On Behalf Of All Others Similarly Situated v. Pension Plan, 08-cv-127-bbc.

716 F.Supp.2d 801

Lawrence G. RUPPERT and Thomas A. Larson, on behalf of themselves and on behalf of all others similarly situated, Plaintiffs,

v.ALLIANT ENERGY CASH BALANCE PENSION PLAN, Defendant.

No. 08-cv-127-bbc.

United States District Court,W.D. Wisconsin.

June 3, 2010.

Eli Gottesdiener, Andrew P. Carter, Steven D. Cohen, Gottesdiener Law Firm, PLLC, Brooklyn, NY, for Plaintiffs.

Mark Casciari, Amanda A. Sonneborn, Ronald James Kramer, Ronald L. Lipinski, Samuel Michael Schwartz-Fenwick, Seyfarth Shaw LLP, Chicago, IL, for Defendant.

OPINION and ORDER

BARBARA B. CRABB, District Judge.

In this class action brought under the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. §§ 1001-1461, plaintiffs contend that defendant Alliant Energy Cash Balance Pension Plan underpaid them when it calculated the lump sum distributions of their retirement benefits. Now before the court are the parties' cross motions for summary judgment, defendant's motion for leave to file a surreply and plaintiffs' motions to exclude certain portions of the reports and testimony of defendant's experts.

Understanding the parties' arguments requires some background about the plan and the laws that applied to it between 1998, when it was established, and 2006, when the applicable laws changed. The plan at issue is a “cash balance plan,” which is a term of art under both ERISA and the Internal Revenue Code, which incorporate parallel laws and regulations governing retirement income plans. A cash balance plan is one in which the plan administrator establishes a “notional account” that includes hypothetical employer contributions, determined as a percentage of the employee's compensation, and hypothetical contributions, expressed as credits. Esden v. Bank of Boston, 229 F.3d 154, 158 (2d Cir.2000). Under defendant's plan, interest on the hypothetical balances in employee accounts was to be “paid” (actually credited) to the employees' notional accounts at an “interest crediting rate” of the greater of 4% or 75% of the actual rate of earnings of the plan's trust fund.

The issue in this case is whether defendant made a proper calculation of the value of the hypothetical retirement accounts available to employees who chose to receive lump distributions of their accounts when they left Alliant's employ before reaching normal retirement age. At the time plaintiffs' lump sum distributions were determined, the law required the calculation to be performed using what pension law practitioners call “whipsaw.” Id. at 159. The calculation was a complex one, made more so by the laws in effect at the time, and it carried some high risk as well. As the court explained in Esden,

the rules governing distributions from defined benefit plans are framed in terms of the normal retirement benefit-typically, a single-life annuity payable at normal retirement age. Any distribution in optional form (such as a lump sum) must be no less than the actuarial equivalent of such benefit. For a cash balance plan this calculation involves projecting the cash balance forward and then discounting back to present value. The projection rates may be defined by the plan; but the discount rate is prescribed by statute. If the plan's projection rate exceeds the statutory discount rate, then the present value of the accrued benefit will exceed the participant's account balance. Unless this higher figure is paid out, the IRS takes the view that an impermissible forfeiture has occurred in violation of ERISA § 203(a) and I.R.C. § 411(a)(2).

Id. In other words, the fund's pre-retirement distributions had to reflect the anticipated interest the fund would earn in the years between the employee's leaving and her retirement date, even though the employee was no longer a plan participant. If it did not, the plan could be found out of compliance.

Behind this requirement was Congress's desire to insure that a lump-sum distribution of pension benefits would equal the value of the benefits the employee would have received had she waited until her normal retirement date and taken them in the form of a pension. Berger v. Xerox Corp. Retirement Income Guarantee Plan, 338 F.3d 755, 761 (7th Cir.2003) (finding Xerox plan illegal because “Xerox tells its employees who leave the company before they reach [retirement] age that if they leave their money with the company they will obtain a pension beginning at age 65 that will reflect future interest credits. They are offered the alternative of taking a lump sum now in lieu of a pension later, but the lump sum is not the prescribed actuarial equivalent of the pension that they are invited to surrender by accepting the lump sum because it excludes those credits.”).

