Pension Wonderland

Imagine you retire and start to receive a pension check from your employer's pension plan. As a careful person, you make your own calculation of your monthly pension and it seems that the pension plan made a mistake. Your pension should be larger. So you send a letter to the plan administrator asking for an explanation of your benefit payment. You send the letter to the address provided in the summary plan description and, to be extra careful, you send it by certified mail. You receive no response. So you send another letter. And another. You make phone calls. Still, no response. You visit the benefits office, only to be told that the benefits administrator left for a meeting, and you are not permitted to look at the pension documents. Five years pass while you work to get an answer to a basic question: How did the plan calculate my benefit? Finally you get your first written response -- from the company's outside legal counsel. He offers an explanation of why your benefit is not as large as you think it should be, but then advises you that it is too late to appeal, too late to go to court, because you failed to challenge the benefit payment five years ago! Sound unreal? Well, it's not, as recounted in this saga of a Motorola retiree.

The retiree finally retained counsel, who a filed a class action. It wasn't too late and the retiree had a right to review the plan documents that supposedly guided the calculation of his pension benefit. The case is now poised for settlement, more than seven years after the retiree first inquired about his benefit calculation.

Tips for Retirees

• Retirees who have a question about their benefit but face an unresponsive pension bureaucracy, may not want to wait five years to consult an attorney. Consider consulting an attorney with ERISA experience early in the process if your pension plan is ignoring your inquiries.

• Consider contacting the local office of the Employee Benefits Security Administration of U.S. Department of Labor. The DOL has responsibility for enforcing ERISA requirements. While the DOL typically does not file lawsuits on behalf of individuals with benefit claims, the EBSA offices have staffers who can contact the plan on your behalf to help obtain the requested documents and an explanation of the benefit payment. A phone call or letter from the DOL may bring more urgency to your inquiry.
  

• If you have received a response to your inquiry about the benefit calculation, and you are not satisfied with the response, you may have to start or continue with the administrative appeals process. If you do not complete the administrative process, or if you wait too long, you may lose your right to pursue your claim. Again, consider consulting with an attorney, if you have not done so previously.
  
  

EDS ERISA Litigation Update

As reported on The ERISA Blog, the District Court for the Eastern District of Texas rejected a proposed settlement in the EDS litigation because it was not in the best interest of the class members. Under the proposed settlement, the class members would only receive two or three cents on the dollar of their losses. So the court concluded that a reasonable class member would rather risk litigation rather than accept such a discounted settlement.

As discussed in more detail here, EDS had appealed the class certification order contending that the plaintiffs did not have standing to bring a lawsuit under Section 502(2)(2) on behalf of the plan as a whole. Apparently, the plaintiffs' counsel faced some tough questions during oral argument, reconsidered the value of the their claims and agreed to the proposed settlement. But the district court suggested that plaintiffs' counsel should rethink their position:

[R]igorous questioning during oral argument does not necessarily indicate how an appellate court will ultimately rule on a particular legal issue, especially one as important as the issue in this case. . . . Whatever the risk of a different ruling by the Fifth Circuit, that risk must be considered in light of the potential benefits of the settlement proceeds to the proposed settlement class.

So the ball is back in the Court of Appeals. I will have more to say about this case when the 5th Circuit publishes its decision.

A Cogent Explanation of Age Discrimination Claims in Cash Balance Plan Conversion Cases

Mary Williams Walsh, of the New York Times, wrote an article earlier this week about a lawsuit filed by employees of the Southern California Gas Company challenging the 1998 conversion of their traditional pension plan to a cash balance pension. Conversions of pension plans to cash balance plans raise many thorny issues, with "wearaway" at the top of the list. As with other cash balance plan conversions, older employees claim that the conversion deprives them of benefits in violation of age discrimination laws. Ms. Walsh nicely captured the essence of these claims in her article. She wrote:

The legal problems have generally come up at companies that converted their pension plans when older workers were about to enter the final years of their careers, when they expected to build up their pensions at the fastest rate. The conversions deprived them of their chance to earn the biggest part of their pensions. Younger workers lose this high-earning phase as well, but for them it does not matter because they are likely to have more years in the new plan, and thus will have the chance to offset the loss of the late-career pension increases.

