The opinion of the court was delivered by: John D. Bates United States District Judge
Plaintiff Denise Clark brings this action pursuant to the Employee Retirement Income Security Act of 1974 ("ERISA"), alleging that defendants improperly denied her a significant portion of her retirement benefits. Defendants are the law firm Feder, Semo & Bard ("Feder Semo" or "the firm") (Clark's former employer), the Feder Semo Retirement Plan and Trust ("Plan"), and two former trustees of the Plan, Joseph Semo and Howard Bard. The Court conducted a six-day bench trial beginning on April 23, 2012, on plaintiff's three remaining claims in the case.
Clark worked at Feder Semo for almost ten years before moving on to other employment in 2002. She was distributed retirement benefits after the firm unexpectedly went out of business toward the end of 2005. However, when Feder Semo went out of business, it had insufficient funds to pay out all benefits due under calculations dictated by the terms of the Plan. Lump sum distributions under the Plan's terms could be determined in two ways, and Plan participants were entitled to receive benefits in the amount of whichever determination was larger. One of the two amounts was a definite amount of money that grew as Plan participants accrued a percentage of their annual compensation in benefits and earned interest on the account balance; Plan recipients, including Clark, were regularly notified of this amount. The other was based on a calculation involving a floating interest rate, which was tied to the return on 30-year Treasuries. When the Plan went out of business, this rate was especially low, resulting in benefit distributions - and Plan liabilities - that were especially high. But the Plan had insufficient funds to pay these benefits, so each Plan recipient received a pro rata share of the amount due. Hence, although Clark ultimately received more money than the fixed amount that had been quoted to her, she received only about 53% of the full amount due under the second calculation. She claims both that the Plan's actuarial assumptions were unreasonable given the terms of the Plan and that she was inadequately informed of the risk of loss of her benefits. Furthermore, Clark contends that under either calculation her account balance was credited with a smaller percentage of her annual compensation than she was entitled to receive.
Clark's three claims accordingly involve the administration of the Plan. First, she contends that she was improperly grouped for the purpose of determining her account balance and that Semo and Bard violated their fiduciary duties in failing to correct this error when Clark made a formal appeal. Second, she contends that the firm violated ERISA's disclosure requirements by failing to disclose the risk of loss if the Plan terminated with insufficient funds and the Plan's lack of insurance to protect participants in that contingency. Third, she contends that Feder Semo and Semo and Bard, as Plan fiduciaries, failed to use a reasonable actuarial assumption for interest on the Plan's assets, causing the Plan to be underfunded.
After careful consideration of the evidence at trial, the parties' memoranda, the applicable law, and the entire record herein, and for the reasons set forth in more detail in the findings of fact and conclusions of law that follow, the Court will enter judgment for the defendants on each of Clark's remaining three claims. With respect to the improper grouping claim, the Court concludes that the decision Semo and Bard made on Clark's appeal was reasonable. With respect to ERISA's disclosure requirements, the Court finds that Clark was not harmed by any failure to disclose the risk of loss at Plan termination and the Plan's lack of insurance. And with respect to the interest rate assumption, the Court finds that the defendants did not breach their fiduciary duties to maintain the Plan on a sound actuarial basis.
This case has already gone through several iterations in this Court. Clark's amended complaint was filed on May 28, 2008 [Docket Entry 28]. On December 17, 2007, the Court dismissed some of Clark's claims but denied defendants' motion to dismiss on the remaining claims. Clark v. Feder Semo & Bard, P.C., 527 F. Supp. 2d 112, 118-19 (D.D.C. 2007) ("Clark I"). On March 22, 2012, the Court granted summary judgment for defendants on all but plaintiff's improper grouping claim. Clark v. Feder Semo & Bard, P.C., 697 F. Supp. 2d 24 (D.D.C. 2010) ("Clark II"). However, on September 13, 2010, the Court issued its decision on reconsideration, which vacated the partial grant of summary judgment. Clark v. Feder Semo & Bard, P.C., 736 F. Supp. 2d 222, 225 (D.D.C. 2010) ("Clark III"). After this decision, the Court ordered Clark to file a statement precisely detailing the nature of her remaining claims so that both the Court and the parties would have a concrete grasp of her at-times evolving allegations. See Order of Sept. 30, 2010 [Docket Entry 85]. In Clark's Statement Detailing Nature of Claims [Docket Entry #87] ("Pl.'s Statement"), she asserted five theories of recovery. On September 7, 2011, the Court granted summary judgment for defendants on two of these claims. Clark v. Feder Semo & Bard, P.C., 808 F. Supp. 2d 219 (D.D.C. 2011) ("Clark IV"). Specifically, the Court concluded that Clark could not bring an "anti-cutback" claim because Clarks' benefits were not reduced by an amendment to the Plan. Id. at 226-29. The Court also concluded that Clark could not bring a claim against Semo and Bard for permitting distributions to the firm's founder and his wife in 2002 and 2005. See id. at 232-34. The case then proceeded to trial on the three remaining claims.
