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Plotnick v. Computer Sciences Corporation Deferred Compensation Plan for Key Executives

United States Court of Appeals, Fourth Circuit

November 8, 2017

JEFFREY PLOTNICK; JAMES C. KENNEDY, on behalf of themselves, individually, and on behalf of all others similarly situated, Plaintiffs - Appellants,

          Argued: September 13, 2017

         Appeal from the United States District Court for the Eastern District of Virginia, at Alexandria. T. S. Ellis, III, Senior U.S. District Judge. (1:15-cv-01002-TSE-TCB)


          Matthew W.H. Wessler, GUPTA WESSLER PLLC, Washington, D.C., for Appellants.

          Deborah Shannon Davidson, MORGAN, LEWIS & BOCKIUS LLP, Chicago, Illinois, for Appellees.

         ON BRIEF:

          R. Joseph Barton, Kira Hettinger, COHEN MILSTEIN SELLERS & TOLL PLLC, Washington, D.C.; Deepak Gupta, Rachel S.

          Bloomekatz, GUPTA WESSLER PLLC, Washington, D.C., for Appellants.

          Christopher A. Weals, MORGAN, LEWIS & BOCKIUS LLP, Washington, D.C., for Appellees.

          Before MOTZ, DUNCAN, and WYNN, Circuit Judges.

          DUNCAN, Circuit Judge

         Plaintiffs-Appellants Jeffrey Plotnick and James Kennedy, former executives of Computer Sciences Corporation ("CSC"), brought claims under § 1132(a) of the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001 et. seq., as amended, alleging denial of benefits under their deferred executive compensation plan after a plan amendment changed the applicable crediting rate. Plotnick and Kennedy sought class certification on behalf of all retired plan participants affected by the amendment, and CSC moved for summary judgment. The district court denied class certification and granted summary judgment for CSC. For the reasons that follow, we affirm the district court.


         As select, highly compensated CSC executives, Plotnick and Kennedy were eligible to participate in the Computer Sciences Corporation Deferred Compensation Plan for Key Executives (the "Plan"). The Plan is a type of unfunded, deferred-compensation plan commonly known as a "top-hat plan, " through which key executives could elect to forgo compensation during their employment in exchange for payments in retirement. See 29 U.S.C. § 1051(2).

         Plan participants' deferrals accrue in a notational account, and the company makes payments to participants after their retirements from CSC's general assets. CSC applies a crediting rate to participants' notational account balances. In practice, CSC pegs the crediting rate to a market-based valuation fund, though Plan documents do not require this. Furthermore, since the Plan is unfunded, CSC applies this crediting rate to calculate each participant's payout but need not invest actual assets in the correlating valuation fund. After retirement, Plan participants receive their deferred income, plus credits earned according to this crediting rate, via either a lump-sum payment or in annual payments over a predetermined number of years. If a participant decides to take annual payments, the Plan directs that CSC make these payments in "approximately equal annual installments." J.A. 412, 434.[1]

         The Plan grants its administrator broad discretionary authority to delegate functions, to determine questions of eligibility, to interpret the Plan and any relevant facts for purpose of the administration of the Plan, and to conduct claims procedures. J.A. 415-16, 441. By its terms, the Plan also may be "wholly or partially amended by the [CSC] Board from time to time, in its sole and absolute discretion." J.A. 422, 448. The crediting rate, in particular, is explicitly "subject to amendment by the Board." J.A. 411, 432. However, the Plan cabins the Board's authority to amend by mandating that "no amendment shall decrease the amount of any . . . [participant's account] as of the effective date of such amendment." J.A. 422, 448.

         Plan documents do not distinguish between active-employee participants and retired participants. Rather, the Plan defines a participant as any key executive who elects to participate in the Plan and who has not yet received all benefits due under the Plan. The Plan also requires "uniform[] and consistent[]" administration with respect to all participants similarly situated. J.A. 416, 441.

         Since the Plan's establishment in 1995, the Board twice amended the crediting rate. From the Plan's inception in 1995 until 2003, it used a crediting rate equal to 120% of the 120-month rolling average yield to maturity on 10-year U.S. Treasury Notes. After 2003, the Board changed the crediting rate to track the 120-month rolling average yield to maturity of the Merrill Lynch U.S. Corporates, A Rated, 15 Years Index as of December 31 of the prior Plan year (the "Merrill Lynch Rate"). Application of this latter crediting rate generally gave Plan participants above-market yields on their deferred income and very low volatility. Furthermore, the method of calculating this crediting rate smoothed out market fluctuations and made annual payments predictable and even.

         While using the Merrill Lynch Rate between 2003 and 2012, CSC calculated the amounts of most future annual payments before the first installment was ever paid. Because the Merrill Lynch Rate was so predictable, CSC divided a participant's account value by the number of total installments to be paid and amortized based on an estimate of the crediting rate derived from the most recent Merrill Lynch Rate. CSC paid an equal amount every year, until the final year's payout, which CSC adjusted to account for the actual performance of the Merrill Lynch Rate over the distribution period. This last payment served as a "true up" and could be less than or greater than the payments for prior years. Thus, over the time that CSC used the Merrill Lynch Rate, the annual installments a participant received were not only "approximately equal" as required by the Plan, but they also were actually equal until the final payment that closed out the participant's account. This final "true-up" payment accounted for market volatility and would be higher or lower depending on the actual performance over the payment term of the valuation fund from which the Merrill Lynch Rate was derived.

         In May 2012, the Board amended the crediting rate again (the "2012 Amendment"). In contrast to earlier crediting rates, the 2012 Amendment resulted in a more flexible crediting rate linked to a participant's selection of one (or more) of four valuation funds. The four valuation funds include a money-market fund, an S&P index fund, a core bond fund, and a target-date retirement fund. This system permits participants to choose crediting rates derived from valuation funds with characteristics that they value, whether that means low volatility, steady growth, or high earning potential. Each fund varies in its potential offerings of risk and reward, and participants can allocate funds in their notational accounts between or among the four valuation fund types in any combination. Participants can even choose to change their allocation mix daily. The 2012 Amendment took effect on January 1, 2013, and applied uniformly to all participants.

         With the 2012 Amendment's expansion of choice comes the potential for volatility and risk, including the possibility of losing value in a participant's notational account.[2]Also, the lack of predictability in the crediting rates from year to year means that annual installment payments can no longer be made strictly equal, as they had been (at least prior to the final "true up" year) when the Merrill Lynch Rate applied. Because the valuation funds will rise and fall with the market--and because participants can now move funds at any time between valuation funds--CSC can no longer predict future payments with precision. Instead, each year CSC calculates a retired participant's notational account value and divides the total value by the number of annual payments still due to the participant to calculate the "approximately equal annual installment" to ...

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