A recent ruling from the federal Court of Appeals highlights two critical ERISA basics: fiduciary duties and disclosure requirements. In Kujanek v. Houston Poly Bag, the Fifth Circuit upheld an award of damages and fees of more than $243,000 for an employer’s failure to provide a participant with a copy of a retirement plan’s summary plan description (“SPD”) and a rollover election form. As explained more fully in the rest of this article, that amount could increase significantly when the lower court reconsiders the question of statutory penalties.
The case concerns a dispute between Houston Poly Bag I, Ltd. (“Poly Bag”), the sponsor of a profit sharing plan (the “Plan”), and long-time employee Kenneth Kujanek, a participant. Kujanek resigned from Poly Bag in September of 2007, and by the end of 2007 he had a vested account balance under the Plan of about $490,000.
Poly Bag’s policy was to provide SPDs to employees only on request. Upon Kujanek’s termination, it did not provide Kujanek with a copy of the SPD, a distribution form, or any information concerning his Plan account.
Several years of litigation between Poly Bag and Kujanek ensued, during which the value of Kujanek’s Plan accounts steadily decreased because of investment losses. During the first year of that dispute, Kujanek contacted the Plan’s financial advisor and requested the information necessary to obtain a rollover distribution of his Plan account. The advisor passed this request along to Poly Bag. Relying on language in its SPD that required all requests for Plan information to be in writing, Poly Bag neither provided the required forms nor contacted Kujanek.
In 2009, during a second round of litigation, Kujanek finally received a rollover distribution, but by that time his account had decreased in value to $306,000. He sued Poly Bag for the difference (over $183,000) in his Plan accounts from the end of 2007 to the date he finally received his distribution.
Two separate aspects of Poly Bag’s obligations as plan administrator were at issue in the case: its obligation to act solely in Kujanek’s interest, which arises under ERISA’s fiduciary rules, and its statutory obligation to provide participants with information about the Plan, which arises under ERISA’s disclosure rules.
While ERISA does not explain how these obligations relate to one another, Poly Bag demonstrates that the letter of the disclosure rules is not a shield against the spirit of the fiduciary rules. In this case, the employer ran afoul of both sets of rules.
It is not news to most plan sponsors that—when they act in a fiduciary capacity—ERISA requires them to act solely in the interest of participants and beneficiaries (hereinafter, “participants”). Fiduciaries must also refrain from any actions that would result in a conflict between their own interests and those fiduciary obligations. Under the common-law trust principles that apply when courts need to interpret ERISA’s fiduciary rules, this duty includes the obligation to inform participants of facts the fiduciary knows but the participant does not know, but that the participant needs to know for his or her own protection.
To defend itself against Kujanek’s charge that it breached this fiduciary duty by failing to provide the SPD and a rollover form, Poly Bag relied on language in the Plan’s SPD requiring all requests for Plan documents (including distribution forms) to be in writing. The Court rejected this argument because Poly Bag knew in 2008 (if not earlier) that Kujanek wanted a distribution of his account balance. The Court held that, as soon as Poly Bag knew of Kujanek’s inquiry, it had a fiduciary obligation to provide him with the forms. The SPD language (requiring a written request) could not shield Poly Bag from that obligation.
The Court noted—as courts are wont to do—that “ERISA’s fiduciary duty is the highest known to the law.” According to the Court, Poly Bag violated that duty by withholding Plan documents and rollover information. It therefore awarded Kujanek the damages he sought, i.e., the amount by which his account balance had decreased from its $490,000 height at the end of 2007. It also upheld the district court’s award of more than $60,000 in attorneys’ fees.
In addition to damages for breach of fiduciary duty, the lower court had awarded Kujanek $25,000 in statutory penalties for Poly Bag’s violation of the disclosure rules. These rules require plan administrators to furnish participants with certain plan documents within 30 days of a written request. Violations are punishable by penalties of up to $110 per day. The district court based its award on a document production request made during the litigation that followed Kujanek’s termination.
The appellate court reversed the lower court’s ruling on this point, noting that discovery requests during litigation are “lawyer-to-lawyer” communications, rather than “participant-to-administrator communications”. Thus, while the discovery request was in writing, it was not a request from the participant to the Plan administrator.
That is not the end of the penalties question, however. In fact, the Court’s remand of this question to the district court may well reflect its opinion that the penalty was too small.
The Court was “troubled” by Poly Bag’s failure to comply with another part of the same disclosure rules: the plan administrator’s obligation to regularly distribute SPDs (including updates) and other plan documents to all participants. Rather than providing these documents as a matter of course, Poly Bag provided them only on request.
The Court remanded the question of statutory penalties to the district court, instructing it to determine whether Poly Bag’s failure to regularly distribute SPDs and other materials, in general, and distribution information, in particular, to participants is a basis for further penalties. If the district court decides that it is, the penalty clock would start much sooner than the discovery request that marked the beginning of the period. Indeed, it could start ticking as far back as Kujanek’s first year as a Poly Bag employee—about 20 years before he received his distribution from the Plan. At up to $110 per day, the penalty for a violation over that period could be substantially larger than the $25,000 penalty the appellate court overturned.
We believe that such an award is unlikely, however, at least on the basis of ERISA’s penalty provisions. This is because there is no statutory penalty for an administrator’s failure to distribute plan documents (such as SPDs) in the ordinary course. It is not clear why Congress required administrators to distribute such documents but failed to include a remedy for violating that requirement. But (despite the appellate court’s instructions) there is no statutory basis for a penalty award.
Of course, the district court might determine that the systematic failure to provide employees with information about the Plan is another fiduciary violation and award damages on that basis. As we reported in our November article, courts have been known to do precisely that when plan sponsors fail to live up to their disclosure obligations. We will watch with interest the further proceedings in the district court.
What Does This Case Mean for Plan Sponsors?
In this case, an employer’s failure to provide two routine documents—an SPD and a rollover form—has already cost it $180,000 in damages and $60,000 in fees. And in the months to come, that failure could cost it more in statutory penalties. Poly Bag should remind employers of some ERISA fundamentals:
- Never take ERISA’s reporting and disclosure obligations lightly. Prepare, update, and distribute SPDs and other plan materials on time.
- Never take ERISA’s fiduciary obligations lightly. Placing even the slightest obstacle between participants and a distribution form (or other plan document) can have disastrous results. And in the right circumstances, even failing to act when participants don’t know their benefits are at risk can violate ERISA’s fiduciary rules. This obligation is not relaxed for troublesome or disgruntled employees. In fact, these are the last employees who should be provided with an axe to grind in federal court.
- Never disregard a participant’s request for plan information. Although ERISA’s disclosure rules refer only to written requests from participants, failure to provide materials requested in other ways (e.g., orally or through a third party) could be a violation of fiduciary duty.
- Always provide terminating employees with copies of the SPD and distribution forms.