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Supreme Court Broadens Deference Granted to ERISA Plan Administrators

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May 19, 2010

Recognizing the complexities involved in the work of benefit plan administrators, the Supreme Court ruled that administrators of ERISA plans that provide for discretionary review are entitled to deferential judicial review of their plan interpretations, even if a previous interpretation of the same plan provision was unreasonable.  “People make mistakes,” the Court acknowledged in Conkright v. Frommert, as five justices, in an opinion authored by Justice Roberts, applied the deferential standard of review for ERISA plan administrators’ interpretations. 

Pension recipients charged that their pension plan and its administrator acted outside the authority granted by the plan by using a particular method to calculate the value of the beneficiaries’ initial lump sum withdrawals.  The plan document at issue described the process that the administrator had to follow to determine benefits payable to employees who left and later rejoined the plan, but did not set forth a specific method to calculate the value of initial withdrawals.  The plan administrator chose to use the “phantom account” method, whereby the hypothetical growth that beneficiaries’ past distributions would have experienced if their money remained in the pension investment funds prior to their rejoining the plan is subtracted from present benefits.  After this method was found to be unreasonable, the plan administrator proposed a new calculation method, by which it would account for the time value of the money beneficiaries had previously received using an interest rate that was fixed at the time of the initial distribution.  Reviewing this second calculation method, the lower court declined to apply a deferential standard of review, found the method improper and applied its own approach.

Analyzing the standard of review, not the particular benefits calculation methods at issue, the Supreme Court reversed the lower court’s decision to not grant deference to the plan administrator’s choice of a second calculation method.  The Court found that a “one-strike-and-you’re-out” approach, by which an honest mistake would strip a plan administrator of the ability to use its expertise to interpret the plan, is too harsh and not supported by trust law or the guiding principles of ERISA.  Rather, as originally announced in the Supreme Court’s Firestone Tire & Rubber Co. v. Bruch decision, the standard of review for plan interpretation is fixed according to the language of the plan at issue.  If the plan provides for discretionary review, a court shall not disturb an administrator’s interpretation unless the interpretation is unreasonable.  Now, underConkright, the deferential standard applies even if the plan administrator previously made an honest mistake attempting to interpret the plan.  Deferential review is not applied only if the administrator acts in bad faith or would not fairly exercise its discretion to interpret the plan’s terms—which the Court opined could be shown through multiple erroneous interpretations of the same plan provision.

The Court also clearly expressed its preference that this issue, and other similar issues that may arise in the future, be resolved without injecting judicial interpretation into the administration of benefit plans.  The Court outlined three advantages of its approach: promoting efficiency by encouraging resolution of benefits disputes through internal administrative proceedings rather than costly litigation; promoting predictability by allowing employers to comfortably rely on the expertise of plan administrators, rather than worrying about unexpected and inaccurate plan interpretations resulting from judicial review, and the attendant increased court costs that would result; and encouraging uniformity by avoiding different interpretations of a single plan provision that could arise from judicial review in multiple jurisdictions.

The Conkright decision is undoubtedly significant and favorable for ERISA plan administrators.  It provides a level of comfort in knowing that a single good faith mistake will not result in a court making an independent interpretation of a particular plan provision.  It is important to note, however, that deferential review is not automatic.  If the plan itself does not provide for deferential review, interpretations will be reviewed de novo, or “from the beginning.”  Thus, to enjoy the advantages of deferential review, plans must include language providing that plan administrators are entitled to use discretion in interpreting the plan.

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