The Court conducted a bench trial over a six-day period beginning on April 23, 2012.
Based on the record established at trial, the Court makes the following findings of fact. The Court will first introduce the individuals involved in this case and then explain the evolution of the firm and the Plan. Next, the Court will describe Clark's treatment under the Plan, including the decision made by the firm upon her appeal of the amount of her distribution. The Court will then explain how, in relevant part, the Plan was funded, including the actuarial assumption of interest that is the basis of one of Clark's claims. The Court will then describe the expert testimony heard at trial about the interest rate assumption. Finally, the Court will review the evidence heard about the Plan's summary plan description.
a. Individuals Involved with the Firm and the Plan
Gerald Feder founded the Feder Semo law firm, then known as "Feder & Associates,"*fn1 in the mid-1970s. Feder Tr. 8:2-9.*fn2 The Plan was founded in the mid-1980s. Feder Tr. 9:14-16, 29:11-16. Feder was the original sponsor and fiduciary of the Plan. Feder Tr. 11:11-12:7. The Plan was initially drafted to be primarily to the benefit of Feder and his wife, Loretta, who was also employed by the firm. Tr. 839:12-21 (Anspach). The Feders retired from the firm on December 31, 2001, but continued to receive a percentage of the firm's revenue for some time thereafter. Feder Tr. 13:6-9, 15:12-19.
Denise Clark is an attorney with an L.L.M. degree and employee benefits certification from Georgetown University Law Center. Tr. 29:10-17 (Clark). She practices in the "employee benefits" area of law, among other related areas. See Tr. 29:20-30:3, 39:18-40:1 (Clark). Clark was hired in 1993 to work at the Feder Semo law firm, then known as "Feder & Associates, P.C.," by Gerald Feder. Tr. 30:6-15 (Clark). After becoming a non-equity partner in 1997, Clark became an equity partner in the firm as a Class A Shareholder in 2000. See Tr. 31:5-35:9 (Clark); Pl.'s Ex. 7. In 2001, she became managing partner of the firm. Tr. 36:25-37:8 (Clark). Clark resigned from the firm in mid-2002 to become the general counsel of the Hotel Employees and Restaurant Employees International Union Welfare and Pension Fund. Tr. 37:20-38:11, 117:21-118:11 (Clark).
Howard Bard is an attorney who began working for the firm roughly contemporaneously with Clark in 1993. Tr. 30:18-20 (Clark). Bard practices in the employee benefits area of the law. Tr. 313:1-14 (Bard). He became a non-equity partner in the firm in 1997 and a Class A Shareholder in 2000 when Clark did. Tr. 31:5-31:7 (Clark); Tr. 319:6-10 (Bard); Pl.'s Ex. 7. He became the managing partner when Clark left the firm in 2002 and remained in that position until the firm terminated in 2005-2006. Tr. 313:17-24 (Bard). It is fair to say that, with one notable exception described below, Bard and Clark were treated equivalently in relevant respects during their time together at Feder Semo.
Joseph Semo is an attorney with substantial experience in the employee benefits field dating to the mid-1970s. Tr. 472:25-475:15 (Semo). His own firm merged with Feder & Associates in July 1998. Pl.'s Ex. 6; Tr. 31:19-32:14 (Clark); Tr. 478:15-17 (Semo). According to the terms of the merger, memorialized in a "Business Combination Agreement" ("BCA"), Semo became a Class A Shareholder in Feder Semo at that time. See Pl.'s Ex. 6.
