A major health services company with thousands of employees overhauled its pension plan some years ago. As it explained to the employees at the time, their then existing benefits would all be converted into a hypothetical lump sum, which would constitute the opening account balance for the new plan. That amount would then grow by a percentage of the employee’s pay each year. It all sounded as though there was nothing to which the employees could object.
But what was not explained to the employees, and what eventually led a class of employees to sue under the federal Employee Retirement Income Security Act (ERISA), was that the beginning balance for many employees with long tenures at the company would be as little as 50% to 70% of the amounts built up under the old pension plan. Calculated in such a manner, the pension balances for such employees could take years just to get back to the levels of the old plan.
The now illegal practice that led to the litigation has happened often enough that it has a name: “wear away.” The employer’s creation of “underwater” beginning balances effectively tells employees that prior pensions were overpaid and that before they can receive compensation under a new pension plan, they effectively must work off a debt, or “wear it away.”
When the case ultimately reached the U.S. Supreme Court, a majority of the Justices agreed with the plaintiffs that if the company had deliberately provided misleading and incomplete information to its employees, in violation of ERISA, a monetary remedy was appropriate. This was a resounding win for the employees, given some earlier case precedents making it difficult to recover monetary awards for employment benefits lost due to employer violations of their duties.