retirement plan and their beneficiaries.
These responsibilities include: (a) acting solely in the
interest of plan participants and their beneficiaries and
with the exclusive purpose of providing benefits to them;
(b) carrying out their duties prudently; (d) following the
plan documents (unless inconsistent with ERISA); (e)
diversifying plan investments; and paying only reasonable
plan expenses. ERISA § 404, 29 U.S.C. § 1104.”

“A fiduciary who breaches any of the responsibilities,
obligations or duties imposed upon fiduciaries by ERISA is
personally liable to make good to the plan any losses
resulting to the plan, and to restore to the plan any
profits of the fiduciary which were made through use of
plan assets by the fiduciary. ERISA § 409, 29 U.S.C. §
1109.” A plan participant may bring an action for
appropriate relief under ERISA § 409, to enjoin any act or
practice which violates ERISA or the terms of the plan, and
to obtain appropriate equitable relief to redress such
violations or to enforce any terms of ERISA or the plan.
ERISA § 502(a)(2) & (3), 29 U.S.C. § 1132(a)(2) & (3).

Under the ERISA regulations referenced in the above
paragraphs and on behalf of our AMFA/United Airlines and
AMFA/Northwest Airlines represented membership, we are
requesting that the PBGC conduct a forensic audit on the
plans and are seeking an initial review of the plan for any
potential conflicts of interest in this matter. We would
like to meet with you to discuss this matter and how you
would like to proceed.

We await your reply.

Sincerely,

O.V. Delle-Femine
National Director

cc: Members of the Senate Finance Committee Members of the
House Committee on Education and the Workforce
AMFA NEC
AMFA Legal
AMFA Legislative
AMFA Economic
AMFA Pension Actuary
AMFA/UAL and AMFA/NWA Members
Glenn Tilton, President & CEO, United Airlines

Click for actual letter>

——————————————————————————–

UAL Union Asks For Pension Probe
Neil Weinberg, 06.22.05, 6:15 AM ET

By Author
Neil Weinberg
Forbes Magazine

NEW YORK – A union representing 16,000 airline ground
workers is calling on the U.S. government to investigate
possible wrongdoing in the management of United Airlines’
pension fund.

The request came in a June 20 letter from the Aircraft
Mechanics Fraternal Association to U.S. Secretary of Labor
Elaine Chao and Bradley Belt, executive director of the
Pension Benefit Guarantee Corp., the government body
charged with taking over insolvent private pension
plans–which has never conducted a forensic audit of any of
the plans it has taken over.

The PBGC agreed to take over the pension plans of bankrupt
United, a subsidiary of UAL (otc: UALAQ – news – people ),
in April as part of an estimated $6.6 billion bailout, the
largest in history. United said at the time it was
compelled to shed its pensions to craft a workable
bankruptcy exit plan.

“The PBGC and its plan termination insurance are
increasingly called upon to protect and pay the pension
obligations promised by large, troubled corporations,” O.V.
Delle-Femine, the union’s national director, said in the
letter. “The PBGC and responsible plan fiduciaries should,
as a matter of course, undertake forensic audits of any
distressed plans in order to determine whether any of the
parties providing financial services to the plans may have
contributed to their demise.”

Delle-Femine said that’s rarely done. “Unfortunately, at
this time, forensic audits of pensions virtually never are
undertaken and wrongdoing related to pension failures has
gone undetected,” he said.

Its legislative liaison, Maryanne DeMarco, said the union
was not aware of specific wrongdoing in the management of
United’s pension funds. However, she noted that a U.S.
Securities and Exchange Commission report released last
month (see “SEC Targets Pensions”) indicated widespread
conflicts of interest exist among pension consultants and
money managers that may cause significant financial damage
to pension funds.

“We take these issues seriously. As part of our due
diligence, we ensure upfront that all of our advisers have
no conflicts. United has always operated our plans in the
best interests of our participants and beneficiaries, and
believe our advisers act similarly,” UAL said in a written
statement in response to our query.

United lists Russell Investment Group as its chief pension
consultant. Russell is also listed as investing money for
United via alliances with other money managers. The company
did not respond to a request for comment. Russell’s
wide-ranging operations appear to be of the sort the SEC
has called on plan overseers to investigate carefully.

“They are a huge broker, a money manager and supposedly
provided objective advice to [United’s pension fund], the
largest pension failure in history,” said Edward Siedle of
Benchmark Financial Services, a firm that investigates
possible wrongdoing among money managers and was consulted
by United’s union. “If that doesn’t merit an investigation,
I don’t know what does.”

Following the savings and loan crisis, the Resolution Trust
Corp. conducted forensic audits and barred firms found to
have misbehaved from further work. But lawyers for the
Labor Department and PBGC have stated that they have not
conducted forensic audits in the past and do not have such
capabilities in-house, according to Siedle. With taxpayers
now looking at bailing out potentially tens of billions of
dollars in busted corporate pensions, the airline union’s
call for such audits may prove the first of many.