Robert Landau is an attorney who was an employee of Feder Semo until approximately January 2000. Tr. 428:1-21 (Landau). Landau appears to have been treated roughly equivalently with Bard and Clark while at the firm, but left the firm before becoming an equity partner.
Mark Nielsen is an attorney who was also an employee of Feder Semo until the firm's dissolution in 2005. Tr. 801:3-802:5 (Nielsen). He had substantial experience with ERISA prior to joining Feder Semo, including an L.L.M. in labor and employment law with a specialty in employee benefits law and subsequent work as an investigator at the Department of Labor on ERISA compliance. Tr. 801:2-17 (Nielsen). Nielsen was involved with Semo and Bard's resolution of Clark's appeal of her distribution of benefits from the Plan. See Tr. 803:20-805:12 (Nielsen).
William Anspach, an attorney, was the Plan's outside counsel from the drafting of its restatement in the early 1990s until the Plan's termination. Tr. 838:4-839:14 (Anspach). Anspach has significant experience in the employee benefits area of law. See Tr. 831:5-836:1 (Anspach).
Dennis Reddington was the firm's enrolled actuary from the mid- to late-1990s until the Plan's termination. Tr. 602:13-16 (Reddington). He has actuarial experience dating to approximately 1989. Tr. 599:20-601:11 (Reddington).
The BCA that merged Feder & Associates with Semo's firm established an "Executive
Committee" for the management of the firm. See Pl.'s Ex. 6 at P0672. Since the BCA indicated that "[t]he members of the Executive Committee shall consist of the Class A Directors only," the original members of the executive committee after the merger were apparently only Feder and Semo. Bard and Clark became members upon becoming equity partners in 2000. At the time of the firm's dissolution, the executive committee appears to have consisted only of Bard and Semo. See id.; Pl.'s Ex. 7. At trial, members of the firm referred to the executive committee as the "board of directors," although others in addition to Bard and Semo appeared to participate in "board" meetings without it being clear to all participants who was and was not a voting member. See Tr. 314:8-315:11, 404:15-21 (Bard); Tr. 813:10-13 (Nielsen).
The most significant relevant event regarding the firm, at least for present purposes, was its dissolution in 2005. On July 21, 2005, Semo was informed by the general counsel of the Union Labor Life Insurance Company ("ULLICO"), the firm's largest client, that the firm would be losing the account. Tr. 488:17-489:19 (Semo). The loss of the firm's biggest client was apparently quite unexpected. Tr. 488:25-489:5 (Semo). After first contemplating trying to downsize, the firm eventually decided to shut its doors. Tr. 490:18-25 (Semo); see also Tr. 49:9-16, 119:7-120:12 (Clark); Pl.'s Ex. 44. The firm essentially ceased operations by the end of 2005. See Tr. 815:5-25 (Nielsen).
The Plan was established on October 1, 1993, and the terms of the Plan were amended several times thereafter. See Pl.'s Exs. 1-3. The firm was the Plan's "plan administrator." Pl.'s Ex. 1 § 2.25; Pl.'s Ex. 3 § 2.30; Tr. 500:23-25 (Semo). The firm administered the Plan through its executive committee and its staff. Tr. 501:1-7 (Semo). The Plan also contained the following statement about Plan fiduciaries:
Standard of Conduct. Each Fiduciary of the Plan shall discharge his duties hereunder solely in the interest of the participants and their Beneficiaries and for the exclusive purpose of providing benefits to Participants and their Beneficiaries and defraying reasonable expenses of administering the Plan. Each Fiduciary shall act with the care, skill, prudence and diligence under the circumstances that a prudent man, acting in a like capacity and familiar with such matters, would use in conducting an enterprise of like character and with like aims, in accordance with the documents and instruments governing this Plan, insofar as such documents and instruments are consistent with this standard.
