What Happened to the Kmart Pension Plan Settlement?

The Kmart pension plan settlement was an $11.75 million class action resolution reached in November 2005 for up to 150,000 current and former Kmart employees whose 401(k) accounts lost value when Kmart stock collapsed around the retailer’s 2002 bankruptcy. A federal judge in Detroit gave the deal final approval on June 28, 2006, and the money came from a directors-and-officers insurance policy rather than from Kmart itself.¹²

Why Employees Sued

Kmart filed for Chapter 11 on January 22, 2002.³ Employees who held Kmart shares in the company’s two defined contribution plans watched those holdings lose most of their value. Court filings later estimated total losses on company stock in the plans somewhere between $28 million and $300 million.¹

In March 2002, former employee Quincie Rankin filed a class action in the U.S. District Court for the Eastern District of Michigan against former CEO Charles Conaway and other former executives and board members.¹ The complaint accused Kmart officials of breaching their fiduciary duties under the Employee Retirement Income Security Act. According to the plaintiffs, executives kept funneling retirement plan assets into Kmart stock after the company had already filed for bankruptcy, and misled workers about the company’s financial health while the plans continued buying shares that were rapidly losing value.⁴

Kmart argued it had simply followed the plan’s rules requiring investment in company stock.⁵ Judge Avern Cohn denied the motions to dismiss on August 20, 2003, and conditionally certified the class on April 16, 2004.²

What the Settlement Provided

After more than three years of litigation, the parties reached an agreement on November 16, 2005.² Participants and beneficiaries of Kmart’s two defined contribution plans would share $11.75 million in cash, with an additional $200,000 set aside for administrative expenses. The money came out of a $25 million directors-and-officers policy held by National Union Fire Insurance Co., not from Kmart or from the individual defendants.¹

The class covered up to 150,000 people who had participated in Kmart pension plans between March 15, 1999, and March 6, 2003.¹ Individual payments turned on three variables: how much Kmart stock a participant held in a retirement account, the number of shares, and when the shares had been acquired.⁴ No specific per-person figure was published. Spread across up to 150,000 people, the average recovery was modest against the estimated losses.

Court Approval and Objections

Judge Cohn preliminarily approved the settlement on February 9, 2006.⁶ The court appointed Professor Theodore St. Antoine as an independent fiduciary to evaluate the deal, and he reported in early February 2006 that the terms were fair and reasonable.²

At the June 26, 2006, fairness hearing, only four class members had filed anything with the court out of more than 100,000 who received notice. Two of those filings were treated as objections, both arguing the class deserved more money. Judge Cohn called the objections “conclusory allegations” that presented “no impediment to approval of the settlement,” and entered final judgment on June 28, 2006.²

Related SEC Cases Against Kmart Executives

The class action was a private ERISA case. The Securities and Exchange Commission brought a separate civil fraud action in August 2005 against former CEO Charles Conaway and former CFO John T. McDonald Jr., alleging they had misled investors about Kmart’s finances before the bankruptcy.⁷⁸⁹¹⁰ None of that money flowed to the 401(k) class.

What Happened to Kmart Pensions After the Settlement

The 2006 settlement resolved the 401(k) stock-loss claims. Kmart’s traditional defined benefit pension plan was a separate story. That plan had been frozen back in January 1996, meaning no new participants and no additional accruals for existing ones.¹¹

When Kmart Holding Corporation and Sears, Roebuck and Co. combined to form Sears Holdings Corporation in March 2005, the new company froze all remaining defined benefit accruals effective January 1, 2006, affecting about 113,100 participants, and replaced the pension going forward with an enhanced 401(k) match.¹² The old Kmart plan was formally merged into the Sears Holdings Pension Plan on January 30, 2008, and that combined plan was later split in December 2016 into Sears Holdings Pension Plan 1 and Pension Plan 2, with participants’ benefits, rights, and features preserved in both.¹¹

PBGC Takeover in 2019

Sears Holdings filed for Chapter 11 on October 15, 2018. The Pension Benefit Guaranty Corporation estimated the two Sears plans, which by then included former Kmart participants, were underfunded by $1.4 billion and only 64 percent funded, covering roughly 90,000 people.¹³ The PBGC moved to terminate the plans effective January 31, 2019, became trustee on February 11, 2019, and took over day-to-day benefit administration on December 1, 2021.¹⁴

The agency said its Single-Employer Insurance Program would cover the “vast majority” of benefits earned under the plans.¹³ The maximum annual guarantee for a retiree age 65 at the termination date was $65,045.¹⁵

A Warning for Former Kmart Participants

One narrow issue can affect former Kmart employees specifically. The PBGC has said that Kmart’s “90-point” retirement benefit, an early retirement provision based on a combined score of age plus years of service, may not be fully guaranteed for service earned after the October 15, 2018, bankruptcy date. Because Kmart benefit accruals were frozen in 1996 and all service credit ended on January 31, 2019, the affected window is small, but it can influence eligibility for an unreduced early retirement benefit.¹⁴

Participants who receive a trusteeship letter from the PBGC need to verify their personal information through a MyPBA online account or by returning a Payee Information Form within 30 days. Payments can be suspended if that step is skipped.¹⁶

1
NBC News. Kmart Pension Settlement May Pay Out $11.75 Million
2
U.S. District Court, Eastern District of Michigan. Kmart Final Order and Judgment
3
SEC EDGAR. Kmart Corporation Disclosure Statement
4
Tampa Bay Times. Kmart Pension Settlement May Pay Out $11.75 Million
5
PlanSponsor. Proposed Settlement in Kmart Company Stock Suit
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Pensions & Investments. An $11.75 Million Settlement of a Lawsuit Against Former Kmart
7
SEC. SEC v. Conaway and McDonald, Litigation Release
8
secactions.com. Commission Wins Jury Verdict Against Former CEO
9
SEC. SEC v. Conaway, Litigation Release
10
MLive. Former Kmart Head Charles Conaway Settles SEC Case
11
PBGC. Sears Holdings Pension Plan Summary Plan Description for Kmart Participants
12
Center for Retirement Research at Boston College. Sears Holdings Pension Freeze Fact Sheet
13
PBGC. PBGC to Assume Responsibility for Sears Pension Plans
14
PBGC. Questions and Answers for Sears Participants
15
PBGC. Notice of Plan Termination, Sears Holdings
16
PBGC. Sears Holdings Pension Plans