This difference in the way older and younger workers fare in a conversion is the source of the age-discrimination claims. The wearaway effect makes the discrepancy even greater. Wearaway happens in cases where some employees - usually people in their 40's and 50's - have already earned bigger benefits under the old plan than they would have earned, in theory, if the new plan had been in place throughout their careers. The employer stops their accruals for several years, until the theoretical amount they would have earned catches up with the amount they actually did earn. This period of zero accruals is called wearaway.

Janell Grenier's ERISABlog has additional links for information on cash balance plan issues, including pending legislation in Congress.

ERISA Section 510 Claim Survives Summary Judgment

ERISA Section 510 prohibits employers from firing employees to prevent them from attaining a benefit. A recent decision from the Eastern District of Pennsylvania recognized that even employees fired allegedly "for cause" can make use of Section 510.

In Leszczuk v. Lucent Technologies, Inc., three Lucent employees claimed that their employer fired them"for cause" to prevent them from receiving severance benefits. Lucent had established a severance benefit program for employees terminated under certain circumstances, including a reduction in force. The employees were notified that their facility was closing and that they would become eligible to participate in the severance plan by the end of the year. With a little more than two months remaining in the year, the employees were terminated "for cause" allegedly because they failed to work for 40 hours per week at their facility. The employees maintained that Lucent permitted them to perform some of their work off site and that Lucent never raised the issue of their work hours until after they were identified as potential severance plan participants.

Lucent filed for summary judgment. First, it argued that the employees did not have standing to file the lawsuit because they were terminated before they satisfied all the conditions necessary to participate in the severance plan. Under ERISA, employees must be plan "participants" to have standing to file a lawsuit. While standing issues can be tricky, the court recognized that Section 510 is designed to cover employees who are fired before they vest in (become eligible for) the disputed benefits. An employer "should not be able through its own malfeasance to defeat the employee's standing."

Next, Lucent argued that the employees' claims failed on the merits. Section 510 requires proof that the employer specifically intended to violate ERISA; if the employee offers only evidence of the lost opportunity to accrue benefits, he loses. The court ruled, however, that the Lucent employees had offered sufficient evidence to allow the case to proceed to trial. In particular, it seems that the timing of investigation leading to the firing weighed heavily in the judge's ruling.

Comment: For larger employers and smaller claims, there is often little apparent reason why an employer would choose to fire an employee to save a few dollars. Hence, Section 510 claims can be difficult to prove. The plaintiffs in this case contended that Lucent saved almost $200,000. The court, however, gave no weight to value of the contested benefits because the plaintiffs did not offer any supporting evidence. Nevertheless, the court was persuaded to permit the case to go to trial by plaintiffs' other evidence. In other words, the amount at stake was not important to this court, at least at the summary judgment stage.

DOL Supports ERISA Plaintiffs

The US Department of Labor has filed "friend of the court" briefs in two Fifth Circuit cases where the issue is whether employees who participate in 401(k) plans can obtain money damages from fiduciaries whose alleged imprudent conduct causes the participants to lose money. First, a little background. ERISA opens two roads for a plaintiff to travel. By the first road, the plaintiff can try to get a court to order a fiduciary to pay money to the plan to restore losses suffered by the plan as a whole. Plaintiffs traditionally traveled this road when fiduciaries did not live up to their responsibilities when making investment decisions or administering the plan. Call this road Route 409/502(a)(2).

Traveling on the second road, plan participants can sue fiduciaries for decisions that caused some harm to the individual, but not necessarily to the plan as a whole. Call this road Route 502(a)(3). The problem for plaintiffs is that Route 502(a)(3) gets too narrow at the end of the road. Route 502(a)(3) limits individuals to "equitable relief" and the Supreme Court has made it clear that equitable relief does not include monetary damages. So, for example, when a fiduciary gives the participant wrong information (such as bad tax advice) that costs the participant some money, many courts will find that the participant cannot recover her losses from the fiduciary.

In the two cases where the DOL has intervened, the defendants argue that the 401(k) plan participants are limited to traveling along Route 502(a)(3) either because (1) the plan participants, not the plan itself, assumed the risk of investment losses, (Langbecker v. EDS) or (2) because only a subset of participants were harmed by the fiduciary misconduct, but not every single participant (Milofsky v. American Airlines, Inc.). The DOL contends that ERISA treats 401(k) plans like any other pension plan so that when fiduciaries make imprudent decisions, participants can obtain remedies through payment of damages to the plan, which then can be allocated as appropriate to the accounts of individuals who suffered losses.

