"Breaking Up Is Hard to Do" is not only the name of a popular song from the 1960s, it also describes the feelings of most employers who, because of competition, business costs or our current bad economy must reduce the size of their employment budget. By the time an employer has to "downsize," the economic factors driving that decision have already done their damage. The question for management is ordinarily not whether a reduction in force or a cut in employee benefits is necessary but, rather, how to do it. Navigating around employee benefit landmines is difficult even in good economic times. It has now become a truly perilous undertaking due to the dramatic declines in retirement plan asset values and the government's increasing scrutiny of employee benefit arrangements. DRAMATIC DECLINE IN RETIREMENT PLAN ASSETS

How bad is it? By the end of calendar 2008, old fashioned pension plans (technically called "defined benefit plans" by those practicing in this area) for Fortune 500 companies had accumulated $1.4 trillion in liabilities and had just $1.1 trillion in assets. Just one year earlier these same Fortune 500 plans had a $63 billion surplus. 2008 's stock market decline simply decimated plan asset values. For example, the average defined benefit plan experienced a 24 percent decline in the value of its assets during 2008. At the end of calendar 2007, 46 percent of pension plans had funding levels of between 90 percent and 110 percent and only five percent of plans were funded below 70 percent. Today it is estimated that only five percent of pension plans are funded above 90 percent. Over 60 percent of pension plans have funding levels below 70 percent. 401(k) plans have fared no better. By the end of calendar 2008 the average 401(k) plan account balance was down by 26 percent. Sponsors of defined benefit plans are thus reeling from a double whammy - large negative investment results occurring at the same time the federal government is mandating increased plan funding.

UNFAVORABLE DEMOGRAPHICS

In the overall U.S. economy, the ratio of active workers to retired workers has been plummeting for many years - it now stands at about three active employers to one retiree compared to 16 active workers to each retiree in 1950. At some companies like Ford and Chrysler, the ratio of active workers to retirees has fallen from six to one in 1950 to one to one now. At GM there is now only one active employee for every two GM retirees.

Beyond demographic factors, the problem is compounded by the fact that the U.S. economy is shrinking. In May 2008, the U.S. unemployment rate stood at 5.5 percent. It is now officially 8.9 percent. Since the recession began in December 2007, over five million jobs have been lost. The Department of Labor estimates that as of April 2009 almost 14 million Americans are out of work.

INCREASED GOVERNMENT SCRUTINY

The Pension Protection Act of 2007 (PPA) added a series of new funding requirements for defined benefit plan sponsors. Generally, the legislation is aimed at requiring all defined benefit plans to achieve 100 percent funding within the next seven years.1 PPAs new funding mandates include a requirement for every defined benefit plan to now fund the present value of the plans' accrued benefits and amortize any unfunded liabilities over a seven year period, using legislated actuarial assumptions.2 The PPA also requires all defined benefit plan losses to be amortized over seven years. Defined benefit plan administrators must also now provide a mandatory annual notice to plan participants, labor organizations and the PBGC generally describing the plan's current funding level. For calendar year defined benefit plans, the first annual funding notice was to be issued by April 30, 2009. 3 Asset smoothing techniques which had not been restricted by law prior to the PPA, now cannot exceed 24 months. If a defined benefit plan's funding level falls below 60 percent, no lump sum distributions will be allowed.4 While there has been a storm of protest from plan sponsors about the wisdom of implementing new funding requirements during a severe recession, those protests have fallen on deaf ears. Many employers face 2009 PPA funding obligations that are multiple times their 2008 contribution amount. Going into 2009, the PBGC was already carrying an $ 1 1 billion deficit and recently announced that it posted a $33.5 billion deficit for the first half of fiscal year 2009, the largest in the agency's 35 year history.

The PPA added new provisions to ERISA aimed at making customized investment advice more readily available to 401(k) plan participants. As added to ERISA, new Sections 408(b)(14) and 408(g) provide an exemption from ERISA's prohibited transaction rules for the provision of investment advice, the acquisition of securities pursuant to the investment advice, and the receipt of fees in connection with the provision of participant-level investment advice to a participant directed plan.

