Plaintiffs’ lawyers have filed a series of cases challenging the lawfulness of the actuarial assumptions used in certain defined benefit retirement plans. The seventh such case was filed on May 20, 2019 in the Eastern District of Virginia.
All seven complaints are based on the same general theories and the same specific claims for relief under ERISA. In general, plaintiffs allege the plan fiduciaries of a defined benefit plan fail to pay alternative forms of benefits in amounts that are actuarially equivalent to the plan’s default benefit, a single life annuity.
In particular, plaintiffs challenge the use of outdated mortality tables, unreasonable interest rates, and/or other unreasonable custom conversion factors used to calculate alternative benefits, such as joint and survivor annuities or life-certain annuities, saying they are not actuarially equivalent to single life annuities.
Plaintiffs contend the fiduciaries have caused retirees to lose part of their vested retirement benefits in violation of ERISA § 203(a) (nonforfeitability requirements). They style their claims for relief as “reformation of the plan”; benefits due; and breach of fiduciary duty.
In their complaints, plaintiffs focus on the use of allegedly “outdated” mortality tables and other allegedly inappropriate “conversion factors” as the centerpiece of their claims:
|Court||Mortality Table or Other Assumption Used||Interest Rate Used|
|Case 1 (S.D.N.Y.)||1971 Group Annuity Mortality Table for Males (“1971 GAM”), set back one year for participants and set back five years for beneficiaries||6%|
|“ ”||1983 Group Annuity Mortality Table for Males (“1983 GAM”), set back one year||5%|
|Case 2 (N.D. Texas)||1984 Unisex Pension Mortality Table (“UP 1984”)||5%|
|Case 3 (S.D.N.Y.)||Custom “conversion factors”|
|Case 4 (D. Minnesota)||Custom “early commencement factors”|
|Case 5 (E.D. Wisconsin)||1971 GAM||7%|
|“ ”||UP 1984||6%|
|Case 6 (E.D. Missouri)||1984 UP, adjusted for likely increases in life expectancy||7%|
|“ ”||1984 UP, adjusted for likely increases in life expectancy||6.5%|
|Case 7 (E.D. Virginia)||1971 GAM||6%|
In the first four cases, the defendants have filed motions to dismiss. The briefing shows the following three primary categories of arguments raised in support of dismissal:
- General ERISA defenses
- It’s a matter of plan design: benefits were calculated using assumptions mandated by the plan.
- Plaintiffs are suggesting that the sponsor must change the mortality tables in a collectively bargained plan without union input – a perceived non-starter.
- Plaintiffs ignore the interplay of mortality assumptions and interest rates: a high interest rate can offset outdated mortality rates.
- Statute of limitations (more than six years since plaintiff received retirement paperwork).
- Failure to exhaust administrative remedies (claim depends on administrative interpretation).
- Standing issues (if no harm suffered by plaintiff).
- The ERISA regulations cited by plaintiffs do not require the use of any particular assumptions in this context, and in other contexts (ERISA’s non-discrimination rules) the regulations specifically authorize the use of the same mortality tables used here.
- Nothing in ERISA’s statutory provisions requires that actuarial assumptions used in calculating early conversion factors be “reasonable” or imposes liability when those factors are not reasonable (addressing 29 U.S.C. §§1053 and 1054).
- Congress could have required that plans only use “reasonable” actuarial factors for calculating benefits at early commencement, but it did not. (Contrasting plan-funding provisions of 29 U.S.C. §1085a, withdrawal liability provisions of 29 U.S.C. §1393(a)(1), and lump sum benefit provisions of 29 U.S.C. §1055(g)(3)(B)).
- There is no private right of action under ERISA to enforce the Code regulation upon which plaintiffs rely (26 C.F.R. §1.401(a)-11). ERISA’s relevant enforcement mechanism allows redress of any violation of “any provision of this subchapter” – not the Code or regulations.
- Other regulations expressly say the mortality table used in a certain plan is a “standard mortality table” that is “reasonable” for plan administrators to use. (citing 26 C.F.R. § 1.401(a)(4)-12 and (a)(4)-3f(7)).
- When Congress intends mortality tables to be updated, it specifies that timing expressly.
- Complaint does not identify what conversion factor would be reasonable or why the ones used were unreasonable.
- Plaintiffs allege a less than 3% difference between the benefits calculated using the actuarial factors in the plan and the actuarial factors they argue are acceptable (for lump sum calculations). Treasury regulations make clear that a benefit difference of 5% or less is not only reasonable, but is deemed “approximately equal in value” as a matter of law. (citing 26 C.F.R. § 1.417(a)(3)-1(c)(2)(iii)(C)).
- Life expectancy has been falling for years, contrary to plaintiffs’ underlying premise.
Given the dispersion of cases filed so far, one cannot be faulted for concluding that plaintiffs’ strategy includes filing these early test cases in as many different federal circuits as possible. To date, the seven cases have been filed in five different circuits.
Rulings Expected this Summer or Fall
In four of the earliest filed cases, briefing on the defendants’ motion to dismiss is complete, meaning that courts could start issuing rulings as soon as this summer. Stay tuned to www.ERISALitigation.com for the latest updates.