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Guest Article

Deloitte logo

(From the September 25, 2006 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Eighth Circuit Case Highlights Fiduciary Issues Relating to Pension Benefit Estimates

A pension plan administrator did not violate any ERISA fiduciary duties in connection with making available to a participant a series of automated benefit estimates that later proved to be wrong, according to the Eighth Circuit Court of Appeals. Christensen v. _______, 2006 U.S. App. LEXIS 23086 (8th Cir. 2006). The Eighth Circuit ruled the plan administrator did not violate its duty of loyalty to participants or its duty of care, in spite of the plaintiff's claim that the administrator knew the automated system produced estimates that were off by 10 percent or more three or four times per month.

Case Overview

The case revolves around an automated system for providing pension benefit estimates to a pension plan's participants. The plan administrator hired an outside vendor to develop and operate the system, which bases estimates on the plan sponsor's database of historical employee payroll information. The system responds to an average of 115,000 requests -- which participants can submit by telephone or e-mail -- for benefit estimates each year. The summary plan description (SPD) tells participants how to use the automated system to request estimates, but also warns --

These estimates are not binding; if a mistake is made, you will be paid the corrected amount, even if less than the estimated amount.

The plaintiff is a participant in the pension plan who used the automated system to request, by telephone, five benefit estimates between March and November 2003. Depending on the proposed retirement date, the estimates ranged from $1,715 per month to $1,763 per month. Each estimate was accompanied by the same warning that appears in the SPD.

At retirement, the participant received a final benefit estimate of $1,754 per month from the automated system. Again, the estimate included a warning that his actual benefit amount, which would be "based on a final review of payroll data and applicable plan provisions," could be different. In fact, due to a job classification error in the automated system, his actual benefit did turn out to be different: $1,484 per month, or almost $300 per month less than the last estimate.

Fiduciary Breach Claims

The court of appeals noted that ERISA plan fiduciaries have two types of duties when dealing with participants and beneficiaries. The first, a "duty of loyalty," is based on ERISA § 404(a)(1)(A), which requires fiduciaries to discharge their duties "solely in the interest of the participants and beneficiaries and ... for the exclusive purpose of ... providing benefits to participants and their beneficiaries." The second, a "duty of care," comes from ERISA § 404(a)(1)(B), which states fiduciaries must discharge their duties "with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims."

Duty of Loyalty

The plaintiff argued, and the court of appeals agreed, that an ERISA fiduciary would breach its duty of loyalty if it "knowingly cause[d] a plan beneficiary to retire based on materially overstated benefit estimates." However, the court concluded the plaintiff did not show any evidence the fiduciary "knowingly" provided false or overstated estimates. Although the court acknowledged the plan fiduciary was aware of occasional mistakes in the automated system, it also noted the repeated warnings about the non-binding nature of these estimates. According to the court of appeals,

... it is not disloyal to plan participants and beneficiaries to adopt a prompt, inexpensive, substantially accurate benefit estimate system that is used 115,000 times a year, accompanied by adequate disclosures that the estimates are non-binding and may not always be accurate. A mistake in the administration of a pension plan is not a violation of the duty of loyalty absent evidence that plan administrators acted in the interests of someone other than participants and beneficiaries.

Duty of Care

The court of appeals noted some circuits take the position ERISA fiduciaries have "an obligation to convey complete and accurate information material to the beneficiary's circumstance" when participants ask them for information. According to the court of appeals, this formulation suggests simple negligence could result in a violation of the duty of care. Other circuits, the court of appeals stated, "construe the duty of care more narrowly."

Rather than decide which standard it prefers, the court of appeals sidestepped the issue by concluding the plaintiff's benefit estimates were wrong due to a "clerical or ministerial error" made by someone who was not acting as an ERISA fiduciary. The court of appeals cited the following Department of Labor regulation (29 C.F.R. § 2509.75-8) for support:

A plan fiduciary may rely on information, data, statistics, or analyses furnished by persons performing ministerial functions for the plan, provided that he has exercised prudence in the selection and retention of such persons. The plan fiduciary will be deemed to have acted prudently ... if, in the exercise of ordinary care in such situation, he has no reason to doubt the competence, integrity or responsibility of such persons.

According to the court of appeals, the plaintiff did not prove the plan fiduciaries violated their duty of care in selecting and retaining the vendor to operate the automated system, or in monitoring the system's accuracy. The court of appeals also noted there was no evidence the plaintiff's flawed estimates were products of a recurring flaw in the system.

One Final Claim ...

In addition to the fiduciary claims, the plaintiff argued the plan administrator violated its statutory duty to furnish a statement of total accrued benefits upon the participant's written request. ERISA § 105(a). The penalty for failing to reply with such a request can be as much as $110 per day, payable to the participant. The plaintiff asked for the maximum possible penalty in this case, $144,430.

The court of appeals found two problems with the plaintiff's claim. First, the plaintiff did not request a benefit statement "in writing," but instead used the telephone-based automated system. Even though the plan had the required procedure in place for requesting statements of total accrued benefits, the plaintiff opted not to use it. Second, even if the plan administrator had violated ERISA § 105(a), the court of appeals stated the maximum penalty -- which is discretionary -- would not be appropriate absent a showing of bad faith.

Deloitte logoThe information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.

If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Taina Edlund 202.879.4956, Laura Edwards 202.879.4981, Mike Haberman 202.879.4963, Stephen LaGarde 202.879-5608, Bart Massey 202.220.2104, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Carlisle Toppin 202.220.2067, Tom Veal 312.946.2595, Deborah Walker 202.879.4955.

Copyright 2006, Deloitte.

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