Compliance September 27, 2007

Discount Rate Used in Cash Balance Conversion not up to Plan Sponsor

September 27, 2007 (PLANSPONSOR.com) - The U.S. District Court for the Eastern District of Missouri has found that a company's use of an 8% discount rate instead of the 30-year treasury rate to calculate opening balances at the time it converted its defined benefit plan to a cash balance plan violated the Employee Retirement Income Security Act (ERISA).
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According to the opinion by U.S. District Judge E. Richard Webber, when converting participants’ accrued benefit in the DB plan to an opening balance in the cash balance plan, U.S. Bank used a whipsaw calculation where it projected the accrued benefit forward using the current interest crediting rate and discounted back to present dollars using the 417(e)(3) regulations.

Citing a previous 2 nd U.S. Circuit Court of Appeals opinion, Webber said, “[T]he regulations do not leave a plan free to choose its own methodology for determining the actuarial equivalent of the accrued benefit expressed as an annuity payable at normal retirement age.”

Webber concluded the statutory requirement that a plan use the 30-year treasury rate in calculating lump-sum distributions is equally applicable to a determination of participants’ opening balances.

U.S. Bank projected participants’ lifetime annuity to age 65 using an interest credit rate of 6.07%, the 30-year treasury rate at the time of conversion, but then discounted back to present value using an 8% discount rate. The court said that by using a high discount rate U.S. Bank did not protect participants’ accrued benefits in violation of ERISA.

The case is Sunder v. U.S. Bank Pension Plan. 

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