Compliance June 16, 2021

Mixed Ruling Issued in MetLife Mortality Table ERISA Lawsuit

The retirees’ main claim is that the plan’s use of mortality tables from 1971 and 1983 to convert default retirement benefits into the alternative benefits that they opted to receive constitutes unreasonable actuarial assumptions.

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The U.S. District Court for the Southern District of New York has published an order in an Employee Retirement Income Security Act (ERISA) lawsuit filed against MetLife by a proposed class of retirees who were formerly employed by the company. In basic terms, the order grants in part and denies in part a motion to dismiss the lawsuit that had been filed by the MetLife defendants, who argued the plaintiffs lacked standing in this matter.

The arguments in the complaint consider the topic of the “actuarial equivalence” of different types of annuity benefits to be paid under the current and former plan designs of MetLife’s own pension plan—in particular, it questions the method of calculating joint and survivor annuity benefit payments as compared with single annuity benefit payments.

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According to plaintiffs, MetLife is failing to pay the full promised value of alternative benefits available under its Metropolitan Life Retirement Plan. The complaint suggests MetLife is failing to meet its obligations to ensure different annuity options under the plan are actuarially equivalent to the plan’s default benefit, as required under ERISA and the terms of the plan itself. In essence, the retirees argue the firm is using severely outdated mortality tables from 1971 and 1983 to convert default retirement benefits into the alternative benefits they opted to receive—in this case, a joint and survivor annuity.

Before discussing the factual background that bears on the legality of the alternative benefits offered by the plan in this case, the District Court reviews the statutory framework in which the issue arises. For example, it notes how ERISA requires that defined benefit (DB) plans provide a qualified joint and survivor annuity and a qualified optional survivor annuity to qualified participants and beneficiaries. As the court explains, both forms of alternative benefits must be “the actuarial equivalent of a single annuity for the life of the participant.” The court also observes that regulations promulgated by the United States Department of Treasury direct employers to use “reasonable actuarial factors” to determine the actuarial equivalence of qualified joint and survivor annuities.

Turning to the factual background in the case, the order states that the MetLife plan, with respect to these non-standard annuities, applies actuarial assumptions based on a set of mortality tables and interest rates to calculate a benefit amount that purports to be actuarially equivalent to the accrued single life annuity benefit.

“In other words, the conversion factor, according to which a single life annuity is converted into another form, has two main components: an interest rate and a mortality table, which is a series of rates which predict how many people at a given age will die before attaining the next higher age,” the order states.

From here, the order provides detailed background about the savings experiences of various lead plaintiffs, who have had their benefit calculations run according to mortality tables created in either 1971 or 1983 and with interest rates of either 6% or 5%. For context—and as identified in the complaint—life expectancies have increased substantially since the 1980s, while interest rates have fallen to near 0. The plaintiffs claim that the defendants’ use of these mortality tables to calculate the amounts of non-standard annuities decreases their present value, in violation of ERISA’s requirement that such alternative benefits be “actuarially equivalent” to the plan’s standard option.

The order then considers and rules on the defense’s counterarguments.

“According to the defendants’ first argument for dismissal, the complaint’s purported lack of guidance as to what would constitute a range of reasonable actuarial assumptions, against which to compare the assumptions used by the plan, constitutes a failure to plausibly allege that any harm stems from the plan’s mortality assumptions,” the ruling states. “The plaintiffs maintain that the complaint demonstrates injury by comparing their current benefits to the amount they would receive were those benefits converted with updated mortality tables. This court is not persuaded that the absence of specifications as to what conversion factors or range of assumptions would be considered reasonable—or would be necessary for actuarial equivalence—constitutes a fatal defect mandating dismissal of the complaint.

