During most of the 39 years Paul Frommert worked as a technician at Xerox, he thought he was well prepared for retirement. The company had a pension plan, and Frommert also contributed to a 401(k) account. But one day in 1996 Frommert noticed “a little slip of paper” tucked inside the annual statement from his employer that summarized his salary and benefits. It cautioned that for people like Frommert, who had been laid off for a few years in the late 1980s and then rehired by Xerox, the listed sums might not be accurate.
Indeed they weren’t. After months of pleading for more information, Frommert learned that the $2,482 a month he had been expecting dwindled to $5.31 under a formula the administrator of Xerox’s pension plan was using.
“My whole life was there, and this is the kick you get,” says Frommert.
Frommert was laid off from Xerox again in 2002. Since then, he has received no pension money at all while he fights a long legal battle for the benefits he believes he earned. Over the years, he has seen much of the life he built near Rochester, N.Y., slip away.
“We re-mortgaged the house to get some money, but that’s gone, and over time, we spent down the 401(k),” says Frommert, now 71. “We’re in the final throes of filing bankruptcy, and I’m going to have to sell the house.”
He picks up odd jobs when he can, but he and his wife, who recently had a double mastectomy, just can’t make ends meet. “We’re devastated,” Frommert says. “Absolutely devastated.”
Deference to plan administrators
Frommert and some 100 others who face a similar problem with their Xerox pensions found no relief at the U.S. Supreme Court. In an April 21 ruling, the high court rejected a lower court’s decision to throw out the plan administrator’s calculation and boost the pension payments.
Instead, in a 5-3 opinion written by Chief Justice John Roberts Jr. and backed by the court’s conservatives, the Supreme Court said judges should defer to the decisions made by plan administrators—even if an administrator has made a mistake in interpreting the plan. While the ruling doesn’t finally settle exactly how much Xerox will pay the retirees, the plaintiffs’ lawyers aren’t optimistic.
The decision’s impact reaches far beyond Frommert’s situation, to millions of U.S. workers who might someday face a dispute concerning health, pension or disability benefits. Advocates for workers and retirees say this area of law already favors companies and their plans, and the decision in Conkright v. Frommert case makes it even more difficult for employees to prevail.
“It certainly slants the playing field heavily in the employer’s direction,” says John Strain, a California attorney who represents several former Xerox employees in a similar lawsuit.
Mary Ellen Signorille, senior attorney with AARP, which filed a friend-of-the-court brief on Frommert’s behalf, says the decision fits with other rulings in which the conservatives on the Roberts court prevailed. Those decisions have generally found that disputes about benefits claims should be decided not by the courts but by a plan administrator—a person who may work for the company that sponsors the plan, but who is charged with a responsibility to the plan’s financial health and its participants.
For courts, that approach could help keep benefits cases off busy court dockets. For companies, it could help lower costs and allow them to continue to offer such plans. But for participants in the plans, “there’s this sense of ‘heads you win, tails I lose,’” Signorille says.
The confidence Americans have about their retirement has taken a hit during the current recession. In a March 2010 survey, just 16 percent of workers said they are very confident about having enough money for a comfortable retirement, a slight increase from the 20-year low of 13 percent recorded last year by the Employee Benefit Research Institute. The same survey found that the percentage of workers who expect to retire after age 65 has increased sharply over the last two decades, from 11 percent in 1991 to 33 percent in 2010. Workers surveyed cited several reasons for postponing their retirement, but the top answers all concern money: the poor economy, a change in their employment situation, the inability to afford retirement, and the need to make up for losses in the stock market.
Despite what Frommert thought was good planning, his retirement has not been what he had hoped. The details of his lawsuit are complicated, even for the notoriously complex area of law concerning the Employee Retirement Income Security Act, or ERISA, which sets standards for most private-sector pension and health plans. When he was laid off in 1985, Frommert received a year’s severance pay and a lump-sum payout from his pension account of $145,000, which he used to pay off his house. Four years later, when he was rehired, he says, he was told it was with the same benefits he had before—the same employee number, the same amount of vacation—“kind of like I’d never left,” he says.
But the formula used later to calculate his benefits—the one he was alerted to with that “little slip of paper”—used what’s known as a phantom account. With that method, the plan administrator took the amount of Frommert’s payout when he first left the company, added the theoretical interest that money would have earned had it remained invested in his account, and then subtracted both from the pension benefits he earned during his second stint with Xerox.
