Whose Job Is It Anyway?
Significance: In the real world, it would be almost impossible to find a retirement plan that doesn’t have some problem. The laws that govern retirement plans are complex and ever-changing, and service providers must compile and distill huge amounts of information to do their jobs. Glitches are almost inevitable. Sometimes, they never make it to the surface. In other instances, like the case in this article, they come to light much later-—and then the problem becomes much bigger. Fortunately, our story has a happy ending, at least for our client. It could have been even happier.
Discussion: We recently handled a litigation matter on behalf of a third party administrator of a defined benefit pension plan. Our client began providing services for the plan in the early 1980s, when it took over the administrative services from a large insurance carrier. Shortly before the switch, the plan made a partial distribution of benefits to approximately 20 plan participants, all of whom had already terminated employment with the plan sponsor. Each of those 20 participants had a small remaining benefit in the plan after they took their partial distributions.
When our client took over around 1984, it asked the plan sponsor to provide it with the names (and other pertinent information, such as birth dates, dates of hire, etc.) of all plan participants. There was nothing written in the file, however, to indicate exactly what was requested. What our client got back was the information regarding only active employees. The names of the 20 terminated participants were not included. (However, the names of those employees showed up in certain historical records that our client received from the insurance company/former plan service provider.)
About three years later, the company decided to terminate its defined benefit plan. Lump sum benefits were paid out to all of the plan participants except the 20 participants whose names were omitted from the list when our client came on board. The assets in the plan greatly exceeded the amount necessary to pay the present value of benefits owed to the participants. The excess reverted to the company. Some of that money should have been paid to the 20 “missing” participants. The company signed off on the amounts of the distribution owed to the participants, the benefits were distributed, and the plan was terminated in 1987.
All was well-—until 2000-—when one of the “missing” participants inquired about the remainder of her retirement benefit. When the plan sponsor realized what had happened, they made a demand upon our client to pay, among other things, all of the past due retirement benefits owed to the “missing” participants, plus interest on the funds that should have been distributed in 1987. The plan sponsor made this demand despite the fact that, at the time of the plan’s termination, it had received a reversion of assets that was nearly ten times the amount that the plan sponsor would have paid in benefits to the missing participants when the plan was terminated—-if they hadn’t been forgotten.
The plan sponsor sued our client. In order to avoid the expense associated with a trial, we filed a motion for summary judgment, asking the court to award judgment in our client’s favor. We made two primary arguments. First, we argued that the claim against our client was barred by the statute of limitations. The point of this argument was that the plan sponsor was in the best position to know who its plan participants were-—especially those plan participants who terminated employment before our client began providing services. Therefore, since the plan sponsor should have known that the former participants were omitted from the termination calculations and should have received distributions at termination, any claim against our client for failing to account for the former participants was barred by the statute of limitations.
The second argument was that the plan sponsor wasn’t damaged. The gist of this argument was that our client never had any responsibility to pay benefits to anybody, and in any event, the plan sponsor had received a windfall when the plan was terminated, by receiving a reversion that included the amounts that should have been paid to the forgotten participants.
The court granted our motion for summary judgment, finding that the statute of limitations barred the claim. This result saved our client the significant expense associated with having a trial. At the motion hearing, however, the court indicated that it disagreed with our argument regarding whether the plan sponsor had sustained damages. The judge held that, despite the fact that the reversion the plan sponsor received included the benefits that should have been paid to the forgotten participants, the plan sponsor may have sustained damages. We mention this to point out that the difference between winning and losing in a litigation matter often turns on whether the lawyer makes all the necessary arguments.
Conclusion: Although our client was victorious in this case, it’s yet another example of one that might have been avoided altogether. It was very difficult to tell exactly what information our client had requested from the plan sponsor back in 1984, because the requests were largely oral, rather than in writing. While it was assumed that our client asked for information regarding all participants (rather than just active) participants, there was no documentary evidence of that fact. Therefore, we had to demonstrate that, even if our client did not ask all the right questions, the plan sponsor still knew everything it needed to know to determine that some of its terminated participants were being left out of the mix.
Plan service providers should take the time to implement procedures that will avoid this kind of problem.
© 2003
Reish Luftman Reicher & Cohen. All rights reserved. The ERISA Controversy Report is published as a general informational source. Articles are general in nature and are not intended to constitute legal advice in any particular matter. Transmission of this report does not create an attorney-client relationship. Reish Luftman Reicher & Cohen does not warrant and is not responsible for errors or omissions in the content of this report.
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