Illinois ERISA Lawyer Blog

Employees of Chicago companies that are subject to a collective bargaining agreement ("CBA") frequently wonder what will happen to their pension benefits if the employer goes belly up, or otherwise does not contribute to the pension fund. Sometimes the owners of these small employers are also employees themselves who perform work for the employer, the scope of which is covered b the CBA. The problem is that multiemployer plans depend on contributions from the employers that sign the CBA to fund the benefits the plan promises, so will the plan pay benefits to an employee or owner-employee from a non-contributing employer? The answer is almost always yes, unless the fund must impose benefit restrictions due to its funding level.

Multiemployer plans are permitted to sue noncontributing employers for delinquent contributions under ERISA § 515. But the plan may not withhold benefits from employees, or even owner employees, in order to enforce the plan's right to those delinquent contributions. A court recently reviewed this same principle, where the owner of the business claimed his pension, and the plan would not pay the benefits because his company was delinquent with its contributions. See Rust v. Electrical Workers Local 26 Pension Trust Fund, No. 10-29 (W.D. Va. Sept. 29, 2011). The fund refused to pay Rust's pension claim because his company experienced financial troubles and stopped contributing to the fund on behalf of the employees.

The court held that the fund could not enforce its claim to delinquent contributions in this manner. The proper way to enforce was through ERISA § 515, rather than withholding benefits. This situation is not to be confused, though, with health insurance plan claims to reimbursement and subrogation for expenditures for injuries caused by a third party.

If your pension plan is attempting to set off any benefits payable to you, speak with an experienced ERISA lawyer.

Executives and employees with retirement plans in Chicago, and nearly everywhere else, now change employers with greater frequency than they did 50 years ago. Long gone are the days where you would typically work for the same company your whole career. This is part of the reason for the rise in popularity of the defined contribution plan over the more traditional defined benefit plan: because you can take your account balance with you. But how exactly do you take your account balance with you when you leave your employer?

Employees typically depend on the employer to provide them with information about how to take the distribution or roll the funds over into an IRA, or another employer plan. So what happens when the employer does not tell you how to make the request? This happened recently, and the United States Court of Appeals for the Fifth Circuit held the sponsor breached its fiduciary duty by failing to notify the employee about how to request a distribution of his benefits following the employee's resignation. Kujanek v. Houston Poly Bag I Ltd., No. 10-20664 (5th Cir. Sept. 27, 2011). In that case, after the employee resigned, the profit sharing plan account balance dropped in value, and the decline could have been avoided if the employee knew how to request the distribution earlier. The court thus held the employer was required to make up for the "loss" to the plan (i.e., the drop in that account's balance) because of the breach of fiduciary duty under ERISA § 502(a)(2). Recall, losses to the plan remedies under that subsection can be obtained for a single participant after Larue v. Dewolff, Boberg, & Associates, Inc., 128 S. Ct. 1020 (2008).

Though this case's facts were limited to failure to notify a participant of how to request a distribution following resignation, the same principle could apply to a surviving spouse who is not notified of how to request a withdrawal following the death of the participant spouse. If your employer, or your spouse's employer, has failed to notify you of how to request a distribution, call a skilled ERISA lawyer.

Nearly every employee of any Chicago-based employer is a participant in some sort of retirement plan offered by the employer: pension plan, cash balance plan, or a 401(k) plan. Participants in 401(k) plans rarely know how much in fees the plan (and therefore, the participants) pay to the service providers. New regulations on disclosure of fees to participants will soon take effect requiring plan administrators to disclose fees charged by service providers to the participants in 401(k) plans.

There has been a wave of lawsuits alleging that certain large 401(k) plans pay excessive fees for mutual funds to service providers. The most recent of which is Renfro v. Unisys Corp., No. 10-2447 (3d Cir. Aug. 19, 2011). In that case, there was lengthy battle over whether Fidelity was a fiduciary with respect to selection of plan investments. The court held it was not, and thus a breach of fiduciary claim could not proceed against Fidelity, following the authority of Mertens v. Hewitt Associates, 508 U.S. 248 (1993). However, the Supreme Court also held non-fiduciaries can be held liable under ERISA § 502(a)(3) in order to unwind a prohibited transaction under ERISA. Harris Trust and Savings Bank v. Solomon Smith Barney, Inc., 530 U.S. 238 (2001). Under ERISA, the service provider will invariably be a "party in interest", such that the provision of services must be for a reasonable fee, otherwise it is a prohibited transaction. ERISA § 406(a).

The courts should thus stop inquiring into whether there was a breach of fiduciary duty, and just focus on whether the fees charged were reasonable for the service, and if not the service provider should be liable to the plan for the amount of the fee charged that was unreasonable under ERISA § 502(a)(3). If you have a question about fees your 401(k) plan pays, speak with a competent ERISA attorney.

Beneficiaries of employer-sponsored retirement plan accounts often find themselves in disputes with each other as to whom is really entitled to the 401(k) or profit sharing plan account balance when the participant dies. Most often, a surviving spouse finds him or herself battling with children from a prior marriage of the deceased spouse. The question both want answered is: what does it take for a surviving spouse to consent to waiving any interest in the benefits? Just such a question came up recently in Chicago before the Court of Appeals for the Seventh Circuit. See Burns v. Orthotek, Inc., Employees' Pension Plan and Trust, No. 10-1521 (7th Cir. Sept. 15, 2001).