The calculation, which Frommert’s suit charged was a violation of ERISA, left him with just a few dollars a month. According to a brief his attorneys filed to the Supreme Court, roughly one-third of the 100 people who joined his suit would receive “no pension at all for their entire post-rehire employment with Xerox” under that method, and pensions for the plaintiffs as a whole would be reduced by almost $20 million.
The case took several twists and turns before it arrived at the Supreme Court, including a ruling from a federal appeals court that the phantom account method was unreasonable. That court also found that the plan administrator had not given Frommert and others adequate notice that she intended to use that accounting method to calculate their benefits.
In his opinion, Roberts used remarkably plain language to explain the court’s decision. “People make mistakes. Even administrators of ERISA plans,” he wrote, apparently referring to the actions the appeals court had rejected.
The chief justice then pointed to a 1989 Supreme Court ruling in another ERISA case, known as Firestone, in which the court ruled that if the language of a plan explicitly gives administrators the authority to make benefits decisions, courts should defer to them. Under that ruling, a court should only overturn a plan administrator if a decision was made in an “arbitrary and capricious” way. Some plans don’t give administrators such “discretionary authority,” but the Xerox plan did.
In the Frommert case, Roberts wrote, “the question here is whether a single honest mistake in plan interpretation justifies stripping the administrator of that deference for subsequent related interpretations of the plan. We hold that it does not.”
Three of the court’s liberal justices disagreed. In a dissent, Justices Stephen Breyer, John Paul Stevens and Ruth Bader Ginsburg said that the majority’s opinion gave plan administrators too much authority. Justice Sonia Sotomayor did not participate in the case.
Employers want predictability
Amy Covert is an attorney who helped draft a friend-of-the-court brief filed by two business groups, the ERISA Industry Committee and the American Benefits Council, on behalf of the Xerox plan administrator. She says the Roberts decision recognizes that deferring to plan administrators helps promote ERISA’s goals of “uniformity, efficiency and predictability” in benefits plans. The benefits law tries to strike a balance between the interests of employers and employees, Covert says.
Allowing judges to interpret a plan instead of a plan administrator would “open a Pandora’s box,” she says, with different judges in different places interpreting the same plan in different ways, making it impossible for companies to prepare for the costs they will face. Instead, the court’s deference to plan administrators helps employers know what to expect. “Employers need this, or else you would see plans shutting down,” Covert says.
In a statement issued after the ruling, Xerox echoed that sentiment. “The decision should help reduce the complexity and expense of ERISA litigation going forward and allow for more predictability and uniformity in the administration of pension plans,” a spokesman said. “Xerox has maintained all along, that it is not about paying the retiree benefits … it is about determining the appropriate calculation based on benefits already paid out when the employees left the company.”
But Strain, the California attorney, sees a flip side to the argument that companies need predictability in their plans. “The effect of that is to say that the employee on the other side is not entitled to the same kind of predictability and enforceability in that contract that the employer is,” he says.
Important questions remain
The decision in Frommert’s case leaves several unanswered questions, says Signorille, the AARP attorney. Chief among them is whether there is some limit to the deference due to plan administrators, especially when, as Roberts acknowledged, they make mistakes.
“How many bites at the apple do they get?” she says. “Is it one, two, three? Nobody knows.”
Frommert’s attorney, Peter Stris, says he is most troubled by the opinion’s failure to define what counts as an honest mistake. He worries that “no plaintiff can win” under the standard Roberts set out in his opinion.
People with benefits plans need to know whether their plans include a “discretionary clause” giving administrators broad authority in decisions and disputes, Signorille says. Without such a clause, someone with a dispute can go straight to court. But for those with discretionary clauses, the final decision maker will often be the plan administrator. “You may have good benefits, but if a plan administrator has discretion, then I would say you have ‘Class B’ rights under that plan,” she says.
Despite the high court’s ruling, it remains unclear just what benefits Frommert and those who joined his suit will ultimately receive. The likely next step is for the Xerox plan administrator to propose a revised formula, to be reviewed by a lower court. Stris says the backup plan the company has been discussing would be only a slight improvement, providing “a peppercorn more” than the phantom account did, and he vows to continue to fight to get more for the retirees.
For Frommert, that means more waiting, and adjusting from his rosy expectations to his harsh reality. “I had a good career there, I was a good worker,” he says, taking a break from the work he’s found recaulking someone’s bathtub. “Now we’re in a mess, and our whole lives are turned upside down.”
Holly Yeager lives in Washington, D.C.