Appeals from the United States District Court for the Eastern District of Missouri.
The opinion of the court was delivered by: Hansen, Circuit Judge.
Submitted: April 13, 2009
Before MURPHY, HANSEN, and BYE, Circuit Judges.
These consolidated appeals and cross-appeal involve disputes under the Employee Retirement Income Security Act (ERISA) regarding a plan amendment and the amount of retirement benefits awarded to Edward W. Sunder and Louis R. Jarodsky, both of whom were participants in a pension plan sponsored by their employer and now known as the U.S. Bank Pension Plan ("USBPP").*fn1 In a summary judgment ruling, the district court dismissed the plaintiffs' ERISA-based age discrimination claim. Following a bench trial, the district court awarded damages to Sunder and Jarodsky on the ground that the conversion of the plan into a cash balance system decreased their accrued benefits in violation of Section 204(g) of ERISA, see 29 U.S.C. § 1054(g). USBPP appeals the award of damages, and Sunder and Jarodsky cross appeal the district court's determination of the date of the plan conversion and the adverse ruling on their ERISA age discrimination claim. We reverse the award of damages but affirm on the cross appeal.
Sunder and Jarodsky each worked at Mercantile Bank in St. Louis, Missouri. Sunder retired at age 53 after a 31-year career making long-term investments, and Jarodsky retired at age 55 after working 22 years in investment management. Both retired in August of 2000, by which time Mercantile Bank had merged with Firstar, which in turn had become U.S. Bancorp.
During their employment, Sunder and Jarodsky each accrued benefits toward a pension under the Mercantile Bancorporation Inc. Retirement Plan, now merged into and known as USBPP. The plan was amended and converted into a cash balance system prior to their retirements. For the sake of clarity, we will refer to the original plan as "the Mercantile Plan," and the amended plan after the conversion as "the Cash Balance Plan."
The Mercantile Plan was a fixed income defined benefit plan set up to provide employees with a fixed monthly annuity at retirement based on each employee's years of service and income level. Under ERISA, a "'defined benefit plan' means a pension plan other than an individual account plan."*fn2 29 U.S.C. § 1002(35) (2000). Typically, a defined benefit plan "consists of a general pool of assets rather than individual dedicated accounts" from which "the employee, upon retirement, is entitled to a fixed periodic payment." Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 439 (1999) (internal marks omitted).
In mid-December 1998, the plan participants received a 15-day notice that the Mercantile Plan was converting to a cash balance system. By way of background, at the time of the plan conversion, and at the time Sunder and Jarodsky received their lump-sum benefits in October of 2000, no ERISA provisions or rules dealt expressly with a cash balance plan.*fn3 "A cash balance plan is a relatively new form of plan intended to combine attributes of both defined contribution and defined benefit plans." Hirt, 533 F.3d at 105. It is typically designed to pay out a lump-sum that accrues in a hypothetical account*fn4 from a combination of (1) "the employer's hypothetical contribution," generally expressed as annual employment-based credits valued by the employee's salary and years of service, and (2) "hypothetical earnings" or interest credits based on a rate specified in the plan and generally guaranteed at either a fixed or variable rate linked to an index such as a Treasury bill rate. Id. (internal marks omitted); see also Register v. PNC Fin. Servs. Group, Inc., 477 F.3d 56, 62 (3d Cir. 2007); Campbell v. BankBoston, N.A., 327 F.3d 1, 4 (1st Cir. 2003). Cash balance plans "create a benefit structure that simulates that of defined contribution plans" because the employer makes contributions for recordkeeping purposes, but the employer does not deposit funds into an actual individual account, and the employer continues to bear the market risks by guaranteeing specific earning credits and a specified level of interest. Hirt, 533 F.3d at 105; Campbell, 327 F.3d at 4. Because a cash balance plan is not an individually invested account, and no ERISA rules explicitly governed cash balance plans at the relevant time, the cash balance plan was by default a "defined benefit plan" subject to compliance with the ERISA rules governing defined benefit plans. Hurlic v. S. Cal. Gas Co., 539 F.3d 1024, 1029 (9th Cir. 2008) ("[c]ash balance plans . . . are defined benefit plans.").
The notice sent to Sunder and Jarodsky stated that depending on various factors, the change to a cash balance system could result in future benefits being earned at a rate that is greater than, the same as, or less than what they would have earned if they had continued to accrue benefits under the Mercantile plan.*fn5 The new Cash Balance Plan would begin with an opening balance that would "include the value of the benefits you earned under the old plan." (J.A. at 447.) Participants were informed that each year, the cash balance would increase by a company-provided credit equal to a given percentage of the employee's pay and an interest credit. Consistent with Section 204(g) of ERISA, which prohibits plan amendments that decrease an accrued benefit, 29 U.S.C. § 1054(g), the notice promised that the total benefit earned under the Mercantile Plan through December 31, 1998, was guaranteed--"your opening balance will be at least as much as the value of your benefit earned under the old plan." (J.A. at 447.) Additionally, the notice promised that certain early retirement subsidies would be included in the opening cash balance for employees age 55 through age 64, and additional transition credits would be added to the opening balance for employees age 45 to 54. (Id.) The Cash Balance Plan provided participants the advantage of knowing how much they had accumulated toward retirement at any given time and permitted participants to elect to take their cash balance upon retirement as a lump sum or an equivalent monthly annuity.
Sunder and Jarodsky both elected to retire prior to reaching normal retirement age, and both elected to receive their benefit in a lump sum. When a plan participant opts to cash out a cash balance account before reaching the normal retirement age, as in this case, ERISA requires that the lump-sum payment "must be the actuarial equivalent of the normal accrued pension benefit." West, 484 F.3d at 400. At the time Sunder and Jarodsky retired, which was before the enactment of the Pension Protection Act of 2006, determining the actuarial equivalent, or present value, of the benefit was a two-step process called a "whipsaw" calculation, requiring the plan administrator to (1) project the hypothetical account balance forward to age 65 using the rate of future interest credits that would have accrued under the plan if the participant had remained in the plan to that time, and (2) discount that amount back to its present value on the date of the actual distribution using the Internal Revenue Code (IRC) statutory discount rate, which is tied to the 30-year Treasury bond, 26 U.S.C. § 417(e)(3)(A)(i)&(ii). West, 484 F.3d at 400. This prevented an impermissible forfeiture of ERISA benefits that might otherwise occur: "If the plan's projection rate exceeds the statutory discount rate, then the present value of the accrued benefit will exceed the participant's [cash] account balance[,]" and the highest figure between the whipsaw calculation and the cash balance must be paid.*fn6 Esden v. Bank of Boston, 229 F.3d 154, 159 (2d Cir. 2000), cert. dismissed, 531 U.S. 1061 (2001).
The Cash Balance Plan required USBPP to determine the actuarial present value of the participants' retirement benefits through a whipsaw calculation but also provided that the participant would receive the greatest of three separate calculations:
(1) the amount accrued under the Mercantile Plan as of December 31, 1998, using the IRC § 417(e)(3) discount rate, (2) the cash balance in the account, or (3) the actuarial equivalent of the cash balance (the whipsaw calculation). USBPP compared these three calculations and paid Sunder and Jarodsky the highest of the three, which in each case was the final cash balance in their accounts. Sunder received $493,081.19, and Jarodsky received $378,813.03. Sunder and Jarodsky questioned the accuracy of these amounts after discovering that the IRC § 417(e)(3) discount rate had not been used to calculate their opening cash balances. Instead, the Cash Balance Plan terms had required the opening cash balance to be set using a higher 8% discount rate prescribed in its Appendix A. ...