McCarthy v. Dun & Bradstreet Corp.
| Citation | 372 F.Supp.2d 694 |
| Decision Date | 06 June 2005 |
| Docket Number | No. CIV.A. 303CV431SRU.,CIV.A. 303CV431SRU. |
| Court | U.S. District Court — District of Connecticut |
| Parties | MCCARTHY, et al., Plaintiffs, v. The DUN & BRADSTREET CORPORATION, et al., Defendants. |
Thomas G. Moukawsher, Moukawsher & Walsh, Hartford, CT, for Plaintiffs.
Carla R. Walworth, Zachary R. Osborne, Paul, Hastings, Janofsky & Walker, Stamford, CT, for Defendants.
The plaintiffs, a group of retired former employees of the Dun & Bradstreet Corporation ("Dun & Bradstreet"), sued Dun & Bradstreet for allegedly underpaying retirement benefits. Remaining in the case is the sole claim that Dun & Bradstreet's Master Retirement Plan ("the Plan") used an unreasonably high discount rate to "actuarially reduce" benefits paid to early-retiring former employees. Dun & Bradstreet has moved for summary judgment. The plaintiffs oppose summary judgment and seek leave to amend their complaint to add a new claim regarding the mortality table used by the Plan. For the reasons given below, Dun & Bradstreet's motion for summary judgment is granted, and the plaintiffs' motion to amend their complaint is denied, except to the extent it is made on consent.
The following facts are not subject to any genuine dispute.
The Master Retirement Plan is a defined benefit plan; employees receive a fixed amount of benefits based principally on years of service and earnings. Under the Plan, retired employees whose benefits have "vested" which occurs after five years of service — may begin to receive benefits as early as age fifty-five, ten years earlier than the normal retirement age of sixty-five. If such an early-retiring employee is no longer employed by Dun & Bradstreet, he receives the amount he would have received at age sixty-five reduced by 6.75% per year for each pre-age-sixty-five year and additionally reduced by a mortality factor. If the early-retiring employee is still employed by Dun & Bradstreet at the time of retirement, the employee receives her normal retirement benefit reduced by only three percent per year. The intention of the Plan is to pay the early-retiring former employee the "actuarial equivalent" of his age-sixty-five benefit, i.e., the present value of that payment, and to pay the early-retiring current employee a "subsidized" amount, i.e., an amount greater than the present value of her age-sixty-five benefit.
The plaintiffs in this case are all early-retiring former employees who, as such, receive their retirement benefits reduced by 6.75% per year and a mortality factor, i.e., they receive the actuarially reduced amount, not the subsidized amount.
Over the past two years, the Plan assets have earned a rate of return of 9.63%; over the last year, 15.91%; over the past 10 years, 10.78%; and over the past 15 years, 10.27%. The current thirty-year Treasury bill rate is approximately 4.9%.
The kind of benefit the Plan provides to early-retiring former employees, like the plaintiffs, is mandated by the Employee Retirement Income Security Act ("ERISA").
In the case of a plan which provides for the payment of an early retirement benefit, such plan shall provide that a participant who satisfied the service requirements for such early retirement benefit, but separated from the service (with any nonforfeitable right to an accrued benefit) before satisfying the age requirement for such early retirement benefit, is entitled upon satisfaction of such age requirement to receive a benefit not less than the benefit to which he would be entitled at the normal retirement age, actuarially reduced under regulations prescribed by the Secretary of the Treasury.
29 U.S.C. § 1056(a). The Secretary of the Treasury has not, however, prescribed any regulations governing actuarial reduction in this context. The only guidance on the matter comes from a Treasury Regulation regarding prohibited forfeitures, which states:
Certain adjustments to plan benefits such as adjustments in excess of reasonable actuarial reductions, can result in rights being forfeitable.
26 C.F.R. § 1.311(a)-4. In other words, a plan is free to use any method to calculate the appropriate "actuarially reduced" benefit to pay early-retiring former employees, so long as that method is reasonable.
There is no dispute about the appropriate general methodology for determining an actuarially reduced benefit. Retirement benefits paid by an ERISA plan typically commence at age sixty-five. When a vested employee retires early, rather than receiving the full amount of his age-sixty-five payment, he receives the present value of that future payment. Accordingly, the process of actuarial reduction is the process of determining the present value of the benefits the early retiring employee would have received starting at age sixty-five.
