A U.S. District Court has ordered Foot Locker to reform its cash balance plan to calculate accrued benefits in a way expected by participants.
U.S. District Judge Katherine B. Forrest of the U.S. District Court for the Southern District of New York found that the plan’s summary plan description (SPD) as well as other communications to participants failed to inform them that their benefits would be in a period of “wear-away” during which new accruals would not increase the benefit to which a participant was already entitled.
Upon conversion from a traditional defined benefit (DB) plan to a cash balance plan design, Foot Locker established a beginning balance based on a participant’s earned DB plan benefit and a 9% discount rate, as well as a mortality discount. Following the conversion, participants’ account balances were credited with pay credits and an interest credit at a fixed annual rate of 6%. The company understood that for years, the account balance under the new formula would be smaller than the ending accrued benefit under the traditional DB plan for most participants. So, to avoid a violation of the Employee Retirement Income Security Act’s (ERISA’s) anti-cutback rule, the plan provided that retiring employees were entitled to the greater of the benefit accrued under the DB plan or the cash balance plan benefit.
According to Foot Locker, participants had the information necessary to inform them they were in a period of wear-away. The company concedes that it did not describe wear-away explicitly because it believed it was too complicated and its variations and effects too unpredictable. But, Forrest disagreed, finding from testimony of plan participants that the communications to them led them to believe their pension benefits were growing with their years of service.
In her opinion, Forrest said all of the communications share core common characteristics: all failed to describe wear-away, and all failed to clearly discuss the reasons for the difference between a participant’s accrued benefit under the old plan and his or her balance under the new plan. She determined that all the statements were intentionally false and misleading, and that the SPD contained a number of intentionally false misstatements.
“Here, there is no doubt that Foot Locker committed equitable fraud,” Forrest wrote. “It sought and obtained cost savings by altering the Participants’ Plan, but not disclosing the full extent or impact of those changes.”
Comparing the case to that of Amara v. CIGNA Corp., but calling Foot Locker’s violations “more egregious,” Forrest said to remedy Foot Locker’s misrepresentations, the plan must be reformed to actually provide the benefit that the misrepresentations caused participants to reasonably expect. With respect to class members who have already retired, the court ordered that retirees and former employees shall be entitled to receive the difference in value between the reformed plan calculation and the benefit they received, in addition to prejudgment interest at a rate of 6% per annum.
Forrest ordered Foot Locker to enforce the plan as reformed, but ordered that all of the remedies provided be stayed to allow the parties to pursue an appeal, if they so choose.
The opinion in Osberg v. Foot Locker, Inc. is here.