3 recent Supreme Court decisions relating to retirement plans — How to eliminate a billion dollar mistake!

By Nick Paleveda MBA J.D. LL.M

National Pension Partners

“When I use a word," Humpty Dumpty said in a rather scornful tone,” it means just what I choose it to mean — neither more nor less”. “The question is," said Alice, “Whether you can make words mean so many different things.” "The question is,” said Humpty Dumpty,"which is to be master — that’s all.”
— Lewis Carroll, "Through the Looking Glass"

Recent Supreme Court cases have given plan administrators a bit more breathing room when working on qualified pension plans for their clients. The Supreme Court takes a realistic view in the area of plan administration, discouraging litigation in this area by allowing the lower courts to reform trust instruments to prevent unintended results.

Three recent cases have addressed pension plans, resulting in saving plan sponsors billions of dollars due to mistakes made by actuaries and attorneys. These plans involved the Xerox plan in the case Conkright v. Frommett, 559 U.S.____ (2010), 130 S.Ct. 1640, 176 L.Ed. 2d 469; the Verizon plan in the case Young v. Verizon; and the CIGNA plan in the case CIGNA v. Amara.

Only the Verizon plan did not reach the Supreme Court as the Court declined to hear the case which, in essence, upheld the lower court’s decision not to allow Verizon to be responsible for as much as $1.7 billion in additional benefits due to an attorney error. In deciding these cases, the following three questions were addressed:

1. When can an administrator not take into account the time value of money?

2. When can a plan document have a formula that states the greater of A and B, but really mean the greater of A or B?

3. When does a summary plan description only provide a “summary,” which may not really be an accurate description of a plan?

The answer is, when the Supreme Court of the United States allows “reformation” of documents due to “scrivener’s errors.”

Pension plans

A pension plan is a defined benefit plan or a retirement plan that promises to provide a lifetime income to the employees or participants of the plan once they reach normal retirement age, I.R.C. section 401(a). In some cases, the employees are given an option of a lifetime income or a lump sum amount, which then can be rolled over to their IRA. The employees are provided a “summary plan” description, which gives the employee an indication of the benefits of the program.

The employee is generally not responsible for contributions, the investment return, the compliance or the benefits of the program, as it is an employer sponsored plan. The risk of the plan is placed on the plan sponsor.

In the last 20 years, many plan sponsors have decided to shift the risk to the employees by adopting a 401(k) defined contribution plan. In some cases, plan sponsors have tried to mitigate some of the risk in a defined benefit plan by converting the plan into a cash balance plan, where the employee will receive the balance in their account, not a lifetime income based on their final salary, their highest three-year salary or their average annual salary.
Many private employers have converted defined benefit plans to cash balance plans to mitigate their exposure to declining interest rate returns and investment returns. Cash balance conversions have been the subject of extensive litigation. Congress attempted to curtail this litigation in The Pension Protection Act of 2006, which barred age discrimination in employment (ADEA) claims, however the Act was prospective and any existing claims were left to the courts to decide.

The Second Circuit Court of Appeals has attempted and has barred claims against pension plans due to lack of standing for participants to bring a cause of action against pension plan administrators, Fischer v. The Penn Traffic Company. The Supreme Court has not ruled in the Fischer case, but recently granted standing in a 401(k) plans case (see LaRue v. De Wolff, Boberg Associates, Inc. 552 U.S. 248 (2008).

The first case Conkright v. Frommett 2010

The first case in the trilogy allowed an actuary not to take into account the time value of money when valuing a participant account. Deference was granted to the plan administrator by the Supreme Court in Conkright v. Frommett, where Justice Roberts gave the majority opinion and stated:

“People make mistakes. Even administrators of ERISA plans. That should come as no surprise, given that the employee retirement Income security Act of 1974 is 'an enormously complex and detailed statute,' Mertens v. Hewitt Associates, 508 U.S. 248,262 (1992), and the plans that administrators must construe can be lengthy and complicated.”

Conkright involved the Xerox pension plan where the employees received lump sum distributions of benefits they had earned up to that point and were later rehired. The dispute concerned how to account for the past distributions when calculating their current benefits.

The plan administrator used a “phantom account” method. The District Court granted summary judgment in favor of the plan administrator, applying a deferential standard of review to the plan administrator’s interpretation. The 2nd Circuit vacated, citing the standard was unreasonable and the respondents were not notified that the "phantom account” method would be used.

On remand, the District Court considered other approaches, including not accounting for the time value of money. The District Court this time did not apply a deferential standard of review and instead found the plan to be ambiguous and allowed the approach that did not take into account the time value of money. The Second Circuit now affirmed holding that the District Court was correct not to apply a deferential standard, and the decision on the merits was not an abuse of discretion.

