The Supreme Court ruled that these workers could sue for individual relief. The decision underscores the importance of truthful benefits communication and brings to light several implications, such as the importance of knowing when you’re communicating as an employer only and when you’re communicating as a plan administrator. Neal Schelberg, a partner at the international law firm Proskauer Rose Goetz & Mendelsohn LLP, illuminates the court’s thought process and advises about benefits communications post-Varity, including an unaddressed problem spot.
Can you begin with the basics of the Varity v. Howe case?
The question the Supreme Court had to address was, "Were Varity representatives acting as a plan administrator when they communicated with the employees?" Varity [representatives] argued they weren’t acting as a fiduciary. They said they were acting as the employer. But under ERISA [the Employee Retirement Income Security Act], there’s [a situation] we call the two-hat dilemma. What we mean by that is an employer that sponsors a plan acts in two capacities: as the plan sponsor—the employer—and as the plan administrator. If the employer is acting as the plan sponsor, the case [history] is clear—it can act in its own self-interest, because it has fiduciary responsibility to the shareholders to act in its own self-interest. Only when the employer acts as the plan administrator does it take on fiduciary responsibility under ERISA.
What if the employer acts as the plan administrator?
If the employer acts as the plan administrator, it takes on the ERISA requirements and must act in a prudent way—not act in the corporate interest, but solely in the interest of plan participants. The question the court had to address was: "Was Varity acting as a plan administrator, that is, assuming fiduciary responsibility, when it had that special meeting and deceived employees into transferring employment?"
How did Varity represent its case?
Varity argued that when it made representations to its employees, it was acting as the employer because it was talking about business conditions—its bright financial future—and it didn’t owe a duty of loyalty to the plan participants.
So what did the court decide?
The court said no, [Varity wasn’t acting as the employer.] It held that: "Conveying information about the likely future of plan benefits, thereby permitting beneficiaries to make an informed choice about continued participation in the plan, and making intentional representations about the future of benefits," in the context of the company’s "bright financial future" constitute a fiduciary function of plan administration.
What’s important about that quote?
Its essence is: When an employer makes business statements about the future of the company, ordinarily those kinds of statements taken in a vacuum are the kinds of things [employers] say to shareholders, to creditors, to employees. There are no fiduciary duties attached there. But when you make those statements in the context of information relating to plan benefits and plan coverage, then the statements take on a different cast and at that point in time are statements relating to plan administration—therefore there are fiduciary duties attached.
How did the company make such statements?
It was telling employees there was this bright financial future in Massey Combines in the context of—this is what’s critical—trying to convince these employees to transfer employment. Company representatives said, "Your plan benefits will be the same, your benefits’ security will be the same, health benefits won’t be reduced, and this company has the wherewithal to deliver on those benefits."
What happened then?
Once the court determined Varity was acting as a fiduciary, the next [question] was, "Did the company breach a fiduciary duty?" The answer was that the statement of a bright financial future clearly was deceptive. [Varity’s representatives] knew the company didn’t have a bright financial future, so [the court] really had very little difficulty determining a breach of fiduciary duty, because the company wasn’t acting in the best interest of plan participants. The court also determined that the participants could sue Varity on an individual basis. That’s a significant departure from the law to date.
Aren’t there a few issues that still need be decided?
The one decision the court didn’t have to deal with—and this I think is the future of the inquiry now—was the question of whether fiduciaries have an affirmative duty to disclose truthful information on their own or in response to employees’ inquiries. There have been a number of cases out there in which some lower courts imposed this duty on plan fiduciaries to disclose information that the participants didn’t even ask for on the theory that in the context of the question [the employee did ask], the fiduciary should have realized that would’ve been an important piece of information and should have affirmatively said to the individual: "You haven’t asked this question, but before you make a benefit decision, you should be aware of this." This is an area employers that are plan fiduciaries should be aware of.
Can you describe these cases?