“The plaintiffs claim that the plan’s use of decades-old mortality tables violates a specific provision of ERISA, namely the Section 205 requirement that covered joint and survivor annuities be actuarially equivalent to the standard annuity from which they were converted,” the ruling continues. “The complaint also refers to the more contemporary mortality tables used by the Society of Actuaries as examples of available reasonable alternatives. The court finds that these allegations provide sufficient context of the nature of the relief sought. Simply put, the plaintiffs seek to reform the plan by replacing the 1971 and 1983 mortality tables with more current ones. … Requiring the plaintiffs to further specify what set of assumptions would be reasonable would impose a pleading standard that is more stringent than that required by either ERISA or the Federal Rules of Civil Procedure.”

Later, the order makes the following observation: “Broadly speaking, some limits on the discretion of plan administrators in the selection of actuarial methodology are necessary to effectuate the protective purposes of ERISA, as recognized by the Second Circuit. The alternative interpretation, in which administrators have free reign to fashion the assumptions used to calculate actuarial equivalence, would permit all kinds of mischief inconsistent with that purpose. Allowing plans to set their own definition of actuarial equivalence would eliminate any protections provided by that requirement. … Consistent with that standard, numerous district courts have denied motions to dismiss actions challenging the use of purportedly unreasonable actuarial assumptions, which were not alleged to violate any other provision of ERISA.”

The defense’s only point of success in the ruling is explained by the court as follows: “Defendants correctly argue that [the plaintiffs’] claims for fiduciary breach are subject to a different standard for determining the accrual date. Pursuant to ERISA Section 413, no action may be commenced, with respect to a fiduciary’s breach of any responsibility, duty or obligation, more than six years after the date of the last action which constituted a part of the breach or violation, or three years after the earliest date on which the plaintiff had actual knowledge of the breach or violation. In this case, the alleged fiduciary breach occurred with the selection of the outdated mortality tables as conversion factors, or the conversion of the plaintiff’s retirement benefits with those tables. That breach must have taken place prior to November 15, 2012, when the lead plaintiff selected retirement benefits that had already been converted under the challenged formula. As the lead plaintiff received his first payment under the plan on December 1, 2012, the court can also reasonably infer that he had knowledge of the alleged fiduciary breach as of, or soon after, that date, i.e., more than three years before filing his complaint. His claim of fiduciary breach must therefore be dismissed as untimely.”

The full text of the ruling is available here.

Compliance June 16, 2021

Judge Significantly Pares Down Claims in ERISA Excessive Fee Suit

Some claims against Konica Minolta and its 401(k) committee were moved forward but all claims against the company’s board were dismissed.

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A federal court has pared down claims in an Employee Retirement Income Security Act (ERISA) excessive fee suit against Konica Minolta Business Solutions U.S.A., its board of directors and its 401(k) plan committee.

The lawsuit alleges that the defendants breached their duties of loyalty and prudence and engaged in a prohibited transaction. The plaintiffs contend that the defendants breached these duties by including “many mutual fund investments that were more expensive than necessary and otherwise were not justified on the basis of their economic value to the plan”; failing “to have a proper system of review in place to ensure that participants in the plan were being charged appropriate and reasonable fees for the plan’s investment options”; and failing “to leverage the size of the plan to negotiate lower expense ratios for certain investment options maintained and/or added to the plan during the class period.”

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Count One of the lawsuit alleges that Konica and the committee defendants breached their fiduciary duties of loyalty and prudence; Count Two alleges that Konica and the board defendants failed to adequately monitor other fiduciaries; and Count Three alleges a prohibited transaction based on excessive and unreasonable compensation paid to the plan’s recordkeeper, Prudential.

For the Prudential Guaranteed Interest Contract (GIC) account, which is alleged to be “the single largest holding in the plan,” the complaint says Prudential receives compensation for “the return on the investment of the plan funds transferred to a general account, plus the nominal 0.1% expense ratio paid by participants in the GIC,” minus “the interest credited to plan participants in the [investment].” The plaintiffs allege that this results in Prudential receiving compensation that “greatly exceeds a reasonable fee in relation to the costs of administering the Prudential GIC.”

