Insights From Encore Fiduciary on Fiduciary Liability & Other Risk Exposures of Employee Benefit Plans


Insights From Encore Fiduciary on Fiduciary Liability & Other Risk Exposures of Employee Benefit Plans

Actuarial Equivalence Claims Require Courts to Rewrite ERISA and Private Contracts – An Analysis of the Contrary Results in the Citgo and Kellogg Cases

contract passed over desk

KEY POINT:  Actuarial equivalence claims that plans are short-changing participants by using outdated mortality tables to convert single-life annuities to joint-and-survivor annuities may appear sympathetic, but ERISA does not require so-called “reasonable assumptions” when calculating alternative annuity payouts – just that plans follow the interest rates and mortality tables in the plan documents.  A Michigan court in the Kellogg-related plans ruled that courts do not have the power to rewrite benefit plans to create requirements that are not in the ERISA statute.  By contrast, an Illinois court in the Citgo case, similar to how most other courts have ruled, allowed an actuarial claim to proceed to trial.  No matter how sympathetic these claims may be, courts that allow actuarial equivalence claims are rewriting ERISA and private contracts – something that should be left to the legislature to change.  

The trial bar’s renewed focus in bringing actuarial equivalence cases against sponsors of defined benefit plans is part of a trend towards using litigation to change a participant’s benefit package.  The fiduciary breach complaints claim that plan sponsors are short-changing married participants by using fifty-year old, outdated mortality tables to calculate joint and survivor annuities.  Of all of the rampant class action litigation against plan sponsors, these claims may be the most sympathetic and unfair to plan participants.  But to give the relief requested in these cases, courts must read new requirements into the ERISA statute and otherwise amend private contracts.  To date, the majority of federal court judges presented with these cases allow these cases to proceed.  The April 2024 decision in the Kellogg case is a rare exception.  It is important to understand that any court ruling to change ERISA or plan benefits represents judicial activism, which is not what ERISA intended.  ERISA was intended to protect plan benefits, but not allow courts to change them.  

It may seem unfair to allow plans to use outdated mortality tables that do not reflect longer lifespans.  But plan sponsors are allowed to offer whatever benefits they want to participants.  Like it or not, plan sponsors are permitted to offer what some would consider an inadequate benefit package.  If plan sponsors offer benefits, they have to follow ERISA’s fiduciary guidelines.  But they should not be subject to fiduciary liability when the trial bar claims that these benefits are unfair to participants.  The remedy to unfairness is to ask your Congressional representative to change the statute, not fiduciary breach litigation.  

In the past month, a Michigan court dismissed actuarial claims against the Kellogg defined benefit plans on the grounds that ERISA does not allow judges to amend ERISA or rewrite private contracts.  In contrast, a Michigan court in the Citgo case denied summary judgment on similar actuarial equivalence claims.  These disparate decisions are worth studying to understand that actuarial equivalence cases are part of an improper trend of using litigation to change private benefit contracts.    

The Law of Actuarial Equivalence in Converting Single-Life Annuities to Joint and Survivor Annuities 

A defined benefit pension plan provides periodic benefit payments after retirement, usually based on the participant’s years of service and wages.  ERISA requires that pension plans offer unmarried participants a single life annuity (SLA), “unless another form of benefit is elected by the participant.”  For married participants, the default form of benefit is a joint and survivor annuity (JSA).  29 U.S.C. section 1055(a)-(b).   

ERISA defines a “qualified” JSA as “an annuity for the life of the participant with a survivor annuity for the life of the spouse which is not less than 50 percent of (and not greater than 100 percent of) the amount of the annuity which is payable during the lives of the participants and spouse, and which is the actuarial equivalent of” the SLA.  Section 205(d)(1), 29 U.S.S. section 1055(d)(1).  “[A]ny annuity in a form having the effect of an annuity described in” section 205(d)(1) is a “qualified” JSA.  Accordingly, plans can offer multiple “qualified” JSAs as long as they provide the spouse with between 50% and 100% of the benefit the participant was receiving.  

