Former Colgate-Palmolive Employees Challenge Cash Balance Plan

August 14, 2007 (PLANSPONSOR.com) - Two former Colgate-Palmolive employees have asked a federal judge in Ohio to grant class action status to a lawsuit alleging their former employer's cash balance plan underestimated their lump-sum retirement payout.

Paul Adelman worked for the company for 13 years and Valerie Nutter for 12 years. Both plaintiffs opted to take lump-sum retirement benefits when they left the company and both claim they were shortchanged, according to the lawsuit.

According to the suit filed in the U.S. District Court for the Southern District of Ohio, “had Plaintiffs’ hypothetical account balances been projected to normal retirement age at a rate that did not understate the value of the interest credits they had the right to receive though normal retirement age,”  they would have received more money.

Adelman received a lump sum payment of $60,654.37 in 2006 and Nutter received a check for $27,258.64 in 2000, according to the lawsuit.

The plaintiffs contend that the Employee Retirement Income Security Act (ERISA) mandates: “any optional form of benefit paid from a defined benefit plan, including a lump sum distribution, to be no less than the present value of the participant’s accrued benefit expressed as an annuity commencing at normal retirement age (under the Plan, age 65).”

In particular, the plan failed to perform the required whipsaw calculation, the plaintiffs claimed. Such a  calculation comes about when participants opt to cash out their hypothetical accounts in a cash balance plan before reaching normal retirement age.

To comply with ERISA, the lump-sum payments must be the actuarial equivalent of the normal accrued pension benefit. The first step is to project forward to normal retirement age a participant’s hypothetical account balance using the rate at which future interest credits would have accrued if the participant had stayed in the plan until that time. Then the calculation discounts that amount back to its present value on the date of the actual lump-sum distribution

The Pension Protection Act (PPA) lifted the whipsaw calculation requirement from the cash balance plan distributions, but the change only applied after August 17, 2006. The 6 th  U.S. Court of Appeals tossed aside AK Steel’s contention that it did not have to use the calculation for its cash balance plan (See AK Steel Cash Balance Distributions Not Covered by PPA ).

Adelman and Nutter asked that the court grant class action status, to include all those former Colgate-Palmolive employees who received a lump sum payment prior to August 17, 2006.

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