Washington Labor, Employment & Employee Benefits Law Blog

Supreme Court Affirms Primacy of ERISA Plan Documents

In a unanimous decision, the U.S. Supreme Court that an ERISA plan’s specific procedure for designating beneficiaries controls over other instruments that may conflict with it.  In the case, Kennedy v. Plan Administrator for the DuPont Savings & Investment Plan, an employee designated his wife as the beneficiary for his pension plan and his savings plan.  They later divorced.  The employee then executed a new beneficiary form for his pension plan naming his daughter as beneficiary, but did not do the same for his savings plan.  When the employee died, the plan’s administrator strictly followed its procedures under the Plan and deemed the employee’s ex-wife to be the beneficiary of the savings plan. 

 

This case is significant because it helps to resolve a surprisingly frequent dilemma that confronts plan administrators  when they encounter a deceased plan participant who failed to remove a former spouse as beneficiary.  In these cases, the beneficiary’s apparent intent often appears to be in conflict with the designation reflected in the plan documents.   The lesson of the case, ultimately, is that where a plan contains a specific procedure for revoking or otherwise changing a beneficiary designation, a plan participant should be careful to follow those procedures, as plan administrators are bound to follow the procedures of the plan.  This is true even if, as in this case, the designated beneficiary had waived those benefits in a divorce decree. 

 More on the case can be found at this link:

Confusion Surrounds Government Curbs on Executive Compensation

There has been a great deal of discussion recently on the need to address the widely-perceived problem of executive overcompensation.  The recent financial meltdown on Wall Street has intensified this discussion.  The federal government recently indicated that banks that accept cash infusions as part of the current financial bailout will be expected to comply with executive compensation provisions, including a “clawback” provision and prohibition on “golden parachutes.”  However, a closer look at those restrictions indicates that they are vague in language, and likely limited in scope.  The clawback provision, for example, only takes requires a corporate board not to pay a severance benefit if the benefit was based on “materially inaccurate” information.  Also, the provisions are not retroactive in scope.  A recent article on the government’s handling of executive compensation in its bailout appears here.

Boeing Joins List of Companies Seeking Pension Changes

Boeing this week added itself to the list of companies that are phasing out defined benefit pension plans.  In negotiations with its unions, Boeing is proposing that all new employees be enrolled in a 401(k) type plan supplemented with contributions by Boeing.  The proposal is not surprising.  Many companies are working to replace their pension plans with defined contribution plans as the only form of retirement security for many workers.   The Supreme Court addressed that issue in the recent LaRue case.  But will the trend create a retirement crisis in the years to come? 

Consider this interview with Brooks Hamilton from 2006.  Hamilton reports a yield disparity in 401(k) plans in which many individual workers receive very poor investment performance.  According to Hamilton, this “destroy[s] the opportunity for ordinary workers to retire in dignity. They couldn't get there from here. There is no way. Number one, they are contributing too little, too late for the most part. They are contributing the least, and then they are getting lousy investment performance.” 

Much has been written lately on the need for older workers to work longer because of shortfalls in retirement benefits.  Pre-retirees expect to work on average a full decade longer than those already in retirement, with nearly half expecting to work early in retirement and one in three working throughout retirement to bolster their savings.  This is not likely to change anytime soon.  A majority of employers believe that employees prefer higher salaries instead of better retirement benefits.  In addition, for those that do have 401(k) plans, they are tapping their 401(k) account for cash and borrowing and withdrawing funds at a record rate. 

Aging Workforce Likely To Increase Age Discrimination Claims and Change Retirement Plans

Within 20 years, nearly 20% of Americans, 71 million people, will be age 65 or older.  Thanks to the baby boomers, America is getting older and doing so at a rapid rate.  Recently, a federal task force published a report addressing the aging of the American workforce.  The task force was comprised of representatives from the Departments of Commerce, Education, Health and Human Services, Labor, Transportation, and Treasury; the Equal Employment Opportunity Commission; Small Business Administration; and Social Security Administration. 