Judge Michael Vazquez of the U.S. District Court for the District of New Jersey first disagreed with the defendants’ argument that the plaintiffs lack standing to assert claims related to the 18 investment options in which they did not invest because they suffered no personal injury as a result of those investments. Citing a decision in Thole v. U.S. Bank, Vazquez said, “Thole suggests … that a plaintiff has standing to sue on behalf of the plan, even if that particular plaintiff was not invested in each one of the plan’s investment vehicles.” If a plan’s participants “have alleged an injury to their own investments by virtue of the fiduciaries’ mismanagement, sufficient to create a case or controversy for Article III purposes,” then ERISA “grants the participants a cause of action to sue on behalf of the plan,” he continued.

Vazquez then turned to whether the defendants were acting as fiduciaries under ERISA when taking the actions the plaintiffs cite in their complaint. Although he agreed with the defendants that Konica is not a fiduciary of the plan merely by virtue of being its sponsor, he found that Konica is a named fiduciary of the plan and is the plan’s administrator. The plaintiffs allege that Konica delegated the plan functions to its 401(k) committee. The judge noted that the complaint fails to allege that any fiduciary duties were non-delegable or that Konica maintained fiduciary duties through other theories, such as agency; however, the parties agree that upon delegation of its ERISA fiduciary duties, Konica maintained a fiduciary duty to monitor the committee’s actions.

Regarding the board defendants, Vazquez agreed with the defendants that the plaintiffs’ allegation that the board has “discretion to authorize Konica to contribute annual profit-sharing amounts to plan participants” is insufficient to establish that the board is a fiduciary because “decisions regarding how much to contribute to the plan are not ERISA fiduciary acts.”

In addition, Vazquez found no further allegations in the complaint as to the board’s discretion and how it exercised that discretion, and he said the complaint is devoid of plausible allegations that any individual member of the board possessed or exercised discretionary authority over the appointment of plan fiduciaries. Likewise, the judge found that the plaintiffs did not plausibly plead that the individual committee members were fiduciaries.

He dismissed breach of fiduciary duties of loyalty and prudence claims against Konica and dismissed all claims in the lawsuit against the individual committee members and Konica’s board of directors.

As for the 401(k) plan committee, Vazquez found that the complaint includes sufficient allegations that it breached its duty of prudence. He said the plaintiffs adequately plead that the plan included funds with higher expense ratios than comparable funds, and the plan’s funds failed to outperform the less expensive comparable funds. In addition, he found that the plaintiffs sufficiently allege that many funds were retained in the plan despite their underperformance as compared with their benchmarks. Vazquez also found that the complaint plausibly pleads a failure to monitor and/or control the plan’s recordkeeping expenses.

“Viewing plaintiffs’ overall allegations of the plan’s mismanagement, the court concludes that dismissal of plaintiffs’ duty of prudence claim as against the committee at this early stage would be inappropriate,” Vazquez wrote in his opinion.

However, he found that the complaint includes few, if any, allegations to support a claim for breach of the duty of loyalty. “Absent from the complaint are any facts to suggest that the committee was acting for its own benefit or for the benefit of a third party,” he said. “As a result, defendants’ motion to dismiss is granted as to Count One with respect to the duty of loyalty.”

Vazquez denied dismissal of the duty to monitor claim against Konica because he found that the complaint sufficiently pleads that the committee breached its duty of prudence.

The judge noted that, in their prohibited transaction claim, the plaintiffs do not specify against which defendant or defendants the claim is brought. Because “prohibited transaction claims require that an action be taken by an ERISA fiduciary,” and Vazquez previously determined that the complaint plausibly alleges only that the committee was a fiduciary with respect to any duties beyond monitoring, he said he construes Count Three as against the committee.

Vazquez found that there are no allegations that the Prudential GIC account was included in the plan primarily for the benefit of a party in interest. “While the plaintiffs allege that the defendants do not satisfy [prohibited transaction] exceptions, the plaintiffs failed to meet their threshold burden, that is, providing sufficient allegations of a violation … in the first instance,” he wrote in his opinion. “As a result, the court concludes that plaintiffs failed to state a prohibited transactions claim and count three is dismissed.”

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