Two issues were raised before the Supreme Court:

1. Should deference be granted to the plan administrator interpretation of the plan?

2. Whether the Court of appeals properly granted deference to the District Court on the merits. The Supreme Court had already addressed the standard of reviewing ERISA plans in Firestone Tire and Rubber v. Brunch, 489 U.S. 101 (1989). If ERISA did not directly address the matter, the court would look to trust law. If the trust document gives the trustee the power to construe disputed or doubtful terms, the trustee’s interpretation will not be disturbed if it is reasonable.
The Firestone approach was expanded in Metropolitan Life Ins. Co. v. Glenn 544 U.S. (2008). In Metropolitan Life, a plan administrator was operating under a conflict of interest. This is quite common as the plan administrator usually answers to the corporation executives, not the employees.

In Metropolitan Life, trust law was applied and discretionary authority is granted even in the face of a conflict. However, in Conkright, the 2nd Circuit had carved out an exception to this “deferential standard.” The 2nd Circuit held that a court need not apply a deferential standard where the administrator had previously construed the same plan terms and the Court found a construction to violate ERISA.

This approach was rejected by the U.S. Supreme Court. The Supreme Court stated, ” …we refuse to create an exception to Firestone deference … recognizing that ERISA law was already complicated enough without adding “special procedural or evidentiary rules” to the mix … If a conflict of interest does not strip a plan administrator of deference … it is difficult to see why a single honest mistake would require a different result.”

Absent a showing of bad faith, the Supreme Court will uphold the decision by the administrator of the plan. Part of this rationale is given in the opinion by Justice Roberts.

“Congress enacted ERISA to ensure that employees would receive the benefits they had earned, but Congress did not require employers to establish benefit plans in the first place.”

Justice Roberts went on to point out, “Congress sought to create a system that is not so complex that administrative cost, or litigation expenses, unduly discourage employers from offering ERISA plans in the first place.”

Deference allows predictability, as an employer can rely on the expertise of a plan administrator rather than worry about unexpected and inaccurate plan interpretations that might result from de novo judicial review. Both the respondents and the amicus briefs concur that deference to plan administrators served these important purposes, but they argued that deference is less important once a plan administrator had issued an interpretation of a plan found to be unreasonable. The Supreme Court would not accept this, clearly not wanting to carve out an exception.

In the Xerox case, Conkright v. Frommett, the actuary did not account for the time value of money when benefits were being projected — just an honest mistake.

The second case: Young v. Verizon 615 F.3d 808 (2010), Cert denied 10-765, 10-911 (2011).

One of the most important cases is one the Supreme Court refused to hear and let the lower court decision stand. In 2011, the Supreme Court, in Young v. Verizon, 615 F. 3d 808 (2010), cert denied 10-765,10-911, (2011), declined to review and let stand the lower court decision that prevented Verizon from funding up to an additional $1.7 billion dollars in additional pension benefits because of an attorney mistake in a cash balance conversion.
In Conkright, for the administrator and actuary to balance the conversion, all the actuary needed to do was not take into account the time value of money. In Young v. Verizon, 615 F.3d 808 (2010) cert denied 10-765, 10-911 (2011) the employees argued:

1. That a discount rate should have been the PBGC interest rate, not 120 percent of the interest rate, and

2. The multiplication was done once rather than twice, as stated in the plan document.

The plan document clearly had an error, otherwise known as a “scrivener’s error.”

The Court held that upon determining the language was a mistake, the committee should have sought to reform the plan document in court, subject to de novo judicial review. The important part of the defendant’s case was asking for reformation of the plan document. Even though Verizon was negligent, this was not a bar to reformation. The plan was reformed and the discount rate chosen by the administrator was used and the multiplication was done once, not twice; perhaps to avoid “unjust enrichment”.

The remainder of the litigation involves who will pay the attorney’s fees. Attorney’s fees are awarded under ERISA 502 (g)(10 which provides, “In any action under this title … by a participant, beneficiary, or fiduciary, the court may allow a reasonable attorney’s fee and cost of action to either party.

The Supreme Court in Hardt v. Reliance Standard Life Insurance Company,___U.S___, 130 S.Ct. 2149 ( 2010) held that a court may award fees under ERISA when the claimant has achieved “some degree of success on the merits” 130 S.Ct. at 2152. A “trivial success on the merits” or a “purely procedural victory” will not suffice id. At 2158.

The U.S. District Court ruled in Verizon that the Court would consider awarding fees for time attributable to the transition factor issue, or multiplication factor issue, which if left to stand could have resulted in a billion dollar mistake.

The third case: Cigna Corp v. Amara, 563 U.S.___ (2011), May 16, 2011.

1. Is the summary plan document or the plan document a controlling instrument?

2. Is the plan sponsor liable for actual harm from statements made to employees in context of the ERISA summary plan document?

Next, the Supreme Court listened to Cigna Corp v. Arma, 563 U.S.____(2011). In Cigna, the employer had established a traditional defined benefit plan with a lifetime income to the employees based on salary and length of service. A new plan was established in 1998, which is known as a cash balance plan where the benefits will be only the value of the account, and CIGNA will make contributions to the account each year.