The task force reports that many older Americans want to continue working or need to do so for financial reasons.  Indeed, much has been written lately on the need for older workers to work longer because of shortfalls in retirement benefits.  Pre-retirees expect to work on average a full decade longer than those already in retirement, with nearly half expecting to work early in retirement and one in three working throughout retirement to bolster their savings.  This is not likely to change anytime soon.  A majority of employers believe that employees prefer higher salaries instead of better retirement benefits.  In addition, for those that do have 401(k) plans, they are borrowing and withdrawing funds at a record rate. 

While workers face economic pressure to work longer, the task force notes that older individuals often face challenges to full participation in the labor market, including a difficult job market for older workers with outdated skills; negative perceptions of older workers’ abilities; health issues, disabilities, or physical limitations for certain types of work; and the lack of flexible work arrangements to enable a greater work-life balance.  A 2002 survey of workers ages 45 to 74 revealed that around two-thirds of respondents reported having witnessed or experienced age discrimination in the workplace,.  An experimental study of hiring conditions for older women in entry-level jobs in Boston, Massachusetts, and St. Petersburg, Florida, found that younger workers were more than 40 percent more likely to be offered a job interview than older workers.

The report states as follows:

Some employers have the view that older workers cost more and produce less than their younger counterparts. This view appears to be based on concerns about wage and benefit costs of older workers as well as age based stereotypes that older workers are unproductive, inflexible, and unwilling to learn. However, research is beginning to show that some employers may overestimate the costs associated with employing older workers while simultaneously underestimating the benefits. Furthermore, little evidence supports the view that older workers are less productive. Additional research may better measure the effect on production of increased experience. Ageist stereotypes may subside as contrary empirical evidence mounts and employers need greater workforce contributions from older workers; however, to date, age discrimination remains a problem for older workers.

The report also notes that some older workers will decide to forgo enforcing their rights:

The ADEA, Age Discrimination in Employment Act of 1967, prohibits age discrimination in employment and employee benefits against persons age 40 and older. Although it has been prohibited for 40 years, age discrimination persists in the workplace. When faced with age discrimination, or what they perceive to be age discriminatory behavior, some employees may choose to move on or retire rather than challenge the illegality through a lengthy and uncertain process.

The report recommends comprehensive legislative action on flexible retirement arrangements to allow employees to phase into full retirement and thereby stay in the workforce longer.  However, it makes no recommendations on the ADEA or age discrimination issues.  Undoubtedly, age discrimination claims will continue to increase as older workers, who face economic pressure to stay in the workforce, fall victim to ageist stereotypes and barriers to equal employment opportunity. 

Supreme Court Allows Employee to Sue for 401(k) Losses

Today the Supreme Court said that a 401(k) participant can sue for losses when a plan fiduciary fails to follow investment directions.   A copy of the opinion is here.  In the case, James LaRue of Southlake,Texas, contends that his stock market holdings plunged $150,000 because administrators of his 401(k) retirement plan failed to follow his instructions to switch to safer investments.  The opinion clarified a remedy issue left open by a 1985 case, Massachusetts Mutual Life Insurance Company v. Russell, 437 U.S. 134 (1985). 

The court’s majority opinion is based in part of the fact that the retirement “landscape has changed” in the 23 years since ERISA remedies were limited in Russell 23 years ago.  The case potentially affects 50 million workers with $2.7 trillion invested in 401(k) plans.  The decision gives a green light to more litigation to manage the nation’s retirement security.  I am reminded of the observation made by the judge in the CIGNA cash balance case reported below: 

Difficult, time-consuming, and expensive litigation with uncertain results – such as this case represents – is assuredly not a sensible way to manage the Nation's retirement system for either employers or employees. Sadly, at least for now, litigation appears to be the only option available to them.

