ERISA Actuarial Equivalence Requires Reasonable Assumptions; QPSA Charges Must Reasonably Reflect Increased Cost

I. Introduction

In William Drummond v. Southern Company Services, Inc., the Eleventh Circuit addressed whether ERISA permits a defined-benefit pension plan to (1) convert a participant’s single-life annuity into a qualified joint-and-survivor annuity (“QJSA”) using any actuarial assumptions written into the plan, even if outdated or unrealistic, and (2) reduce participants’ accrued benefits through “QPSA charges” that allegedly exceed the plan’s true incremental cost of providing a qualified preretirement survivor annuity (“QPSA”).

The plaintiffs—William Drummond and Richard Odom—alleged that Southern Company Services, Inc., the Southern Company Pension Plan, and its Benefits Administration Committee used mortality assumptions based on the 1951 Group Annuity Mortality Table (“1951-GAM”) (with “setbacks”) and a 5% interest rate. They claimed these assumptions depressed monthly QJSA payments and inflated annual charges for the preretirement survivor protection, resulting in underpayment of vested benefits.

The district court dismissed. The Eleventh Circuit reversed, holding that ERISA’s “actuarial equivalent” and “nonforfeiture” protections impose substantive constraints: actuarial equivalence must be calculated using actuarial assumptions a reasonable actuary would use at the time of benefit determination, and QPSA charges may not exceed a reasonable reflection of the plan’s increased cost of providing the QPSA.

II. Summary of the Opinion

  • Actuarial equivalence (29 U.S.C. § 1055(d)): A plan converting a single-life annuity into a QJSA must use reasonable mortality and interest-rate assumptions (those a reasonable actuary would use at the time).
  • Nonforfeiture (29 U.S.C. § 1053(a)) as to QJSA conversion: Where the plan’s conversion yields a QJSA with less total value than the participant’s protected “normal retirement benefit,” the shortfall plausibly constitutes a prohibited forfeiture.
  • QPSA charges (29 U.S.C. § 1055(i)): The statutory exception allowing plans to account for “increased costs” of providing QPSA benefits, in an “equitable manner,” caps charges at an amount that reasonably reflects the cost of providing the QPSA; excessive charges plausibly violate the nonforfeiture rule.
  • Fiduciary duty (Count IV): Because plaintiffs plausibly alleged underlying ERISA violations, the fiduciary-duty claim survives as well.

III. Analysis

A. Precedents Cited and Their Influence

1. ERISA’s protective purpose: securing earned benefits

  • Cent. Laborers' Pension Fund v. Heinz (quoting Lockheed Corp. v. Spink): Used to frame ERISA’s core aim—participants should not be “left emptyhanded” after promised benefits vest. This purpose informed the court’s rejection of an “anything goes if written down” view of actuarial assumptions.
  • Thole v. U.S. Bank N.A.: Cited for the defined-benefit plan structure (fixed monthly benefit; employer bears investment underperformance), underscoring why actuarial manipulation can directly reduce participants’ promised payouts.

2. Spousal-protection context of § 1055

  • Boggs v. Boggs: Central to the court’s contextual reading that § 1055 exists “to ensure a stream of income to surviving spouses.” The panel reasoned that allowing unrealistic assumptions to shrink survivor-protected benefits would be “inexplicable” in light of ERISA’s solicitude for spouses.
  • Lasche v. George W. Lasche Basic Profit Sharing Plan: Reinforced the Eleventh Circuit’s recognition of § 1055’s “legislative policy of protecting spousal rights,” supporting a reading that gives real content to “actuarial equivalent.”

