Absence of Notification of Annuity Benefit Choice Irrevocability may Constitute Fiduciary Duty Breach
Failure to inform a plan participant that the choice of a joint and survivor annuity was irrevocable after the participant's retirement may amount to a claim for breach of fiduciary duty under ERISA the Third Circuit found. (Jordan v Federal Express Corporation (1997, CA3) 1997 US App LEXIS 14801). Captain John Paul Jordan, an airline pilot until his disability retirement on June 1, 1989, participated in his employer's "fixed" pension plan and variable annuity pension plan. Both plans provided for retirement benefits for disabled participants in the form of a statutory joint and survivor annuity. The plans required the plan administrator, Federal Express, to furnish participants with information on the available retirement options prior to their choice.
In particular, the participant was to receive a written explanation of the availability of an election to waive the statutory joint and survivor annuity, and a written explanation of the terms and conditions of the statutory annuity, as well as the financial effect of making the election. The plans mandated that subsequent to a participant's retirement the election of the joint and survivor annuity could not be rescinded nor could the designation of the joint annuitant be changed.
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|Company / Product||Rate||Yrs.|
|Sentinel Security LifePersonal Choice Annuity 10||3.00%||10|
|Liberty Bankers LifeBankers Elite 9||3.00%||9|
|Oxford LifeMulti-Select 8||2.70%||8|
|Liberty Bankers LifeBankers Elite 7||2.90%||7|
|AmericoPlatinum Assure 5||2.70%||5|
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In the letter from Federal Express explaining the options to Jordan, there was no mention of the irrevocability of the annuity election. Jordan never requested information on the revocability of his election, nor did he receive, before his retirement election, a copy of the terms and conditions of the plans or their summary plan descriptions.
Jordan and his wife, Linda, claimed that had they known about the irrevocability of the annuity option, they would not have chosen the joint and survivor annuity due to the tenuous state of their marriage. In September 1989, Jordan received his first disability retirement check. Shortly thereafter, Jordan and Linda divorced. Jordan remarried Patricia, but was told by Federal Express that he could not substitute Patricia for Linda as his survivor. Even though Jordan obtained a qualified domestic relations order in which all of Linda's rights to the annuity were surrendered, Federal Express would, at best, remove Linda from the annuity but not add Patricia.
Jordan sued the plans in federal district court alleging primarily that he was not informed in advance of his election that he was barred from postretirement changes in his election. Since ERISA only allows plan participants to sue in certain circumstances, Jordan brought suit against Federal Express on three theories:
1. Federal Express violated ERISA's reporting and disclosure provisions, therefore Jordan should be allowed to recover benefits under the terms of the plan according to ERISA § 502(a)(1)(B)
2. Federal Express' violation of statutory reporting and disclosure provisions gave rise to a claim for equitable relief under ERISA § 502(a)(3)
3. Federal Express' failure to tell Jordan about the irrevocability of his election was a breach of fiduciary duty for which relief should be available under ERISA § 502(a)(3)
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The district court denied relief on all three theories. Relief under theory (1), above, would only allow enforcement of the terms of the plan. Since the plan defines its entitlements without reference to reporting and disclosure issues, this theory was rejected. For Jordan to prevail on theory (2), above, he needed to allege "extraordinary circumstances." Since his petition did not describe any extraordinary circumstances, such as bad faith on the part of Federal Express, this theory was rejected. Finally, the district court rejected theory (3), above, the breach of fiduciary duty claim because, again, there was no evidence of extraordinary circumstances and, alternatively, because absent a request on the part of a participant, Federal Express had no fiduciary duty to determine if Jordan was confused about the plan's terms or conditions.
The Third Circuit agreed with the district court's dismissal of Jordan's claims based on the first two theories. However, the appellate court reversed the district court's decision on theory (3), the breach of fiduciary duty claim. The district court had dismissed this claim primarily because there was insufficient evidence of extraordinary circumstances. However, the Third Circuit pointed out that claims based on fiduciary duty to inform are evaluated differently from violations of ERISA's reporting and disclosure requirements.
Extraordinary circumstances are not required to sustain a breach of duty claim. Here there was a material issue of fact as to whether Federal Express breached its duty to inform Jordan about the irrevocability of the election before he chose the joint and survivor annuity benefit. The fact that the potential breach of duty involved an omission rather than a misrepresentation was not fatal to Jordan's claim.
Alternatively, the district court had also dismissed Jordan's breach of fiduciary duty claim because he did not inquire about the irrevocability of the election and Federal Express had no duty to determine whether any confusion about a plan term existed. The Third Circuit felt that the lack of a specific request for information was not necessary to support a fiduciary breach to inform action. In fact, circumstances known to the fiduciary can give rise to a duty to inform.
Under the terms of the plans, Federal Express was required to provide all pertinent information relevant to a participant's election of plan benefits. Jordan received an explanatory letter before he chose his benefits. The letter did not mention that any choice of joint and survivor annuity would be irrevocable. However, it did describe another plan, the INVEST plan, in which Jordan was free to change his election. Also, the letter talked about his ability to change his election in the retirement plan prior to retirement. Thus, there was still an issue of fact whether Federal Express' failure to describe the irrevocability was a material omission and a breach of its fiduciary duty to exercise the care, skill, prudence and diligence required by ERISA § 404(a).The Third Circuit remanded the case so that the above issue of fact could be determined. Further, if Jordan prevails and is entitled to relief he may recover back benefits, he may rescind his retirement choice, and he may choose a new disability retirement option.
Presumably this would allow him to substitute his new wife for his ex-wife in the joint and survivor annuity if he so chooses.