Compliance October 7, 2019

AT&T Sued Over Calculation of Early Retirement Benefits

The plaintiffs say the plan’s terms reduce benefits using “Early Retirement Factors” and “Joint and Survivor Annuity Factors” which result in plan participants receiving less than the actuarial equivalent of their vested accrued benefit, as required by ERISA.

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Former participants in the AT&T Pension Benefit Plan have sued AT&T and the plan claiming their benefits were reduced because of the way benefits are calculated for those who retire before age 65.

According to the complaint, the plaintiffs and proposed class members are forced to forfeit accrued, vested pension benefits if they retire before age 65 and/or receive their pension benefit in the form of a Joint and Survivor Annuity. They say this is because the plan’s terms reduce these alternative forms of benefits using “Early Retirement Factors” and “Joint and Survivor Annuity Factors,” which result in plan participants receiving less than the actuarial equivalent of their vested accrued benefit, as required by the Employee Retirement Income Security Act (ERISA).

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The plaintiffs explain that a participant’s pension benefit is expressed as a monthly pension payment beginning at “normal retirement age,” which is age 65 under the AT&T plan. This monthly payment is a single life annuity because it pays a monthly benefit to the participant for the participant’s entire life. Under ERISA, “if an employee’s accrued benefit is to be determined as an amount other than an annual benefit commencing at normal retirement age [of 65] . . . the employee’s accrued benefit . . . shall be the actuarial equivalent of such benefit . . . .”

Thus, the complaint says, ERISA requires that if a plan allows a participant to retire early with a reduced monthly pension, the value of his reduced monthly pension must be actuarially equivalent to the participant’s monthly pension benefit commencing at age 65. The case concerns two ways in which the AT&T plan improperly reduces pension benefits, in violation of ERISA’s actuarial equivalence rules.

First, the plaintiffs allege the plan’s Early Retirement Factors reduce benefits to less than the actuarial equivalent amount of the participant’s monthly benefits commencing at age 65. The earlier the participant retires, the greater the reduction to his benefits. For example, under most programs of the plan, if a participant’s normal pension benefit beginning at age 65 is $10,000 per month, and he retires at age 60, his monthly benefit is reduced by a factor of 0.58. As a result, the value of his monthly benefit is 58% of $10,000, or $5,800 per month, when the actuarial equivalent benefit he is entitled to receive under ERISA is approximately $7,090 per month.

Second, the plaintiffs point to applicable Treasury regulations that say, “A qualified joint and survivor annuity must be at least the actuarial equivalent of the [single life annuity]. Equivalence may be determined, on the basis of consistently applied reasonable actuarial factors.” A joint and survivor annuity is expressed as a percentage of the benefit paid during the retiree’s life. For example, a 50% joint and survivor annuity provides a surviving spouse with 50% of the amount that was paid during the retiree’s life.

The plaintiffs allege that the plan’s Joint and Survivor Annuity Factors reduce benefits to less than the actuarial equivalent amount of a participant’s benefit expressed as a single life annuity. For example, if a participant’s single life annuity benefit is $10,000 per month, and he is married, his default form of benefit is a 50% joint and survivor annuity, which is reduced by a factor of 0.90 for most programs under the plan. As a result, the participant’s monthly benefit is 90% of $10,000 per month, or $9,000 per month, when the actuarial equivalent benefit he is entitled to receive under ERISA is approximately $9,200 per month.

The plaintiffs say the to the best of their knowledge based on the available information, the Early Retirement Factors and the Joint and Survivor Annuity Factors in the AT&T plan applicable to the class have not been updated in over a decade, despite dramatic increases in longevity. “Because the Early Retirement and the Joint and Survivor Annuity Factors have not been updated to be in line with reasonable actuarial assumptions, they do not yield actuarially equivalent payments to Class members as required by ERISA. As a result, Defendants have improperly reduced Class members’ pension benefits in violation of ERISA’s actuarial equivalence requirements,” the complaint says.

In addition, the plaintiffs say, ERISA Section 203(a) provides that an employee’s right to his or her vested retirement benefits is non-forfeitable and states that paying a participant less than the actuarial equivalent value of his accrued benefit results in an illegal forfeiture of his benefits. “Thus, the Plan’s terms that reduce participant benefits to less than their actuarial equivalent value violate ERISA’s anti-forfeiture requirement set forth in [Section] 203(a).”

