Compliance December 15, 2021

Delta Air Lines Faces ERISA Actuarial Equivalence Pension Lawsuit

The complaint challenges the use of both allegedly outdated mortality tables and artificially high interest rate assumptions in the conversion of annuity types under multiple pension plans.

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A new Employee Retirement Income Security Act (ERISA) lawsuit has been filed in the U.S. District Court for the District of Nevada, naming as defendants Delta Air Lines Inc. and a number of administrative committees and individuals tasked with operating the company’s pension plans.

The lawsuit resembles other “actuarial equivalence” challenges filed under ERISA against major U.S.-based employers in recent years. The suits are focused on the actuarial equivalence—or lack thereof—of different forms of annuities paid out by pension plans sponsored by the employers. Thus far, the cases have reached mixed results, with some being cleared for discovery, some being dismissed outright on technical grounds and others reaching rapid settlements. 

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In all the cases, including the new Delta Air Lines matter, the plaintiffs claim their employers are failing to pay the full promised value of “alternative annuity benefits” defined by the plan. The suits say this generally happens because the plan sponsors are allegedly using outdated mortality assumptions and interest rate calculations while converting standard annuity payments into alternative options, such as annuities that include spousal survivor benefits, also known as joint and survivor annuities (JSAs).

As stated in the new complaint, mortality assumptions for participants and beneficiaries and interest rate assumptions together generate a “conversion factor,” which expresses the dollar amount of one form of the pension’s monthly benefit as a fraction of the dollar amount of the alternative monthly benefit. The plaintiffs state that if a plan’s “conversion factor” for JSA benefits, relative to either the standard life annuity (SLA) benefit or a more valuable plan benefit, is lower than the conversion factor that would be generated from reasonable actuarial assumptions about mortality and interest rates, then the plan’s alternative benefits are not actuarially equivalent.

The complaint alleges that the Delta Air Lines plans’ conversion factors for calculating JSA benefits are lower than the conversion factors generated by reasonable actuarial assumptions, resulting in the payment of JSA benefits that are not actuarially equivalent to the SLA benefits participants could elect to take instead.

“Under the plans, the defendants use a .90 conversion factor to calculate a 50% joint and survivor annuity and a .80 conversion factor to calculate a 100% joint and survivor annuity,” the complaint states. “These conversion factors do not provide participants with actuarially equivalent benefits. For a 65-year-old participant with a 65-year-old spouse, the conversion factor for the 50% JSA in 2020, based on reasonable actuarial assumptions, would have been .92, or 2.3% higher than what the plans pay. The conversion factor for the 100% JSA would have been .85, or 6.6% more than the plans pay.”

The plaintiffs suggest the plans’ conversion factors thus depress the present value of benefits received as a JSA, resulting in benefits that are materially lower than the actuarial equivalent of the plans’ SLA benefits.

“In sum, Delta is causing the plaintiff and class members to receive less than they should as a pension each month, which will continue to affect them throughout their retirements,” the complaint states.

One unique feature in this lawsuit relative to the previous related suits is the plaintiffs’ allegation that the several pension plans in question do not identify the actuarial assumptions upon which the conversion factors set out in the plans’ tables to calculate the 50%, 75% or 100% JSAs are based.

“It is likely that the plans’ conversion factors were set decades ago, when mortality rates were significantly higher, and were never updated,” the plaintiffs allege. “One plan’s conversion factors, for example, have not changed since 1996. Regardless of the reason, however, the conversion factors shown in the tables are unreasonably low compared to the conversion factors generated by using actuarial assumptions that were reasonable at any time during the last decade.”

The full text of the complaint is available here. Delta Air Lines has not yet responded to a request for comment about the allegations.

Client Service December 15, 2021

Financial Wellness Trends Shine a Light on Employee Needs

Areas of focus have shifted during the pandemic and will define trends for the new year.

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After living through a pandemic that has lasted for well over a year, U.S. investors’ behaviors and outlooks have clearly shifted, and their viewpoints about financial wellness have been similarly reshaped. Now, recent analyses highlight how employees’ needs and the use of financial wellness help have changed this year.

Betterment’s 401(k) business surveyed 1,000 full-time U.S. employees and found that, as of this fall, 54% of workers are somewhat or significantly more stressed about their finances than they were before the pandemic. On a positive note, 66% of employees reported that they have an emergency fund. Of those who didn’t, 81% indicated that it was because they didn’t have enough money to build one, rather than not understanding why it was necessary or not knowing how to build one.

