Balser News

Supreme Court 2008 Rulings Affect on Nonqualified Plans

September 2, 2008

During its most recent term, the U.S. Supreme Court issued two decisions relating to the design and administration of employee benefit plans. The Court's rulings in Metropolitan Life Ins. Co. v. Glenn and LaRue v. DeWolff, Boberg & Associates, Inc., made it easier for plan participants to legally challenge decision-making of employers and fiduciaries about the sponsored retirement programs.

MetLife v. Glenn addressed the question of conflict of interest. It posed the question of whether or not a conflict of interest is present when the same plan administrator makes decisions about eligibility for benefits as well as having the responsible for paying any benefit claims. The Sixth Circuit Court of Appeals reviewed the case, applying the deferential abuse-of-discretion standard. Among the "relevant factors" the Sixth Circuit considered was what it characterized as the conflict of interest created by MetLife serving as both the insurer and the decision-maker on Glenn's claim. The majority opinion, written by Justice Stephen Breyer, affirmed the lower court decision that a plan administrator that both evaluates and pays claims does have a conflict of interest, and that such a conflict should be "weighed as a factor in determining whether there is an abuse of discretion." Chief Justice John Roberts filed a separate opinion, arguing that a conflict of interest should only be considered "where there is evidence that the benefits denial was motivated or affected by the administrator's conflict." Justice Anthony Kennedy also filed a separate opinion, concurring in part and dissenting in part. Justice Scalia, joined by Justice Clarence Thomas, dissented. Agreeing that a conflict of interest arises when a plan administrator both analyzes and pays out benefits, the dissent argued that the administrator "does not abuse its discretion unless the conflict actually and improperly motivates the decision."

LaRue v. DeWolff, Boberg & Associates, Inc. involves a 401k plan participant who claims that the plan administrator failed to make certain investments that the participant had directed and that he therefore is entitled to bring a 502(a)(2)/409 claim. The plan administrator argues that ERISA permits suit against a plan administrator only for “losses to the plan,” and that the participant’s losses were personal to him and did not affect the overall plan. The participant rejoins that his losses “directly [affect] the overall amount of assets held by the plan.”

LaRue presents two questions: (1) whether under ERISA, a participant in a defined contribution pension plan may sue to recover losses to the plan caused by a breach of fiduciary duty, even when those losses affected only the participant’s individual account; and (2) whether an action by a plan participant against a fiduciary to recover losses caused by a breach of duty seeks “equitable relief” for purposes of ERISA Section 502(a)(3). The fact that petitioner James LaRue sought to recover funds (approximately $150,000) that he allegedly lost when the plan administrator failed to make certain investments that he had directed does not, the U.S. contends, take his suit outside the purview of Section 502(a), as any recovery by LaRue will ultimately benefit the plan as a whole by “directly increas[ing] the overall amount of assets held by the plan.” In closing, the United States notes that ERISA was enacted to address “misuse and mismanagement of plan assets by plan administrators,” as well as “to protect . . . the interests of participants in employee benefit plans . . . by establishing standards of conduct, responsibility, and obligation for fiduciaries of [those] plans, and by providing for appropriate remedies, sanctions, and ready access to the Federal courts.”

How does a plan sponsor respond to this decision in the non-qualified deferred compensation plan area?

Certain changes will improve the likelihood that a court will review its benefit under the abuse of discretion standard. For one, the plan sponsor should make sure the line of delegation of authority (a.k.a. liability) flows clearly and unambiguously away from the board of directors, and does not inadvertently vest responsibility in the employer and/or its senior executives. Another considerate is to include some type of “statute of limitations" to the plan documents regarding participants' claims, and carrying that through the plan summary and web communications. It’s also consider wise to clarify within the plan document that all claims for benefits, including claims related to alleged administrative errors, must be filed according to the claims procedures of the Plan and ERISA.

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