After three trips to the district court - and a side visit to the U.S. Supreme Court - the Second Circuit issues a liability judgment in this ERISA matter, dating back to 1989. It holds the Xerox retirement plan liable as a matter of law for miscalculating retirement benefits and for misinforming class of their rights under the summary plan description (SPD). The case is remanded yet again to the district court for entry of remedy. Notably, the Second Circuit puts real teeth in the ERISA requirements in 29 U.S.C. §§ 1022 and 1054(h) that a plan must accurately inform participants of plan terms and of any amendments.
Frommert v. Conkright, No. 12-67 (2d Cir. Dec. 23, 2013): During the era in the 1980s and 90s when companies began converting their defined-benefit (i.e., annuity-type) retirement plans to defined-contribution (i.e., 401(k)) plans, Xerox adopted a hybrid version - a floor-offset plan - that consisted of three parts:
"(1) the Retirement Income Guarantee Plan formula ('RIGP'), which is used to calculate a defined benefit annuity; [fn] (2) the Cash Balance Retirement Account ('CBRA'), a defined contribution system consisting of an account with yearly contributions from Xerox, accruing interest at a rate of one percent above the one-year Treasury Bill rate, along with the beneficiary's transferred balance, if any, from Xerox's pre-1990 profit sharing plan; (3) the Transitional Retirement Account ('TRA'), a defined contribution system consisting of an account with the beneficiary's transferred balance from the pre-1990 profit sharing plan, increased based on investment results. The values in the beneficiary's CBRA and TRA are converted into annuities, after which the monthly values of the three accounts are compared, and the beneficiary receives benefits from the account with the greatest monthly value.
The class consisted of individuals who left Xerox, rolled-over their retirement money from the plan, then reentered the plan upon rehire. Participants who left Xerox's plan took a lump sum of their retirement fund, which they then reinvested in another retirement plan or instrument elsewhere.
These participants objected that, upon returning, the amount of the lump sum was debited against the calculation of their benefits. The plan used a "phantom account offset method," which treated the employee's accounts as if the roll-over were still in the plan (for calculation purposes, to determine which method yielded the highest amount), but then subtracted from the final payment "the current value of the employee's prior distribution in that same account."
The class objected both (1) that the phantom account offset method violated the terms of the plan itself (ERISA § 502(a)(1)(B), 29 U.S.C. § 1132(a)(1)(B)) and (2) that they received inadequate notice of the offset (ERISA §§ 102 and 204(h), 29 U.S.C. §§ 1022 and 1054(h)).
Much of the history of the litigation was about how much to defer to the Xerox plan committee's determination that the phantom account offset method was consistent with plan terms. The Supreme Court ultimately held that the court had to defer to the plan committee's interpretation, despite that it changed its interpretation over the history of the case. Conkright v. Frommert, 559 U.S. 506 (2010). On remand the district court held that the plan committee's interpretation was not unreasonable and that plan participants received required notice of the calculation method.
The Second Circuit reverses. It holds that, despite the deference due the plan administrator's decision under the Supreme Court mandate in Conkright v. Frommert, nevertheless its interpretation was unreasonable. The panel holds that nothing in the plan terms supports a calculation of benefits that treats rehired employees worse than newly-hired ones, imposing greater market-risk on reentering participants:
"To be clear, ERISA plans may be constructed to change the risk borne by rehired employees or reduce such employees' benefits in a manner that treats them worse than newly hired employees, provided that such terms exist in the plan. They do not exist here. The newly hired employee's benefits are determined under Section 4.3 [which describes the three components of the Xerox Plan]. We fail to see how an offset that purports to calculate 'accrued benefits' under that section would treat rehired employees and newly hired employees differently. Sections 4.3(e) and (f) provide interest rates for use in converting CBRA and TRA into annuities, not for determining the accrued benefit under RIGP. No provision in the Xerox Plan defines the offset in accordance with the method the Plan Administrator advocates, and Section 4.3 defines the RIGP 'accrued benefit' only with reference to the RIGP formula. Accordingly, we find that the proposed offset produces an absurd and contradictory result and is therefore unreasonable."
Second, even assuming that the offset method was reasonable, the panel holds that the plan failed to give participants adequate notice of the affect on their benefits: "Comparing the Plan and its SPDs, we find that the SPDs fail to clearly identify the circumstances that will result in an offset, are insufficiently accurate and comprehensive, and fail to explain the 'full import' of . . . the Plan." In particular, the SPD did not advise participants that the amount of the lump-sum distribution will invariably reduce the RIPG benefit. And "even assuming that the SPDs prescribe an offset to RIGP, the SPDs fail to describe the mechanics of any offset. Specifically, the SPDs fail to state the interest rate to be used to make the actuarial equivalence."
The panel remands the case to the district court to enter a remedy. For the notice violations, the panel observes that equitable relief is authorized under ERISA § 502(a)(3), although the court below will need to consider what is any harm was caused by the lack of notice. Alternatively, the class might be entitled to enforcement of the plan terms under ERISA § 502(a)(1)(B).