Appeals Court Upholds Anti-Cutback Decision

The decision comes out of the U.S. Court of Appeals for the District of Columbia Circuit, which took the case on appeal from a lower court. 

That lower court, the U.S. District Court for the District of Columbia, ruled in Denise M. Clark v. Feder Semo and Bard, P.C., et al (No. 1:07-cv-00470) that the law firm Feder Semo & Bard P.C. did not violate the Employee Retirement Income Security Act (ERISA) when it terminated its pension plan and paid former law partner Denise M. Clark a lump-sum distribution that was approximately half the value of her straight life annuity (see “Court Rules Law Firm Did Not Violate ERISA Anti-Cutback Rule”).

In her suit, Clark contended that Feder Semo improperly grouped her for purposes of her account credit, thereby understating her retirement benefits. She also claimed that Feder Semo violated ERISA's anti-cutback rule when it proportionately reduced the aggregate amount distributed to plan participants to match the plan's assets.

Among other claims, Clark also argued that the retirement plan's fiduciaries failed to use a reasonable actuarial assumption for interest that caused the plan to be underfunded. And, she contended that the retirement plan's fiduciaries failed to comply with the distribution discrimination restrictions in Treas. Reg. 1.401(a)(4)-5, with the effect of reducing the benefits received by most plan participants. 

The ruling from the appeals court affirms the district court’s decision that there is no cause for action under ERISA for a breach of Section 401(a)(4), but it also notes that neither the district court nor any of the decisions its cites addressed the particular statutory argument advanced by Clark. 

That argument centers on Treas. Reg. 401(a)(4), which provides that retirement plans may lose their tax-favored status if “the contributions or benefits provided under the plan…discriminate in favor of highly compensated employees.” The appeals court argues that, while Clark showed certain distributions made from terminated plan assets may have been discriminatory, she did not seek to disqualify the plan. Instead she seeks relief under ERISA, which the courts found to be inappropriate.

Clark argued in her original suit that express authorization for her claim is found in 29 U.S.C. § 1344, a provision of ERISA that sets forth general rules governing the allocation of the assets of a retirement plan upon termination. She points to portion of § 1344 that authorizes the Secretary of the Treasury to step in and override an application of those general rules that would violate § 401(a)(4). According to Clark, this authority for the Secretary to intervene into the workings of a plan also imposes upon a fiduciary the duty to avoid the discriminatory distributions barred by § 401(a)(4).

The line of argument caused the appeals court to “become cautious, because the Supreme Court has repeatedly warned courts against permitting such suits to proceed under ERISA based on novel causes of action not expressly authorized by the text of the statute.” According to the appeals court’s decision, Clark never explains how authority for the Secretary to intervene becomes the source of a duty for a plan fiduciary, implying it was appropriate for the district court to reject the argument.

The second question on which the appeals court offered additional consideration centered on whether the plan administrators breached their fiduciary duties when relying on the advice of the plan’s lawyer, Wiliam Anspach, to place Clark in a group receiving benefits based on the firm’s annual contribution to the retirement plan of 10% of their salary.

Clark argued that Feder Semo breached its fiduciary duty by relying on the advice, which she said was based on a mistake of fact that the firm would have discovered had it undertaken an independent investigation. The appeals court ruled that the district court properly concluded that relying on the advice of counsel was justified under the circumstances, but provided additional statutory justification.

In short, the appeals court concluded that ERISA’s adoption of the common law’s standard of fiduciary trust in § 1104(a)(1)(b) permits prudent fiduciaries making important decisions to rely on the advice of counsel in appropriate circumstances.

So while there was, in fact, a year in which Clark had been placed in and then subsequently removed from a group that was slated to receive additional contributions (and therefore additional benefits), it was still prudent for the plan to place Clark in a different benefits group based on the counsel’s advice. 

The full text of the decision is available here.