The ruling comes at a time that pension plans are being replaced by defined contribution plans as the only form of retirement security for many workers.   At the same time, more people than ever are tapping their 401(k) account for cash and older workers are being told that they need to work longer.

Supreme Court Agrees to Hear 3 More Employment Cases

The Supreme Court agreed to review three more employment cases addressing:  (1) whether an arbitration clause in a collective bargaining agreement can apply to statutory issues as well as contract issues; (2) whether a union may charge non-union members for litigation costs expended on behalf of the union members; and (3) how a divorcing spouse may waive rights to the other spouse's ERISA pension benefits.  Richard Bales has a good analysis of the arbitration issue at the Workplace Prof Blog and Paul Mollica reports on it at Daily Developments in EEO Law. 

Split Decision in Litigation Over CIGNA Cash Balance Pension Plan

Those following employee benefits litigation know that there have been hundreds of cases filed over the trend by companies to convert their traditional, defined benefit pension plans to cash balance plans.  Another ruling was issued late last week in a class action case involving a plan conversion by CIGNA.  The judge summarized the background the case as follows:

Since the mid-1980s, hundreds of U.S.employers have converted their traditional defined benefit pension plans into what are known as "cash balance" retirement plans. In fact, according to the Pension Benefit Guaranty Corporation, over 1,500 cash balance plans and other similar hybrid plans were in existence as of 2003, providing pension benefits to over 8 million participants, approximately one-quarter of the total employee population covered by defined benefit plans.

Like many other corporations, CIGNA Corporationconverted its traditional defined benefit plan to a cash balance plan, in 1998.Despite their popularity among employers, cash balance plans have spawned considerable litigation. This case is yet another in a long list of cases challenging an employer's conversion to a cash balance retirement plan under the Employee Retirement Income Security Act ("ERISA").

Plaintiffs consist of a class of current and former CIGNA employees who participated in CIGNA's traditional defined benefit plan before January 1, 1998 and have participated in CIGNA's cash balance plan since that time. Plaintiffs and Defendants raise numerous class, sub-class, and individual claims and defenses. At the risk of over-simplification, however, the central issues in this case may generally be described as follows:whether CIGNA's cash balance plan is age discriminatory or otherwise violates certain non-forfeiture and anti-backloading rules under ERISA; whether CIGNA gave the notices and other disclosures required by ERISA; and whether the information CIGNA provided its employees about the conversion and the cash balance plan in summary plan descriptions and other materials satisfied ERISA's requirements.

The questions raised in this case are vitally important to both employers and employees (and their families). Given how profoundly significant retirement plans and planning are to the great majority of Americans – employees and employers alike – this is one area where the answers should be clear, explicit, and definite. Regrettably, however, the answers to the issues raised by these parties are not entirely clear, in large measure due to the fact that ERISA, and the regulations under it, are often lamentably obscure – to describe them as a tangled web does not do them justice. On top of that, there are conflicting decisions around the country on identical issues, making planning for nationwide enterprises impossible.

Elsewhere in the opinion the court made this particularly insightful observation: 

Difficult, time-consuming, and expensive litigation with uncertain results – such as this case represents – is assuredly not a sensible way to manage the Nation's retirement system for either employers or employees. Sadly, at least for now, litigation appears to be the only option available to them.

Ultimately, in a 122-page opinion, the court concluded the conversion of CIGNA's retirement plan to a cash balance plan did not discriminate against older workers.  "To the contrary, the CIGNA Plan provides greater annual benefits to older workers who are similarly situated to younger workers."  The court noted that any difference in benefits from a worker retiring in 2015 to a worker retiring in 2030 is due to the "time value of money,” not discrimination.  On the other hand, the court held that CIGNA can be liable for its failure to provide proper notices to the retirees and failure to explain things in an easily understood manner.  It may be that only non-monetary relief will be available in these circumstances, but the court has required further briefing on what relief should be ordered.  A copy of the opinion is here.