WASHINGTON -- In an action that could affect millions of workers nationwide, the Department of Labor sued two California companies yesterday for allegedly improperly replacing employee pension plans with annuities sold by Executive Life Insurance Co.
The suits, which mark the first time the government has challenged employers' actions in picking insurance companies, seeks to force the companies to make up any losses the workers may suffer because of the April 11 collapse of Executive Life.
The two suits were filed in federal district court in Washington against Maxxam Inc. and its subsidiary, Pacific Lumber of Scotia, Calif., and Magnetek, a Los Angeles-based manufacturer of heavy electrical equipment. Top executives of the companies also were named as defendants.
In addition, the Department of Labor sent "demand" letters to several unidentified companies, insisting that they provide guarantees to workers of full retirement benefits.
These companies rely on annuities from insurance companies that have not yet fallen into trouble. But the Labor Department fears that some of these insurance carriers could fail and is encouraging the companies to move retirement funds to top-rated insurers.
"We want to put the greatest possible pressure on businesses involved and the insurance industry to see that retirees get their benefits," said David G. Ball, assistant secretary of labor. "They have to live up to their obligations."
The California Department of Insurance seized Executive Life two months ago after the company was crippled by junk-bond losses. It was the largest failure of a life insurer ever. Since then, the state has re
duced monthly payments to retirees by 30 percent to conserve the insurer's assets.
Although Executive Life's failure has drawn federal attention and resulted in several hearings on Capitol Hill, yesterday's action marked the first intervention by a federal agency in the complex issues posed by the insurer's failure.
While the suits directly affect only about 6,000 individuals covered by Executive Life annuities, Mr. Ball said the litigation could affect 3 million to 4 million others who depend on similar insurance policies for their pensions.
The companies of these workers and retirees terminated pension plans in the 1980s and used the surplus cash for other purposes. The companies typically replaced the pension plans with higher-paying annuities, policies from insurance companies providing for monthly payment of retirement benefits.