The opinion of the court was delivered by: PARKER
The question presented in this proceeding is whether an employer serving as the fiduciary of an employee benefit group life insurance plan (Plan) violates its fiduciary duties by using dividends from the Plan to recoup voluntary contributions to the Plan made by him. The plaintiff, Louise Corley, alleges that her employer, The Hecht Company, and the parent company, May Department Stores (May), have violated their fiduciary obligations imposed by common law and the Employee Retirement Income Security Act of 1974 (ERISA or the Act), 29 U.S.C. §§ 1001 et seq., by using dividends from the Plan in this fashion. She further claims that May, which serves as administrator of and fiduciary for the Plan, violated various disclosure duties imposed by ERISA and the common law.
After consideration of the parties' memoranda of authority, the Court concludes that May violated neither the common law nor ERISA in obtaining reimbursement of the funds which it voluntarily contributed to the Plan. However, the Court does also find that May has not satisfied the Act's requirement that a fiduciary exercise care and diligence in handling of the plan assets. The Court further finds that May's description of the Plan furnished to the participants was misleading and thereby violative of the disclosure provisions of ERISA. In view of those findings May is barred from obtaining any future reimbursement; is ordered to remove itself as fiduciary of the Plan and to nominate a new administrator; and, is ordered to publish a new description of the Plan.
The principal material facts are not disputed. Defendant May is a retail department store operator incorporated in New York and headquartered in Missouri. The Hecht Company is an operating division of May. Plaintiff is a District of Columbia resident employed by the Hecht Company at one of its warehouses located in Maryland. In July 1973, she enrolled in the contributory group life insurance plan administered by May.
May established the Plan in 1966 with the Metropolitan Life Insurance Company (Metropolitan) serving as the insurance carrier. Employees obtained coverage by authorizing May to deduct premium payments from their paychecks. The payroll deductions were established to completely fund the insurance policy and May had no obligation to contribute toward payment of the premium. However, the aggregate employee contribution did not, in some years, equal the insurance premium and May advanced the needed monies.
The shortfall in payments arose for two reasons. First, the actual cost of insuring employees for a given year was determined by Metropolitan at the close of the year based on the actual mortality experience under the Plan for that year. Thus, in years in which experience under the policy was not favorable, Metropolitan required a retroactive premium payment to make up the difference between the annual premium that had been paid and the higher premium amount required after the year-end premium recalculation. May did not seek an additional payment from the employees but voluntarily made up the difference.
Second, premiums were "underwithheld" because of the formula by which May determined the amount of contributions required from participating employees. Metropolitan based its annual rates for employee contributions at a constant or flat rate regardless of age, and May did likewise from 1966 through mid-1973 in setting rates for employees. However, from mid-1973 to late 1977, May varied employee contribution amounts in order to provide younger employees with reduced rates. This "step-rated" contribution schedule resulted in lower aggregate employee premiums than Metropolitan charged under its flat rate schedule. The shortfall, or "underwithholding", was also met by voluntary direct payments from May to Metropolitan. In late 1977, Metropolitan likewise converted to the step-rated basis, and the underwithholding ceased.
While May filled the gap during a number of years between the annual premium charged by May and the employees' contributions, the result in other years was quite different. In some years, the employees' total contribution exceeded the cost of the insurance premium. This surplus-which the parties in this case have also called a "dividend" or "refund"-was remitted to May.
The experience described above is summarized in the following table:
For each of the refunds through 1977, May received a check from Metropolitan and deposited the money in a special bookkeeping account. By November 1977, May had not been fully reimbursed for its retroactive premium and underwithholding payments, with total company payments exceeding reimbursements by $ 302,993. Nevertheless, in that month, the company established a "rate stabilization reserve" account at Metropolitan with $ 342,197 of the dividend from 1976. Under the 1977 arrangement between May and Metropolitan which established the reserve account, Metropolitan ceased making retroactive premium refunds to May for the contributory life insurance policies but, rather, retains these monies and credits them to ...