New Interpretation of Plan Provisions Violates ERISA

A federal appellate court found a plan administrator cannot change the calculation of early retirement benefits for participants who terminated under an old version of the plan document.

The 3rd U.S. Circuit Court of Appeals ruled a pension plan administrator may not apply amended plan terms to participants whose benefits vested under pre-amendment plan documents.

According to the appellate court’s opinion, John Cottillion worked at United Refining Company for 29 years, from 1960 until 1989, and his benefits had vested under “the 1980 Plan,” which is the version of United’s Pension Plan for Salaried Employees that applies to people whose benefits vested after 1980 but before 1987. United amended the plan in 2002, backdated to January 1, 1995, to state that the benefits of terminated, vested participants who begin receiving plan payments before age 65 would be “actuarially reduced to reflect the earlier starting date.” The court determined that if the administrator applied the plan amendment to Cottillion it would be a violation of the Employee Retirement Income Security Act’s (ERISA’s) anti-cutback rule, which prohibits employers from amending a retirement plan in a way that reduces benefits already accrued under the plan.

For more stories like this, sign up for the PLANSPONSOR NEWSDash daily newsletter.

The case was prompted when, in 1995, the plan’s actuaries claimed United had erroneously paid to terminated, vested participants vested under the 1980 and 1987 plans pensions that were not actuarially reduced, and that this jeopardized the plan’s favorable tax treatment. United sent letters to terminated, vested participants who had not yet begun to receive benefits telling them if they elected to receive retirement benefits before turning 65, the benefit would be reduced to reflect the early election date.

About a year later, United sent letters to terminated, vested participants who were already receiving pensions, saying their benefits should have been actuarially reduced, and that their monthly pensions would be lowered “until the excess payments have been recovered,” after which they would begin receiving the amount they should have been receiving.

Affected employees sued in the U.S. District Court for the Western District of Pennsylvania alleging that United’s actions deprived them of a benefit to which they were entitled under the plan, in violation of ERISA, and that United violated ERISA’s “anti-cutback” rule.

The appellate court agreed, rejecting United’s arguments that summary plan descriptions show the intent was to reduce early retirement benefits all along. The 3rd Circuit noted that the SPDs state that “[i]f the terms of the Plan document and the Trust agreement and of this summary are inconsistent, the terms of the Plan document and the Trust agreement will control.” In addition, United published employee handbooks that are wildly inconsistent about whether benefits are calculated with actuarial adjustment, and these handbooks’ differences with each other and with the SPDs convinced the court that the plain meaning of the plan should control.

The appellate court’s opinion in Cottillion, et.al. v. United Refining Company, et.al. is here.

Genworth Survey Highlights Retirement Shortfalls

More than half of U.S. adults responding to a recent Genworth survey have not started making financial arrangements for retirement.

According to the recent “Generational Planning Study” released by Genworth, nearly half (46%) of American adults give themselves a poor or failing grade when it comes to their retirement account contributions.

Americans are also somewhat pessimistic about other critical topics, including long term care arrangements and the cost of other health care. According to the study, fully 53% of adults have not started making financial arrangements for retirement, and four in 10 respondents stated not having saved enough for retirement is their biggest financial regret. 

For more stories like this, sign up for the PLANSPONSOR NEWSDash daily newsletter.

“Preparing ourselves financially for future aging and care needs is one of the biggest issues Americans are facing today,” says Tom McInerney, president and CEO of Genworth. “Competing financial obligations, lack of information and even fear prevent many from making a plan simply because they don’t know how to approach retirement planning and take the first step.”

Of respondents who have started making retirement arrangements, the average age is 33, Genworth finds. Respondents also report average annual retirement savings of $7,360—but Genworth researchers warn the more informative median saving figure is a mere $500.

When asked about the amount of money they will need to retire, adults said they anticipated needing, on average, $1.7 million for retirement. At the current average annual savings rate, a 33-year-old would only have approximately half a million dollars at age 65, assuming a 4% compound interest rate. 

Genworth finds a major component of retirement planning that tends to be overlooked by Americans is the potential need for long term care. According to Genworth researchers, as many as seven in 10 Americans will require some form of long term care before their death.

According to Genworth, Americans can take several easy steps for their financial and families’ well-being. The survey reveals few people have created a will, designated guardians or set advanced medical directives. “These three, little-to-no-cost actions can be added to a financial checklist that spans every stage of life,” the researchers note. “It is increasingly more important to develop good habits earlier in the retirement planning process, even though life changes and aging tend to be the impetus for many to start planning for their aging and retirement needs.”

Genworth encourages plan sponsors and advisers to download the full Generational Planning Study from its website. The underlying survey research was conducted in collaboration with J&K Solutions LLC and The Olinger Group, via an online survey of 1,000 U.S. adults from across the U.S., during February 2015.

«