3. “Actuarial equivalent” as a term of art; reasonableness as inherent

  • Stephens v. U.S. Airways Group, Inc.: Provided a baseline definition—equal present value “under a given set of actuarial assumptions.” The Eleventh Circuit distinguished Stephens because assumptions were undisputed there; here, the dispute is whether assumptions must be reasonable.
  • Reichert v. KelloĔ Co.: The decisive inter-circuit anchor. The Eleventh Circuit expressly aligned with the Sixth Circuit’s holding that actuarial equivalence requires reasonable assumptions, creating a growing appellate consensus.
  • Call v. Ameritech Mgmt. Pension Plan: Used for the mechanics of actuarial equivalence—converting expected payment streams to present value.
  • Shields v. Reader's Dig. Ass'n, Inc.: Supported the basic economic intuition: payments over two lives generally extend longer, so monthly payments are usually lower, which heightens the importance of honest assumptions.
  • Esden v. Bank of Bos.: Cited for the proposition that allowing plans to self-select assumptions could “eviscerate” ERISA protections. This helped justify applying a substantive reasonableness constraint.
  • McDaniel v. Chevron Corp.: Demonstrated judicial willingness to evaluate whether assumptions are “actuarially correct” rather than mechanically accepted, reinforcing that “actuarial equivalence” is not purely formal.

4. Administrative-law lens after Loper Bright

  • Loper Bright Enters. v. Raimondo and Skidmore v. Swift & Co.: The court treated Treasury regulations as persuasive rather than automatically controlling, but afforded them weight due to expertise and contemporaneity.
  • M & K Emp. Sols., LLC v. Trs. of the IAM Nat'l Pension Fund and Becerra v. Empire Health Found.: Supported consulting Actuarial Standards of Practice as specialist materials for statutes “addressed to specialists.”

5. Nonforfeiture doctrine boundaries

  • Alessi v. Raybestos-Manhattan, Inc.: Defendants relied on Alessi to argue § 1053(a) guarantees only enforceability, not any calculation method. The court limited Alessi: it addresses how the “protected benefit” is calculated, not whether a plan may later reduce the value of that benefit through an unreasonable conversion.
  • Contilli v. Local 705 International Brotherhood of Teamsters Pension Fund: Supported the key forfeiture concept applied here: a reduction in total value of monthly benefits can be a “kind of forfeiture.”

6. ERISA administration themes (predictability/flexibility)

  • Conkright v. Frommert, Rush Prudential HMO, Inc. v. Moran, and Aetna Health Inc. v. Davila: Invoked by defendants/amici to stress predictability and employer incentives. The court acknowledged these themes but held they cannot override text, structure, and the substantive protections embedded in § 1055 and § 1053.

B. Legal Reasoning

1. Text and “term of art” analysis

The court began with § 1055(d)(1)(B)’s requirement that a QJSA be the “actuarial equivalent” of a single-life annuity. Because ERISA does not define the term, the panel treated it as a professional term of art, examining actuarial norms (especially the Actuarial Standards of Practice). Those norms repeatedly require actuaries to select reasonable assumptions and to reassess whether previously selected assumptions remain reasonable.

2. “Present value” and anticipation of events

The panel also drew support from ERISA’s definition of “present value” as a value adjusted to reflect “anticipated events” (29 U.S.C. § 1002(27)). A present-value computation premised on dramatically outdated mortality expectations is difficult to reconcile with “anticipated” lifespans.

3. Regulatory confirmation (Treasury) under post-Chevron doctrine

Treasury’s long-standing regulation (26 C.F.R. § 1.401(a)-11(b)(2)) describes actuarial equivalence as determined using “consistently applied reasonable actuarial factors.” While not treated as automatically binding, it carried persuasive force due to expertise, contemporaneous issuance, and consistency over time.

4. Structural/contextual reinforcement: spousal protections

The court emphasized that § 1055 is an integrated spousal-protection scheme: QJSA defaults, strict spousal consent rules, and minimum survivor percentages. Reading “actuarial equivalent” as permitting arbitrary assumptions would hollow these protections—contradicting § 1055’s evident function described in Boggs.

5. Semantic canon: avoiding insignificance

Allowing any assumptions “so long as written down” would reduce “actuarial equivalent” to a near-empty formality. The court invoked the canon against interpretations that render statutory language insignificant.