In plainer English, a JSA is a series of monthly payments that start when a participant retires and end only when both the participant and his or her spouse have died.  If the participant dies before his or her spouse, the spouse will continue to receive monthly payments, but at a reduced portion of what the participant received while alive.  A 50% JSA means that the surviving spouse receives 50% of the monthly benefit that the participant received while alive.  

Pension plans use actuarial assumptions – interest and mortality rates – to convert SLAs to JSAs, resulting in lower monthly payments for JSA recipients due to the longer expected payout period.  ERISA section 205’s actuarial equivalence requirements safeguard the value of optional benefit forms by requiring that qualified JSAs be at least actuarially equivalent to the SLA offered.  Specifically, when converting a single life annuity into a joint and survivor annuity, ERISA further requires the resulting joint and survivor annuity be the “actuarial equivalent” of the single life annuity.   The text of 29 U.S.C. section 1055(d)(B) is as follows:  

(d)“Qualified joint and survivor annuity” and “qualified optional survivor annuity” defined

(1)For purposes of this section, the term “qualified joint and survivor annuity” means an annuity—

(A) for the life of the participant with a survivor annuity for the life of the spouse which is not less than 50 percent of (and is not greater than 100 percent of) the amount of the annuity which is payable during the joint lives of the participant and the spouse, and

(B) which is the actuarial equivalent of a single annuity for the life of the participantSuch term also includes any annuity in a form having the effect of an annuity described in the preceding sentence.  (emphasis added).

ERISA does not include any further definition of “actuarial equivalent.”  It also does not require that plans update mortality tables or otherwise ensure that that mortality table is somehow reasonable.  By contrast, as we will discuss later, at least three other section of ERISA require reasonableness in the actuarial equivalence calculations.  The key dispute in actuarial equivalence cases involves whether ERISA mandates a minimum value for qualified JSAs to ensure both married and unmarried participants receive benefits of comparable value, even though such requirement is not in the statute.   

To calculate actuarial equivalence, the first step is to calculate the present value of the total future benefits that a participant would receive under both annuities.  Calculating actuarial equivalence requires using the two main inputs noted above:  (a) an interest rate and (b) a mortality table.  Combined, they create a conversion factor, which is used to determine the benefit amount for a participant that would be actuarially equivalent to a single life annuity.  

The interest rate is used to determine the present value of each future payment, and the mortality table is used to predict how many payments will be made for any given participant.  That rate reflects the time value of money:  the fact that money that is available now is worth more than the same amount available at some future date, because one can earn investment returns in the interim on money that is available now.  

A mortality table is a series of rates used to predict how many people of a certain age will survive to reach the next, higher age.  For example, one entry in a mortality table would describe how many 65-year-old people would survive to turn 66.  Mortality tables are based not only on an individual’s age, but also on their year of birth.  This is because, as a general matter, life expectancies have improved over time.  An average 65-year-old person today can expect to live several years longer than the average 65-year-old person could expect to live as of, for example, the 1980s.  

As noted previously, Congress did not include any “reasonable” condition on the term “actuarial equivalent” in 29 U.S.C. ¶ 1055(d).  In other words, the plain language of section 1055(d) omits any “reasonableness” requirement – when other ERISA sections expressly include one.  It provides only that a retirement benefit taken in some other form or at some other time “shall be the actuarial equivalent” of a SLA commencing at normal retirement age.  It says nothing about how actuarial equivalence is to be calculated:  it does not specify what inputs to use, nor does it explicitly require them to be “reasonable” –  either individually or in the aggregate.  

The key issue, therefore, in actuarial equivalence lawsuits is whether a court can or should read a reasonableness requirement into section 1055(d).  If a court enforces the statute as it is written, the cases will be rejected.  But if the court reads a reasonableness requirement into the statute, the lawsuits will be plausible.  It is all a matter of how a court sees its role in interpreting the ERISA statute.

