The next wave of Employee Retirement Income Security Act (ERISA) litigation could be upon us, depending on the outcome of four new lawsuits bringing untested legal arguments about the reasonableness of actuarial assumptions.
The four lawsuits, all filed in December 2018 by the same law firms, are against defined benefit pension plan sponsors and allege that the sponsors’ use of actuarial assumptions for various actuarial equivalency purposes is unreasonable and violates ERISA, including breach of fiduciary duty.
How Actuarial Assumptions Affect Pension Plans
The four cases focus on how pension plan benefits are calculated using actuarial assumptions about different payment forms (i.e. annuity versus lump sum) and different payment beginning dates (i.e. early retirement versus normal retirement).
Generally, a pension plan’s actuarial assumptions are based on the advice of a retirement plan’s actuary and are incorporated into the plan document. The only legal guidance governing these assumptions is that they must be “reasonable,” but neither ERISA nor the Internal Revenue Code defines what reasonable means. (See 26 C.F.R. § 1.401(a)-11(b)(2) for conversion from single life annuities to other optional forms and 26 C.F.R. § 1.401(a)-14(c)(2) for commencement of an early retirement pension.)
Actuarial assumptions, or actuarial equivalence, are generally based on two factors: mortality tables and interest rates. Some pension plans use a single factor, but underlying that factor are mortality and interest assumptions. The four cases in question focus on the mortality tables and interest rates used by the defendants to pay pension benefits.
Claims Allege ‘Unreasonable’ Actuarial Assumptions Caused Underpayment, Violated ERISA
The plaintiffs in all four cases allege that the actuarial assumptions being used are “unreasonable” and as a result, certain pension recipients have been underpaid.
Stated technically, their argument is that by using these unreasonable assumptions, certain pension recipients have not been paid the full value of their accrued benefit, resulting in an impermissible forfeiture of that accrued benefit.
Each of the cases seeks a declaratory judgment that the actuarial assumptions are unreasonable and requests the “kitchen sink” of equitable relief options, including reformation of the pension plan language and an accounting of all prior pension underpayments.
The plaintiffs also claim that the plans’ fiduciaries breached their fiduciary duties under ERISA by failing to follow ERISA and are seeking similar equitable relief for those claims.
When Do Actuarial Assumptions Need To Be Reasonable?
To resolve these claims, the courts may need to address whether actuarial assumptions must be reasonable at all times. Currently, most lawyers and actuaries believe actuarial assumptions need to be reasonable when the pension benefit is initially accrued.
It is unclear whether these actuarial assumptions need to be reassessed in future years with respect to past accruals. The current industry understanding has resulted in pension plans with multiple pension benefit formulas that each have several different actuarial assumptions, depending on what factors were considered reasonable at the time the formula was initially adopted.
It Could Come Down to Expert Actuarial Opinion
It remains to be seen whether the novel claims made in the lawsuits are valid, and, if they are, what possible remedies there may be.
Ultimately, the claims attack actuarial equivalence, which as the name implies, depends on an actuary’s professional opinion and not on a legal standard. Although there may be some minor legal issues that a court could resolve, ultimately, if these claims continue, they will likely be a battle of the expert actuaries.
The legal argument is a creative attempt at finding a new basis for bringing retirement plan lawsuits, similar to the excessive-fee lawsuits, which alleged that investment fees charged to 401(k) participants were too high and allowed plaintiffs’ law firms to collect millions of dollars in fees litigating the issue over the past decade.
These four cases are very new, and the defendants are in the process of responding to the allegations in the complaints. In the absence of a clear legal standard, defendants may have a difficult time resolving these cases in the early stages of litigation through motions to dismiss.
Stay Tuned for More Information
We will review the responses filed by the defendant plan sponsors and provide an update on the four cases, which are listed below:
- Masten v. Metropolitan Life Insurance Company, Case No: 1:18-cv-11229, filed in Southern District of New York on December 3, 2018.
- Martinez Torres v. American Airlines, Inc., Case No: 4:18-cv-00983, filed in Northern District of Texas, Forth Worth Division on December 11, 2018.
- DuBuske v. PepsiCo, Inc., Case No: 7:18-cv-11618, filed in Southern District of New York on December 12, 2018.
- Smith v. U.S. Bancorp, Case No: 0:18-cv-03405, filed in District of Minnesota on December 14, 2018.