The lawsuit seeks all appropriate equitable relief, including but not limited to: a declaration that the plan’s Early Retirement Factors and Joint and Survivor Annuity Factors violate ERISA’s actuarial equivalence and non-forfeitability requirements; reformation of the plan to bring its terms into compliance with ERISA; and recalculation of benefits pursuant to the reformed plan for all participants who received a Joint and Survivor Annuity or Early Retirement Benefit and payment to them of the amounts owed under the reformed plan.
Compliance October 7, 2019

Congressional Leaders Want SECURE Act Passage in 2019

Based on the conversations industry advocates are having in Washington, none of the leadership in the Senate or the House opposes passage of the SECURE Act.

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Chris Spence, TIAA’s senior director of government relations, took a few minutes away from his regular Monday schedule to update PLANSPONSOR readers on the status of the Setting Every Community Up for Retirement Enhancement Act, commonly referred to as the “SECURE Act.”

Earlier this year, the bipartisan bill passed the House of Representatives by a practically unanimous margin of 417 yeas to 3 nays, with 12 non-votes. The legislation’s progress was hailed by House members, retirement industry lobbyists and advocates, and grassroots organizations as a significant victory for the average American worker. At the time, some of these advocates suggested immediate Senate passage of SECURE was likely.

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Now, Congress has fewer than three-dozen legislative days left this session—and the list of priorities is long. Still, according to Spence, retirement reform remains achievable. He says TIAA believes, like many others, that the SECURE Act would strengthen the pillars of a dependable and enduring employer-based U.S. retirement system. The bill would create a focus on guaranteed retirement income that cannot be outlived, a generous match to employees’ savings, and a commitment to putting participants’ interests first.

PLANSPONSOR: Can you update us on your expectations for SECURE Act during the end of the year?

Chris Spence: Since the bill passed the House back in May it has been sitting in the Senate in something like legislative limbo, as we try to figure out a path forward via unanimous consent. My opinion is that unanimous consent remains an option—it’s still something that we are working on and we are talking to all the members who will listen about ways the hold on unanimous consent could be lifted. So, that remains the first option.

The second path forward is securing floor time for the SECURE Act, meaning the bill would be brought up for a full Senate debate. We are continuing to look at ways this could possibly happen, but of course this is going to be up to Senate Majority Leader Mitch McConnell. He has other priorities, namely all the confirmations he wants to get done. So, not many bills like this are going to be seeing floor time ahead of 2020. 

The third main option, and probably the most realistic at this point, is to see the bill being attached to a broader package, perhaps a must-pass bill tied to the funding of the government. More likely this will not be tied into the continuing resolution deadline that is coming up before Thanksgiving, but will instead be tied to something passed at the end of the year.

PS: Can you explain more about what the timeline looks like? Forty legislative days will pass quite quickly.

Spence: Yes the floor time issue is an important one. In a given year there is actually a pretty limited amount of time the Senate has to legislate. When you put a piece of legislation on the Senate floor, because of the rules, it’s generally not something that can be done in a couple hours. You need at least a few days to get it done, if not more than that. 

That’s why we are have pushed for unanimous consent. Unanimous consent doesn’t require any floor time, so that remains the fastest and most expeditious pathway, but there are currently still three senators who are not agreeing with unanimous consent.

Based on the conversations we have, none of the leadership in the Senate or the House opposes moving this bill into law. They are supportive of it and they want to get it done, and I believe they wall want to get it done this year—by the end of this year. So it remains a logistical issue, more than anything, in my opinion.

PS: Which senators have a hold on unanimous consent at this point?  

Spence: The three Senators are Ted Cruz, Mike Lee and Pat Toomey.

Senator Cruz has concerns about the 529 college savings plan provisions. Senator Lee has concerns about a provision that provides some relief for small community newspapers. And Senator Toomey has primarily voiced concerns about certain technical tax corrections that impacts retailers, which he wants to see addressed.

At this point we are still in a waiting game, and people like myself are doing our jobs behind the scenes in keeping the pressure on. Can we negotiate a way around these holds or perhaps get some floor time? We are trying.

PS: What happens if we get to 2020 and we haven’t seen passage of the SECURE Act? Will you keep trying?

Spence: Certainly, that’s the fourth possible path forward. If we go into 2020 we are still in the same Congress, so the bill will not have to be passed out of the House again.

My hope is that by the end of 2020 we will have the SECURE Act passed, and then on January 2nd, 2021, we can hit the ground running and start looking at a lot of the other retirement proposals that are out there. Senators Portman and Cardin have their own bills they have introduced in this Congress, and Representative Richard Neal in the House, who chairs Ways and Means, has his own approach that overlaps with the Portman-Cardin bill.

Ultimately we hope the SECURE Act’s success could create some momentum and a further opportunity to get bipartisan retirement legislation over the finish line.

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