Plan Amendment Was Abuse of Discretion

November 4, 2005 ( - The US District Court for the Eastern District of Michigan found that trustees of a profit sharing plan abused their discretion when they amended the plan to change the benefit valuation method.

According to the court, the trustees amended the plan just two weeks after participant Stephen Zervan complained of the plan’s investment returns and threatened to quit his job, BNA reports.  T he court said the trustees’ decision to amend the plan was “infused with a conflict of interest” because the timing of the amendment indicated it was aimed at adversely affecting Zervan’s benefits.

The company, Maday Construction Inc., was owned and operated by Edward Maday and his four children.   Two of Maday’s children were the profit sharing plan trustees.  When Maday turned 70 1/2 in June 2000, he received his share of the plan’s assets, which accounted for one-half of the plan’s total value.   According to the court, instead of liquidating the securities in the plan’s investment portfolio to pay Maday’s benefits, the plan’s trustees made an in-kind contribution of the securities, BNA reports.

Zervan said he learned on March 14, 2001 that his plan account had suffered significant losses, and quit his job that day.   He told the trustees that he would return to work if they answered a series of questions regarding the plan.   Dissatisfied with the answers he was given, Zervan officially resigned as of April 2, 2001.   He did not know that the trustees had amended the plan as of March 29, 2001.

The amendment changed the valuation date such that, instead of   a participant’s benefits being valued as of December 31 of the year preceding his or her employment termination, the departing participant’s interest would be valued as of the 30th day of the month in which the participant terminated his or her employment.   If Zervan’s benefits had been calculated using the pre-amendment formula that called for a valuation date of Dec. 31, 2000, he would have received $88,572.   By using the valuation date of April 30, 2001, as called for under the amendment, Zervan was entitled to $77,275, according to the court.

Zervan disputed this calculation and said he would not accept less than $88,572.   In addition to the benefit reduction resulting from the plan amendment, the plan was then terminated on June 12, 2002, and because of the plan’s losses, Zervan’s benefit totaled $59,267.

Zervan filed a lawsuit under the Employee Retirement Income Security Act (ERISA) alleging the trustees violated ERISA, breached their fiduciary duties, and deprived him of accrued benefits, among other things. He claimed that the amendment was improper and could not be used to calculate his benefits.

The court rejected Zervan’s argumentthat the amendment violated ERISA’s anti-cutback rule.   The court also denied Zervan’s summary judgment motion on his claim that the trustees breached their fiduciary duties by investing in high-risk investments and failing to diversify and on his claim that the trustees breached their fiduciary duties by failing to inform him of the high-risk investments undertaken by the plan, the plan’s losses, and the distribution to Maday.

The court said, “Under Sixth Circuit precedent . . . courts will not impose new duties upon the fiduciaries to disclose losses, risk in the plan, or a large distribution from the plan when there is no statutory requirement to make such disclosures.”

However, the court agreed with Zervan that the amendment was arbitrary, saying the trustees’ amendment of the plan “was infused with a conflict of interest, which when considered in light of the timing of the amendment and its obvious adverse effect on the plaintiff and beneficial effect on the administrator’s personal financial interest in the plan’s assets amounted to an abuse of discretion.”   In his opinion, Judge David Lawson agreed that the amendment could not be used to calculate Zervan’s benefits, and ruled that he was entitled to $88,572.

The case is Zervan v. Maday Construction Inc. Employees Profit-Sharing Plan, E.D. Mich., No. 02-10319-BC, 10/31/05.