Guest Article

Employee Inquiry Is Key to Employer's Fiduciary Disclosure Obligation, Court Rules

An employer is required to provide "complete and truthful information" about potential plan changes if a plan participant inquires about these changes, but the employer is not required to volunteer this information prior to final adoption of new provisions, according to a recent ruling by the full 9th U.S. Circuit Court of Appeals. The case is Bins v. Exxon Company U.S.A. (2000 U.S. App. LEXIS 19080).

This decision by the full court modifies an earlier panel decision (Bins v. Exxon 1999 U.S. App. LEXIS 20779) in which the 9th Circuit concluded that a plan sponsor has a duty both to accurately answer a participant's questions about potential plan changes and to disclose material plan changes under consideration, regardless of whether participants inquire about these changes.

The recent ruling reverses a district court decision that granted summary judgment to Exxon after it determined that plan changes were not under serious consideration when Bins asked for information.

Facts of the Case

Bins was an employee of Exxon, U.S.A., a division of Exxon Corporation. He became eligible for retirement in 1995 and decided to retire effective Jan. 1, 1996, a date he later postponed to February. After hearing rumors of a special program that might permit the payment of extra severance benefits if Exxon, U.S.A. decided to reduce its workforce, Bins inquired about whether this program was being considered for implementation. He was told truthfully by his supervisors, his company benefits counselor, and an Exxon attorney conducting a retirement seminar that these individuals had no knowledge of a new severance program offering.

On his last day of work, Dec. 27, 1995, Bins made a final inquiry about whether the company was going to offer severance benefits and was told that there was no information on such an offering. Bins finished out his employment by taking scheduled vacation and off-duty days and did not inquire further about the severance program.

Meanwhile, Exxon, U.S.A. had initiated a study team in 1995 to consider ways to improve the functioning of the department in which Bins was employed. The plan recommended a reorganization of the department and the creation of a special severance program to encourage early retirement by the 200 employees who would be eliminated from the department in this process. This plan went to Exxon, U.S.A. management in November 1995.

The Exxon, U.S.A. vice president reviewed the plan, followed by a senior vice president and the division president, who received the plan in December 1995. The plan then went to Exxon, where it was favorably reviewed in January 1996 by an Exxon senior vice president. Later that month, the Exxon, U.S.A. president gave his approval for the department to implement the reorganization and special severance program. The program was formally announced in February, less than two weeks after Bins retired. Bins filed suit, charging a breach of fiduciary duties to disclose plan changes once they were under serious consideration.

The district court held that serious consideration of the plan began in January 1996, the date the program was reviewed by Exxon's senior vice president, and noted that Bins made no inquiry after that date. Thus, the court ruled, Exxon, U.S.A. had no duty to inform him of the possible change. Bins appealed the district court ruling.

Summary of the Decision

The full panel of the 9th Circuit ruled that Exxon, U.S.A. did not have a duty to volunteer any information about possible plan changes in the absence of a participant inquiry, but was obligated to respond completely and accurately when a participant inquires about a change under serious consideration.

The court relied on "Fischer II" (Fischer v. Philadelphia Electric Co., 96 F.3d 1533, 3d Cir. 1996) as the proper means for ensuring that employers fulfil their fiduciary duties to disclose information on changes in the plan. However, the court noted that the specific decision-making authority must be analyzed in context to determine where true serious consideration began, stating that "the flexibility inherent in the Fischer II test is essential."

Because it is possible that decisions were actually made at relatively low management levels and only confirmed or "monitored" by senior Exxon executives, the court determined that the date of serious consideration could not be presumed to be the date on which the program proposal was provided to the highest-level executive. The district court was asked to determine whether the division of Exxon, U.S.A. was "essentially self-managed."

The court noted further that if an employee inquires about a possible plan change and the change is later seriously considered for implementation, a plan fiduciary is required to provide information on the possible change only if the employee requested to be kept informed at the time of the initial inquiry and the plan fiduciary agreed to provide such updates.

In the partly dissenting opinion, three judges declined to endorse the broad interpretation of senior management adopted in the majority opinion, noting that "by senior management Fischer II really meant 'senior.'" The dissenting opinion did not support conjecture about whether Exxon, U.S.A. employees "resembled" senior management, a question raised in the opinion for consideration by the district court on retrial.

Commentary

The 9th Circuit's latest ruling contains mostly good news for plan fiduciaries, although there is a little good news for plan participants. The good news for plan fiduciaries is that the full 9th Circuit reversed the decision of the three-judge panel finding that plan sponsors/fiduciaries must affirmatively disclose the fact that changes are under serious consideration.

In establishing an affirmative disclosure rule, the three-judge panel was reasonably trying to protect participants who did not know the right questions to ask. However, if plan fiduciaries needed to affirmatively disclose to participants every possible change that was merely under serious consideration even if it might never actually be implemented, there was a risk of confusing participants or causing them to "tune out" important plan communications.

Another important part of the 9th Circuit's decision for plan fiduciaries was the court's finding that plan fiduciaries do not have an affirmative duty to "follow up" with plan participants about future developments unless the participant requests updates and the plan fiduciaries agree to provide those updates. This will put the responsibility on plan participants to clearly and specifically ask for information about current as well as future benefit enhancements under serious consideration. If the plan fiduciaries do not agree to provide updates, then participants will have the burden of continually requesting information about changes then under serious consideration.

The good news for plan participants is that the full 9th Circuit may have slightly lowered the point at which "serious consideration" could occur if for example, senior management typically "rubber-stamps" decisions of a lower-level benefit committee or director of benefits. This will lead to very fact-specific inquiries about how corporations work and their past practices of approving plan amendments.

Reprinted with permission from the October 2000 supplement to The Pension Plan Fix-It Handbook, ©Thompson Publishing Group, Inc., 2000. All rights reserved.

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