Plan Administrators Have Discretion to Round
Cash balance plans often provide a pay credit and an interest credit in determining a participant’s accrued benefit. The pay credit is often a percentage of compensation. The interest credit is established in the plan and can be a fixed rate or a formula. Recently the Duke Energy Retirement Cash Balance Plan was sued by a participant who claimed that the plan’s decision to round the interest rate to five decimal points violated ERISA. The participant claimed that the plan should round to 15 to 17 decimal points.
The federal district court in North Carolina said no, the rounding decision is a discretionary decision that the plan administrator can make and that choosing to round to five decimal places was not an abuse of discretion.
The amounts involved were small. The participant argued that the rounding discrepancy resulted in an underpayment of interest credits that totaled $41.80 between January 2006 and October 2012, but even that amount omitted months in which the plan’s rounding convention in fact benefited the participant. Of course if the suit were expanded to all plan participants, the damages would be much higher given the many participants in the Duke Energy plan. The participant would also be entitled to attorney’s fees if he won his suit.
Employers can hope that this decision will discourage other participants from bringing lawsuits challenging rounding conventions.
Contact Benefits Notes for more information.