Court: Employer Need Not Disclose ERISA Plan Changes To Possible Retirees

July 14, 2003 ( - A federal appeals court has determined that an employer does not have a fiduciary duty under ERISA to disclose retirement plan considerations when employees affected by such considerations file for retirement.

>The US 5th Circuit Court of Appeals upheld a lower court’s determination that no fiduciary breach occurred. However it arrived at its decision away from the “serious consideration” rule other federal courts have applied to decide similar cases.   Circuit Judge Patrick Higginbotham said in the court’s opinion that it did not believe that such a bright-line test was appropriate for determining whether an employer breaches its ERISA fiduciary duties by not disclosing material information about employee benefit plans, according to Washington-based legal publisher BNA.

>Instead, the 5th Circuit adopted a separate fact-specific approach to determine whether the benefit plan information was material. “The overarching question in such an analysis is whether there is a substantial likelihood that a reasonable person in the plaintiffs’ position would have considered the information an employer-administrator allegedly misrepresented important in making a decision to retire,” Higginbotham said in the opinion.

>Further, the appellate court determined that employers do not have a fiduciary duty to affirmatively disclose that they are considering amending ERISA benefit plans.   “[T]he proper course for an employer to follow is not to affect the employee’s decision whether to retire in any way – not by lying to them to induce them to retire before implementation of an enhanced early retirement program, nor by being forced to tip off the employees to its business strategies to aid them in taking best advantage of the company’s future plans. This middle road will allow the company to make its business decisions without hindrance while prohibiting it from tricking its employees into retirement by making guarantees it knows to be false,” the court said.

Changes In The Air

>William Martinez, Frank Ditta, and Lafayette Kirksey all filed suit against their former employer, Schlumberger Ltd., alleging fraud, fraudulent inducement, negligence, and gross negligence after the company announced the enactment of a voluntary early retirement plan just two weeks after the trio announced their own retirements.   The three former employees contended that at the time of their retirement, Schlumberger management knew of the proposed plan, yet failed to disclose information about the plan when they inquired if any early retirement package would be offered.

A judge in the US District Court for the Southern District of Texas ruled in favor of Schlumberger, finding the company did not breach its ERISA fiduciary duties in failing to disclose the plan to the employees. To reach this conclusion, the district court applied the “serious consideration” test and found that Schlumberger was not seriously considering the voluntary early retirement plan at the time of the employees’ retirement.

However, the appeals court, while agreeing with the conclusion, rejected the lower court’s use of the “serious consideration” test. In rejecting the test, which has been adopted by seven federal circuit courts of appeals, the 5th Circuit said the US Supreme Court would not endorse the use of such a bright-line test.

“Our reservations with the serious consideration test do not lie in its solid underpinnings, which acknowledge the reality that businesses need be allowed some latitude in responding to employee inquiries about future plan changes since at some level the potential for such changes is virtually always being discussed. We hold only that the lack of serious consideration does not equate to a free zone for lying,” the appeals court said.

The case is Martinez v. Schlumberger Ltd., 5th Cir., No. 02-20173, 7/9/03.