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More than three-fourths of employees (76%) agree that the pandemic made them re-examine their financial wellness situation. Sixty-eight percent said they are prioritizing building their retirement fund more than they did pre-pandemic, 59% are prioritizing paying off credit card debt more now, and 35% are prioritizing paying off their student loan debt more.

Nearly half (46%) say they didn’t think they needed an emergency fund before the pandemic, but they do now.

Employee benefits executives have found that, in response, employers are offering several types of benefits this year for the first time, many as a result of the pandemic. Most notably, many employers are offering automatic emergency savings programs. In addition, participants’ financial wellness and emergency preparedness have become more important in advisers’ service models.

Retirement plan recordkeepers have also responded to the increased focus on emergency savings. They shifted how they see their role in ensuring financial security for participants and reacted to plan sponsor demand.

Looking at More Than Just Retirement Plan Actions

“Plan sponsors historically have stressed employees’ need to save for retirement, then, during the COVID-19 pandemic, about one-quarter had to take a hardship withdrawal from their retirement plan because they didn’t have emergency savings,” says Rebecca Liebman, founder and CEO of LearnLux, a workplace financial well-being program provider. “And employers need to look at more than employees’ retirement plan actions. We see people maxing out their retirement savings, but they have thousands of dollars in debt. People have many financial problems causing them stress.”

Liebman says financial well-being programs have evolved over the years; they historically were mostly used by high-net-worth employees, but that has changed. “No matter how much income someone has, they all need some type of financial guidance,” she says. “So we see people of all income levels seeking help with financial wellness, and employers are recognizing this.”

LearnLux explored thousands of aggregated, anonymized data points from October 2020 to October 2021 via its financial well-being platform. It included a sample of 1,012 employees representing a wide range of job functions, income levels and geographic locations. That analysis found that 92% of employees report some degree of financial stress, and this is true at all income levels—95.1% of employees making $75,000 or more report feeling financially stressed.

According to LearnLux’s “Employee Financial Wellbeing Report: Year in Review 2021,” the top things causing financial stress are investing (57.5%), sticking to a budget (47.7%), unexpected expenses (40.3%), buying a home (34.5%) and the economy (31%). Interestingly, retirement did not make it into the top 10.

Building savings is the top goal for employees making less than $75,000, and planning for retirement is the top goal for employees making more than $75,000. Paying off credit card debt is a goal for 29.8% of employees in the analysis and paying off student loan debt is a goal for 26.4%.

While individuals were given a reprieve from paying student loan debt during the pandemic, that relief is ending in January. Many employees aren’t prepared, and experts say employers have an opportunity to help with the financial burdens their workers face as they prepare to start paying their debt off again. 

Liebman says the main problem LearnLux sees is employees having difficulty addressing competing financial goals. “They want to save for emergencies or for retirement, but they have debt or are saving for a home,” she says. “They need decision support for how to allocate their money.”

Some of the top suggestions given to employees who use LearnLux’s financial wellness program include:

  • Pay down high-interest debt;
  • Save enough to get an employer-sponsored retirement plan match;
  • Save $1,000 for emergencies;
  • Use a health savings account (HSA); and
  • Pay down non-mortgage debt.

The LearnLux report says taking small steps along the way makes reaching big goals achievable.

Using a financial wellness program and/or a financial planner is a good way for employers to help because, in many cases, they can’t legally provide answers to some of their employees’ questions, Liebman notes. She adds data gleaned from financial wellness providers can be used to recognize what employees need and determine what offerings they can put on the benefits menu.

Research has shown that people of all ages are seeking more help with financial wellness and retirement savings and planning, and many are interested in financial wellness help from financial advisers.

Seventy-eight percent of employees surveyed by Betterment say it’s important that their employer offer financial wellness benefits, with 83% saying they view financial wellness benefits as a sign that their employer values them and their work. Nearly eight in 10 (78%) want their employers to more proactively and clearly communicate the financial wellness benefits they offer.

LearnLux says life events such as getting married and starting a family are key decision points in a person’s financial life. “Offering employees education and guidance on these events can help them feel financially resilient,” the company says in its report.

Liebman says the main financial wellness focus for 2022 is rebuilding emergency savings.

“Over the past year and a half, people had to dip into their savings for themselves or a loved one,” she notes. Other trends that will impact employees’ financial well-being most in the coming year include navigating cash flow changes, choosing the right health insurance/voluntary benefits, preparing for big life events and saving for retirement.

Experts also say monitoring improvements in employees’ financial lives effectively gauges the success of employer financial wellness programs.

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