The Supreme Court recently found in Conkright v. Frommert that a "single honest mistake" in plan interpretation does not justify denying deference to the administrator in subsequent related interpretations of the plan. Writing for the majority, Chief Justice Roberts rejects the "one-strike-and-you're out" approach to administrator deference asserting that the principles of trust law and ERISA warrant the application of deference to a plan administrator's decisions to ensure uniformity in internal administration and efficiency in benefit plan operation.
In Conkright, the plaintiffs were employees of Xerox who left the company in the 1980s, received lump sum distributions of retirement benefits that they had accrued in the company pension plan and were later rehired. The ERISA pension plan gave the plan administrator deference to interpret plan terms. Plaintiffs originally sued the pension plan and plan administrators claiming that the "phantom account" method used by the plan administrator to calculate the plaintiffs' current benefits and account for the prior distributions was unreasonable. The district court granted summary judgment for the plan, but the Second Circuit vacated and remanded finding that the plan administrator's interpretation was unreasonable. On remand to the district court, the plan administrator proposed a new interpretation and calculation method that accounted for the time value of money the plaintiffs had previously received. However, the district court declined to apply the Firestone v. Brush deferential standard to this second interpretation and instead crafted its own interpretation for the calculation of current benefits for these rehired employees. The Second Circuit affirmed this aspect of the district court's decision finding that if a plan administrator errs in interpreting the plan on its initial attempt, it is no longer entitled to deferential review upon its re-interpretation of the same plan terms. The Supreme Court disagreed.
The Court found that a single honest mistake in plan interpretation does not warrant "stripping the administrator of that deference for subsequent related interpretations of the plan." Using language that may be music to plan fiduciaries' ears, Justice Roberts stated that "people make mistakes. Even administrators of ERISA plans." The majority opinion focuses on the guiding principles of trust law and the bedrock ERISA principles of "careful balancing" between ensuring fair and swift enforcement of rights under a plan and the encouragement of the creation of such plans in the first place. Specifically, the majority finds that the district court should have accorded deference to the plan administrator's second interpretation of the calculation method on remand as there were no allegations of dishonesty or bad faith in the plan administrator's initial interpretation of the plan.
This decision is another affirmation of the Firestone deference standard. It can be viewed as a positive for plan sponsors since it promotes predictability and retains plan discretionary authority with the plan administrator in cases where the initial plan interpretation was found unreasonable as long as such decision was made in good faith.