Appeal from an order of the United States District Court for the Southern District of New York (Scheindlin, J.), entered on December 11, 2006, granting partial summary judgment to Plaintiffs.
The opinion of the court was delivered by: Wesley, Circuit Judge
Before: JACOBS, Chief Judge, WESLEY, Circuit Judge, and CROTTY*fn1, District Judge.
Plaintiffs are five present or former employees of either Smith Barney or Citibank, N.A., both of which are divisions of Citigroup, Inc. ("Citigroup"). Plaintiffs, and the class they represent, allege that the Citibuilder Cash Balance Plan ("Plan") violates the Employee Retirement Income Security Act of 1974 ("ERISA"), as amended, 29 U.S.C. § 1001 et seq. Plaintiffs seek injunctive and declaratory relief as well as monetary damages.
By order dated December 11, 2006, the United States District Court for the Southern District of New York (Scheindlin, J.) granted partial summary judgment to Plaintiffs on various grounds, including: first, that the Plan violated ERISA's minimum benefit accrual rules through its use of the "fractional rule"; and second, that Citigroup violated ERISA's § 204(h) notice requirement. 29 U.S.C. § 1054(h). Citigroup challenges those two conclusions.*fn2
Plaintiffs cross-appeal, raising a number of issues. On appeal, both parties agree that the district court erred in concluding that the "fractional rule" can never properly be applied to cash balance plans, such as Citigroup's Plan. Because we find that Citigroup's Plan does not violate ERISA's minimum benefit accrual rules, and that Citigroup did not violate ERISA's § 204(h) notice requirements, we reverse.
A. ERISA Benefit Plans Generally
ERISA recognizes two basic types of retirement plans: defined contribution plans and defined benefit plans. Hirt v. Equitable Ret. Plan for Employees, Managers & Agents, 533 F.3d 102, 104 (2d Cir. 2008). Defined contribution plans, also known as individual account plans, "guarantee only that the employer will contribute [a certain amount] to the [employee's retirement] account," without providing any guarantee as to that account's value upon the employee's retirement. Id. at 105; see also 29 U.S.C. § 1002(34). A defined contribution plan is a "pension plan which provides for an individual account for each participant and for benefits based solely upon the amount contributed to the participant's account, and any income, expenses, gains and losses." 29 U.S.C. § 1002(34).*fn3 Both the employee and the employer may contribute to a defined contribution plan, but the employer's contribution is fixed. Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 439 (1999).
Defined benefit plans "generally guarantee [employees] a specific benefit [upon retirement] without regard to how the market performs." Hirt, 533 F.3d at 105; see also 29 U.S.C. § 1002(35). In contrast to a defined contribution plan, a defined benefit plan "consists of a general pool of assets rather than individual dedicated accounts." Hughes Aircraft Co., 525 U.S. at 439. The pool of assets "may be funded by employer or employee contributions, or a combination of both." Id. In a defined benefit plan, "no plan member has a claim to any particular asset that composes a part of the plan's general asset pool." Id. at 440. Rather, members have a right to a defined level of benefits, known as accrued benefits. Id. In a defined benefit plan, an accrued benefit is "expressed in the form of an annual benefit commencing at normal retirement age."
29 U.S.C. § 1002(23)(A). Whereas, in a defined contribution plan, the accrued benefit is understood as "the balance of the individual's account." 29 U.S.C. § 1002(23)(B).
Defined contribution and defined benefit plans primarily "differ in who bears the risk of investment performance." Hirt, 533 F.3d at 105. In a defined contribution plan, the employee bears the risks, while in a defined benefit plan, "the employer typically bears the entire investment risk." Hughes Aircraft Co., 525 U.S. at 439. In a defined benefit plan, the employer is obligated to "cover any underfunding as the result of a shortfall that may occur from the plan's investments." Id. And, if a defined benefit plan is overfunded, the employer "may reduce or suspend [its] contributions." Id. at 440.
Within the context of these two types of retirement plans, employers have developed a relatively new kind of plan called a "cash balance plan." Hirt, 533 F.3d at 105. The cash balance plan is "intended to combine attributes of both defined contribution and defined benefit plans." Id. "[C]ash balance plans are often described as 'hybrid': they create a benefit structure that simulates that of defined contribution plans, but employers do not deposit funds in actual individual accounts, and employers, not employees, bear the market risks." Id. Cash balance plans are considered defined benefit plans under ERISA because the accounts are hypothetical in nature and the employee receives a specified lump-sum payout upon retirement. Esden v. Bank of Boston, 229 F.3d 154, 158 (2d Cir. 2000); see also 29 U.S.C. § 1002(35). As a result of this classification, the term "accrued benefit" in a cash balance plan is "expressed in the form of an annual benefit commencing at normal retirement age." Esden, 229 F.3d at 163 (quoting 29 U.S.C. § 1002(23)(A)).*fn4
When an employer establishes a cash balance plan, an account is created in the name of each participant to keep track of his or her accrued benefits. Bilello v. JPMorgan Chase Ret. Plan, - F. Supp. 2d -, No. 07-cv-7379 (DLC), 2009 WL 2461005, at *1 (S.D.N.Y. Aug. 12, 2009). In a cash balance plan, the account contains "pay credits," which "represent a percentage of the participant's salary that is periodically deposited into the account, as well as 'interest credits,' which apply a common interest rate to the account balances." Id. Pay credits only accumulate until the termination of the participant's employment, but interest credits continue to accrue until the benefits are distributed. Id. In a cash balance plan, the employer may offer the employee the option of a lump sum payout instead of an annuity; however, "any such payout must be worth at least as much, in present terms, as the annuity payable at normal retirement age." Id.
Proponents of cash balance pension plans assert that this "hybrid" structure is beneficial for employees because it is easier for them to understand, it allows for greater portability, it establishes a system whereby benefits accrue more evenly over an employee's career, and it is "therefore better suited to the increased job-mobility of contemporary labor markets." Esden, 229 F.3d at 158 n.5.
Advocates of cash balance plans also maintain that they benefit employers. They suggest that "because employees better appreciate the value of their pension rights, the employer's fringe benefit dollar has greater impact." Id. They also argue that a cash balance plan "retains the funding advantages of a defined benefit plan" for the employer. Id. Specifically, "actual contributions are made to a single trust fund, based on actuarial assumptions; therefore... the employer retains funding flexibility as long as the solvency of the plan is maintained;" and investment returns that exceed "the promised interest credits (as well as forfeitures of the non-vested benefits of any terminated participants)" are retained by the ...