West v. Ak Steel Corp.

• Decision Date: 20 April 2007
• Docket Number: No. 06-3442.,06-3442.
• Citation: 484 F.3d 395
• Parties: John D. WEST, on behalf of himself and all others similarly situated, Plaintiff-Appellee, v. AK STEEL CORPORATION (formerly Armco Inc.) Retirement Accumulation Pension Plan and AK Steel Corporation Benefit Plans Administrative Committee, Defendants-Appellants.
• Court: U.S. Court of Appeals — Sixth Circuit

484 F.3d 395

John D. WEST, on behalf of himself and all others similarly situated, Plaintiff-Appellee, v. AK STEEL CORPORATION (formerly Armco Inc.) Retirement Accumulation Pension Plan and AK Steel Corporation Benefit Plans Administrative Committee, Defendants-Appellants.

No. 06-3442.

United States Court of Appeals, Sixth Circuit.

Argued: March 16, 2007.

Decided and Filed: April 20, 2007.

ARGUED: Robert D. Wick, Covington & Burling, Washington, D.C., for Appellants. Thomas A. Downie, Gary, Naegele & Theado, Cleveland, Ohio, for Appellee. ON BRIEF: Robert D. Wick, Covington & Burling, Washington, D.C., for Appellants. Thomas A. Downie, Gary, Naegele & Theado, Cleveland, Ohio, Thomas R. Theado, Jori B. Naegele, Robert D. Gary, Gary, Naegele & Theado, Lorain, Ohio, Allen C. Engerman, Northbrook, Illinois, for Appellee.

Before COLE, CLAY, and GILMAN, Circuit Judges.

OPINION

RONALD LEE GILMAN, Circuit Judge.

This is a class action lawsuit brought by early retirees in the AK Steel Corporation Retirement Accumulation Pension Plan (AK Steel Plan) who elected to receive their pension benefits under the Plan in the form of a lump-sum payment. The AK Steel Plan is a cash balance plan specifying that participants can elect to receive a lump sum equal to their "account balance" at the termination of employment rather than having to wait until they reach the normal retirement age of 65. According to the plaintiffs, the AK Steel Plan's failure to use what is known as the "whipsaw calculation" when determining the value of the lump-sum distributions for these early retirees caused a forfeiture of benefits in violation of the Employment Retirement Income Security Act (ERISA).

The district court, in April of 2004, granted partial summary judgment in favor of the plaintiffs on the issue of liability. A year and a half later, the district court awarded the plaintiffs over $37 million in damages and more than $9 million in prejudgment interest. AK Steel timely appealed. For the reasons set forth below, we AFFIRM the judgment of the district court.

I. BACKGROUND

A. The AK Steel Plan

ERISA specifies that employee benefit plans are subject to "minimum standards . . . assuring the equitable character of such plans and their financial soundness." ERISA § 2(a), 29 U.S.C. § 1001. Under ERISA, a pension plan is either a defined contribution plan or a defined benefit plan. ERISA §§ 3(34), 3(35), 29 U.S.C. § 1002(34), (35). A defined contribution plan "provide[s] for an individual account for each participant and for benefits based solely upon the amount contributed to the participant's account . . . ." ERISA § 3(34), 29 U.S.C. § 1002(34). In other words, an employee's retirement benefit is the eventual value of his or her account to which contributions have been made by the employer and/or the employee.

Any other type of pension plan is a defined benefit plan. ERISA § 3(35), 29 U.S.C. § 1002(35). Under a defined benefit plan, an employee's benefit is an amount, either in the form of an annuity or a lump-sum payment, equal to a specified percentage of the employee's salary in the final years of his or her employment. The AK Steel Plan at issue in the present case is a hybrid of both a defined contribution plan and a defined benefit plan known as a "cash balance plan," but is classified under ERISA as a defined benefit plan.

"A cash balance plan is a defined benefit plan that possesses many of the characteristics of a defined contribution plan." Robert Rachal, Russell L. Hirschhorn & Nicole Eichberger, Cases and Issues in Cash Balance Plan Litigation, 22 Lab. Law. 19, 21 (2006). Cash balance plans mimic traditional defined benefit plans in that participants do not typically make any contributions. Id. Like defined contribution plans, however, a cash balance plan creates an account for each participant. But unlike traditional defined contribution plans, the account is hypothetical and created only for recordkeeping purposes. Id.

