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Buffett-Backed Pension, 401(k) Cuts Draw Lawsuit

A class action lawsuit brought by plan participants, a retiree and a plan fiduciary claims that Warren Buffett’s Berkshire Hathaway broke a promise it made as part of an acquisition agreement not to cut benefits.

The lawsuit, filed last month in U.S. District Court in Fort Worth, Texas, says that Warren Buffett’s Berkshire Hathaway broke a pledge it made not to reduce benefits when it acquired Acme Brick as part of its 2000 purchase of Justin Industries. The lawsuit claims that, “Since that time, the employees have stuck with the company through good times and bad, in anticipation that their benefits under the retirement plans would ultimately compensate them fairly.”  

The suit is being brought by Acme CFO Judy Hunter, who, as a member of the retirement plans committee, has standing both as a participant and a plan fiduciary; Anita Gray, assistant controller at Acme; and Bobby Lynn Allen, a retired employee. It notes that on July 15, Acme’s senior management voted to make changes to the retirement plans — changes it claims were driven by Buffett and Marc Hamburg, Berkshire’s CFO. The suit claims that if the changes were not made, “Berkshire Hathaway intended to divest itself of Acme as a subsidiary.”

The lawsuit claims that, since 2010, Berkshire has reduced Acme’s contribution to the 401(k) retirement plan from a 50% match on up to 5% of salary to 25% — and the pension plan was frozen earlier this month. The lawsuit alleges that the changes violate ERISA and asks the court to declare that Berkshire Hathaway’s promise not to reduce benefits constitutes an amendment to the retirement plans. Consequently, it asks that Berkshire not only be required to unfreeze Acme’s pension plan, but to reinstate the value of the reduced contributions — and to desist from making any further changes, as well as other unspecified damages. In the alternative, they argue that it constitutes a contract for the benefit of the employees — and its breach entitles the employees to damages.

Case History

The lawsuit notes that, beginning in 2006, Berkshire Hathaway began proposing reductions in the retirement plans, including a “hard freeze” of the company’s pension plan. It claims that the retirement plans committee resisted the reductions — and then in 2012 “discovered” that its officers “mistakenly reduced” the 401(k) plan match to 25% in 2010 and 2011. Berkshire Hathaway CFO Hamburg directed Acme not to make retroactive contributions to the plan, and when told that Acme planned to restore the company match level to 50% for both 2012 and 2013, Hamburg, on behalf of Berkshire Hathaway (and his capacity as a director of Acme, according to the lawsuit), directed Acme not to do so. (The match remained at 25% from 2010 through 2013.) The suit notes that the company adopted a “soft freeze” (closing the plan to new employees) for its pension plan in March 2013.

The lawsuit explains that after months of discussions and after being advised the matter was in the hands of Berkshire Hathaway’s attorneys, as well as with pending external audits of the 401(k) plan and the pension plan commencing, in June 2014 the plan committees sent a letter to the Board of Directors of Acme in which the 401(k) committee demanded that Acme immediately retroactively restore to 50% the matching contributions for 2010-2013, as well as an addition contribution to restore lost earnings on those contributions.

Non-negotiable Demands

The lawsuit notes that in response to communication from the plan committees to Acme’s board of directors demanding the restoration of contributions, Berkshire Hathaway summoned Dennis Knautz, the President and CEO of Acme, to Omaha, Neb., for a meeting with Warren Buffett. During that meeting the letter was discussed, and, according to the lawsuit, Knautz was presented with an ultimatum: either (1) agree to a “hard freeze” of the pension plan now and concurrently move the 401(k) employer matching percentage to 50%, subject to modification of the amount of the 401(k) employer matching percentage any time after 2014; or (2) agree to a “hard freeze” of the pension plan to be effective in five years, with the 401(k) employer matching percentage to remain at 25%. The lawsuit says that Knautz reported to the committee that “these alternatives were non-negotiable, and that if neither of the alternatives were accepted by the Committees, then Berkshire Hathaway intended to divest itself of Acme as a subsidiary.”

Last month, concerned about the prospects of the threatened divestiture, Acme’s senior management agreed to one of those choices, calling for the immediate “hard freeze” on the pension plan and to reinstate the 50% match for the 401(k) for 2014, with modifications possible after this year, the lawsuit said. Employees were notified of the changes a few days later.

Berkshire Hathaway’s Response

In response, a statement released Sept. 5 by Berkshire Hathaway notes that, “The plaintiffs contend that the acquisition agreement (the relevant section of the acquisition agreement is attached) by which Berkshire Hathaway acquired Acme fourteen years ago required Acme to permit participants to accrue additional defined benefits forever, at the same rate that benefits were being accrued at the time of the acquisition, and to make additional 401k matches forever, at the same rate as the matches at the time of the acquisition. Acme strongly believes this interpretation of the acquisition agreement is clearly wrong and expects that its actions will be upheld by the courts.”

Acme Brick has about 2,242 employees, of which 1,558 are in the pension plan and 1,010 in the 401(k), according to the lawsuit. Acme manufactures and sells brick and distributes other building products in 14 states, primarily in the south and southeastern United States.

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