Changes to Withdrawal Liability Assumptions

[Guest Grumpy456]

Assume a plan uses a calendar year. For withdrawals occuring in 2009, the plan uses one of the permissible withdrawal liability allocation methods which includes an 8% investment return assumption. A participating employer requested a withdrawal liability estimate in 2009 and the plan gave it an estimate of $300,000 (assuming the withdrawal occurred in 2009). Effective 1/1/2010, the trustees changed the investment return assumption from 8% to 5.5% (everything else about the withdrawal liabilty allocation method remainded the same). The trustees did not notify participating employers of this change in advance. The participating employer ends up withdrawing on June 1, 2010 and learns of the investment return assumption change for the first time when it receives the plan's notice of withdrawal liabilty. Its withdrawal liability using the new investment return assumption is $500,000. The participating employer appealed what it describes as an unreasonable change to the assumptions adopted by the trustees, but the plan takes the position that the changes were reasonable for a variety of reasons, that the trustees had the fiduciary authority to make such a change, that such change is prudent for a variety of reasons, and that nothing in the plan documents or applicable law prohibit the change. Does anyone know what rules govern how/when the plan's trustees may adopt changes to the assumptions which underlie withdrawal liability calcs? Thanks!!!

[Guest Smash]

Most funds put significant disclaimer language in withdrawal liability estimtes stating that the estimate is just an estimate, and should not be relied upon as a predictor of an assessment in future years. They don't have to include this language. It is the employer's responsibility to hire someone to explain this stuff to them.

My understanding is that there may be some trust provision that requires informing employers of a change in the assumptions, but in general, I don't think there is a statutory requirement to let anyone know that the interest rate is being changed from one year to the next. If a plan informs employers, it is being nice. I don't think Central States told UPS that they were changing in advance of the UPS withdrawal, but I could have the timing off.

It is also my understanding that the assumptions, including the interest rate, do not belong to the plan trustees. The law requires that in total, they represent the best estimate of the actuary. It is his best esstimate, and given the current economic environment and the state of many employers, switching to a lower interest rate is definitely supportable. I think an employer challenge would require proof by preponderence that the assumption is unreasonable (why did the actuary make this change). Maybe there is some room to argue that it is not the actuary's best estimate, but under the direction of the Trustees, that the change was made, and do they have the authority to do so. This seems like an uphill battle. Many actuaries are refining their assumptions and lowering the interest rate. Personally, I would back up the actuary in this argument.

I think there was at least one case where an employer successfully argued that the assumptions were changed on January 1, not December 31 of the prior year. The fund was then required to assess the withdrawal liability using the higher interest rate.

[Effen]

Smash - good to have you aboard.

I agree with everything you said, except that the Trustees do not control the assumptions used for the withdrawal determination. Like FASB assumptions, I think the withdrawal assumptions are completely in the hands of the Trustees. They can ask for direction from the actuary, but ultimately they can set them where ever they want. If they actuary doesn’t agree, he/she can caveat the calculations.

I look at them the same way I look at FASB assumptions. That is, the actuary is just doing the calculations based on directives from the Trustees or Plan Sponsor.

[Guest Smash]

Smash - good to have you aboard.

I agree with everything you said, except that the Trustees do not control the assumptions used for the withdrawal determination. Like FASB assumptions, I think the withdrawal assumptions are completely in the hands of the Trustees. They can ask for direction from the actuary, but ultimately they can set them where ever they want. If they actuary doesn’t agree, he/she can caveat the calculations.

I look at them the same way I look at FASB assumptions. That is, the actuary is just doing the calculations based on directives from the Trustees or Plan Sponsor.

Glad to be aboard. It was a happy accident that I found this site.

I am not sure I agree with your disagreement. I would read ERISA 4213(a) to say that the assumptions, other than those prescribed by the PBGC, belong to the actuary. Maybe the trustees have the choice between 4213(a)(1) and 4213(a)(2).

In practice, the actuary may take into consideration concerns of the Trustees related to the overall viability of the Plan and sponsoring employers in setting these asssumptions. I am aware of instances where fund counsel will not even let the trustees discuss the withdrawal liability assumptions.

If an actuary had a statement that basically stated that they did not believe the assumption was their best estimate, an employer would seem to have an immediate challenge under 4213.

[Effen]

I have re-read the statutes and humbly withdraw my appeal.

[Guest Grumpy456]

But isn't it the trustees who ultimately have the fiduciary liability to ensure that plan is properly funded? And if too many employers are allowed to leave the plan by not paying their "fair share" of withdrawal liability (because the assumptions selected by the actuaries are bad), would the remaining employers who now have to make even larger contributions as a result have a claim against the plan's trustees for breach of fiduciary duty or against the plan's actuaries for breach of _________ (the actuaries are not, in most instances, plan fiduciaries unless they are "functional fiduciaries" of some sort). It would make no sense to hold the plan's trustees liable for something the actuaries did (or didn't do), unless the claim would be breach of fiduciary duty for retaining actuaries who used unreasonable assumptions.

[Guest Smash]

I think the Trustees are protected from this type of lawsuit so long as they went through a reasonable process in selecting the actuary. If the actuary says "use 10% as the withdrawal liability interest rate", then they probably should start the RFP process. Also, it may be by inserting themselves into the process of selecting the assumption, they have not appropriately delegated to an advisor, and they do not have the expertise to make the decision. This might open them up to some breach of fiduciary breach issues. This is not my area of expertise.

[Guest Grumpy456]

Thanks for all of the responses and thoughts--much appreciated!