Langbecker was filed as a class action after EDS stock suffered a steep decline in value following the EDS's disclosure of some adverse financial information in September 2002. The plaintiffs claimed that because the plan fiduciaries had access to company information about certain previously undisclosed risks, the fiduciaries should have known that EDS stock was overvalued and an imprudent investment and should have taken action to protect the 401(k) participants, most of whom were invested in company stock. The district court agreed with the plaintiffs that the case could be certified as a class action because their claims were on behalf of the plan as a whole. The defendants contend on appeal that a 401(k) plan is merely a collection of individual accounts so that the individual participants do not have "standing" to file a suit on behalf of the plan -- i.e. they cannot follow Route 409/502(a)(2). In other words the fiduciary does not have plan wide responsibilities, but only responsibilities to each individual participant. So, in the defendants' view, the participant's only remedy, if there is one at all, is for equitable relief via Route 502(a)(3).

The DOL says that this is nonsense. ERISA sections 409 and 502(a)(2) do not exempt 401(k) or other defined contribution plans. Moreover, the plaintiffs are not bringing individual benefit claims. Instead, they are challenging the fiduciaries' decision to retain EDS stock as an investment option and to permit the company the continue to make matching contributions in form of EDS stock. By these decisions, the fiduciaries made an allegedly imprudent investment choice available to virtually all participants.

I think DOL has the better argument here. ERISA specifically permits participants to file a lawsuit on behalf any plan, and the plaintiffs' allegations go to the management of the plan itself: disclosure of information to participants and the prudence of certain investments options. Moreover, virtually all participants were invested in EDS stock, so the fiduciary misconduct, as a practical matter, affected the plan as a whole. Interestingly, the ERISA Industry Committee ("ERIC") offers a compromise in its brief filed in support of the defendants. ERIC suggests that class action suits under section 502(a)(2) are appropriate in cases of corporate failure such as Enron and World Com, but not when the plan sponsor remains viable and the employer stock remains a sound investment for at least some participants (presumably those participants who bought the stock when after bad news depressed the price).

The other case, Milofsky, involved the claims of 218 pilots who participated in a 401(k) plan offered by a company that was acquired by American Airlines. The transfer of their plan assets was allegedly botched and they sued American Airlines and others, alleging that they were misled about the transfer process and that because of fiduciary breaches regarding the timeliness of the transfer, the value of their accounts -- and thus the overall value of the plan -- decreased. The pilots sought to recover their actual damages suffered through a payment to the plan that would then be allocated to their individual accounts. The pilots lost at the district court and on appeal to a Fifth Circuit panel. They now are seeking "en banc" review of the panel's decision and DOL is supporting the request for rehearing.

The Fifth Circuit panel ruled in a 2-1 decision that the pilots could not sue under section 502(a)(2) because their claim was essentially about a particularized harm that targeted only a specific subset of plan participants and the remedy they sought would benefit only themselves, not the plan. The panel relied heavily on the Supreme Court's 1985 decision in Russell that recoveries under sections 409 and 502(a)(2) must benefit the plan as a whole. DOL contends, however, that because all of a participant's investments in a 401(k) plan are "plan assets," any imprudent fiduciary decision that diminishes plan assets can be remedied through monetary damages even if only some plan participants were harmed. The panel's contrary reasoning would leave participants without a remedy even in cases of blatant misconduct such as a fiduciary diversion of employee contributions, as long as only some, but not all participants are harmed.

DOL correctly argues, in my view, that a distinction between remedies (or roads traveled) based on the number of participants harmed unduly limits ERISA's protections. The plaintiffs are not seeking "extra-contractual" relief: they want what their plan promised them: prudent management. The Sixth Circuit and at least one district court have ruled that a subclass of participants may follow Route 409/502(a)(2) as long as the claim seeks damages payable to the plan. If the Fifth Circuit reverses Langbecker or fails to overturn Milofsky after en banc review, the Supreme Court may have another ERISA case on its agenda next Term.

Both DOL briefs can be found here and the ERIC brief is here.