Because defendant used a variable rate (4% or 75% of the actual rate of earnings) for its cash balance plan, it could not rely on a particular interest rate; rather, it had to select a method of reflecting the hypothetical future interest credits to which the plan participant was entitled. With the advice of a company specializing in ERISA plans, defendant chose to use the 30-year Treasury rate for both its calculations. Because this rate was the same one the law prescribed for determining present value, employees who left early and took their lump sum distributions received an amount that was equal to the amount in their hypothetical account balances.

Plaintiffs challenge defendant's use of the Treasury rate for both calculations. They do not, and cannot, challenge its use for the present value calculation because that use is required by law. Instead, they object to its use for determining future interest credits because, they say, it does not reflect the rate that defendant promised its plan participants, which was 4% or 75% of the actual earnings rate on the plan's trust fund. They have marshaled experts in an effort to show that the average interest credits over the class period should have been closer to 10%, whereas use of the Treasury rate averaged around 5.178%. For its part, defendant argues that the Treasury rate was close enough to the actual earnings rate to be reasonable and that commonly accepted definitions of “interest rate” and “present value” support defendant's decision to pay the plaintiff classes only their plan account balances by using the 30-year Treasury rate for both calculations.

I conclude that for the years in dispute, 1998-2006, defendant's method of calculating projected future interest credits violated 26 U.S.C. § 411 because it did not fairly represent the interest rate promised in the plan. Plaintiffs' claims are not barred by the statute of limitations because defendant never informed the plan participants how it was calculating the projected future interest credits or that it was using a method that did not fairly represent the value of the promised future interest credits.

This leaves the question of what interest rate or rates defendant should use to estimate plaintiffs' future interest credits. Defendant's motion to file a surreply brief will be granted to allow defendant to argue that under the recent decision by the United States Supreme Court in Conkright v. Frommert, --- U.S. ----, 130 S.Ct. 1640, 176 L.Ed.2d 469 (2010), the court should allow defendant to choose a new method for determining an unbiased rate. I conclude that Conkright has no bearing on the issue to be decided in this case. Deferring to the plan fiduciary would be inappropriate in a matter such as this one, involving the method for reflecting future interest credit, on which the plan administrator enjoys no discretion. At the same time, I cannot determine from the parties' submissions what method would best reflect the promised future interest credit. Therefore, I will leave that issue for trial.

I am able to resolve a few side matters related to damages. I conclude that plaintiffs are entitled to prejudgment interest because it is presumptively available in ERISA cases and it is fair to award it. I also conclude that a pre-retirement mortality discount should be applied to any calculation. Plaintiffs' failure to respond to defendant's arguments operates as a concession that the discount is appropriate.

Finally, I will grant plaintiffs' motion to exclude portions of reports and testimony of David Godofsky and Ian Altman because the challenged testimony is nothing more than legal opinion and unsupported say-so, and Altman's March declaration is an improper supplementation of his expert report. I will deny plaintiffs' motion to exclude the reports and testimony of Vincent Warther regarding his use of the “Black-Scholes” model because defendant has adequately explained how that methodology may be reliable as used in this case. Plaintiffs can raise their concerns when cross-examining Warther at trial.

I. MOTION TO EXCLUDE EXPERT REPORTS AND TESTIMONY

A. Godofsky and Altman, dkt. # 260

Plaintiffs have moved to exclude certain reports and testimony of David Godofsky and Ian Altman. First, plaintiffs take issue with portions of Godofsky's report and testimony related to his interpretation of the term “interest rate” as that term appears in the applicable law. This testimony includes an interpretation of the meaning of “interest rate,” a description of the “intent” of Congress and explanation of the requirements of ERISA and the Internal Revenue Code.

Defendant contends that Godofsky should be able to testify about his understanding of legal terms because they “do not, in and of themselves, determine the outcome of the instant matter.” Def.'s Opp. Br., dkt. # 270, at 5 (emphasis omitted). However, defendant is mistaken; Godofsky's testimony goes directly to the question whether the law allows defendant to use the interest rate it did. There can hardly be a more outcome-determinative legal conclusion.

The cases defendant cites do not support admissibility in this context. Naeem v. McKesson Drug Co., 444 F.3d 593, 610 (7th Cir.2006) (testimony about...