In late 2018, class action counsel began filing lawsuits against large defined benefit plan sponsors alleging a novel cause of action—that the plans were using unreasonable actuarial assumptions to convert participant benefits to alternate forms of payment. Since then, the litigation has expanded to affect plans sponsored by American Airlines, Anheuser-Busch, AT&T, Corteva, Dow, Dupont, MetLife, PepsiCo, Raytheon, and U.S. Bancorp.
The cases generally allege that plan sponsors are failing to fulfill their duties under their plans by failing to provide actuarially equivalent benefits to participants. To date, the complaints have taken one of two forms:
- Plan sponsors are using unreasonable early retirement factors, which result in inappropriate reductions of benefits for early retirees.
- The plans in question are generally failing to provide actuarially equivalent benefits because the interest rates and mortality tables used to calculate participant benefits are inappropriate. Although the complaints acknowledge that interest rates and mortality tables must be considered together in determining whether the actuarial factors utilized by the plan are reasonable, they generally focus on mortality tables that do not reflect improvements in mortality. The complaints emphasize that, in many cases, plan sponsors did not update the mortality tables since the inception of the plan. It is not uncommon for defined benefit plans to update mortality tables infrequently, and very little guidance exists regarding what mortality tables a defined benefit plan can permissibly use.
To date, the decisions issued by courts suggest that there is some possibility that plaintiffs can succeed in claiming that a plan is obligated to use reasonable mortality tables. In Smith v. U.S. Bancorp, a case challenging the early retirement factors in U.S. Bancorp's defined benefit plan, the District Court for the District of Minnesota rejected U.S. Bancorp's motion to dismiss, relying on the general principle that distributions from a plan must be actuarially equivalent to the plan's accrued benefit at normal retirement age and that unreasonable actuarial equivalence factors can cause those benefits not to be actuarially equivalent.
In contrast, in DuBuske v. PepsiCo., the District Court for the Southern District of New York dismissed similar claims regarding the early retirement factors utilized under PepsiCo's defined benefit plan. There, the Court determined that the case fundamentally arose under ERISA's anti-forfeiture provision, which only applied after the attainment of normal retirement age. This arguably leaves open the possibility of claims being made by participants based on inappropriate actuarial factors that apply to participants who have attained normal retirement age.
Although a clear precedent has not yet emerged from these lawsuits, we recommend that defined benefit plan sponsors consult with their actuaries to determine whether the actuarial assumptions utilized by their plans are in line with those of comparable plans. We also recommend that plan sponsors continue to monitor developments in these lawsuits as they arise.
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