Judicial Rewriting of Retirement Plans: Lump Sum Adjusted for Future Costs of Living

Gary Williams filed suit, individually and on behalf of all others similarly situated, alleging that the Rohm and Haas Pension Plan (Plan) violated the Employee Retirement Income Security Act (ERISA) by failing to include a cost-of-living adjustment (COLA) in his lump sum distribution from the Plan. 29 U.S.C. § 1054(c)(3). The district court granted class certification and entered summary judgment for Williams. The district court concluded that the terms of the Plan violated ERISA because the COLA was an accrued benefit as ERISA defines that term. Later a 7th Circuit panel agreed with the district court.

This erroneous holding which applies cost of living adjustments to a lump sum payment completely ignores the function of the time value of money. The value of a lump sum payment is having all the money you are owed immediately all at one time, this allows you to invest the money immediately as you see fit, and with that assumption of agency comes responsibility to invest that money wisely in order to offset inevitable inflation. Conversely if one instead elected to receive annuity payments, and entrust the money one has paid into a retirement fund to the funds managers, they instead bear the responsibility for investing the money soundly over time, and to grow the value of the account which should offset rises in the cost of living. Because the retirement fund possesses the money, the agents of the fund can invest it, and bear the risk of changes in the value of money due to inflation, fluctuations in interest rates, and in the cost of living. Requiring a lump sum payment to incorporate the future cost of living ignores that such a payment is made in the present time, where the present costs of living and investment are known, and effectively pays a retiree twice, once for the present value of money in lump sum form that allows them to invest the money, and again a COLA adjustment to offset the future value of money of the money they received in the present time.  

 

Issue Areas:

Individual Liberty, Limited Government

Question(s) Presented:

Whether a lump sum payment from an ERISA plan must be considered an accrued benefit even if the language of the plan itself informs annuitants that lump sum payments will not be adjusted for future costs of living.


ALF’s Amicus Brief:

ALF argues that the panel misapplied its own precedent which was inapposite, in that it dealt with monthly rather than lump sum payments that were  adjusted according to a calculation using CPI (essentially an inflation measurement tool) annually. The economic rationale for making COLA payments, does not apply to lump sum payments, because money received in the present is more valuable than money received in the future, and therefore there is no need to adjust for the future value of money.

The precedent case, Hickey, dealt with the issue of whether the plan could be terminated without making cost of living payments. Under this plan cost of living benefits were part of three distinct and explicitly termed types of benefits that workers paid into, past service, future service, and cost of living. The Hickey court looked to the language of the plan itself to ascertain whether cost of living payments were a benefit accrued rather than merely an adjustment for future payments reflecting the value of money at the time they are to be issued. Because the plan in the case at bar does not create a distinct category of benefits, but instead adjusts the benefits earned by the CPI, Hickey is not instructive.

Mandating that COLA payments must be included in lump sump incentivizes retirees to take their money out of the retirement plan, straining such funds as a whole, by paying them both a present day premium of money and the future inflation adjustment. This is something that those who negotiated this plan clearly and through express language intended to avoid. It is not the place of a court to rewrite this plan in favor of retirees who elect to withdraw their money from the fund.

Status:

The Seventh Circuit denied the motion for rehearing en banc.

Date Originally Posted: August 31, 2007

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