This case, “yet another in a long list of cases challenging an employer’s conversion to a cash balance retirement plan under the Employee Retirement Income Security Act ('ERISA') …” and the particulars aren’t pretty.
Former BP workers Fritz Guenther and Walt Fujimoto filed suit in 2016, alleging BP Corp. North America Inc. and the BP Retirement Accumulation Plan deprived a class of retirees by least $100 million in benefits following a problematic plan conversion in the 1980s.
They were joined in the suit by fellow retiree Les Owen in August 2020, alleging that BP switched the Standard Oil of Ohio retirement plan to its own in 1989 following the Sohio acquisition—and, to put it mildly, “misinformed” workers about the impact on their retirement benefits.
Following a 14-day bench trial, in a findings of fact and conclusions of law, U.S. District Judge George C. Hanks Jr. concluded that "Plaintiffs have demonstrated by clear and convincing evidence that BP violated its fiduciary duties to communicate completely, accurately, and solely in the best interests of the plan participants when it chose to market and 'sell' the plan amendment … to quell concerns from participants.”
He found that the plaintiffs were entitled to equitable relief under Section 502(a)(3) of ERISA, 29 U.S.C. § 1132(a)(3), and ordered the parties to file supplemental briefs regarding the appropriate form of that equitable relief.
More than 40 of the 57-page ruling (Guenther et al. v. BP Retirement Accumulation Plan et al., case number 4:16-cv-00995, in the U.S. District Court for the Southern District of Texas) consists of a detailed blow-by-blow of the process BP undertook in considering, and ultimately embracing the switch from a traditional defined benefit design to a cash balance plan.
Throughout the details provided by Judge Hanks indicate not only that a primary motivation for the switch was to shift inflation risk from the company to the participants in the plan, but that for a clear plurality, if not a majority of the BP workforce, the switch represented a reduction in projected benefits[i].
None of this was disclosed to participants. In fact, Judge Hanks noted that “the average participant understood a comparable retirement benefit was one that was at least equal to what they would have received under the prior benefit formula.”
He further noted that “BP never provided class members with a specific comparison of their retirement benefit under the ARP and the RAP, even when requested,” and that “nothing BP sent out to participants in the intervening years alerted plan participants that BP’s promise of a comparable retirement benefit was false for the Class.”
This, of course, while BP was acting as a fiduciary during the 1989 communications campaign, and yet he noted that “neither BP nor the Plan Administrator complied with the 1989 requirements of ERISA § 102(a), 29 U.S.C. § 1022(a), to disclose to participants in a manner calculated to be understood by the average plan participant the plan changes, including the removal of the early retirement benefit subsidy and the circumstances by which the participant’s retirement benefits might not be as good or better than under the final average plan as promised.”
Instead, Judge Hanks noted that:
1) BP promoted only the positive aspects of the plan change to employees for the purpose of retaining the employees;
2) BP made promises to employees about comparative plan performance without warning employees about circumstances that would cause the promise to fail;
3) BP did not share with employees that BP realized benefits from the conversion other than immediate cost savings;
4) BP did not share with employees that the converted plan introduced risk to the employees they had not previously borne; and
5) BP did not explain it had removed the early retirement benefit, and what that meant to employees as they reached age 55.
In essence, he noted that "the employees were mistaken about their future benefits because of BP’s Communication Campaign and the failure to comply with ERISA’s notice and disclosure requirements."
Time and again it was pointed out that "the information provided—including comparisons to the benefits the previous formula provided—communicated to the participants that the RAP 'is an innovative pension plan that provides retirement benefits participants can count on.'" These benefits were described as "comparable to—and, in most cases, better than—the benefit you would have received under the prior pension formula."
Moreover, he commented that "to reduce suspicion that the change might reflect a reduction in benefits, BP represented to participants that '[t]he revised plan is not a cost-cutting exercise.'"
Critically, Judge Hanks noted that "BP communicated with participants in a manner in which it placed the company’s interests above those of the participants in the plan."
What This Means
Cash balance conversions are tricky things with lots of individual variables to consider (employee tenure, interest rates, etc.)—things that can change over time and with the passage of time. Trying to share/communicate anything that complex at an individual level is a process fraught with the possibility of missteps and bad assumptions.
Regardless, based on the process detailed by Judge Hanks, it’s hard to see this effort as anything but a deliberate effort to obfuscate what appeared to be a known and widespread reduction in promised benefits compared with the traditional defined benefit plan in violation of both the spirit and black letter law of ERISA.
- Nevin E. Adams, JD
[i] Worth acknowledging in this case is the following: “The Court finds persuasive the expert opinion of Lawrence Deutsch, an actuarial and pension-consulting expert, that BP’s plan conversion caused a substantial reduction in benefits for the Class.”
