Communicating Benefit Matters In the Wake Of An Economic Downturn

A downturn in the economy can have a ripple effect on your company’s employee benefit packages. A company’s worsening profit picture can force you to offer enhanced early retirement packages or to decrease matching contributions to its 401(k) plan.

How you communicate these and other employee benefit changes can make the difference between the company winning or losing in court.

Decreasing future pension benefits
As a means of dealing with slowing profits, companies may decide to reduce the rate at which its employees earn future pension benefits. In this way, the company may be able to reduce its required contribution.

While generally, you don’t have to communicate to employees amendments to plans, such as Section 401(k) plans, until well after the plan year in which the change is adopted, a different rule may apply in the case of pension plans.

Specifically, if the company decides to amend its pension plan to significantly reduce the rate at which employees earn benefits in the future, including early retirement benefits, employees, as well as any union representing the employees, must be notified within a reasonable period of time before the effective date of the amendment.

While what constitutes a “reasonable period of time” has not yet been defined by statute, companies will likely wish to give at least 30 days prior notice. The notice must be written so that the average participant can understand the effects of the amendment. This means, among other things, that the notice should not unduly minimize the effects of the amendment, notwithstanding the fact that telling employees bad news in a softening economy is not easy.

Although it may be difficult in some instances to determine whether a future reduction constitutes a “significant” reduction requiring the notice to be provided, as a practical matter, companies should provide the notice whenever they are amending a pension plan to decrease future benefits. The result of not providing the notice when it should have been issued is a $100 a day per participant penalty, or, possibly even nullification of the amendment.

Possible enhanced severance packages
Once a company actually amends or adopts a program covered by the Employee Retirement Income Security Act, employees must be advised in writing of the amendment’s or plan’s — as applicable — provisions. However, an evolving area of the law may require a company to disclose potential amendments or enhancements in order to avoid a fiduciary breach. This issue becomes particularly important as more and more companies contemplate providing enhanced early retirement or severance packages in order to reduce their workforces by voluntary terminations.

More and more courts are ruling that once a company has given “serious consideration” to such enhancements, HR professionals, and others in the company to whom employees would generally direct their benefit questions, must make sure that they do not mislead employees.

This is important because typically the employees inquiring as to possible enhanced severance programs are those who would likely qualify for the early retirement or enhanced severance package and who are afraid to retire lest they lose out on the increased benefits.

These court rulings mean, for example, after management has given serious consideration to implementing an early retirement program, an HR professional may be forced to reveal the fact as to the existence of the deliberations if asked by employees. While HR is not required to be a soothsayer and predict the outcome of those deliberations, he/she cannot disavow that enhancements may be adopted. Rather, the HR professional should respond that management is considering making changes but have not yet made a final decision.

This standard has been held to apply even if the HR professional being asked is truthfully unaware of management’s deliberations. This means then, that in order for a company and its officials to avoid potential fiduciary liability, HR, as well as any employees who are likely to be the persons to whom employees would direct benefit questions, will need to be apprised as to the existence of these deliberations.

In order to determine when the potential for liability exists, it is necessary to know when companies enter the “serious deliberations” stage. Serious consideration occurs when: (1) a specific proposal; (2) is being discussed for purposes of implementation, (3) by senior management with the authority to implement the change.

In order to have a specific proposal, it is not necessary that the choices have been narrowed to only one option nor is it necessary that the proposal being considered actually be the one ultimately implemented. Rather, it is sufficient if there is a specific proposal that is sufficiently concrete to support consideration by senior management for the purpose of implementation.

The requirement that the specific proposal be discussed for purposes of implementation means that management can still participate in the fact gathering stage, such as discussing options with outside consultants, without necessarily triggering the “serious consideration” stage.

Finally, the fact that under a company’s by-laws, only its board of directors has authority to actually implement such a program does not mean that you will not have “serious consideration” until the proposal reaches the board. It is likely that the third requirement is satisfied if the proposal has reached management with the authority to present it to the board.

While most courts have not gone so far as to rule that a company has an affirmative obligation to advise all potential employees that might be affected by the change of the existence of deliberations, at least one court has held that a company can in effect, obligate itself to do so.

This might arise, for example, if an employee who has heard rumors of an enhanced severance package stops by the HR office to inquire. If, at the time, management has not given serious consideration to such a change, the HR professional can answer in the negative without concern for fiduciary liability. If, however, the employee then asks the HR professional to keep him advised of any change in the answer, the HR professional must use extreme care in answering.

If the HR professional’s answer can be interpreted as agreeing to do so, at least one court takes the position that the failure to advise the employee if management begins serious consideration could again expose the company to fiduciary liability.

The deteriorating investment vendor
One of the issues that may arise when the economy turns downward is the solvency of various investment providers. This issue might arise, for example, if the company’s Section 401(k) plan allows participants to choose to invest among various investment options, including a fixed income investment, such as a guaranteed investment contact.

If the company learns that the investment advisor’s solvency may be in peril, the company must decide what must be told to participant/investors and when. Several recent cases have arisen alleging the failure of companies and plan fiduciaries to timely and/or sufficiently advise participants.

While there is no direct statutory guidance, the standard being used by the courts is whether the company and/or plan fiduciaries provided employees with enough information with sufficient expediency to allow participants to attempt to protect their investments. For example, if company officials learn through articles in financial publications that the vendor may be experiencing financial difficulties, the company and/or plan fiduciaries will need to follow-up by discussions with the vendor, research in other financial publications and possibly through the assistance of qualified third-party advisors, such as accountants or other financial specialists.

The company should also determine what — if any — means exist for extricating participant funds; for example, whether individual or bulk-transfers are available under the terms of the contract. This information should be complied in a short time frame and ultimately made available to all potentially affected participants.

If participants have the right to transfer some or all of their investments, the communications should also remind participants of any transfer or surrender options. As a practical matter, company and plan officials communicate in a manner that allows employees to protect themselves but without causing a panic or run on the investment that might only serve to exacerbate the problem.

Summary
When the economy slows, companies will often make changes in their employee benefit packages designed to increase their profits. These types of changes can themselves require special communications to employees. In order to avoid potential litigation, it is necessary to know what has to be communicated and when.

This article is prepared in summary form and is not to be construed as legal advice or opinion on any specific fact or circumstance.