Three former Jeld-Wen employees have filed a lawsuit against the company, alleging that a 2010 amendment to the company’s retirement benefit plan unlawfully cost them hundreds of thousands of dollars in retirement payouts.
The lawsuit, filed in the U.S. District Court in Medford on Wednesday, alleges changes to Jeld-Wen’s Employee Stock Ownership Plan resulted in a collective loss of value approaching $650,000.
The plaintiffs, Robert Jimerson, Phillip Bellotti and Bradley Snodgrass, are all former employees who had accumulated at least 15 years of ESOP credits.
The lawsuit states the company violated federal law by amending the benefit payout structure of Jeld-Wen’s ESOP, which is managed by an administrative committee that includes Executive Vice President Ron Saxton and President and CEO Rod Wendt, who are both named as defendants in the lawsuit.
The lawsuit was also filed on behalf of the potentially hundreds of other Jeld-Wen employees scattered across the nation who could be affected by the ESOP amendment.
All three plaintiffs, who ended their employment between 2005 and 2008, retired under a plan that, if the plan participant was not yet 55 and eligible for early retirement, guaranteed payouts based on the valuation of Jeld-Wen’s privately owned stock at the time their employment ended.
That payout was therefore frozen and would not be subject to change if Jeld-Wen’s stock increased or decreased in value.
It also included an annual interest increase between 3 and 5 percent until they were qualified to receive full distribution of their benefits.
The company’s stock was strong until 2008, when the housing market collapse sparked a continuous and precipitous decline in its valuation, which dropped more than 70 percent in value from 2007 to 2011. Over that time, the value of a single share dropped by $510.
On Nov. 19, 2010, Jeld-Wen amended the ESOP to retroactively take effect Jan. 1, 2010. The amendment eliminated the annual interest increase and mandated that the undistributed accounts of separated employees would be valued based on the current value of company stock, now worth a fraction of what is was at the time the plaintiffs retired, the lawsuit states.
Jeld-Wen, in a letter to shareholders in 2011, explained that the change was a result of a new guidance by the Internal Revenue Service, which indicated that the IRS would challenge certain methods that treated former employees differently than active employees — the benefits of active employees fluctuated with the current Jeld-Wen stock value while the stock value for former employees was frozen in place.
But as the lawsuit points out, the company did acknowledge that the guidance did not specifically address Jeld-Wen’s ESOP allocation method prior to 2010.
The amendment also allowed current accounts to be assessed “new expenses.” The lawsuit alleges those funds, charged against employees’ retirement accounts, were used to pay distributions for those already receiving full benefits and whose accounts continued to be credited with the annual interest increase and were not affected by fluctuations in Jeld-Wen’s stock value.
The new expenses totaled 8 percent of balances in the undistributed accounts, a figure that amounts to close to $10 million, said Bruce Rinaldi, an attorney with Cohen, Milstein, Sellers and Toll, a law firm based in Washington, D.C., that is handling the lawsuit.
“In essence, the plan and its fiduciaries were using the new expenses to cover up the losses to the plan caused by its fiduciaries’ breaches of fiduciary duty,” the lawsuit states.
The money was used to cover a $127 million gap between the obligations of the ESOP and the assets held in trust to meet the ESOP’s defined benefit obligations, the suit alleges. The filing states the shortfall was caused in part by mismanagement of ESOP funds by the administration committee.
“We think they’re basically charging the current participants for what was essentially their blunder,” said Joe Barton, an attorney with Cohen, Milstein, Sellers and Toll.
Jimerson had $58,000 in new expenses charged to his account, the lawsuit alleges.
The lawsuit claims that, under the Employee Retirement Income Security Act of 1974 (ERISA) which sets minimum standards for pension plans in private industry, the accrued benefit of a participant in a plan may not be decreased by an amendment of that plan.
Therefore, the 2010 amendment constituted a prohibited cutback of benefits that violated ERISA, a federal law, according to the compliant.
Overall, the lawsuit alleges that the 2010 amendment caused a decline in value to Jimerson’s plan of about $491,000. Bellotti’s plan lost about $67,800 in value, and Snodgrass’ lost about $87,400 in value.
Jeld-Wen officials did not respond to phone and email requests for comment.