Consumer Agenda for Retirement Security

Initiative #2: Empower workers to promote their own retirement security

A. Develop a package of legislative and regulatory proposals to level the playing field for participants in administrative and court proceedings.

When Congress enacted ERISA, the private pension law, 34 years ago, it intended to create a fair dispute resolution system under which employees denied retirement or health benefits would have fair and impartial judicial consideration of their benefit claims and could be compensated for any losses caused to them by negligent or fraudulent behavior.  Unfortunately, the federal courts have distorted the law’s dispute resolution framework so that it tilts in favor of the employer.  An executive at a large insurance company wrote an almost gleeful memo about the disadvantages participants in ERISA plans face.  He wrote that “State law is preempted by federal law, there are no jury trials, there are no compensatory or punitive damages, relief is usually limited to the amount of benefit in question, and claims administrators may receive a deferential standard of review.”  This unfair system urgently needs repair.  Here are some of the components of a legislative package:

(i) Adopt a de novo standard of review for benefit denials.
(ii) Provide adequate remedies when participants suffer damages.
(iii) Clarify the scope of ERISA’s attorney’s fees provisions.
(iv) Redefine who is a “participant” for purposes of filing a lawsuit.
(v) Ensure that participants have a reasonable period in which to file a lawsuit.

(i) Adopt a de novo standard of review for benefit denials.
Under present case law, when a participant challenges a benefit denial in court, the participant must show not only that the denial violated the terms of the plan, but that the plan’s denial was arbitrary and capricious.  This is patently unfair and is different than the rules that apply to virtually all other types of contractual disputes.  Courts should rule for the participant when the participant is entitled to benefits under the terms of the plan. 

(ii) Provide adequate remedies when participants suffer damages.
In a series of cases, the Supreme Court has said that participants in retirement plans cannot receive normal contractual damages when they are wrongfully denied benefits and often cannot receive monetary relief when a plan fiduciary negligently or even intentionally injures them.  Moreover, although section 510 of ERISA prohibits an employer from terminating or discriminating against an employee for the purpose of defeating the employee’s rights under ERISA or to retaliate against the employee for exercising his or her rights under federal law, there are often no effective remedies for individuals.  Some courts have said that ERISA prohibits a court from awarding back pay in such cases even though this may be the only remedy that can make the employee whole.  Legislation is needed to ensure that injured participants -- in benefit and fiduciary and section 510 claims -- have access to the same range of remedies that injured people have in almost every other type of civil action.

(iii) Clarify the scope of ERISA’s attorney’s fees provisions.
ERISA includes a provision allowing courts to award attorney’s fees in civil actions.  In other statutes, similar attorney’s fee provisions have been understood to provide that fees should be awarded to prevailing plaintiffs in the absence of extraordinary circumstances.  Such an approach to fees is especially appropriate under ERISA, where the failure to award fees translates into an effective reduction of a participant’s retirement income, since the benefits will be reduced by the amount of the fee. 

For inexplicable reasons, most courts have often refused to award fees to participants who prevail in a civil action unless the participant can show that the defendant acted in bad faith.  In addition, courts have refused to award fees for attorney time at the important administrative appeal stage of a case.  The Department of Labor should take on these two issues by issuing regulations on fees, filing briefs amicus curiae and seeking clarifying legislation.

(iv) Redefine who is a “participant” for purposes of filing a lawsuit.
ERISA provides jurisdiction for a participant to bring a civil action to recover benefits or to remedy a fiduciary breach.  Some courts have held that individuals, who received their benefits from plans as lump sums, even though incorrectly calculated or later determined not to include the entire benefit, are no longer participants and thus cannot bring lawsuits.  The Department of Labor can take on this issue by amending its regulations, by filing briefs amicus curiae and, if necessary, seeking clarifying legislation.

(v) Ensure that participants have a reasonable period in which to file a lawsuit.
ERISA provides no statute of limitations for benefit disputes, and courts have generally looked to state contract law.  However, plans have increasingly been creating their own, short-fuse statute of limitation as a contractual term.  Moreover, courts have sometimes held that the statute of limitations begins running as soon as a participant has reason to believe that the plan would reject his or her claim if presented.  The law should establish a statute of limitations that plans cannot shorten and that does not begin running until a plan actually denies a claim.

Learn more about the other initiatives in the Consumer Agenda for Retirement Security.

Initiative 1: Promote a more adequate and secure private retirement income system.
Initiative 2: Empower workers to promote their own retirement security.
Initiative 3: Improve retirement savings plans.
Initiative 4: Improve traditional and hybrid pension plans.
Initiative 5: Make retirement plans fairer for workers and their spouses.

Print the Consumer Agenda for Retirement Security [PDF].