Appellate Court Affirms Top Hat Plan Change in Crediting Rate

The court found nothing in the plan document prevented the board of the Computer Sciences Corporation Deferred Compensation Plan for Key Executives to amend the plan to introduce a more volatile crediting rate than before.

The 4th U.S. Circuit Court of Appeals has affirmed a lower court ruling in a case in which two former executives of Computer Sciences Corporation (CSC) alleged a denial of benefits claim under Section 1132(a) of the Employee Retirement Income Security Act (ERISA) because the defendants changed the crediting rate for the Computer Sciences Corporation Deferred Compensation Plan for Key Executives.

The district court held that under any standard of review, “CSC correctly interpreted the Plan as permitting the 2012 Amendment, and CSC’s denial of plaintiffs’ claims for benefits was therefore appropriate,” and it granted summary judgment to CSC. The appellate court affirmed the district court’s decision.

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

As background, the top-hat plan was unfunded, and plan participants’ deferrals accrue in a notational account. CSC applies a crediting rate to the notational account balances and pays retirement benefits from its general assets.

Under terms of the plan, the plan administrator has broad discretionary authority over the plan and the terms of the plan may be wholly or partially amended from time to time at the administrator’s discretion. However, the plan does mandate that “no amendment shall decrease the amount of any participant’s account as of the effective date of such amendment.”

After 2003, the plan’s board amended the plan to chang the crediting rate to track the 120-month rolling average yield to maturity of the Merrill Lynch U.S. Corporates, A Rated, 15+ Years Index as of December 31 of the prior plan year. Application of this crediting rate generally gave plan participants above-market yields on their deferred income and very low volatility. Furthermore, the method of calculating this crediting rate smoothed out market fluctuations and made annual payments predictable and even.

In May 2012, the Board amended the crediting rate again which resulted in a more flexible crediting rate linked to a participant’s selection of one (or more) of four valuation funds. The four valuation funds include a money-market fund, an S&P index fund, a core bond fund, and a target-date retirement fund. This system permits participants to choose crediting rates derived from valuation funds with characteristics that they value, whether that is low volatility, steady growth, or high earning potential. Participants can also choose to change their allocation mix daily. The 2012 amendment took effect on January 1, 2013, and applied uniformly to all participants.

Discussion of the arguments

The court opinion notes that one of the plaintiffs retired in March 2012 and one retired in September 2012. Neither plaintiffs’ account decreased in value at the time the 2012 amendment took place.

On May 20, 2013, the plaintiffs each sent CSC a letter claiming benefits under the plan before the change in the crediting rate, but CSC denied their claims on July 22, 2013. The plaintiffs then filed a lawsuit.

The plaintiffs challenge three features of the 2012 amendment: the change to the crediting rate; the introduction of potential for risk and volatility into the plan; and variations in annual distributions, which they argue are no longer “approximately equal.”

Regarding the amendment of the crediting rate, the appellate court found a plain reading of the plan permits the plan’s board to change the crediting rate so long as the change does not decrease the value of a participant’s notational account at the time of amendment. The plan also generally requires that administration be uniform and consistent. The 2012 amendment did not decrease the value of any notational account at the time the amendment took effect and applied uniformly to all participants.

With regard to the introduction of risk and volatility into the plan, the court said the plaintiffs seek to read into the plan a guarantee that simply does not exist. The opinion says the “Plan’s textual requirements—that there be uniform administration of participants’ accounts and that amendments not reduce the value of these accounts at the time of amendment—limited the Board’s discretion in meaningful ways. For example, CSC could not apply a negative crediting rate, because this would reduce the value of accounts at the time the amendment took effect. Furthermore, the Plan administrator could not exclude Appellants’ accounts from the 2012 Amendment because this might violate the requirement of uniform administration.” But, the court noted that the text of the plan document does not limit the board’s selection of a crediting rate in the way in which the plaintiffs argue. “The relative level of risk or volatility in a crediting rate merely follows from the crediting rate that the Board selects, and the Plan places no limit on a crediting rate’s exposure to market-based risk. Phrased differently, since the Plan made no promises about the levels of risk or volatility in the crediting rate, the 2012 Amendment could not render such a promise illusory,” the opinion says.

Finally, the appellate court noted that since the 2012 amendment, eligible participants’ payments are no longer the same from year to year, but CSC still pays participants in “approximately equal annual installments.” According to the opinion, because the new crediting rate introduced the potential for more market volatility into participants’ notational accounts, CSC developed a process of dividing the amount in a retired participant’s notational account in a given year by the number of years remaining under the plan.  By doing so, CSC achieves “approximately equal” annual payments to eligible participants. 

The court pointed out that in practice, these payments cannot be strictly equal over time. “CSC cannot predict the actual performance of an S&P index fund over a year’s time, much less over a decade, and even if CSC attempted to predict future performance of a particular valuation fund, it still could not predict how a participant’s allocation decisions across funds might influence future credited earnings or losses,” the opinion says. “Participants who select valuation funds with lower but steadier rates can expect similar annual installment payments, while participants who select riskier but possibly more rewarding valuation funds can expect greater variation from year to year.”

The court concluded that the new system cannot deliver more than “approximately equal” annual payments, but this is all that the plan document requires.

«