Failing to Notify Participants of Plan Changes Can Be Costly
Among ERISA's many notice and disclosure obligations, the requirement to timely inform participants of important plan changes is one that is too often overlooked. Although there is no monetary penalty for failing to distribute a summary of material modifications ("SMM") or an updated summary plan description ("SPD") within the time periods set by the regulations, such a failure can still have severe consequences. AT&T recently learned that lesson - to the tune of a six-figure judgment awarded to a deferred vested participant in its defined benefit pension plan. (Helton v. AT&T, Inc. Sept. 16, 2011).
Following a three-day trial, a United States District Court in Virginia ruled that the fiduciaries of the AT&T Pension Benefit Plan had abused their discretion by failing to timely notify Francine Helton of a change in the Plan's terms. That change was significant because it would have entitled Ms. Helton to retire at age 55 with no reduction in her monthly benefit. The court also found that the Plan's fiduciaries had erred when they failed to correct Ms. Helton's misunderstanding as to her eligibility to retire.
Change in Early Retirement Eligibility
Ms. Helton terminated her employment from AT&T in May of 1997, at age 50, following an extended leave of absence. At that time, she was not eligible for an unreduced benefit under the Plan. Just three months later, however, AT&T amended the Plan in a way that would have allowed her to begin receiving distributions at age 55 with no reduction for early retirement. AT&T claimed that it had notified employees of this change in a letter sent in late April of 1997, and then again in 1998 when it distributed a revised SPD. Ms. Helton contended that she received neither the letter nor the revised SPD.
Further complicating the case for AT&T, Ms. Helton also testified that, in 2001, she had specifically asked a Plan representative to verify that she was not entitled to a benefit until she reached age 65. Although Ms. Helton obviously misunderstood her rights at this point, the court found no evidence that the Plan representative attempted to correct Ms. Helton's misunderstanding. Only when Ms. Helton inquired again in 2009, as she neared age 65, did she learn that she had
been eligible to receive a benefit for nearly eight years.
Ms. Helton asked the Plan to make retroactive benefit payments to her from the date she attained age 55. That request was denied, as was her administrative appeal. The Plan's fiduciaries based their denial on a finding that she had received notice of the change in the Plan's rules through both the April 1997 letter and the 1998 SPD. Ms. Helton filed suit shortly thereafter.
Defective Notice and Abuse of Discretion
The court reviewed Ms. Helton's claim under the "abuse of discretion" standard, giving deference to the Plan fiduciaries' findings. Even under that forgiving standard, however, the court concluded that the fiduciaries' evaluation was woefully deficient. The fiduciaries could point to no evidence that either the April 1997 letter or the 1998 SPD had actually been delivered to Ms. Helton. Moreover, they could not demonstrate that they even considered the possibility that those notices had not been delivered. Instead, they merely relied on vague statements from the Plan administrator about the standard process for distributing such notices.
The fiduciaries' defense was hampered by the fact that Ms. Helton's employment records had been destroyed years before the trial. Thus, there was no way to prove that the notices had actually been sent to her. The fiduciaries were also unable to produce mailing lists used for these notices that included Ms. Helton's name.
Perhaps most damaging to the AT&T defendants, however, was the fact that the 1997 letter and the 1998 SPD were addressed only to active management employees. Ms. Helton was neither actively employed during those times, nor a management employee. Instead, she had terminated her employment after a leave of absence, and she was then classified as a deferred vested participant.
Because the defendants could not prove that they took appropriate measures to notify Ms. Helton of the change in the Plan's early retirement rules, the court held that they had acted arbitrarily and capriciously in denying her claim, and that they had violated ERISA's disclosure rules. It pointed to ERISA's regulatory requirement that plans notify affected participants - including deferred vested participants - of material changes within 210 days after the end of the plan year in which the changes are adopted. Those regulations require administrators to "use measures reasonably calculated to ensure actual receipt of the material by plan participants." By failing to mail an SMM or revised SPD to deferred vested participants, the Plan's fiduciaries violated that requirement.
Fiduciary Breach for Failing to Correct Misunderstanding
The court also concluded that the AT&T defendants had breached their fiduciary duties by failing to correct Ms. Helton's misunderstanding of her rights under the Plan. According to the court, fiduciaries have an obligation "not to misinform employees through material misrepresentations and incomplete, inconsistent or contradictory disclosures." When Plan representatives became aware in 2001 that Ms. Helton did not understand that she was entitled to retire with unreduced benefits at age 55, rather than age 65, they had an affirmative fiduciary duty to correct that misunderstanding.
Ultimately, the court awarded Ms. Helton nearly $125,000 in retroactive benefits, and it also ordered AT&T to pay her attorneys' fees.
Lessons for Fiduciaries
Although the process of sending timely SMMs to affected participants is obviously more complicated for plans with thousands of participants scattered all across the country, errors such as those addressed in the Helton case can happen to any plan, with equally drastic consequences. To avoid such a costly mistake, plan fiduciaries should:
- Prepare and distribute SMMs as soon as material modifications are made to the plan;
- Carefully evaluate how notices of such changes are being distributed, and to whom;
- Maintain contemporaneous records of the process used to distribute those notices, such as mailing lists; and
- Instruct benefits administrators to correct participants when they express an obvious misunderstanding of their rights under the plan.
In the end, adopting a plan amendment is merely the tip of the iceberg; the real danger lies in failing to communicate the amendment's changes to affected participants.
Gregory L. Ash, Partner
Spencer Fane Britt & Browne LLP