Alert June 30, 2010

U.S. Supreme Court Clarifies Standard of Review for Plan Fiduciary's Discretionary Plan Interpretation

In a 5-3 decision, the U.S. Supreme Court held in Conkright v. Frommert, 130 S. Ct. 1640 (2010), that where plan documents confer discretion on a fiduciary to interpret the plan, a court should apply deference in reviewing that fiduciary’s interpretation of the plan provision, even if a different, earlier, good faith interpretation of the same plan provision was previously overturned by the court as unreasonable. 

At issue in Conkright was a plan administrator’s interpretation of a plan provision regarding how to account for a lump sum distribution previously received by a participant who later became reemployed, earned additional plan benefits and ultimately retired.  In its first opinion in this case, the Second Circuit overturned the administrator’s original interpretation of this provision.  On remand, the administrator proposed a new interpretation of the plan, and the reviewing district court declined to apply a deferential standard to the second interpretation.  The Second Circuit affirmed, in part, stating that the district court need not “afford deference to the mere opinion of the plan administrator in a case, such as this, where the administrator had previously construed the same terms and we found such a construction to have violated ERISA.”  Frommert v. Conkright, 535 F.3d 111, 119 (2d Cir. 2008) (emphasis in original).

The Supreme Court reversed this decision.  Chief Justice Roberts began the majority opinion simply: “People make mistakes.  Even administrators of ERISA plans.”  The court then held that “an ERISA plan administrator with discretionary authority to interpret a plan is entitled to deference in exercising that discretion” even if it has previously made “a single honest mistake in plan interpretation.”  The majority cautioned that ad hoc exceptions should not be applied to the rule of discretion – a rule based on trust law principles underlying ERISA as well as policy considerations:  “ERISA represents a careful balancing between ensuring fair and prompt enforcement of rights under a plan and the encouragement of the creation of such plans.” (internal quotations and citations omitted).  Chief Justice Roberts emphasized that the court’s holding promotes “interests in efficiency, predictability, and uniformity” in ERISA plan administration, consistent with congressional intent. 

Justice Breyer wrote the dissent, joined by Justices Stevens and Ginsburg.  They agreed with the general proposition that, “where an ERISA plan grants an administrator the discretionary authority to interpret plan terms, trust law requires a court to defer to the plan administrator’s interpretation of plan terms.” (emphasis in original).  The dissenters, however, were persuaded that under trust law “a court may exercise its discretion to craft a remedy if a trustee has previously abused its discretion” (emphasis in original) and that ERISA policy goals of “promoting predictability and uniformity” “are, at the least, offset by . . . discouraging administrators from writing opaque plans and interpreting them aggressively.”