Compliance May 15, 2003

Court: SPD Trumps Employer 'Summaries'

May 15, 2003 (PLANSPONSOR.com) - Caps on annual pension plan payments that maintain a plan's tax-qualified status take precedence over information to the contrary in an employer's plan "summaries."
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>The case centered on whether the documents handed out by the employer were a summary plan description (SPD) or not.   In this case the three “summaries” in question consisted of a single-page handout, a two-page brochure that covered the employer’s fringe benefits, and a section of the employee handbook. The 7th US Circuit Court of Appeal found these documents to not be an SPD, according to Washington-based legal publisher BNA.

>Therefore, the “documents prepared by an employer do not supersede those documents that establish the terms of a pension plan,” said Circuit Judge Frank Easterbrook, writing for the court. Conversely, conflicts between the compulsory SPD and the plan itself are resolved in favor of the SPD, the court said.

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Promised Larger Pension

>Two doctors employed by Carle Clinic Association, Richard Helfrich and Daniel Nelson, alleged they were promised a pension that could be as large as 50% of average earnings. This contention came from the plan “summaries” the two had received.

>However, the total annual pension under the clinic’s ERISA-governed defined benefit plan could not exceed $160,000, since paying more would cost the plan its tax qualified status.  When the plan refused to exceed this ceiling, the doctors filed a lawsuit under ERISA Section 502(a) in the US District Court for the Central District of Illinois.

In the initial trial, the district court judge granted summary judgment to Carle Clinic, finding that the plan’s terms explicitly restricted payments to a level consistent with retaining tax advantages.   Affirming this decision was the appellate court.

>On appeal, the doctors claimed that the “summaries” handed out overrode the terms of the plan, none of which mentioned the cap.   However, the handouts were not SPDs, the court found, saying, “employer-prepared summaries . . . have no footing in ERISA and could not be enforced against the plan without disregarding the boundary between two distinct entities: the plan and the employer.”

>Noted instead by the court was the full description in the SPD of the $160,000 cap.   Even though the other “summaries” were prepared by the employer, the SPD takes precedence since “plans cannot control what miscellaneous recruiters and personnel managers say, nor does even a large employer’s human-resources staff draft descriptions with the precision that the plan itself will do,” the court ruled.

The case is Helfrich v. Carle Clinic Association, 7th Cir., No. 02-2765, 5/12/03.

Investing May 14, 2003

WSJ: S&P To Start Ranking REITs

May 14, 2003 (PLANSPONSOR.com) - More than 90 real estate investment trusts (REIT) are expected to join the ranks of the Standard & Poor's (S&P) earnings and dividend quality-ranking system.
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Although still awaiting a formal announcement by S&P, the inclusion would take effect sometime this month.   The move comes only two years after S&P began including some REITs in its 500-stock index as Wall Street is increasingly warming up to the sector that has had an average 7% yield over the past three years, according to a Wall Street Journal report.

Raymond Mathis, REIT equity analyst at S&P told the Wall Street Journal the decision to include REITs was spurred, in part, by the amount of phone calls he said S&P fielded from institutional investors who wanted to invest in REITs. The reason for the demand are some institutional requirements of a high S&P quality ranking.   In general, the rankings, graded on a scale of A-plus to C, with A-plus signifying the company has the strongest dividend and earnings growth, appear on the front of S&P’s stock reports, which are available to individual and institutional investors, mutual funds, and financial advisers who subscribe to S&P.

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The rankings are calculated annually. But they can change before a year ends if there’s a major dividend cut, or bankruptcy in the interim.   However, the rankings are less a predictor of future performance than a look at how companies perform over time, based on the system’s approach of appraising the growth and stability of earnings and dividends on individual companies, based on per-share earnings and dividend records over the past 10 years.

Thus far, the only REITs assigned A-plus ratings are shopping-center ownersKimco RealtyCorp. andMid-Atlantic Realty Trust, of Lutherville, Md.   To see the complete rankings for REITs, investors can visit  www.standardandpoors.com  and click on “Equity.”

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