Amid historically low interest rates, the U.S. 7th Circuit Court of Appeals’ recent affirmation of a retirement plan’s choice of discount rate for converting annuities into lump-sum payments to beneficiaries should reassure defined benefit plan sponsors facing similar challenges.
In Dennison v. MONY Life Retirement Income Security Plan (No. 12-2407, 7th Cir., March 6, 2013), Judge Richard Posner and the two other 7th Circuit jurists who heard the case supported a ruling by the U.S. District Court for the Western District of Wisconsin (3:10-cv-338-bbc, W.D. Wisconsin, May 15, 2012) in favor of the discount rate used to determine present value for two plans in which the plaintiff, retiree John J. Dennison, was enrolled while working for Mutual of New York Insurance company, now a subsidiary of AXA.
When he became eligible for benefits from the plan upon turning age 55 in 2009, Dennison was given a choice between taking benefits in the form of a “straight life” annuity, a fixed monthly sum for the rest of his life, or taking a lump sum represented as the actuarial equivalent of the annuity. He opted for lump-sum payments from the two MONY DB plans in which he participated, one of which was a “top hat” plan for highly compensated employees that was not under ERISA oversight because it was a non-qualified plan.
When interest rates are low, as they have been since the time of Dennison’s pension payout in 2009, that leads to a lower rate of growth for an annuity over a beneficiary’s lifetime than would result from higher rates. So when a lump-sum distribution is calculated in a low-interest-rate environment, a higher lump-sum payment is awarded for that reason.
Dennison and others in the class-action lawsuit with him contended that MONY’s plan should have used lower discount rates than it did for their payouts, which would have made their current lump sums larger.
Ruling Reinforces Lessons for Sponsors
It’s important to know that this case ruled on the discount rate issues as a breach-of-contract matter, not as a review of a plan administrator’s decision. All the same, Judge Posner’s opinion, while not a major upset to ERISA law, does “reinforce lessons that plan administrators should already know,” according a recent briefing on the Dennison decision posted on law firm Seyfarth Shaw’s ERISA & Employee Benefits Litigation Blog.
These lessons include, “[b]e meticulous in drafting plan language. Think long and hard before amending a plan and seek counsel if necessary. Remember how to calculate present value. These tips will help guard against headaches for the plan and save sleep for plan administrators,” the March 20 blogpost continued.
Finding out More
To read the complete story on Thompson’s HR Compliance Expert, click here.
To learn more about different types of retirement plan distributions, see ¶810 of the Pension Plan Fix-It Handbook.