i. Benefits Under the Original Plan
The calculation of retirement benefits for a participating employee under the Plan was a multi-step process. This process did not change under the various iterations of the Plan. The Plan was a "cash balance" or "defined benefit" plan. Pl.'s Ex. 1 § 1.5. Under such a plan, each participant has a "hypothetical" (or "theoretical") account balance. Id.; see also Tr. 180:24-181:22 (Poulin). The hypothetical account balance is created by the making each year of hypothetical contributions to the account by the firm, as well as interest adjustments. See Pl.'s Ex. 1 § 1.5; Tr. 182:14-15 (Poulin). The amount of the yearly contribution made to each employee's hypothetical account varied under the iterations of the Plan, but the basic idea remained the same from the outset: contributions were determined by multiplying the amount of each participating employee's compensation in the "plan year" by a certain percentage. See Pl.'s Ex. 1 § 2.3; Pl.'s Ex. 2 at P0063; Pl.'s Ex. 3 § 2.3. Different employees received hypothetical contributions in amounts that varied not only according to salary, but also how they were "classified" under the Plan. That is, the hypothetical contribution for each employee was based on multiplying that employee's salary by a percentage that depended on which "group" (or "class") that employee fell into under the Plan's terms. Under the original iteration of the Plan, there were three such groups. The Plan provided:
For any Plan Year commencing on or after October 1, 1993, the actuarially equivalent single sum value of the portion of a Participant's Accrued Benefit attributable to the current Year of Service [is] determined by multiplying each Participant's Compensation for the Plan Year by the following product:
(A) For Participants in Class A, . . . 45% of such Participant's Compensation . . .;
(B) For Participants in Class B, . . . 20% of such Participant's Compensation . . .; and
(C) For Participants in Class C, . . . 8% of such Participant's Compensation . . . .
Pl.'s Ex. 1 § 2.3(b). The original iteration of the Plan defined the groups as follows: "Class A shall include all Participants who are shareholders of the Employer, Class B shall include all Participants who are classified as officers and not members of Class A, and Class C shall include all Participants who are not Shareholders of the Employer or officers." Pl.'s Ex. 1 § 5.1(a). In addition to employer contributions made to the hypothetical account each year, the hypothetical account balance would also increase each year by an interest percentage, as defined in the Plan. See id.
The next step in determining the retirement benefit due to a participating employee was "accumulating" the hypothetical balance based on the age of the employee at the time of the distribution of benefits. See Pl.'s Ex. 96 ¶ 7; Pl.'s Ex. 1 § 5.1(a). Under the terms of the Plan, the hypothetical account balance would be accumulated (or "projected") at a 7% interest rate until the time when the employee would reach the age of 65 (normal retirement age). Tr. 181:8-182:1 (Poulin). In other words, one would take the employee's age at termination, determine how much time would elapse until that employee would turn 65, and compound (or "accumulate" or "project") the account balance at a certain interest rate for that amount of time. Next, the quantity would be further accumulated, again at a 7% interest rate, to the employee's expected date of death, as provided for in mortality tables. See Tr. 189:2-14 (Poulin). As an expert indicated at trial, the concept being effectuated is that this amount is the amount that would be necessary to provide the beneficiary with an annuity for the rest of their life from retirement at age 65. See Tr. 183:12-15 (Poulin).*fn3 The Plan referred to this amount - the hypothetical account balance accumulated from current age to expected date of death - as the "Accrued Benefit." See Pl.'s Ex. 1 § 5.1(a).*fn4 The Accrued Benefit is an important quantity, because the amount of the retirement benefit actually received by the employee is calculated from the Accrued Benefit. The benefit actually received by the participant, however, depended on how the employee opted to receive it.
The Plan afforded participants two options for receiving their benefits. The option that the Plan referred to as the "Normal Retirement Benefit" was an annuity, payable from age 65 to the participant's death. See Pl.'s Ex. 1 § 5.1; Tr. 183:6-15 (Poulin). As a factual matter, nobody seems to have taken this option. The other option was to receive the retirement benefit as a lump sum following termination from the firm. The Plan defined how a lump sum would be calculated and contained certain rules about when the lump sum could be received by "terminated participants."
With respect to timing, under the original iteration of the Plan, if
the terminated participant's accrued benefit was less than or equal to
$15,000, the participant could receive the lump sum as soon as
administratively feasible following the end of the plan year in which
employment was terminated. Pl.'s Ex. 1 § 8.6. If a terminated
participant's accrued benefit exceeded $15,000, the participant could
not receive the lump sum until five years after the end of
the plan year in which employment was terminated. Id.*fn5
As explained below, these rules were amended over the time
period at issue here.