The hypothetical account on paper looks much like a traditional 401(k) account. Id. at 22. "This account balance is made up of two components: (i) a pay credit (e.g., 3% of pay per year); and (ii) an interest credit on the account balance, which may be fixed or variable and tied to some index." Id. If these interest credits are tied to an average rate of return on investments in the stock market, for example, the employer bears any "investment risk" by agreeing to credit the participant's account at that market rate. Even if the employee ceases working for the plan sponsor, interest credits continue to accrue to the employee's hypothetical account until he or she begins receiving pension benefits. When an employee reaches the normal retirement age of 65, the pension benefit is the value of this hypothetical account balance. The employee can usually choose whether the benefit is distributed in the form of a single-life annuity or a lump-sum disbursement.

In the present case, the AK Steel Plan provides for two different types of cash balance accounts: Opening Accounts and Future Accounts. Opening Accounts represent the lump-sum value of the retirement annuity that an employee had earned under AK Steel's prior benefit formula as of January 1, 1995. The Opening Accounts grow at a minimum interest rate of 7.5% per year. Future Accounts keep track of benefits earned after January 1, 1995, the date on which AK Steel converted its previous traditional pension benefit plan to a cash balance plan. The Future Accounts receive pay credits at a rate of between 3% and 12% per year, calculated according to a chart that factors in both the participant's age and continuous years of service as of December 31, 1994, multiplied by an applicable percentage of pay that is periodically set by AK Steel. For example, a Plan participant who was 39 years old on December 31, 1994 and had six continuous years of service as of that date would receive pay credits at the rate of 3% of earnings. A Plan participant who was 55 years old on that date, in contrast, with the same years of service, would receive pay credits at a rate of 5% of earnings. Interest credits on Future Accounts are tied to the rate of return on U.S. Treasury securities.

The AK Steel Plan provides that

[s]ubject to the minimum protected benefits described in Section 4.8, a Participant may Retire on or after his Normal Retirement Date and receive a . . . Benefit payable in accordance with Article VI in one of the following payment options: (a) Full lump-sum payable on his Benefit Commencement Date equal to his Accounts; (b) Full annuity beginning on his Benefit Commencement Date equal to the Actuarial Equivalent of his Accounts; or (c) Partial lump-sum and partial annuity payable or beginning on his Benefit Commencement Date equal to the respective pro-rata amounts determined under (a) and (b) above.

AK Steel Plan § 4.1. A participant who takes early retirement, subject to certain conditions not relevant to this appeal, may also elect to receive his or her pension benefit in any of the above-mentioned payment options. AK Steel Plan § 4.2.

Section 4.8 of the AK Steel Plan, titled "Minimum Protected Benefit," states that "no Participant shall have a . . . benefit that is less than the actuarial equivalent of his accrued benefit determined under the terms of the [prior plan]...." "Accrued Benefit" is defined by the Plan as

the Accounts payable in the form of a single life annuity commencing on a Participant's Normal Retirement Date (or, if later, such Participant's actual retirement date) that is the Actuarial Equivalent of the Participant's current Account. The Account is projected to Normal Retirement Date and converted to a single life annuity using the factors set forth in Exhibit I. This single life annuity shall be determined by dividing the then current value of such Participant's Account by the applicable factor as described in Section A of Exhibit I.

Another key provision of the AK Steel Plan is § 1.2, which tracks the language of ERISA. Section 1.2 defines a participant's accrued benefit under a defined benefit plan as an "individual's accrued benefit determined under the plan . . . expressed in the form of an annual benefit commencing at normal retirement age." ERISA § 3(23)(A), 29 U.S.C. § 1002(23)(A).

The Internal Revenue Service (IRS) issued a determination letter in November of 1996 that approved the AK Steel Plan. As part of its application, the AK Steel Plan expressly stated that an employee electing a lump-sum distribution of benefits would receive a payment equal to his or her account balance.

B. Whipsaw calculation

The most litigated aspect of cash balance plans has proven to be the so-called "whipsaw calculation." This calculation arises when participants opt to "cash out" their hypothetical accounts before they reach normal retirement age. To comply with ERISA, lump-sum payments such as the ones received by the plaintiffs in the present case must be the actuarial equivalent of the normal accrued pension benefit. See Berger v. Xerox Corp. Ret. Income Guar. Plan, 338 F.3d 755, 759 (7th Cir.2003) (citing 29 U.S.C. § 1054(c)(3)). The actuarial equivalent is calculated in two steps. First, a participant's hypothetical account balance is projected forward to normal retirement age—in the AK Steel Plan, age 65—using the rate at which future interest credits would have accrued if the participant had remained in the AK Steel Plan until that time. Second, that projected amount is discounted back to its present value on the date of the actual lump-sum distribution.

If the interest rate used in Step 1 is greater than the discount rate used in Step 2, the amount of the participant's lump-sum disbursement will be larger than his or her hypothetical account balance. This two-step process is commonly referred to as the "whipsaw calculation." In the present case, Opening Accounts receive interest credits at a minimum annual rate of 7.5%, while the...