Whereas ERISA does not require a reasonableness factor for converting SLAs to JSAs, ERISA requires reasonable assumptions in three other contexts:  (1) withdrawal liability; (2) plan funding requirements; and (3) calculations of lump sum benefits.  For example, 29 U.S.C. .section 1393(a)(1) requires employers to compute withdrawal liability using “actuarial assumptions and methods which, in the aggregate are reasonable . . .”  Congress also knew how to distinguish between requiring actuarial factors to be reasonable in the aggregate and requiring each of them to be reasonable on its own.  For example, 29 U.S.C. 1085a(c)(3)(A) requires that for plan-funding purposes, plans must use “actuarial assumptions and methods . . . each of which is reasonable.”  Third, Congress requires reasonable actuarial factors for calculating lump-sum benefits.  Specifically, 29 U.S.C. section 1055(g) requires the present value of an annuity to be calculated using the “applicable mortality table and the applicable interest,” which are defined elsewhere, if it is to be “immediately distributed.”  Plan sponsor defendants argue this shows that if Congress had meant to include a reasonableness requirement in section 1054(c)(3), it could have done so.  

Plaintiffs Arguments in Actuarial Equivalence Cases:  Despite receiving the exact benefit that the plan sponsor promised the participant, the trial bar claims in actuarial equivalence cases that plan sponsors have “shortchanged” plan participants by exploiting “gaping loopholes” in ERISA.  These claims have largely worked, with only two courts dismissing these claims on the merits, including the April decision in the Kellogg case discussed below.  

Plaintiffs argue that to protect married retirees, plans offering qualified JSAs must ensure their lifetime value equals or exceeds that of the SLAs.  The argument continues that achieving this “actuarial equivalence” requires the present values of both benefit forms, as “present value” underpins actuarial equivalence in ERISA.  This mandate necessitates assumptions that realistically project future events. In other words, assumptions that are demonstrably reasonable.

Plaintiffs argue that present value must reflect anticipated events” and “conform” with Treasury regulations that define “present value.”  See 29 U.S.C. section 1002(27) (defining “present value”).  The Secretary of Treasury has prescribed numerous regulations relating to the calculation of actuarial equivalence of alternative forms of benefit, each of which requires the use of actuarial assumptions that are “reasonable.”  For example, the Treasury regulation concerning qualified JSAs provides that “[e]quivalence may be determined, on the basis of consistently applied reasonable actuarial factors, for each participant and for all participants or reasonable groupings or participants.”  26 C.F.R. section 1.401(a)-11(a)-11(b)(2).

In sum, plaintiffs argue that, by using decades-old formulas, based on 50-year old mortality data, plans “shortchange retirees on their benefits and jeopardize the very financial security ERISA aims to safeguard.”  Plaintiffs also argue that giving plan sponsors “unfettered discretion” in choosing the actuarial formulas used to determine benefits is untenable.  They argue this discretion would permit plans to manipulate actuarial formulas, which taken to extreme, would allow centuries-old mortality tables and empower plan sponsors to exploit participants for their own gain.  

The Kellogg Actuarial Equivalence Case

The Kellogg actuarial equivalence case is typical of the over thirty cases that have been filed.  It is useful to review, to see how much money is at stake.  The average JSA benefit discrepancy alleged in these cases is approximately $40 per month.   

The Kellogg defined benefit plans at issue in the case, including plans for corporate employees and a multiemployer plans for unionized employees, required specific actuarial factors and assumptions to apply when converting a SLA to a JSA.  The plan document prescribed an interest rate of 6% and the UP-1984 Mortality table.  

The amended complaint in the Kellogg case does not allege that the Kellogg defendants failed to follow the plans’ terms in calculating their pension benefits.  Instead, plaintiffs allege the plans’ mortality tables and interest rates were “unreasonable and outdated.”  As a result, plaintiffs contend they received a lower pension benefit than if the plan fiduciaries used “formulas based on reasonable and current assumptions required by ERISA and the accompanying Treasury regulations.”  

