“We are pleased to inform you about new improvements to our plan.” How many times have you sent out notices like this (perhaps drafted by your vendor) without thinking about whether they are incomplete or misleading?
We have just had another reminder from the Second Circuit Court of Appeals of the potential consequences of inaccurate plan communications. This came on December 23, 2014 in the form of a decision upholding class relief to participants who challenged CIGNA’s conversion of its defined benefit pension plan to a cash balance plan. The relief in effect rewrote the plan to eliminate “wearaway”, a technical term referring to the period when a participant might accrue no benefits because future accruals were less than the minimum benefit that had been earned under the plan before its conversion.
Why the Plaintiffs Won. The basis for the relief was not that the plan violated any plan qualification rule then in effect by providing for wearaway, but that participants had not been adequately warned about it in CIGNA’s communications and the summary plan description. In fact, they had been told that “your benefit will grow steadily throughout your career” and that the new plan would “significantly enhance” CIGNA’s retirement program.
The Case History. The CIGNA participants challenged the wearaway and plan conversion on multiple grounds, including age discrimination, when they initiated their suit, but lost on all of the issues except misleading communications. The United States Supreme Court decided in 2011 that lower courts erred in finding that participants could recover benefits calculated without wearaway under ERISA Section 503(a)(1) (authorizing suits for benefits payable under the terms of the plan), or that the SPD could modify the terms of the plan. (See our prior post and Osler Update.) The Supreme Court went out of its way in its decision to outline the forms of equitable relief that might instead have been awarded under Section 501(c)(3) of ERISA based on misleading communications. The lower courts took the hint.
The New Decision. The Second Circuit affirmed a district court decision awarding class relief and reforming the plan to match what was communicated by giving participants the sum of benefits earned prior to and after the conversion. The court went out of its way to point out other instances in which the new plan design was inferior to the pre-conversion plan, including loss of certain subsidies and exposure to interest rate risk under the new design.
Grounds for Reformation. The Second Circuit found that all that was required for reformation was either a mutual mistake (which was not claimed in the case) or a showing that “defendants committed fraud or similar inequitable conduct and that such fraud reasonably caused plaintiffs to be mistaken about the terms of the pension plan.” Those requirements were satisfied.
Lessons for Administrators. Regular readers of our blog know that the decision to redesign a pension plan is made by the plan sponsor in a settlor, not a fiduciary capacity. However, like most plan sponsors, CIGNA wore “two hats” here, because at the time of the conversion, it was also the fiduciary responsible for ERISA-required plan communications. Had CIGNA properly communicated the challenged plan changes, more realistically and with less puffery, it could have avoided liability for unintended benefits. Companies that adopt prototype plans need to be especially alert when distributing plan communications, because in almost all cases their vendor has not assumed legal responsibility for administration or the communications it sends out. These documents should always be carefully reviewed before they are distributed to avoid a potential lawsuit.