Then CIGNA sent a notice to the employees explaining how generous they were in transitioning the plan from a traditional defined benefit to a cash balance plan. The notice, also known as a 204(h) notice, was sent to the employees, which misrepresented the benefits. The misrepresentation was clearly a vain attempt by management to show the employees that a change to a cash balance plan was in the best interest of the employees when clearly it was not in the employee’s best interest.
Management did not do a good job in promoting the benefits, which are a faster vesting schedule, three years as opposed to six, and portability to a new company. Instead, management stated and touted the new plan would “significantly enhance” its retirement program and would produce “the same benefit security” with “steadier benefit growth”. Record E-503 (Exh.98).

In fact, the company saved $10 million annually by converting the traditional plan to a cash balance plan. The U.S. District Court stated the notice had defects and cause the employees “likely harm.” The District Court then ordered CIGNA to pay benefits accordingly, finding authority in ERISA 502(a)(1)(B), which authorized a plan participant or beneficiary to bring a civil action to recover benefits due under the terms of the plan. The Second Circuit Court of Appeals affirmed.

When this issued reached the Supreme Court of the United States, argued on November 30, 2010 and decided May 16th 2011, the Supreme Court in an 8-0 decision held that 502(a)(1)(B) did not give the District Court authority to reform the CIGNA plan. Instead, relief is authorized by 502(a)(2), which allowed a participant, beneficiary or fiduciary to redress violations of ERISA or the plan terms. The U.S. Supreme Court vacated the judgment against CIGNA and remanded the case back to the District Court.

Justice Breyer, writing for the majority, stated, “Because the District Court has not determined if an appropriate remedy may be imposed under 502(a)(3), we must vacate the judgment below and remand this case with further proceedings consistent with this opinion.”

Part of the problem in the CIGNA case is the plan was oversold to the employees. In November 1997, the newsletter stated that the new plan would “significantly enhance” its retirement program and would produce an “overall improvement in retirement benefits and would provide the same benefit security with steadier benefit growth.”

In fact, the company saved $10 million dollars annually on the conversion. This is partially due to the fact that under a traditional plan, as salaries increase, benefits can rise dramatically. It is also due to the fact as participants get older, the contributions may not have kept up with the benefit promised, and partially due to interest rates declining, where the actuarial assumptions show a higher interest rates. For example, if interest rates are 10 percent, to provide a $40,000 benefit without reducing principal, one would need $400,000. If interest rates decline to five percent, one would now need $800,000 to provide the same benefit.

In a cash balance plan, this risk goes away as the participant is only entitled to what is in his account and whatever lifetime income it would buy.

Can you trust your summary plan description?

ERISA section 102(a) and 104(b) require a plan administrator to provide beneficiaries with summary plan descriptions and with summaries of material modifications, "written in a manner calculated to be understood by the average plan participant,” that are “sufficiently accurate and comprehensive to reasonable apprise such participants and beneficiaries of their rights and obligations under the plan.” 29 U.S.C. 1022(a), 1024(b).
The summary plan description stated the employees would receive the greater of A+B. The plan document, however, stated the employees would receive the greater of A or B. The District Court ordered and enjoined the CIGNA plan to reform its records and to reflect that all class members now receive A+B benefits.

The Second Circuit issued a brief summary order that affirmed the District Court’s decision. On appeal to the U.S. Supreme Court, CIGNA argued that 502(a)(1)(B) does not, in fact, authorize the District Court to enter into this type of relief. The U.S. Supreme Court agreed.

According to the Supreme Court, 502(a)(1)(B) grants a court the power to enforce the terms of the plan but not “change them.” The Supreme Court ruled that a summary document provide communications with beneficiaries about the plan but they do not constitute the terms of the plan. However, section 502(a)(3) is different. That provision allows a participant, beneficiary or fiduciary to obtain "other appropriate equitable relief." (Or, in English, this is where the Courts can change the terms of the plan).

The first question is whether the District Court may reform the terms of the plan in order to remedy the false or misleading information CIGNA provided in the summary plan description.

Historically, courts of equity could only void or enforce but not reform a contract, Bradford v. Union Bank of Tenn., 13 How 57,66 (1852) J. Eaton, Handbook of Equity Jurisprudence p.618 (1901).

Second, the District Courts remedy held that CIGNA would not take from employee benefits it had already promised. This would take place if the participants received A, not the greater of A+B or a formula which is the greater of A or B. Third, the District Court required the administrator to pay already retired beneficiaries money owed to them under the plan as reformed. Equity courts have the power to grant monetary relief.

The real question then, according to the Supreme Court, became how the failure to provide proper summary information in violation of the statute injured employees, even if they did not act in reliance on the summary documents. To obtain relief, the participant must show that the violation injured him or her. In this case, the Supreme Court asked that a showing of “actual harm” take place and the case was remanded for further proceedings.


In conclusion, plan administrators can now breathe a sigh of relief. If a plan has structural problems, the IRS has allowed corrections to take place through the EPCRS program. If the plan cannot be corrected through EPCRS and the plan sponsor is in litigation, the court may retroactively “reform” the trust under 502(a)(3) to account for errors that were made in the plan document. These errors could have devastating effect on the plan sponsor; however, the Supreme Court has adopted what appears to be a pragmatic view to solving problems faced by qualified plan administrators.