Three participants served as named plaintiffs in the purported class action, claiming that the Kellogg plans “shortchanged” their benefits by using the outdated UP-1984 mortality table and a 6% interest rate.  The first plaintiff Thomas Reichert worked for Kellogg for 11 years, and elected to receive his pension as a 50% Joint and Survivor Annuity with his wife as a beneficiary.  A single life annuity would have paid him $455.69 per month, but he receives $380.50 per month because he chose the 50% JSA.  Reichert contends that he should receive approximately $406.39, or $25.89 more per month, if the JSA was calculated using different, i.e., updated, mortality assumptions.  Reichert seeks $4,076, which includes past damages of $1,320.39 and future damages of $3,385.61.

Plaintiff Stuart Buck worked for Kellogg for approximately 13 years.  He alleges that the SLA would have paid him $563.75 per month, but chose the 50% JSA and receives $467.46 per month.  He contends that his benefit would be approximately $499.87, or $32.41 more per month, if calculated using different mortality table assumptions.  He seeks $5,802, which includes past damages of $1,717.73 and future damages of $4,084.27.

The third Plaintiff Kenneth Henrich worked for Kellogg for approximately 32 years.  The SLA annuity would have yielded $1,683.19 per month, but he chose the 100% JSA and receives $1,273.52 per month.  Henrich contends he would receive $1,338.05, or $64.53 (5.1%) more per month if his benefit were calculated using different mortality table assumptions.  Henrich seeks $15,053, including past damages of $2,968.38 and future damages of $12,084.62.  It is noteworthy that he did not choose the plan’s qualified joint and survivor annuity, and instead chose the 100% JSA.  The defense argued that, because he did not choose the plan’s default option, the actuarial equivalence 29 U.S.C. § 1055(d) should not apply to his benefit.  Plaintiffs argue that actuarial equivalence applies to any JSA chosen by a participant.  This argument was not addressed by the court.  

The question then becomes what it means to be “actuarially equivalent” under section 1054(c)(3).  In the Kellogg case, the plan used more modern 1984 mortality tables and a lower 6% interest rate.  In the Citgo case, the Plaintiff alleged that defendant’s use of the 1951 Adjusted Mortality Table and 7.5% interest rate violates ERISA’s actuarial equivalence requirement, because those assumptions are not reasonable and do not reflect current mortality or interest rates.  The defense was the same in both cases.  Defendants contended that two benefits are “actuarially equivalent” if value of the two benefits are equal using the interest rate and mortality tables specified in the defined benefit document.  They assert that section 1054(c)(3) does not require disregarding plan terms in favor of “reasonable” or “current” mortality tables and interest rates.  

Michigan Court Grants a Motion to Dismiss the Kellogg Actuarial Equivalence Case

On April 17, 2024, the Eastern District of Michigan dismissed the actuarial equivalence case brought against the Kellogg multiemployer plan in Reichert v. Bakery, Confectionary, Tobacco Workers and Grain Millers Pension Committee, Case NO. 2:23-cv—12343 [E.D. Mich. April 17, 2024].  For the Michigan court, it was a simple exercise of statutory construction.  The starting point was the “plain language of the statute.”  The court was also mindful of the Supreme Court’s admonition in Great-West Life & Annuity Ins. Co. v. Knudson, 534, U.S. 204, 209 (2022) that courts should be “reluctant to tamper with the enforcement scheme embodied in the statute by extending remedies not specifically authorized by its text,” because “ERISA’s carefully crafted and detailed enforcement scheme provides strong evidence that Congress did not intend to authorize other remedies it simply forgot to incorporate expressly.”  