6. Nonforfeiture linkage: unreasonable conversions and excessive charges

With actuarial equivalence requiring reasonableness, the court treated alleged value shortfalls in QJSA conversions as plausibly infringing § 1053(a)’s nonforfeiture protections. For QPSA charges, the court read § 1055(i)’s exception as limited: plans may account for “increased costs” only in an “equitable manner,” and Treasury’s regulation (26 C.F.R. § 1.401(a)-20, Q&A 21) operationalizes that as a charge that “reasonably reflects” the cost of providing the QPSA.

C. Impact

1. Substantive constraint on plan conversion assumptions (Eleventh Circuit rule)

The decision establishes within the Eleventh Circuit that “actuarial equivalent” under ERISA § 1055(d) is not satisfied by mere internal consistency of computations; it requires assumptions within the range a reasonable actuary would use at the time. This exposes plans to litigation risk where plan documents embed stale or aggressive mortality/interest assumptions that reduce QJSA value.

2. Expanded pathway for nonforfeiture challenges

By recognizing that an undervalued annuity form can plausibly constitute a forfeiture under § 1053(a), the opinion supplies plaintiffs a second statutory hook—potentially significant for pleading and remedies (and for challenging other benefit “adjustments” that functionally reduce protected value).

3. Policing QPSA charges as cost-based, not revenue-generating

The holding on § 1055(i) signals that preretirement-survivor cost “charges” cannot be used as a disguised benefit cut or margin generator. Plans must be prepared to justify QPSA charge levels as reasonable reflections of incremental cost, accounting for legitimate cost drivers (including, potentially, adverse selection) with defensible actuarial support.

4. Likely practical effects

  • Plan governance: Greater need for periodic review/update of mortality and interest assumptions used in optional-form conversions and QPSA costing.
  • Litigation posture: More cases surviving motions to dismiss due to the court’s recognition that reasonableness is fact-intensive and often unsuitable for resolution on the pleadings.
  • Inter-circuit momentum: By joining Reichert v. KelloĔ Co., the Eleventh Circuit strengthens a nascent appellate consensus, increasing pressure on outlier approaches and raising the stakes for potential Supreme Court review if splits emerge.

IV. Complex Concepts Simplified

1. “Actuarial equivalent”

Two benefit forms are “actuarially equivalent” when they have the same value today, after translating future payments into present value. That translation depends on assumptions—especially (a) how long people are expected to live (mortality) and (b) how money grows over time (interest/discount rate). If assumptions are unrealistic, the “equivalence” can be a mathematical illusion that underpays real people.

2. “Present value”

Present value is the worth today of money to be paid in the future. A dollar paid years from now is worth less than a dollar today because money can earn returns (and inflation erodes purchasing power). Present value calculations must reflect “anticipated events,” meaning realistic expectations about lifespan and time.

3. QJSA vs. QPSA

  • QJSA: A married retiree’s default annuity paying during the retiree’s life, with continuing survivor payments to the spouse after the retiree dies.
  • QPSA: The spouse’s survivor protection if the participant dies before retirement, unless properly waived with spousal consent.

4. “Nonforfeiture”

Once a retirement benefit is vested/protected, ERISA limits the plan’s ability to take it away or reduce its protected value. The court treated materially undervalued annuity conversions and excessive QPSA charges as plausible forms of prohibited forfeiture.

V. Conclusion

The Eleventh Circuit’s core contribution is to convert ERISA’s “actuarial equivalent” and QPSA-cost language from potentially hollow formalities into enforceable, substance-protecting rules. Plans must use reasonable actuarial assumptions when converting single-life annuities into QJSAs, and QPSA charges must be equitably tied to the plan’s increased cost of providing the preretirement survivor benefit. The decision strengthens ERISA’s protective function for workers and spouses and signals that actuarial mechanics cannot be used to erode vested retirement value through outdated or unreasonable assumptions.