Determining the appropriate actuarial reduction requires principally two steps. First, the future benefit is reduced by a "discount rate."1 This discount rate reduction reflects the time value of money, i.e., that a dollar paid today is more valuable than a dollar paid next year. Second, the future benefit is reduced by a "mortality factor." The mortality factor reduction reflects the possibility that the retiring employee might not live to age sixty-five (and so, had he not taken his benefits early, might not have received anything) and is calculated based on a table of average life expectancies.
The dispute in this case concerns the first step — selection of a discount rate. In general, it is not easy to select a discount rate that appropriately reflects the time-value of money. In part, this is because all people and entities do not equally value money paid over time. In other words, there is not one ideal discount rate. Instead, a particular person's discount rate depends on what the person expects his money to earn over time, and that expectation will vary according to a number of factors such as how risky an investment the person is willing to make and how soon he expects to need his invested money. For example, if Susan is willing to put her money in a risky investment that she expects will earn 30% over a year, one dollar a year from now is worth only around seventy-seven cents to her today, because that is the amount she believes she could invest today to receive a dollar in a year. By contrast, if Sam is only willing to put his money in a conservative investment that he expects will earn 1% a year, he will, today, value one dollar paid a year from now much higher, at around ninety-nine cents.
Consequently, determining the appropriate discount rate for the purpose of calculating actuarially reduced retirement benefits requires answers to two questions: (1) Whose discount rate is to be used? (2) What is that discount rate?
The first question — whose discount rate should be used — has two possible answers: either the Plan's or the Plan's participants. Resolution of this question is ultimately one of statutory interpretation. If ERISA's intention in requiring payment of actuarially reduced benefits is to make plans indifferent to the timing of their payment liability, then it makes sense to use the Plan's discount rate. If, on the other hand, ERISA's intention is to make it equally desirable for employees to retire at an earlier age as at later age, then it makes sense to use the participants' discount rate.
The plaintiffs argue that the discount rate of participants must be used; Dun & Bradstreet argues that the Plan's discount rate should be used. I will assume the plaintiffs are correct because, as I explain below, infra n. 5, it makes no difference in this case.
To actually use the discount rate of all Plan members to calculate early-retirement benefits would be nearly impossible. It would require the selection of a different discount rate for every retiree depending on their investment preferences, risk profile, goals, etc. Neither side suggests that ERISA sets such a task. ERISA only requires that a plan select a methodology that is reasonable. I read this to mean that a plan has met its ERISA obligations with respect to calculation of early benefit payments if it selects a discount rate that is reasonably calculated to be representative of its participants' average discount rate. The question, then, is what assumptions can a plan reasonably make regarding the average discount rate of its participants.
The plaintiffs argue that, whatever other assumptions are made about participants' discount rate, the Plan must assume that its participants have effectively zero tolerance for risk. This is so, the plaintiffs claim, because the Plan itself is a defined benefit plan, which guarantees its participants payment of their benefits. In other words, because the Plan is risk-free, it must be assumed that its participants are, on average, risk-averse. The plaintiffs conclude that a reasonable discount rate must, therefore, be based on the rate of return that a plan participant could expect to receive in the market for an effectively zero-risk investment. Such a rate, according to the plaintiffs, is best given by the rate on thirty-year Treasury bills, which is currently at approximately 4.9%. Consequently, the plaintiffs believe that the rate of 6.75% chosen by the Plan is unreasonably high.
I agree with the plaintiffs that it is reasonable to look to the investment characteristics of the Plan itself in attempting to determine a discount rate representative of the discount rate of the average plan participant. After all, every plan participant has at least the following investment characteristic in common: some of his or her retirement savings are invested in the Plan. I do not, however, agree that this premise requires selection of a zero-risk discount rate.
Although zero-risk is a salient feature of the Plan, an equally salient feature is the rate...
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McCarthy v. Dun & Bradstreet Corp.
...U.S.C. § 1001 et seq. The district court ruled against plaintiffs with respect to both benefit plans. McCarthy v. Dun & Bradstreet Corp., 372 F.Supp.2d 694 (D.Conn.2005) (McCarthy II); McCarthy v. Dun & Bradstreet Corp., No. 03CV431, 2004 WL 2743569, 2004 U.S. Dist. LEXIS 23996 (D.Conn. Nov......