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A Prudent Response to Actuarial Equivalence Lawsuits

Frequently Asked Questions

Class action lawsuits were recently filed against five large defined benefit plan sponsors and their plan committees. The complaints allege that participants’ early retirement or optional benefits (i.e., joint and survivor annuities) were understated due to the use of outdated and unreasonable plan actuarial assumptions or conversion factors.

A prudent response against these lawsuits (or potential lawsuits) is to undertake a third-party, conflict-free review to determine whether a plan is potentially at risk.

In raising this issue, some sponsors have asked:

  • “Why use a third party actuary?”  
  • “What is the point of the review?”  
  • “What happens if a potential issue is uncovered?”  
  • “Is performing a study an admission of guilt?”  

Below are answers to these important questions. 

“Why use a third party actuary?” 

Attorney Client Privilege – the work of a third party actuary engaged by outside counsel ‘internally’ to the client (dealing only with in-house counsel) should be able to maintain privilege in the event the client/plan is sued. 

Under ERISA and Federal Rules, actions and conversations of fiduciaries acting in a fiduciary capacity are not privileged. The ongoing plan actuary frequently speaks with plan fiduciaries (even if acting in a non-fiduciary capacity). As such, it can be difficult to establish that any conversations fiduciaries had on the matter occurred while they were acting in a non-fiduciary capacity.

What is the point of a review?”

  • Conducting a simple review of a plan’s actuarial equivalence assumptions is prudent and something that should occur periodically.
  • Prospectively making potential changes as a result of the review is both reasonable and appropriate – not an admission of guilt.
  • The ongoing actuary may never have raised the topic despite being viewed as responsible for keeping the sponsor/plan actuarially compliant.

“Is performing a study an admission of guilt?”

For those still leery that undertaking a review signifies ‘guilt’, analysis can be incorporated into a general compliance review. Should results identify the need for actuarial equivalence to be updated, action can be taken as part of the review.

Outside ERISA counsel works with a third party actuary (each applying their respective expertise) on a general compliance review to determine:

  • Is the plan nondiscriminatory?
  • Is compensation reflected properly?
  • What is the plan’s definition of actuarial equivalence and is that definition reasonable?
  • Are 415 limits protected?
  • Are hours counted/applied properly?
  • Are 404(c) fiduciary actions properly documented?

“What happens if a potential actuarial equivalence issue is uncovered?”

Litigators on these cases indicate that:

  • Retroactive changes will apply only at the instruction of the Court.
  • Prospective changes are not an admission of guilt.

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