Retirement Plan Sponsors Must Use Reasonable Actuarial Assumptions

Takeaway: Defined benefit retirement plan sponsors that use outdated actuarial tables to determine actuarial equivalence in various calculations risk significant monetary liability. Those in this position may wish to consult with their actuary and counsel to evaluate possible exposure and next steps.

The Employee Retirement Income Security Act (ERISA) requires plan sponsors to use reasonable actuarial assumptions in making a qualified joint-and-survivor annuity conversion and in calculating the charge for a qualified preretirement survivor annuity, according to the 11th U.S. Circuit Court of Appeals. Failure to use reasonable assumptions constitutes an impermissible forfeiture under ERISA, the court also held. The 11th Circuit joins the 6th Circuit in requiring use of reasonable assumptions.

This case involves three types of monthly retirement benefits called “annuities” and certain ERISA rules governing them:

Single life annuity. A plan that pays a participant a fixed amount each month from retirement until the individual’s death.

Joint-and-survivor annuity. A plan that, at the start, pays a fixed amount — almost always lower than that under a single life annuity — during the joint lives of the participant and spouse. If the participant dies first, the spouse continues for life to receive a “survivor annuity,” which must be between 50% and 100% of the monthly payment during the participant’s and spouse’s joint lives. The total value of a joint-and-survivor annuity must be the “actuarial equivalent” of a single-life annuity for the participant’s life.

Preretirement survivor annuity. A plan that starts payments to the spouse if the participant dies before retiring. Each payment must be at least equal to the payment a spouse would receive under a joint-and-survivor annuity or its “actuarial equivalent.”

Plan beneficiaries alleged that their former employer, its pension plan, and the plan’s administrator used unrealistic, out-of-date assumptions about how long they and their spouses would live. Consequently, they claimed they get less than they are owed in each monthly pension payment, which would amount to many thousands of dollars over time.

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The beneficiaries claimed — as individuals and on behalf of a class of those similarly situated — that the alleged underpayments violated the ERISA provision requiring monthly payments under a joint-and-survivor annuity to be the “actuarial equivalent” of those under a single life annuity, and the provision prohibiting “forfeiture” of an employee’s retirement benefit after it has vested.

ERISA allows plans to charge participants for the increased costs of providing a preretirement survivor annuity, but caps these charges at a reasonable reflection of a plan’s increased costs. Plaintiffs alleged that their charges were substantially higher than that.

The trial court dismissed the complaint for failure to state a valid claim; the 11th Circuit reversed. The appeals court disagreed with defendants’ argument that they can use assumptions of their choice as long as they are written into the plan. “A plan converting one form of annuity to its ‘actuarial equivalent’ must base that calculation on the kind of actuarial assumptions a reasonable actuary would use,” the court held. 

Because a joint-and-survivor annuity is less valuable than a single-life annuity, a plan’s improper calculation of the joint-and-survivor annuity violated ERISA’s rule against forfeiture of protected benefits, the court also held in reversing. Finally, “an employer cannot charge employees more to be covered by a preretirement death benefit than it costs the employer to offer the benefit. That [also] would violate ERISA’s nonforfeiture rule.”

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Because ERISA does not define the term “actuarial equivalent,” the court relied on:

• Norms of practice that call for actuaries to “use assumptions that provide a realistic basis for projecting future events.” Defendants cited no persuasive literature to the contrary.
• A regulation that interprets a federal Tax Code provision identical to the relevant ERISA provision as requiring application of “reasonable actuarial factors.” Parallel provisions across the two statutes have the same substantive meaning, the court said.
• Traditional principles of statutory interpretation, including the plain meaning of the terms and the idea that defendants’ interpretation would reduce the “actuarial equivalent” provision to a nullity.

Under these interpretations of ERISA, plan participants plausibly stated valid claims, and the appeals court sent the case back to the trial court for further proceedings.

Drummond v. Southern Company Services Inc., 11th Cir., No. 24-12773 (May 26, 2026).

Margaret M. Clark, J.D., SHRM-SCP, is a freelance writer in Arlington, Va.