The court noted that ERISA requires qualified JSAs to be actuarially equivalent to the SLA offered under 29 U.S.C. § 1055(d).  But the text of § 1055(d) does not require that plans employe certain assumptions or mortality tables, and does not impute a “reasonableness” requirement of the actuarial equivalence computation.  The court noted that ERISA includes a “reasonableness” requirement for (1) calculating lump sum payments, (2) withdrawal liability and (3) plan funding requirements, but not for calculating the conversion from SLAs to JSAs.  The court held that “[i]f Congress intended to include a reasonableness requirement in § 1055, it would have done so.”  The Court noted that it sympathized with plaintiffs’ position that the actuarial equivalence requirement could be rendered “meaningless” if plan sponsors manipulated mortality tables, such as using Sixteenth Century mortality tables.  “But the Court must apply the law that Congress passed and does not have the authority to make new policy . . . It would appear that a Congressional remedy would provide a path to address reasonable concerns about extreme application of mortality data.”  

While there have been decisions on compelling arbitration [Duke v. Luxottica in the E.D.N.Y.] or failure to exhaust administrative remedies [Brown v. UPS in the N.D. Ga.], the Kellogg decision is only the second decision in an actuarial equivalence case that granted a motion to dismiss on the grounds that ERISA does not require a reasonableness requirement for JSA conversions.  The other case was Belknap v. Partners Healthcare Sys., Inc., 588 F. Supp. 3d 161 (D. Mass. 2022).

On May 5, 2024, the Northern District of Illinois denied summary judgment in Urlaub v. Citgo Petroleum Corporation, Case No. 21-C-4133.  Most of the decision was focused on the factual dispute over whether the four-year statute of limitations had expired to challenge the benefit conversion based on when participants elected the JSA, but the court found a factual dispute between experts on the substantive issue of whether the SLA-to-JSA conversion of the Citgo plan was reasonable.  Citgo’s plan document specified an eight-percent annual investment return and mortality rates from the 1971 Group Annuity Mortality Tables.  This decision involves a summary judgment motion, but is consistent with how most courts have found actuarial equivalence cases to be plausible.     

The Encore Perspective

After years focused on defined contribution plans, the trial bar has turned its attention to defined benefit plans, bringing claims alleging (1) actuarial equivalence; (2) excessive health plan fees; and most recently (3) pension risk transfer cases.  There are serious standing issues on the latter two types of cases.  Actuarial equivalence cases are dangerous because they present a very sympathetic fact pattern.  The trial bar is very effective in coloring these claims as unfair to plan participants.  They are persuasive when they argue that it is an unfair marriage penalty when plan sponsors are converting to joint and survivor annuities using 1971 mortality tables.  Indeed, it is probably unfair to use fifty-year old mortality tables from when the plan was first initiated, without updating to more modern mortality tables that reflect longer life spans.  

But ERISA’s safeguards were to ensure that plan sponsors meet their benefit obligations.  ERISA’s safeguards were never designed to allow participants to use litigation to improve their plan benefits.  This is an important distinction.  The role of judges in enforcing ERISA was never to rewrite the plan or create new statutory requirements.  The Kellogg court gets this right. 

Actuarial equivalence cases present a slippery slope.  The stakes are that the court system is being improperly used to change private contracts.  If participants want better benefits, they can ask their employers for better benefits.  And if they want a certain level of benefits granted by federal law, then they can ask Congress to enact a statute guaranteeing that level of benefits.  But the solution is not for Article 3 courts to legislate or amend contracts.  That is what we need to prevent when courts are presented with seemingly sympathetic actuarial equivalence claims.

Disclaimer:  The Fid Guru Blog is intended to provide fiduciary thought leadership and advocacy for the plan sponsor community in areas of complex fiduciary litigation.   The views expressed on The Fid Guru Blog are exclusively those of the author, and all of the content has been created solely in the author’s individual capacity.  It is not affiliated with any other company, and is not intended to represent the views or positions of any policyholder of Encore Fiduciary, or any insurance company to which Encore Fiduciary is affiliated.  Quotations from this site should credit The Fid Guru Blog.  However, this site may not be quoted in any legal brief or any other document to be filed with any Court unless the author has given his written consent in advance.  This blog does not intend to provide legal advice.  You should consult your own attorney in connection with matters affecting your legal interests.

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