A federal court has found a retirement plan representative’s failure to investigate a participant’s concerns about his retirement benefit calculations amounted to “constructive fraud.” 

U.S. District Judge Sean F. Cox of the U.S. District Court for the Eastern District of Michigan rejected Detroit Edison’s argument that its retirement plan representative made an “honest mistake” when assuring John R. Paul Jr. and his wife that the calculations of his retirement benefits presented on four different statements were based on the correct number of years of credited service.

According to the court opinion, Paul began his years with the company as a temporary employee in 1984. Starting in July 1988, he was a regular employee, but switched during his years of service from being a union employee to a non-union employee then back again. Paul began considering retirement in late 2007, and requested and received a Pension Calculation Statement estimating his potential retirement benefits from Aon Hewitt, the third-party administrator (TPA) for the plan. He also requested and received three more statements, the last one at his May 6, 2009, retirement interview.

During that interview, Paul and his wife met with a representative and reviewed a number of documents. They discussed the lump-sum payment and monthly annuity payment Paul would receive upon retirement, as well as Paul’s hire date and the calculation of his years of credited service. Given the union and non-union positions Paul held during his employment, he questioned the representative about the computation of his years of credited service—specifically the effect the transfers between union and non-union jobs would have on the accrual of his years of credited service.

The representative indicated that the information on the Retirement Interview Statement was correct, as Paul’s pension was calculated using the March 5, 1984, hire date listed among the baseline information. The representative further explained that, from Paul’s original hire date of March 5, 1984, his four pensions would all be bridged together. After the discussion, Paul and his wife signed an authorization form.

Paul retired on July 1, 2009, two years prior to when he would have been eligible to receive an unreduced early retirement benefit under his retirement plan. Sometime during an audit in 2011, Aon Hewitt discovered that the years of credited service used to calculate Paul’s pension benefit were overstated by 3.00365 years. Paul received an overpayment notice that stated his monthly annuity would be reduced by $54.42 per month and his lump-sum payment was overstated by $14,429.36; it offered him several options for repaying a total of $17,776.35 in excess benefits plus investment earnings.

Paul filed a claim with the benefits committee, which was denied. He appealed that decision, and the committee decided his monthly benefit would still be lowered, but he would not have to repay the $14,429.36 if he forfeited a special benefit of $6,884.49 he was still due.

Paul filed a lawsuit seeking payment of all monies owed to him, as well as $25,000.00 in costs and damages. Detroit Edison filed a counterclaim seeking repayment of the overstated initial lump-sum payment of $14,429.36.

Paul did not challenge the plan administrator’s interpretation of the retirement plan, but claims that the plan should be estopped from enforcing the terms of the plan. Estoppel “precludes a party from exercising contractual rights because of his own inequitable conduct toward the party asserting the etoppel,” the court noted in its opinion. “Equitable estoppel operates to place the person entitled to its benefit in the same position he would have been in had the representations been true.”

Cox found Paul was misled when the retirement plan representative assured him that the years of credited service calculations on the Retirement Interview Statement were correct and that his various pensions would be bridged together. He also found that Paul relied on these statements when he decided to retire.

According to Cox, for equitable estoppel, Paul must must show that the defendants’ “actions contained an element of fraud, either intended deception or such gross negligence as to amount to constructive fraud.” Detroit Edison argued that the case is similar to a previous case, Stark v. Mars Inc., in which a District Court found there was no intent by the plan to deceive the beneficiary, but that the person responsible for calculating the benefits made an honest mistake.

But, Cox said, what transpired in this case was more complicated than the “honest mistake” in Stark. “Cognizant that the different union and non-union positions Plaintiff held during his employment complicated the calculation of his years of credited service, Plaintiff sought clarification of those calculations from the company representative at the retirement interview. The company representative assured Plaintiff that the calculation of his years of credited service was correct… The Court finds that the company representative’s assurances, which were a crucial aspect of Plaintiff’s decision to retire effective July 1, 2009, were so grossly negligent as to amount to constructive fraud upon Plaintiff,” he wrote in his opinion.

Cox noted that, in the Stark case, the 6th U.S. Circuit Court of Appeals reasoned that the plaintiff failed to show gross negligence because the defendant “properly investigated the exact concern” raised by plaintiff. However, in the current case, Cox said, “the representative’s failure to properly investigate the concern raised by plaintiff was not an honest mistake but was precisely the sort of malfeasance that may give rise to constructive fraud.”

Cox granted Paul’s Motion for Summary Judgment and denied Detroit Edison’s, and ordered that the retirement plan be estopped from reducing Paul’s retirement benefits and return him to “the same position he would have been in had the representations been true.”