Benefits and Compensation

Appellate Court Upholds Pension Plan’s Right to Stand by Employee’s Withholding Choice

A recent federal appeals court decision serves as a reminder that communicating with employees about their options for benefits calculation methods in defined benefit retirement plans is a very important aspect of preparing them adequately for retirement. Some DB plans offer more than one way to accumulate assets, and allow participants to choose the method that best suits their circumstances.

In Durbin v. Columbia Energy Group Pension Plan No. 12-3910 (6th Cir., April 17, 2013), the panel of judges from the U.S. 6th Circuit Court of Appeals clarified in their ruling that their primary job was not to determine whether the pension participant Terry Durbin, a welder with Columbia Energy Group since 1981, affirmatively elected to have his pension calculated under the “Account Balance” method — or passively elected to use the default “Final Average Pay” method by doing nothing.

Instead, the 6th Circuit judges said they simply needed to determine whether the benefits committee acted “arbitrarily and capriciously” in determining that Durbin elected to use the so-called AB I method. They ruled that the committee did not, affirming an earlier decision in favor of the plan sponsor that the U.S. District Court for the Southern District of Ohio had rendered and that Durbin had appealed.

Under the FAP method for this plan, pension benefits are calculated at the end of employment by taking one-third of the total compensation paid to the employee for the 36 months he or she receives the most compensation, selected from the 60 months immediately before the end of employment, the court decision explained. This calculation method usually is more beneficial for longtime employees, such as Durbin. Under the AB I method, pension benefits accrue over time, according to a number of variables, and the current balance is reflected in an account with statements.

Facts of the Case

Durbin had participated in the Columbia Energy Group Pension Plan since the beginning of his employment in 1981. NiSource Inc., parent of Columbia Energy Group, maintains the plan along with those for employees of nine other NiSource subsidiaries.

When Durbin signed up for the plan, his benefits were calculated according to the FAP method, which was the default method. In 1999, NiSource and its subsidiaries amended the plan to allow employees to elect to have their future pension accruals determined according to the AB I method.

In early 2000, Durbin attended a meeting in which NiSource personnel explained the changes and distributed a document specifying the time frame and method for making the election. Employees who wanted to participate in the new AB I program had to place a telephone call and make the election by April 30, 2000. Employees who did nothing would continue in the FAP program. Once made, the election was irrevocable.

The two sides disputed whether Durbin elected to participate in the AB I program. He alleged that he indicated on a paper ballot form that he intended to continue his participation in the FAP program, but neither party has a record of this paper ballot. Hewitt Associates, the plan’s third-party administrator, showed from the plan’s electronic database records that Durbin called its participant service center four times on April 27, 2000, ultimately electing by phone to  participate in the AB I program. Durbin said in an affidavit that he did not place a call to elect to participate in the AB I program.

Hewitt’s administrative record also includes numerous documents exchanged between the plan and Durbin over the next decade. Documents entitled “Columbia Retirement Plan Account Balance Option Account Statement” showing the annual account balance for the previous year were sent to Durbin for each year from 2004 to 2010. Durbin signed three different forms entitled “Plan Account Balance Option Preretirement Death Beneficiary Designation,” each time designating his wife as his beneficiary. The option to designate was only available to AB I participants; FAP benefits automatically go to the spouse of a deceased participant. The record also showed that Durbin was sent documents entitled “Summary Plan Descriptions” that would have been specific to the AB I program.

The plan sponsor argued that if Durbin made his shift to the AB I method in error, he should have noticed and reported it when he received a letter confirming the change back in 2000.

In 2010, Durbin began to make plans for his retirement and contacted Hewitt because he thought the amounts shown on his online account balance appeared low. Hewitt told him that he enrolled in the AB I program in 2000 via telephone. When Durbin appealed that year to the plan committee to have his benefits recalculated with the FAP method, the committee investigated records related to Durbin’s case and denied the request because it said he had elected to participate in the AB I plan instead. In reviewing the evidence gathered, the committee concluded that to allow him to switch to the FAP program “after a decade of hindsight would be unfair.”

When Durbin’s appeal reached the 6th Circuit in early 2013, it found that “[t]here is no genuine issue of material fact as to whether the Committee’s decision was appropriate, and the decision was not arbitrary and capricious.”

What This Means for Plan Sponsors

As this case shows, it’s possible for the participant to challenge and want to reverse a benefits calculation decision if he or she is unsatisfied with the longer-term results for his or her account balance. Plan committees can avoid costly legal judgments on such issues by sticking close to what their plan document allows and keeping careful records, as well as insisting that their TPAs are doing the same, as NiSource did in this case.