The amount of the lump sum that a participant would receive was the larger of two quantities. Tr. 184:11-185:1 (Poulin); Tr. 604:15-22 (Reddington). The first amount was the "present value" of the Accrued Benefit calculated using the Plan assumptions - that is, using the 7% interest rate. This amount would be equal to the hypothetical account balance at termination - the account balance before accumulation. See Tr. 604:15-22 (Reddington); Pl.'s Ex. 71.*fn6
The second amount was the "present value" of the Accrued Benefit calculated using the so-called "GATT rates." See Tr. 189:15-190:1-2 (Poulin); Tr. 604:15-605:25 (Reddington); see also Pl.'s Ex. 2 at P0062. The GATT interest rate is a "moving average of the 30-year Treasury rate." Tr. 743:4-15 (Altman); see also Tr. 185:2-15 (Poulin); Pl.'s Exs. 24, 25 at D766.
One of the two possible amounts for the lump sum was calculated using a variable interest rate; hence, the lump sum actually due to Plan participants could vary from the hypothetical account balance to different degrees over time. The lower the interest rate used in a present value calculation, the larger the present value will be, since money received in the future will be less discounted. Thus, the lower the GATT rate, the greater the lump sum distribution would be in excess of the hypothetical account balance. This disparity is known as the "whipsaw effect." Tr. 204:22-205:13 (Poulin); Tr. 605:12-606:5 (Reddington). Because the whipsaw effect is based on taking the present value of benefits that would be received at age 65, the effect will be more significant for younger participants. See Tr. 282:8-10 (Poulin). Quite importantly, as it turned out, the GATT rate was substantially lower than 7% during the time period at issue in this case and many of the Plan participants were significantly younger than 65. Hence, the lump sum due to many participants was substantially larger than their hypothetical account balances. See Tr. 285:8-12 (Poulin).
The first revision to the Plan that is relevant to this case was the "Third Amendment," executed October 1, 1998, a few months after Semo joined the firm. Pl.'s Ex. 2 at P0064.*fn7 The Third Amendment redefined the grouping of employees and created an additional group as follows:
Class A: All Participants who are Class A Shareholders of the Employer and who were born prior to January 1, 1950.
Class B: All Participants who are Class A Shareholders of the Employer and who were born on or after January 1, 1950.
Class C: All Participants who are either Class A or Class B Shareholders of the Employer and who were born on or after January 1, 1950.
Class D: All Participants who are not Shareholders of the Employer.
Pl.'s Ex. 2 at P0066. Gerald Feder clearly qualified under this amendment for treatment under Class A. Tr. 806:22-25 (Nielsen). But as this Court has previously noted, the Third Amendment contained a patent ambiguity: Class A Shareholders who were born on or after January 1, 1950, could be placed in either the second group (which received an employer contribution, or "service credit," of 20% of compensation) or the third group (which received an employer contribution of 10% of compensation). See Clark II, 697 F. Supp. 2d at 32. At the time of the Third Amendment's enactment, Semo was in this category; Clark and Bard were not because they were not yet Class A Shareholders. See Tr. 540:5-25 (Semo). The BCA explicitly provided, however, that Semo would be "classified under the Firm's pension plan as a participant entitled thereunder to a rate of contribution of twenty percent (20.0%)," Pl.'s Ex. 6 § 3(i), assuring him treatment as a Class B participant. See Tr. 539:10-541:3 (Semo). When Bard and Clark became Class A Shareholders in March 2000, they entered into this ambiguous category.*fn8
A minor amendment to the Plan was made in October 2000. That amendment added an exception to the rules about when participants could receive lump sum distributions. Under the exception, a participant who had at least five years of service with the firm prior to termination would be eligible for a lump sum distribution upon turning age 63 and incurring a one-year break-in-service. Pl.'s Ex. 2 at P0067. The only other change was to add Clark and Bard's names to the Plan. Id.
In August 2003, the terms of the Plan were completely restated, effective October 1, 2002, with more substantial changes from the earlier version, apparently to bring the Plan into compliance with newly enacted laws that are not relevant here. See Pl.'s Ex. 3 § 1.2, Pl.'s Ex. 37. The August 2003 ...