In terms of case development, I know of two recent cases. The most prominent case is Eddy v. Colonial Life Insurance Co., a 1990 District of Columbia Circuit Court case. Eddy had AIDS; he was terminating employment. He asked the plan fiduciary about conversion of his group medical plan—under some state insurance laws you have the right to convert to an individual policy—and was correctly advised that there were no conversion rights. What he really meant to ask was whether he had a COBRA right. So he asked the wrong question, to which he was answered honestly and correctly.
The circuit court ruled that the representative at Colonial Life insurance Co. had breached the company’s fiduciary duty. The court said that within the context of the inquiry, the fiduciary should have disclosed the difference between conversion rights and COBRA rights. It said the fiduciary’s [responsibilities] were not merely to avoid misrepresentations, but also to communicate material facts regardless of whether the participant made the inquiry.
And the other case?
The other is Bixler v. Central Pacific Teamsters Health and Welfare Fund, out of the 3rd Circuit, 1993. The participant in the case went on strike with his union and died soon after. His spouse called the plan administrator and asked if she was entitled to death benefits. The administrator correctly replied that she was not entitled to any death benefits. The participant never mentioned COBRA [rights].
The court said the administrator had reason to know COBRA benefits would’ve been an important piece of information for this spouse to know and should have, on his or her own, raised with her the possibility that she was entitled to COBRA rights. The circuit court said that not only is there a negative duty for plan fiduciaries to refrain from misinforming, but there’s also an affirmative duty to inform when the fiduciary knows silence may be harmful. We were hoping that Varity would address whether there is this affirmative duty.
This affirmative duty sounds tough to adhere to.
The law [as interpreted] in these circuit court cases is that you can satisfy your COBRA obligations, which the plan administrators in both these cases did, and still breech a fiduciary duty. The courts imposed an obligation over and above COBRA statutory requirements. So you can do everything the law requires, but when people call and ask about XYZ, you have a fiduciary duty in the context of the question of XYZ to raise ABC. Can you answer honestly, yet not anticipate what people might have in their minds, and still be responsible? In the District of Columbia and 3rd Circuits, it appears that you can.
What’s your advice to human resources professionals?
There are a couple of rules in terms of plan communications post-Varity. [The first] proposition is that plans should explicitly identify who the plan spokespersons are. Although you can’t effectively erect walls around various individuals, I think—post-Varity—you want to limit, to the extent feasible, the number of employees who have the ability to communicate with plan participants.
The Supreme Court has told us that plan fiduciaries will be held very closely to the information being conveyed. Middle managers and supervisors should refrain from talking about future or existing plan benefits. Once again, you want to limit, to the extent you can, who can speak authoritatively on behalf of the plan.
And what’s the second communication suggestion?
Once "serious consideration" is given to the implementation of a new benefits program or an amendment to an existing program, the courts say that at that point, if an employee inquires about whether there will be a benefits program or a change in program, you have to answer honestly and fully. So say I knock on your door and [tell you] I’m looking to retire in the next couple of months under the current retirement plan, but that if you tell me there’s serious consideration being given to the implementation of an early-retirement window or enhanced benefits, I’ll wait a couple months. The question then for the plan fiduciary—who knows there’s something on the drawing board—is what affirmative obligation does he or she have to say, "Well you asked the question" [and advise the person to wait to retire]? The courts have said when there’s serious consideration being given to a benefit program and you’re asked [about it], you have to answer it honestly and forth-rightly. Some cases, however, are beginning to suggest that there may be a duty to volunteer this information, even when not asked.
Your final advice?
At the time that a plan or an amendment to a plan is adopted, you should give immediate notice to employees of that program even if the plan is to be effective at a later date. You want to give notice of the change as soon as you can, just from a liability-avoidance view. Because if participants are contemplating taking action—terminating employment or going out under an early-retirement window—you want to be in the posture of providing as much advance notice as possible. [Otherwise] a person retires and three months later, when the company proposes a new plan, [the person could] come back and say, "If you had told me at the time I retired, I would have waited." There are a number of cases brought about from that kind of scenario.
If you pool all these cases together under ERISA, they clearly broaden the obligation of plan fiduciaries to communicate more information, and more often, with plan participants and beneficiaries. That’s the direction these cases are going.
Personnel Journal, November 1996, Vol. 75, No. 11, pp. 91-95.