Lump Sum Rule Challengers Lose Court Fight

November 26, 2007 ( - A federal judge in Wisconsin has ruled that former American Family Insurance Group workers who claim they were coerced to take lump sum distributions before their normal retirement age cannot sue their employer's defined benefit plans.

U.S. District Judge Barbara B. Crabb of the U.S. District Court for the Western District of Wisconsin threw out a lawsuit against the plans sponsored by American Family Insurance Group. In rejecting the former employees’ claims they were “coerced” into taking their benefit payouts as lump sums, Crabb said the former employees lacked legal standing because they had not shown they had been hurt.

“The plaintiff-participants allege that they were coerced into taking their lump sum distribution within 90 days of their termination and deprived of the opportunity to wait until their normal retirement age to choose the same option or another one. Yet none of them says he would exchange the option for another,” the court wrote. “None of them alleges that he has been harmed financially by choosing the lump sum option.”

In her ruling, Crabb also turned aside assertions by the former employees that the plans’ 90-day election period for lump-sum distributions violated a Treasury regulation which specifies that a benefit plan that provides for the distribution of any portion of a participant’s nonforfeitable accrued benefits cannot impose a “significant detriment” on any participant who does not consent to a distribution.

According to the case history in the opinion, American Family sponsored a defined benefit plan for employees and a separate one for district managers. Before 1997, all of the benefit options for plan participants involved a form of monthly annuity payment, except for the cash outs mandated for participants who had benefits of less than $3,000 when they left the company.

The plan was amended on September 1, 1997 to create two distribution options for all vested plan participants: a lump sum distribution option and an immediate annuity for participants entitled to deferred vested retirement benefits. The court said participants who retired before age 65 had three months from leaving the company to designate either the lump sum or the annuity. The court noted that the lump sum distribution option has been selected by 90% eligible plan participants since 1997.

The plaintiffs argued that the 90-day time limit in which to make their payout elections amounted to a form of coercion.

The case is McCarter v. Retirement Plan for the District Managers of the American Family Insurance Group,   W.D. Wis., No. 3:07-cv-00206-bbc, 11/16/07.