In Burns, Dr. Burns was the owner of an orthodontics practice, and the practice sponsored a pension plan, of which Dr. Burns was the plan administrator, named fiduciary, and main plan participant. He died in 2004, but his second wife, Cheryl, survived him. Before his death, Dr. and Cheryl Burns signed three plan documents: Dr. Burns' waiver of a joint and survivor annuity with spousal consent, designation as beneficiaries Dr. Burns' two sons, and Cheryl Burns' consent to the beneficiary designations. After Dr. Burns died, however, Cheryl claimed survivor benefits under the plan. She argued that while she did sign a consent form to the waiver of the joint and survivor annuity and signed the consent to the sons being beneficiaries, the forms did not comply with ERISA's requirement that her signature be witnessed by a plan representative in accordance with ERISA § 205.

That section of ERISA requires that any pension benefit payable in the form of a life annuity must provide for a joint and survivor benefit, and if the participant is married, that form of payment can only be waived if (1) the spouse consents in writing, (2) the election designates a beneficiary, and (3) the spousal consent acknowledges the election and is witnessed by a plan representative. In the Burns case, Cheryl contended that though she signed the consent, it was not witnessed by a plan representative because Dr. Burns did not sign the form as a witness.

The Court of Appeals appeared to weigh the equities of the case here, and held that the "witnessed" requirement did not require that the plan representative actually sign the documents as a witness. Dr. Burns was a plan representative, and signed the forms himself, and admittedly he provided the forms to Cheryl.

If you are a surviving spouse or a beneficiary and have questions about the validity of a spousal consent to designate an alternative beneficiary, talk to an ERISA lawyer.

Few employees that participate in an employer-sponsored 401(k) plan question whether the plan is paying excessive fees to the funds it offers as investment options. We often just assume the plan, and the employer, are leveraging the buying power of the large amount of assets held in the plan to secure the lowest possible fees for the participants. But this may or may not be true. One theory advanced in several cases so far is that when the 401(k) plan offers "retail" class mutual funds, rather than "institutional" class funds available at a lower cost, the plan fiduciaries are not meeting their fiduciary obligations. See, e.g., Loomis v. Exelon Corp., No. 10-1755 (7th Cir. Sept. 6, 2011).

The crux of the participants' argument is that where a plan can use its size to negotiate lower fees, or where the same fund is available in both a lower-fee "institutional" class and a higher-fee "retail" class, the fund should opt for the lower cost alternative. The Court of Appeals for the Seventh Circuit, though, has disagreed with this rationale several times now. See, e.g., Hecker v. Deere & Co., 556 F.3d 575 (7th Cir. 2009). The court, however, reasoned that the employer, Exelon in this case, met its obligation because it provided an array of investment options to participants, some with lower fees.

The flaw I see in both the court's reasoning, and the manner in which the participants presented the argument, is that it does not address the overall shift in attitude about plan expenses as the predominant plan type shifted from traditional pension plans to the modern 401(k) plans. In a defined benefit pension plan, participants were promised a certain benefit, and any plan expenses necessarily drove up the employer's cost. The employers therefore were very savvy about paying plan expenses, using the plan's size to leverage the best deals possible. But as we have shifted to the 401(k) being the predominant type of retirement plan, the participants and not the employer bear many of those expenses, such as fund and management fees. Are the employers really using the same level of diligence to defray expenses as they did when the expenses came from their own pockets?

If you have questions about 401(k) plan fees, call an ERISA lawyer today.

Employees and Retirees in Chicago that are participants in a pension plan should be concerned about a cost of living adjustment ("COLA") in their pension plans. A COLA is an annual adjustment to a pension benefit based upon a cost of living index. The question arises, however, when a participant takes a lump sum distribution, whether that lump sum will reflect future COLAs or not. A class action case on this topic recently settled, and some parties challenged the settlement. Williams v. Rohm & Haas Pension Plan, No. 10-1978 (7th Cir. Sept. 2, 2011).

The case began when Cory Williams left Rohm & Haas, and elected to take a lump sum distribution of his pension benefit under the terms of the plan. He later came to believe his lump sum distribution should have included the present value of the future COLAs that he would have received if he elected an annuity. The district court granted summary judgment in his, and the class's, favor. It, and the appellate court, held that a COLA is an accrued benefit within the meaning of § 2(23)(A) of the Employee Retirement Income Security Act ("ERISA"), and thus ERISA § 504(c)(3), which provides any lump sum distribution must be the actuarial equivalent of any benefit payable as an annuity. In fact, tax regulations provide that when a plan an early retirement annuity is to be the actuarial equivalent of an early retirement annuity, the lump sum must include a COLA. Treas. Reg. § 1.411(a)-11(a)(2).

The parties contested the damages amounts, and the Plan argued the tax regulation was not applicable because under other precedent, other similar tax regulations have been held to be merely a requirement for preferential tax treatment, but not a requirement to comply with ERISA. See McCarter v. Ret. Plan for the Dist. Managers of Am. Family Ins. Grp., 540 F.3d 649, 651 (7th Cir. 2008). Before the district court could address this argument on damages, the parties settled the claims.

If you have questions regarding the cost of living adjustment in your pension plan, speak to a pension lawyer versed in ERISA today.