The day after President Obama was inaugurated, on January 21, 2009, the Department of Labor published final investment advice regulations that included rules implementing Section 408(b)(14) and a class exemption covering certain transactions outside the scope of the statute and regulations. Shortly thereafter, in response to a memorandum issued by Rahm Emmanuel, Obama's Chief of Staff, the Department of Labor opened a new comment period inviting public comments on any substantive issues raised by the regulation, and delayed the regulation's effective date until May 22, 2009. On May 22, 2009, the Department further delayed the final regulations until November 18, 2009.

This latest delay follows the introduction by Representative Rob Andrews (D-NJ), chair of the Health, Employment, Labor, and Pensions Subcommittee of the House Committee on Education and Labor, of the "Conflicted Investment Advice Prohibition Act of 2009." Andrews' bill would eliminate Section 408(g) of ERISA and instead require that any investment adviser hired to provide investment advice either to a participant-directed plan or to its participants must qualify as an "independent investment adviser." The bill would retain the current structure that permits advisory programs to be provided either through a fee-based approach or through the use of a computer model. However, the bill imposes new restrictions on these programs that go above and beyond current rules.

Other recently introduced legislation is focused on increasing the transparency of fees associated with 401(k) Plans. On April 21, 2009, George Miller (D-CA), chair of the House Education and Labor Committee (HELP Committee), reintroduced the "401(k) Fair Disclosure for Retirement Security Act of 2009," which is nearly identical to the version of the legislation that was approved by the HELP Committee in April 2008. According to Chairman Miller, among other things, the proposal would (1) require service provider disclosures to employers broken into four categories (plan administration and recordkeeping, transaction fees, investment management fees, and other fees) including disclosure of potential conflicts of interest, (2) require standardized disclosures to participants regarding investment options, investment option performance, and fees associated with each investment option, and (3) condition limited employer liability for participant directed investments under Section 404(c) of ERISA on the use of at least one index fund in a plan's investment lineup.

Prior to the reintroduction of Representative Miller's proposal, Senators Tom Harkin (D-IA) and Herb Kohl (D-WI) reintroduced their fee disclosure legislation on February 10, 2009, "The Harkin/Kohl Defined Contribution Fee Disclosure Act of 2009." We also anticipate that House Ways and Means Committee member Richard Neal (D-MA) will reintroduce his fee disclosure proposal from 2008 sometime in the near future.

Meanwhile the 2009 amendments to COBRA have added a new level of complexity to an already complicated law regulating group health plans. In a nutshell, the 2009 COBRA amendments allow employees who lose their job through no fault of their own between September 1, 2008 and December 31, 2009, to have the federal government pay for 65 percent of their COBRA premiums (the employer receives a payroll tax credit equal to 65 percent of the COBRA premium). New laws mean new rules, new COBRA notices and new unanswered questions.

GOOD TIMES FOR ERISA PLAINTIFFS LAWYERS

With the rapid decline in the U.S. economy has come an upsurge in employee benefit related lawsuits. For example, when Caterpillar and Alcoa announced reductions to their retiree medical benefit plans during 2008 they were immediately hit with class action lawsuits. To no surprise, benefit reductions are very unpopular with retirees. While employers have generally convinced courts they are allowed to share costs with salaried retirees under ERISA regulated retiree medical plans,5 these same arguments have not fared as well in connection with retiree medical benefits covered under a union contract.6 To make matters worse for employers trying to maneuver through the many obstacles associated with a decision to reduce benefits, the circuit courts of appeals have patently different opinions about when collectively bargained retiree medical plans can be changed. The outcome of a retiree medical lawsuit increasingly depends on the analysis employed by the court in considering benefit reduction cases. Retired union members favor the analysis employed by the Sixth Circuit for a very good reason.