FleetBoston Cash Balance Suit Moves Forward

The court refused to dismiss Donna Richards claim that the cash balance plan violated the Employee Retirement Income Security Act (ERISA) section regarding age discrimination and the rate of benefit accrual, BNA reports.   In its decision, the court said that Section 204(b)(1)(H) of ERISA requires a participant’s rate of benefit accrual to be measured solely in terms of an annuity payable at normal retirement age and not at the rate at which amounts are allocated to an employee’s account.

Richards’ claims that FleetBoston failed to notify participants of a significant reduction in the rate of benefit accrual 15 days prior to the effective date the plan was converted and failed to provide an adequate Summary Plan Description were also left standing.

The court did dismiss Richards’ claim that the cash balance plan violated ERISA’s Section 203(a) nonforfeitability provision by conditioning Richards’ receipt of cash balance benefits on her foregoing the early retirement benefits she earned prior to the adoption of the cash balance plan. The court noted that the cash balance plan did not require a choice between alternative benefits because participants who accrued benefits prior to the plan conversion would receive one benefit that was “ always the greater of” their cash balance account benefit and their benefit accrued under the defined benefit plan.

Richards’ claim that the plan violated ERISA Section 204(b)(1)(B)’s anti-backloading rule by causing participants to face years where they accrue zero benefits followed by years where they accrue actual benefits was also dismissed.   According to the court, if the cash balance plan was treated as having been in effect for all plan years, employees would never have accrued a benefit under the defined benefit plan and would have started accruing benefits under the cash balance formula from the start of their employment.

In addition, the court dismissed Richards’ claim that FleetBoston breached its fiduciary duties by frequently informing retiring plan participants of the value of their cash benefit accruals while failing to inform them of the greater benefits they were owed under the defined benefit plan, saying that she lacked constitutional standing to pursue the claim because she was not personally injured by the alleged breach.

In a separate opinion, class-certification was granted as to the three claims left intact.

FleetBoston converted its defined benefit plan to a cash balance plan in January 1997. When it adopted the cash balance plan benefits that employees had earned under the defined benefit plan were converted to an opening hypothetical cash balance.   According to the court opinion, the opening balances did not include the value of a defined benefit plan participant’s right to subsidized early retirement benefits.

The cash balance plan provided that, upon termination of employment, an employee who had participated in both the defined benefit plan and the cash balance plan would receive the greater of his or her cash balance account or his or her benefit under the defined benefit plan, frozen as of January 1, 1997.   This, combined with the fact that the cash balance plan converted less than the full value of the prior accrued benefits to the participants’ opening account balances, meant that the value of retirement benefits available to such participants did not increase past the frozen benefit that they already had accrued until the amount in the cash balance account reached and then exceeded that amount, the court said. This allegedly caused employees to work for many years following the 1997 plan conversion without actually accruing any new benefits.

An SPD distributed to participants allegedly did not mention this ‘wear-away’ effect or that participants’ benefit accruals under the cash balance plan would be reduced as they got older.

The case is Richards v. FleetBoston Financial Corp., D. Conn., No. 3:04-cv-1638 (JCH), 3/31/06.