Court of Appeals Hands Victory to Plaintiffs in Lawsuit Alleging Detroit Edison Company Misled Them Into Transferring to Volatile Cash Balance Plan
On March 23, 2021, the Sixth Circuit Court of Appeals issued a major victory to pension plaintiff Leslie Nolan in her putative class action against The Detroit Edison Company (DTE), ruling that she plausibly alleged in her complaint that DTE misled her and other employees into transferring out of its “traditional” pension plan (TP) and into a new cash balance pension plan (CBP) without disclosing, among other things, that if interest rates fell there was a risk they would earn no new benefits for many years, if ever. In fact, Nolan earned no new benefits the entire 15½ years she was in the CBP! The lower district court had dismissed Nolan’s complaint on the grounds that she could not have been misled about the CBP and that her claims were untimely. The Sixth Circuit’s ruling revives Nolan’s complaint and allows Nolan to move forward on her claim of misleading, as well as on an additional claim that DTE breached the terms of its pension plan. Read on for more details (as alleged in the complaint).
Under the TP, the pension was computed as a percentage of eligible pay times years of service, and was paid in the form of a monthly annuity. Under DTE’s new CBP, an account was established for each participant to which Contribution Credits (a percentage of eligible pay) and Interest Credits were annually added, and the benefit was paid in the form of a lump sum or annuity (participant’s choice).
In early 2002, DTE issued a Retirement Choice Decision Guide to Nolan and other DTE employees, inviting them to transfer to the CBP and promising that if they did so they would receive (A) their “frozen and protected” TP benefit, plus (B) Contribution Credits and Interest Credits earned under the CBP (the “A+B” Benefit Promise”). The Guide also explained that their opening account balance in the CBP would equal the lump sum present value of their frozen and protected TP benefit, computed using a 30-year Treasury rate of 5.48%.
When DTE issued its invitation, Nolan had 22½ years of service with the company and had accrued a pension under the TP in the amount of $1,581.19/month. Nolan accepted DTE’s invitation, transferred to the CBP, and continued to work for DTE for another 15½ years until her retirement in December 2017 when she had 38 years of service. Given the A+B Benefit Promise in the Guide, Nolan naturally expected that her pension would be larger than the pension she earned 15½ years earlier under the TP. Therefore, she was shocked when DTE informed her it would pay only the pension she earned under the TP; that is, it would not pay her the Contribution Credits and Interest Credits she earned under the CBP (or the annuity equivalent of those Credits). This meant that Nolan earned no new pension benefits the entire 15½ years she participated in DTE’s CBP!
Contrary to the representations in the Guide, Nolan learned that DTE failed to freeze and protect her TP benefit under the CBP (the opening account balance) and, instead, allowed its value to fall with declining Treasury rates. Consequently, when Nolan retired, her TP benefit under the CBP had a value of only $585.28/month, as compared to $1,581.19/month 15½ years earlier–a loss in value of nearly $1,000/month! Further, DTE claimed that the benefit Nolan earned under the CBP equaled only $987.83/month, which was the sum of Nolan’s devalued TP annuity ($585.28/month) and the annuity she earned from her Contribution Credits and Interest Credits under the CBP ($402.55/month). However, because pension plans may not lawfully reduce benefits that have already accrued, DTE determined that it would pay Nolan the benefit she earned under the TP ($1,581.19/month), reasoning that it was “larger” than the benefit she earned under the CBP ($987.83/month).
Nolan objected to DTE’s “larger’ of calculation methodology because it nowhere appeared in the Guide. Rather, the Guide repeatedly represented that employees who agreed to transfer to the CBP would receive (A) their frozen and protected TP benefit plus (B) Contribution Credits and Interest Credits earned under the CBP. The Guide also contained charts and graphs showing increasing benefit accruals under the CBP, reinforcing that participants who transferred to the CBP would receive more than solely the TP benefit they had earned as of the time of the transfer. Nonetheless, DTE refused to change its position that Nolan was entitled to only the TP benefit she earned 15½ years earlier. So, Nolan filed a putative class action in a Michigan federal district court against DTE, a DTE affiliate, and others involved in administering DTE’s pension plans (collectively, DTE).
In her complaint, Nolan brought three claims against DTE under the Employee Retirement Income Security Act (ERISA): (i) Count I–breach of the terms of the plan; (ii) Count II–violation of ERISA §102, which requires plan summaries (here, the Guide) to be sufficiently comprehensive and understandable to the “average participant” and not misleading; and (iii) Count III–violation of ERISA §204(h), which requires that participants be timely sent a notice when a plan amendment provides for a significant reduction in the rate of future pension accruals, written in a manner calculated to be understood by the average participant.
The district court dismissed Nolan’s complaint, ruling that all three Counts were untimely and that Nolan could not have been misled about the CBP in violation of ERISA §§102 and 204(h). For the most part, the Sixth Circuit Court of Appeals disagreed with these rulings. It held that Counts I and II were timely and, with respect to Count II, Nolan had stated a plausible claim for violation of ERISA §102. However, with respect to Count III, the Sixth Circuit held that the procedural portion of Nolan’s claim under ERISA §204(h) was time barred and that, with respect to the substantive portion of that claim, the complaint and attached materials showed that DTE had made a “good faith” effort to comply with the statute’s notice requirements, but noted that a “good faith” defense is not available under ERISA §102. Accordingly, the Sixth Circuit reversed the district court’s dismissal of Counts I and II (violation of the terms of the plan and ERISA §102, respectively), affirmed the district court’s dismissal of Count III, and remanded the case back to the district court for further proceedings consistent with its rulings.
Although the Sixth Circuit’s judgment revives Nolan’s complaint as to Counts I and II, it is important to understand that the Sixth Circuit did not rule on the merits of those claims. Nolan still needs to prove the merits of those claims to the district court.
Representing Nolan and the putative class members are Eva Cantarella (lead counsel for the class and author of the blogs on this website), Robert Geller, and Patty Stamler–partners at Hertz Schram PC in Bloomfield Hills, MI.
If you believe you might be a member of the putative class and would like to be kept informed of the litigation, please contact Eva Cantarella at 248-335-5000 or [email protected] or [email protected]