Lawsuits Serve as Warning to DB Plans: Review Your Actuarial Assumptions

July 2020

Increases in life expectancy resulting from medical advancements and better health habits are generally viewed as a sign of progress for society. But for defined benefit plans that haven’t updated the assumptions used to determine payouts to participants, increasing life expectancy could lead to an increasing risk of being sued.
Benefit plan participants and beneficiaries have filed several high-profile lawsuits against major defined benefit plans, alleging that the organizations used outdated mortality tables that resulted in the underpayment of benefits. While the majority of these lawsuits remain unsettled, plan sponsors should view these examples as a wake-up call to reexamine the actuarial assumptions they use to determine benefit payouts.


Understanding the “Reasonable” Clause in the Law

Neither ERISA nor the Internal Revenue Code (IRC) explicitly states that plan sponsors must use the most current mortality table or interest rate to make such conversions. Instead, ERISA says that plan sponsors must use “reasonable” assumptions to determine actuarially-equivalent benefits. This “reasonable” clause has been the focus of lawsuits—and should serve as a red flag for other defined benefit plan sponsors who may need to reconsider whether their mortality tables and interest rates meet this subjective standard.
When outdated mortality tables with shorter life expectancies are used, they often result in lower benefit payouts. Plaintiffs argue this is not reasonable and constitutes an ERISA violation because plan fiduciaries are obligated to act in the best interests of plan participants. These lawsuits seek compensation for the difference between benefits received and benefits that would have been generated using “reasonable” mortality tables and interest rates.
The defendants in these cases have filed motions to dismiss the cases, generally arguing that neither ERISA nor the IRC requires the use of specific mortality tables. In addition, defendants have argued that the plaintiffs haven’t satisfied the burden of proof to show the unreasonableness of the variables used to calculate the conversions.