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Sixth Circuit Revives Class Action Alleging Misleading Notice About Cash Balance Conversion

In Nolan v. Detroit Edison Co., No. 19-1867, __F.App’x__, 2021 WL 1097101 (6th Cir. Mar. 23, 2021), Plaintiff-Appellant Leslie Nolan, a participant in the Detroit Edison Company (“DTE”) cash balance pension plan, appealed the district court’s dismissal of her putative class action seeking additional pension benefits and relief for DTE’s alleged violations of ERISA’s substantive disclosure requirements with respect to communications about transferring from DTE’s traditional defined benefit plan to its new cash balance plan. Nolan worked for DTE and participated in its defined benefit plan for 22.5 years when, in 2002, DTE invited its employees to transfer from the defined benefit plan to its cash balance plan. In connection with this invitation, DTE provided participants with a Decision Guide which served as a Summary of Material Modifications (SMM). The Guide referenced a presentation with slides given by Ayco, an independent consulting firm retained by DTE. The essence of the Guide and presentation slides about the new plan led Nolan to believe that at retirement she would receive the sum of A (her frozen and protected traditional plan benefit) plus B (contribution and interest credits earned under the cash balance plan) (“the A+B Promise”). After electing to participate in the cash balance plan and working another 15.5 years, Nolan was surprised to be offered a retirement benefit equal to what she accrued under the defined benefit plan. DTE claimed employees were entitled to “the greater of their earned benefit under the old method, frozen as of the new plan’s commencement, or the benefit earned under the new plan.”

Nolan filed a putative class action alleging “(1) a claim for benefits under ERISA § 502(a)(1)(B) for a breach of Plan terms (Count I); (2) a violation of ERISA § 102 (Count II); and (3) a violation of ERISA § 204(h) (Count III).” Count I seeks benefits based on the A+B Promise. Counts II and III are alternative claims seeking relief for the Guide’s inaccurate description of the cash balance plan and failure to inform her of the downsides of the cash balance formula, including the likelihood of the wear-away phenomenon (when an employee continues to work for a company but does not receive additional benefits for those additional years of service). The district court dismissed the claims for being time-barred and for failing to state a claim.

With respect to the claim for benefits in Count I, the parties agreed that a six-year statute of limitations applies. Nolan argued that the statute of limitations began to run when she learned in 2017 that DTE would not honor the A+B Promise. DTE argued that it began to run in 2002 when Nolan received the Guide which notified her of the benefits she would receive. The Guide emphasized that the traditional plan benefit would be “frozen and protected” and employees would begin earning benefits under the cash balance plan. The Guide noted that the initial cash balance benefit “increases each year” and the Ayco presentation included a chart from which one can reasonably infer benefits being calculated using the A+B formula. Drawing all reasonable inferences in Nolan’s favor, the court could not conclude that Nolan received a clear and unequivocal repudiation of benefits in 2002. Having filed the complaint in 2018, the court found that it was timely.

ERISA § 102 requires plans to state their manner of operation in clear and understandable terms in the Summary Plan Description. With respect to the ERISA § 102 claim, the court found that Nolan has a colorable claim that DTE did not explain in plain English in the Guide or the Ayco presentation materials that employees transferring to the cash balance plan would not receive any new benefits if the accrued benefits under the new plan did not catch up to their frozen traditional plan benefit. DTE also did not explain the impact of interest rates on depreciating already-earned benefits during conversion. The impression was that interest rates could be variable and slow the growth of added benefits, but not result in no additional benefits, which is what happened to Nolan.

ERISA § 204(h) requires that pension plan amendment notices about a reduction in the rate of future benefit accrual be written in a manner calculated to be understood by the average plan participant, provide enough information for participants to understand the effect of the plan amendment, and be furnished within a reasonable time before the effective date of the plan amendment. With respect to the procedural claim under ERISA § 204(h), the court found that it was time barred. Nolan claimed the Guide was provided at least 45 days too late. The court found that Nolan knew or should have known in 2002 that transferring to the cash balance plan would eliminate her early retirement benefit because the Guide stated the value of early retirement factors are not included in the initial cash balance benefit. Because she had reasonable notice of the amendment within a reasonable time before the effective date of the amendment, her procedural claim is time barred.

With respect to the claim that DTE did not comply with the substantive disclosure requirements of § 204(h), the court found that DTE made a “good faith effort” to comply with § 204(h)’s requirements, which is all that was required prior to the Treasury Department’s new regulations interpreting § 204(h). Even assuming the Guide did not successfully convey information in plain English about the wear away period or impact of interest rates, it did contain “explanations, comparison, and cautions,” and indicate a “multi-modal informational campaign.” The court reversed the dismissal of Counts I and II and affirmed the dismissal of Count III.

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