administrators

Yosaun Smith v. CommonSpirit Health et al. concerns the Plaintiff’s, Yosaun Smith (“Smith”), action against the administrators of her ERISA retirement plan, Defendants CommonSpirit (“CommonSpirit”) and Catholic Health Initiatives Retirement Plans Subcommittee (“Subcommittee”) alleging that the Defendants violated ERISA when they did not replace “actively managed mutual funds with passively managed mutual funds.” The Court of Appeals for the Sixth Circuit upheld the decision from the district court, affirming that ERISA does “not give the federal courts a broad license to second-guess the investment decisions of retirement plans,” and that remedies are only available under ERISA when a fiduciary duty has been violated. Thus, the Plaintiff in this case alleged no facts supporting the conclusion that the Defendants had violated any fiduciary duties under ERISA.

Over the last few decades, employer provided retirement funds have commonly been structured as defined-contribution 401(k) plans. These plans allow participants to contribute pre-tax income to accounts, the amount often matched by employers. Therefore, the value of the assets in the account is the determining factor of the amount participants will receive in their payout; “A beneficiary’s payout thus may ‘turn on the plan fiduciaries’ particular investment decisions.’” ERISA provides that under a defined-contribution plan, participants may bring an action for breach of fiduciary duty against the plan administrators if the fund is imprudently managed. Until recent years, plans were actively managed by plan fiduciaries where “the portfolio manager actively makes investment decisions and initiates buying and selling of securities in an effort to maximize return.” However, more recent trends have enabled investors to use index funds, creating a “fixed portfolio structured to match the overall market or a preselected part of it.” This option means that there is “little to no judgment” involved in the management of the plan.

The Plaintiff in this case is an employee of Catholic Health Initiatives (otherwise known as CommonSpirit Health) and has been a participant in its defined-contribution 401(k) plan (“Plan”) since 2016. The Plan is administered by an appointed administrative committee and serves more than 105,000 participants with more than $3 billion in assets. Options available to participants include index funds with low management fees (0.02%) as well as funds that are actively managed with management fees up to 0.82%. If employees do not select a fund, they are placed by default into the Fidelity Freedom Funds, which are actively managed. These are a group of “target date fund[s]” meaning that “managers change the allocation of the underlying investments that they hold over time, say by selling funds that hold stocks to buy a greater proportion of funds that hold bonds or cash.” The purpose of this management is the “reallocation of asset types [allowing] managers to protect an employee’s investment gains and spare her the unpredictability of market fluctuations as she approaches retirement.”

The Eleventh Circuit Court of Appeals in Gimeno v. NichMD, Inc. analyzed whether Section 1132(a)(3) of ERISA provides authorization for a beneficiary of a plan governed by ERISA to sue for ‘”appropriate equitable relief’” due to violations of the plan or relevant statute. Thus, the question presented to the court is whether “Section 1132(a)(3) create[s] a cause of action for an ERISA beneficiary to recover monetary benefits lost due to a fiduciary’s breach of fiduciary duty in the plan enrollment process[.]” The Court answers this question in the affirmative, stating that a court “may order typical forms of equitable relief under Section 1132(a)(3).”

This decision reverses that of the district court, which had held that “such a claim would be futile.” The basis for this reversal is the common practice of awarding “equitable surcharge” in cases where a fiduciary’s breach of duty caused a beneficiary to sustain losses. The facts of the case center around the plan holder, Justin Polga, and his spouse, Raniero Gimeno (“Plaintiff”). Polga was an M.D. and an employee of NCHMD, Inc., a subsidiary of NCH Healthcare System Inc. (“Defendants”). When initially hired by the Defendants, the HR department assisted Polga in filling out the relevant paperwork. Gimeno was listed as the primary beneficiary under the relevant plan (“Plan”) and NCH Healthcare the administrator. Polga decided to elect to pay for $350,000 in “supplemental life insurance coverage on top of $150,000 in employer-paid coverage.” In order to receive this coverage, it was required that Polga submit “an evidence of insurability form,” however this form was not provided in his enrollment paperwork nor did the HR department attempt to rectify the error. Therefore, Polga was never properly enrolled on the program according to the insurance company. Despite this fact, the Plan “deducted premiums corresponding to $500,000 in life insurance coverage from Polga’s paychecks.” Further, Polga was provided with benefits statements that included the $500,000 in coverage.

When Polga passed away, the Plaintiff filed a claim with the Plan’s insurance company for benefits as the named beneficiary. The claim was partially denied, as the company approved the claim for the amount of benefits excluding the supplemental amount. Subsequent to this denial, the Plaintiff filed suit to recover the supplemental benefits, alleging that “by failing to notify Polga of the need for the form and misleading him about the nature of his coverage, the defendants breached their fiduciary duty to administer the plan fairly and properly, to inform Polga of his rights and benefits, and to ensure that all application forms were correctly completed and submitted.” As a remedy, the Plaintiff also sought that the Defendants be required by order to pay the benefits that would have been received if not for the breach – “the unpaid $350,000.”

Articles Tagged with administrators

Sixth Circuit Affirms Dismissal of ERISA Case, Holding that Plan Management was not Imprudent

Eleventh Circuit Rules in Favor of ERISA Beneficiary