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CCH® PENSION AND BENEFITS — 7/21/06

Fiduciary duty is breached where failure to credit plan accounts is based on misreading of plan language

An employer's misreading of defined contribution plan terms, which served to divest plan participants of vested benefits, justified the removal of the employer as a plan fiduciary because the flagrancy of the misreading was evidence that the employer was not acting in the best interests of the participants, according to the U.S. Court of Appeals in Richmond (CA-4). The plan terms plainly provided that an employee's benefits would be fully vested after he or she completed five years of service. The employer, which was the plan sponsor, and, temporarily the plan trustee, instead retroactively determined that five years of plan participation were required before an employee's benefits would be fully vested. The employer then ordered the plan administrator to forfeit the benefits of employees who had left the company after five years of service, but prior to completing five years of participation in the plan.

The employer was required by the plan's terms to make annual contributions to a trust fund for each eligible employee. When the employer ceased to make contributions in 1995, the plan administrator contacted the Department of Labor (DOL), which then filed suit against the employer in district court.

The DOL also charged that the employer had, over time, requested that the plan administrator turn over more than $700,000 of the plan's assets to cover the employer's administrative expenses, even though most of the plan administration work had been turned over to third parties. When the district court granted summary judgment in favor of the DOL, and removed the employer as plan fiduciary, the employer appealed.

"Bizarre" reading of plan terms evidence of fiduciary breach

In upholding the lower court's decision, the appellate court pointed out that the employer's order that participants should not be given credit for all their years of employment contravened not only the plan's terms (the plan repeatedly defined a "Year of Service" in terms of service with the employer, not participation in the plan), but also ERISA's minimum vesting requirements. ERISA §203(b)(1) requires, stated the court, that "all of an employee's years of service with the employer...be taken into account." The court characterized the employer's misreading of both the plan and ERISA as "bizarre," and added that it was evidence that the employer had neither prudently managed the plan, nor acted solely in the interests of the plan participants.

Further evidence of the employer's breach of fiduciary duty was its demand for over $700,000 for administrative expenses, according to the court. The court noted that the employer had provided virtually no documentation for its demands, and that it had failed to specify what services it provided to back up its monetary claim. In fact, stated the court, the employer's receipt of approximately $62,000 from the plan administrator constituted a prohibited transaction, under ERISA §406(a)(1)(D).

For more information on this and related topics, consult the CCH Pension Plan Guide.

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