Since 2018, more than 30 lawsuits have been filed against sponsors of defined benefit pension plans alleging that certain benefits payable under the plans are not actuarially equivalent. The results in these cases in the district courts have been mixed and a number have settled.
Earlier this month, the Sixth Circuit Court of Appeals ruled 2-1 in favor of plaintiffs—overturning the prior dismissals granted by the district courts in Reichert v. Kellogg Co. and Watt v. FedEx Corp. Generally, the Court of Appeals ruled that ERISA implicitly imposes a reasonableness requirement on plans’ actuarial assumptions. We provide analysis of the decision below.
Background
Qualified pension plans generally provide benefits in the form of single life annuities that are payable to retired participants over their lifetimes, commencing at the plan’s normal retirement age (typically age 65). Such plans are required to also offer joint and survivor annuities, in which a specified percentage (commonly between 50% and 100%) of the amount that the retired participant was receiving continues to a surviving spouse after the death of the participant. Plans may also allow participants the option to commence their benefits prior to normal retirement. Because these options are expected to pay benefits over a longer period of time than a single life annuity beginning at normal retirement age, the monthly payment amount is actuarially reduced to ensure the total value of the benefit is “equal” to the single life annuity.
In determining the amount of reduction to apply to joint and survivor annuities and pre-normal retirement annuities, plans typically rely on actuarial assumptions related to the time value of money (i.e., the interest rate) and participant life expectancy (i.e., the mortality table). Plans may use their own actuarial assumptions for these purposes, in contrast to the legally-required assumptions that plans must use for lump sums and certain other forms of payment under Code section 417(e).
These lawsuits generally assert (a) the actuarial assumptions used by plans for these purposes are not reasonable because the actuarial assumptions rely on outdated mortality tables, and (b) reductions in excess of those calculated with “reasonable” assumptions violate ERISA. Defendants typically dispute both of these assertions.
Reichert v. Kellogg Co. and Watt v. FedEx Corp.
In both cases, the district courts granted defendants’ motions to dismiss and noted that ERISA does not impose a subjective “reasonableness” standard on the actuarial assumptions used to convert benefits into optional forms. The defendants in these cases generally argued that the actuarial assumptions they used were not arbitrarily chosen, and they are disclosed to participants who can freely choose other forms of benefit. Defendants also claim that, although their actuarial assumptions are not unreasonable, ERISA does not impose a subjective reasonableness requirement.
The district courts agreed that ERISA does not include a reasonableness standard. In other sections of ERISA, such as the requirements related to the calculation of minimum funding levels and withdrawal liability assessments, Congress did specify that the assumptions must be reasonable but not for the purposes addressed in these lawsuits. The district courts concluded that the omission of a reasonableness requirement here was deliberate and granted dismissal on that basis.
On appeal, the Sixth Circuit Court of Appeals disagreed with the district courts, ruling 2-1 that the phrase “actuarially equivalent” implies that reasonable assumptions are used. In reaching this conclusion, the court cited actuarial texts and court decisions dating back to the passage of ERISA that suggest actuarial equivalence and reasonableness are linked. The court also concluded that reading a “reasonableness” requirement into the statute was necessary to fulfill its purpose. The dissenting opinion to this decision focused more heavily on the strict language of the statute, including the explicit requirement for reasonableness in some areas of ERISA but not others. The dissent also suggested that the citations underlying the majority decision were selectively chosen, and alternative citations exist that support the opposite conclusion.
In its holding, the Court cautioned that reasonableness “is a range, not a precise prescription” and that “courts have long afforded deference to the determinations of plan actuaries when assessing reasonableness under other ERISA provisions, upholding actuaries’ chosen assumptions if they are ‘within the scope of professional acceptability.’” These sentiments echo the findings in Smith v. US Bancorp—another pending case on this issue. With Reichert v. Kellogg Co. and Watt v. FedEx Corp. both remanded back to their respective district courts for further proceedings, it remains to be seen how those courts will reconcile the range of reasonableness concept with plaintiffs’ focus on the assumption limitations for certain forms of benefit under Code section 417(e)
Groom Takeaways
Court rulings in these cases have been mixed in the eight years since the first challenge in this area. In the face of this uncertainty, at least seven cases have been resolved by settlement. Most recently, in Masten v. Metropolitan Life Insurance Company, an agreement was reached just one day before the case was set to go to trial.
Reichert v. Kellogg Co. and Watt v. FedEx Corp. shine a spotlight on the critical legal question: does ERISA implicitly require that the assumptions used to convert benefit options satisfy a reasonableness standard? Notably, shortly after the Sixth Circuit ruled on these cases, the District Court for the Eastern
District of Missouri came to the opposite conclusion in Landel v. Olin Corp., ruling that no reasonableness standard applies. These decisions illustrate the uncertain legal landscape that sponsors face.
We will continue to monitor these lawsuits. Sponsors with any questions about actuarial equivalence litigation are encouraged to contact the authors of this article, Mark Carolan, Louis Mazawey, Ross McSweeney, and Joshua Shapiro, or your Groom attorney.
