February 10, 2020

By Michelle C. Yau

It is important for Taft-Hartley plan trustees to be informed of developments related to ERISA fiduciary liability. Cohen Milstein continuously monitors ERISA lawsuits, and in this issue of the Shareholder Advocate, we summarize developments related to several lawsuits concerning actuarial equivalence rules found in certain ERISA provisions. Over the last year, there were nine class cases filed that allege pension plans are violating ERISA by paying less than actuarially equivalent benefits to defined benefit plan participants. Plaintiffs in these lawsuits generally allege that plan fiduciaries and sponsors of their defined benefit plans violate ERISA when a plan uses outdated mortality tables to calculate alternative forms of benefits or “form factors,” which are predetermined factors used to convert normal form benefits into alternative forms. The plans at issue in these lawsuits are those sponsored by household names, such as American Airlines, U.S. Bancorp, AT&T, Metropolitan Life Insurance Company, Anheuser-Busch, Raytheon Company, and Huntington Ingalls Industries.

A participant’s pension benefit is generally expressed as a monthly pension payment beginning at “normal retirement age” as defined by the plan (no later than age 65). This monthly payment is called a single life annuity because it pays a monthly benefit to the participant for her entire life (i.e., from the time she retires until her death). ERISA-governed pension plans may (and, in some circumstances, must) offer optional forms of benefits. Several provisions of ERISA require that when participants receive optional forms of benefits, the value of the optional forms must be actuarially equivalent to benefits expressed as a single life annuity commencing at normal retirement age. 

“Actuarial equivalence” is a computation that is designed to ensure that, all else being equal, two alternative forms of benefit payments have the same present value as each other. Generally speaking, present value is calculated using two primary actuarial assumptions: (1) an interest rate and (2) a mortality table. The interest rate discounts to present value each future payment using an assumed rate of return that is based on current market conditions. The mortality table provides the expected duration of that future payment stream at the time the table is published based on statistical life expectancy of a person at a given age. ERISA’s actuarial equivalence requirements are summarized as follows:

  • For defined benefit plans “if an employee’s accrued benefit is to be determined as an amount other than an annual benefit commencing at normal retirement age [of 65] … the employee’s accrued benefit … shall be the actuarial equivalent of such benefit[.]” ERISA § 204(c)(3), 29 U.S.C. § 1054(c)(3).
  • ERISA’s non-forfeitability requirements provide that if a participant receives less than the actuarial equivalent value  of her accrued benefit, this results in an illegal forfeiture of her benefits, and hence a violation of ERISA § 203(a), 29 U.S.C. § 1053(a).
  • In addition, ERISA requires all defined benefit plans to provide Qualified Joint and Survivor Annuities, which are the “actuarial equivalent of a single annuity for the life of the participant.” ERISA § 205(a) & (d)(1)(B), 29 U.S.C. § 1055(a) & (d)(1)(B). 
  • Finally, if a plan offers early retirement benefits, ERISA requires that all participants receive no less than the actuarial equivalent of their benefit commencing at normal retirement age. ERISA § 206(a)(3), 29 U.S.C. § 1056(a)(3).

Whether the actuarial equivalence requirements have been met turns, in large part, on whether the actuarial assumptions used to calculate optional forms of benefits are reasonable and have been updated to reflect current trends in mortality and interest rates. In many of the cases where fiduciaries were sued, the mortality tables used to calculate optional forms of benefit were very outdated (with publication dates ranging from 1951-1984). If these allegations are true, the mortality tables used by several large plans have not been updated for decades—in some cases, for as much as 70 years. In other cases, the plans use form factors to convert benefits into optional forms and plaintiffs similarly allege that those form factors have not been updated for decades. These are the types of factual issues to be aware of if you are a trustee of an ERISA-governed plan.

While it is unclear how the lawsuits that have been filed to date will resolve, two of them have survived motions to dismiss and, in the one case that was originally dismissed, plaintiffs’ motion for reconsideration was granted. Given the likelihood of continued litigation in this area, trustees should consider taking some “belts and suspenders” actions to help defend against or avoid these types of lawsuits. For example, trustees could ask their plan’s actuary to periodically review the actuarial assumptions or form factors used to calculate the Qualified Joint and Survivor Annuities and early retirement benefits. The plan actuary could provide an opinion as to whether those assumptions or form factors are reasonable. Note, however, that if the plan actuary provides an opinion that the assumptions or form factors used by the plan to calculate benefits are unreasonable, the plan likely will need to revise its terms to employ reasonable actuarial assumptions. The revised terms may increase pension benefits obligations for the plan and negatively impact its funding status. Being proactive in working with the plan’s actuary to identify any potential issues related to actuarial equivalence should serve the plan well.