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Who owns funds of a retirement plan?

(Article published in the Oct 20, 2010 issue of Manila Standard Today)   

The answer of the Supreme Court, embodied in its decision in the case of Metropolitan Bank & Trust Company, Inc. v. The Board of Trustees of Riverside Mills Corporation Provident and Retirement Fund, et al, G.R. No. 176959, promulgated on September 8, 2010, is loud and clear.  The member-employees are real owners and certainly not their employer which set up the fund.

 Riverside Mills Corporation (RMC) established on November 1, 1973 a Provident and Retirement Plan (Plan) for its regular employees.  It is called a “provident” plan because the promised amount at time of retirement of a member is the total contributions made, usually monthly, by either the employer or the employee, or both, which is a fixed amount, usually a percentage of the member’s basic monthly salary, and the investment performance of the trustee.

 A provident plan is also called, for that reason, a “fixed contribution plan” as distinguished from a “fixed benefit plan” wherein the promised benefit is fixed and not dependent on the amounts contributed into the plan and its investment performance.  The usual formula would be to give the employee, say, “two months for every year of qualified service” in the company. 

The RMC plan required both RMC and the qualified member to contribute 2% of the employees current basic monthly salary, with RMC’s matching contribution to increase by 1%every five (5) years up to a maximum of 5%.  The original investment manager of the funds was the Commercial Bank and Trust Company but it in its place, for the period relevant to our discussion, was Metropolitan Bank and Trust Company.


   As in the case of all most retirement plans, it may be amended or terminated by the Company at any time on account of business conditions.  By way of protecting what is known as vested benefits, it also provided that no such amendment or termination shall operate to permit any part of the assets of the fund to be used for, or diverted to purposes other than the exclusive benefit of the members of the plan and their beneficiaries.  In no event shall any part of the assets of the fund revert to RMC before all liabilities of the Plan have been satisfied.

 In 1984, RMC ceased operations but Metropolitan Bank and Trust Company continued its services to the trustees of the plan.  Then, ten years later, the bank wrote the trustees saying that the board of bank had decided to apply the remaining assets held in the name of the fund against the outstanding obligations of RMC to the bank.

 It turned out, however, that RMC has unpaid employees.  They learned of the trust account and thus demanded their share of it.  They claimed that MetroBank failed in its duties as trustee for them and, contrary to the principles of trust law, and, by such reversion, committed an act that was  “not only unwarranted but unsconscionable.”

 The Supreme Court took the case as an opportunity to give a short lecture in Retirement Trust 101.  It began by giving a definition of trust: “A trust is a ‘fiduciary relationship with respect to property which involves the existence of equitable duties imposed upon the holder of the title to the property to deal with it for the benefit of another.’”

 Then, it continued to give the two general classifications of trust: “A trust is either express or implied.  Express trusts are those which the direct and positive acts of the parties create, by some writing or deed, or will, or by words evincing an intention to create a trust.”  It did not defined an implied trust, which as defined by Art. 1441 of the Civil Code, is one that comes into being by operation of law. 

 The description of an implied trust is not too accurate, but that is irrelevant to the case under discussion because the plan established an express trust.  Specifically, it was “an express trust created to provide retirement benefits to the regular employees of RMC.  RMC retained legal title to the Fund but held the same in trust for the employees-beneficiaries.  For that reason, every contribution to the fund was credited direct to each member’s account. 

 The trust was described by the court as a revocable trust because “RMC reserved the power to terminate the Plan after all the liabilities of the Fund to the employees have been paid.  It used the typical formula: “in no event shall any part of the assets of the Fund revert to the Company before all liabilities of the Plan have been satisfied.”

 Ironically, it was the last quoted phrase that the bank used to justify appropriating what was in the trust fund.  It maintained that the assets had “technically reverted” to it because no further claims were made since 1984”, the year RMC ceased operations.  The technical reversion was authorized, according to the bank, by a contractual stipulation in the promissory note evidencing the obligation of RMC to the bank that authorized the lender to apply to the payment of the obligation  “all moneys, securities, and things of value which may be in its hand or on deposit or otherwise belonging” to the borrower. 

 The Supreme Court did not buy the argument.  It said, “employees’ trusts or benefit plans are intended to provide economic assistance to employees upon the occurrence of certain contingencies, particularly old age retirement, death, sickness or disability.  They give security against certain hazards to which members of the Plan may be exposed.  They are independent and additional sources of protection for the working group and established for their exclusive benefit and for no other purpose.”

 Score one point for labor, showing the labor force is remembered not only during Labor Day and elections.  Their welfare are kept in the hearts of those in robes who in this instance at least are not who an ex-president said they were.