Working Together

Since its adoption the Employee Retirement Income Securities Act of 1974, as amended (“ERISA”), has required employee benefit plan sponsors to make disclosures regarding plan terms and plan expenses.  The most well-known of these disclosure is the Summary Plan Description.  The number of disclosures that plan sponsors are required to provide has increased over time.  As a consequence, since 1997 the U.S. Department of Labor (the “DOL”) has had a safe harbor that permits the electronic distribution of the required disclosures.  A new safe harbor focusing on accessing disclosures on an internet website became available in July 2020, when the DOL’s Final Regulation issued on May 27, 2020 became effective.

The disclosures are important not only for informing participants about their benefits. Disclosures may also form the basis for determining when the ERISA statute of limitations for bringing breach of fiduciary claims starts to run.  Under ERISA a claim for breach of fiduciary duty must be brought no later than the earlier of: (i) six years after (A) the date of the last action which constituted a part of the breach or violation, or (B) in the case of an omission, the latest date on which the fiduciary could have cured the breach or violation; or (ii) three years after the earliest date on which the plaintiff had actual knowledge of the breach or violation.  The current question for plan sponsors is how to handle disclosures to participants in light of the U.S. Supreme Court’s recent decision regarding what “actual knowledge” means.

In February 2020 the U.S. Supreme Court issued its opinion in Intel Corporation Investment Policy Committee et al v. Sulyma, 589 U.S. _______ (2020), 140 S. Ct. 768, 206 L.Ed.2d 103 (2020,) finding that when ERISA declares that “actual knowledge” is required to trigger the 3 year statute of limitations for fiduciary breach actions, ERISA is to be taken literally.  For a participant to have actual knowledge, her knowledge must be more than “potential, possible, virtual, conceivable, theoretical, hypothetical or nominal.” 140 S.Ct. at 777.  Simply providing ERISA-required disclosures in a Summary Plan Description or other required disclosure under Title I of ERISA is not enough to prove that the participant actually read and understood the disclosures being made.

In the preamble to the Final Regulation concerning the new electronic disclosure safe harbor, the DOL cites Sulyma and notes that the regulation does not address issues such as whether a covered individual read, understood, or had actual knowledge of the contents of the covered documents accessed.  It is beyond argument that it is in a participant’s best interest to read and understand disclosures made regarding plan terms and investment alternatives. Accordingly, it would be prudent for plan fiduciaries to create a mechanism that strongly encourages plan participants to actually read disclosures and ask questions if they do not understand the disclosures.  The fact that these mechanisms may also be used to prove actual knowledge, thus triggering the running of the statute of limitations, is an additional incentive for putting such mechanisms in place.

Sulyma suggests several ways to prove “actual knowledge.”  “Evidence of disclosure would no doubt be relevant, as would be electronic records showing that the [participant] viewed the relevant document[s] and evidence suggesting that the [participant] took action in response to the information contained in them.”  140 S.Ct. at 779.  Sulyma also notes that fiduciaries can contend that evidence of “willful blindness” supports a finding of “actual knowledge.”  The doctrine of willful blindness has been used by prosecutors in criminal actions. The Supreme Court extended the application of the doctrine to civil cases for patent infringement in Global-Tech Appliances, Inc. v SEB S. A., 563 US 754 (2011).  In Global-Tech the Court noted that the federal appellate courts do not have a uniform standard for proving willful blindness, but the standards have the following common requirements:  “(1) the defendant must subjectively believe that there is a high probability that a fact exists and (2) the defendant must take deliberate actions to avoid learning of that fact.”  563 US at 769.  Accordingly, the mechanisms adopted by plan fiduciaries to strongly encourage plan participants to read disclosures and ask questions if they do not understand the disclosures should be geared to establishing, where a participant denies reading the disclosure, that there is a high probability that the participant believed that plan disclosure documents contained specific information and then took deliberate actions to avoid accessing that information.

Below is a chart setting out the basic requirements of the safe harbor that has been in place since 2002, as modified by the Final Regulation, and the new safe harbor for providing retirement plan disclosures electronically. Both safe harbors provide for notices to participants (active and terminated entitled to benefits under the plan), retirees in pay status, beneficiaries and alternate payees (“Covered Individuals”).  The updated 2002 safe harbor does not require affirmative initial notices to active employees who have effective access to electronic documents at work (often referred to as “Wired at Work” individuals), but in light of Sulyma plan sponsors may want to provide an initial notice to such individuals (see Chart below regarding initial notice requirements). Each notice requirement creates an opportunity for recipients to affirmatively acknowledge their receipt of the notice, comprehension of the notice, and their affirmative duty to review the disclosure referenced in the notice.  When accessing an electronic disclosure, mechanisms can be added requiring the Covered Individual to specifically acknowledge review of the disclosure and comprehension of the information conveyed in the disclosure. Plan sponsors should confer with service providers and plan counsel about ways to adapt their disclosure procedures to address the Sulyma decision.