UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
December 11, 2006
IN RE CITIGROUP PENSION PLAN ERISA LITIGATION
The opinion of the court was delivered by: Shira A. Scheindlin, U.S.D.J.
THIS DOCUMENT RELATES TO: ALL ACTIONS
OPINION AND ORDER
Michael Lonecke, Raymond Duffy, Anne Nelson, Robert S. Fash and Craig A. Harris, on behalf of themselves and a class of similarly situated individuals, filed consolidated actions alleging that the Citibuilder Cash Balance Plan ("Plan") violates the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), 29 U.S.C. § 1001 et seq. In summary, plaintiffs lodge three challenges against the Plan. First, they challenge the legality of the Plan's accrual formula. Second, they assert that because Plan participants never received adequate notice of Plan amendments in 2000 and 2002, those amendments never took effect as a matter of law. Third, plaintiffs argue that the Plan unlawfully discriminates on the basis of age.
Specifically, plaintiffs allege in Counts I and II, respectively, that the Plan is impermissibly backloaded due to insufficient interest credits and that even if this backloading is cured, the Plan will produce an illegal accrual phenomenon known as a "whipsaw." In Count III, plaintiffs allege that the Plan's "fractional test" method of computing accrued benefits is precluded under ERISA and, in the alternative, the test is being wrongfully applied. In Counts IV and V, plaintiffs allege that the Plan discriminates based on age. Count VI has been withdrawn. In Count VII, Plaintiffs allege that Citigroup Inc., and its Plans Administration Committee ("defendants") failed to provide Plan participants proper notice that the 2000 and 2002 cash balance amendments ("CBAs") would reduce the rate of future benefit accrual.
On August 25, 2006, the parties filed cross-motions for summary judgment on all counts.*fn1 For the reasons set forth below, summary judgment for plaintiffs is granted in part and denied in part. Summary judgment for defendants is denied.
A. Cash Balance Plans
Under a cash balance pension plan, an employer guarantees each participant a retirement benefit premised on a hypothetical account that has been established in each participant's name. These accounts grow over time according to a predetermined formula, driven by two components: (1) the employer's hypothetical "contributions," expressed either in dollars or a specified percentage of the participant's current yearly salary (making it a "career average" formula); and (2) hypothetical earnings expressed as interest credits, which can either increase at a fixed rate or be tied to an extrinsic index, such as 30-year Treasury bonds. Employer contributions and interest credits are usually allocated to the accounts annually. Each year participants receive a balance statement so they can review the value of their pension.
Since 1985, when cash balance plans were first introduced, they have become an increasingly popular way to structure retirement pensions. As of 2004, "nearly one-third of Fortune 100 companies had adopted some form of cash balance plan, and a 2002 survey of firms with pension plans containing more than 1000 participants revealed that 10 percent of plans were cash balance plans."*fn2 Proponents of cash balance plans maintain that from an employee's perspective, they are superior to traditional defined benefit plans because they are easier to understand and they allow benefits to accrue more evenly over the course of a career. They are also more portable than other defined benefit plans, thus allowing workers to change jobs without experiencing significant reductions in benefits.*fn3 It is also commonly accepted that cash balance plans are advantageous for employers in that: (1) they are cheaper and less administratively burdensome to maintain; (2) employers retain funding flexibility as long as plans remain solvent; (3) their simplicity fosters employees' appreciation for the value of their pensions; (4) they can significantly reduce future payouts overall, thereby boosting their earnings; and (5) employers reap the benefit of any investment experience on plan assets that exceeds the interest rate assumption.*fn4
B. Citigroup's Cash Balance Plan
Both parties have agreed to all material facts.*fn5 The named plaintiffs are present or former employees of either Smith Barney or Citibank, N.A., both of which are divisions of Citigroup Inc. ("Citigroup").*fn6 They all accrued benefits under the Plan during all or part of the period since January 1, 2000.*fn7 Two named plaintiffs were vested participants at the time their employment terminated.*fn8
1. January 1, 2000 CBA
In October 1998, Citicorp merged with Travelers Corporation ("Travelers"), and their respective pension plans also merged.*fn9 Importantly, the provisions on plan amendments set forth in the Travelers Plan were incorporated into the Citibank Plan as of December 31, 1998. Pursuant to these provisions, authority to amend the Citibank Plan was vested with the plan sponsor, Citigroup, "by action of its Board of Directors" ("Board").*fn10
In a meeting on October 19, 1999, the Board exercised this authority by adopting a series of resolutions going to the heart of plaintiffs' case. Pertinent excerpts of the meeting minutes state:
an amendment to the Citigroup Inc. Pension Plan incorporating the cash balance design for certain subsidiaries of the Company, on substantially the terms as previously presented to the Board is hereby approved . . . .*fn11
Although the provisions of the amendment were not set forth in an executed Citibuilder Retirement Plan document until May 2001,*fn12 plan participants did receive notification of the amendment in December 1999 - after the Board's vote and prior to the CBA's effective date, January 1, 2000. Notice was mailed to all effected employees by a letter dated December 9, 1999, from Tim Peach, Director of Retirement Benefits.*fn13 Attached to the letter was a document entitled - in large boldfaced letters - "The Citigroup Pension Plan Notice of Significant Reduction in Benefit Accruals for Certain Employees of Citigroup Inc. and its Subsidiaries" ("December 1999 § 204(h) notice").*fn14 This notice contained a general summary of how the cash balance formula would work, as well as a table listing the percentages of salaries that would be credited to accounts annually, such percentages being based on an employee's age and years of service.*fn15 The notice did not include specifics or mention the Plan's application of the fractional test for compliance with statutory accrual principles. Readers with questions were directed to "[p]lease see the brochure titled Your New Citigroup Benefits, which [they] received earlier this year, for more details."*fn16
As noted above, the provisions of the newly adopted cash balance plan were not set forth in a written document until May 27, 2001.*fn17 Plan Article 4.1 lays out the funding scheme giving rise to plaintiffs' claims, and states, in pertinent part, as follows:
(a)General. The Account of a Participant shall be the sum of the Interest Credits and Benefit Credits credited to the Account established for such Participant following his entry into this Plan in accordance with Article II. The opening balance for each Participant in his Account shall be zero. Notwithstanding any provision to the contrary, in no event shall an Account be credited with any amount prior to January 1, 2000.
(b)Benefit Credits. The Account of a Participant shall be credited with a Benefit Credit as of the last day of each of the Plan Years in the period beginning with the Plan and ending with the Plan Year in which a Participant's employment with an Employer is terminated. The Benefit Credit shall be equal to the applicable percentage of the Participant's Compensation paid by an Employer during the Plan Year, as determined by the Participant's age and Years of Credited Service as of the end of such Plan Year in accordance with Table 4.1(b) below; provided,
(2) with regard to the Plan Year in which the Participant's employment with an Employer is terminated, (A) the Benefit Credit shall be determined by the Participant's age and Years of Credited Service as of the date of termination, (B) Compensation shall be recognized for this purpose only through such date of termination, and (C) such Benefit Credit shall be made as of the date of termination instead of the last day of such Plan Year.
Benefit Credits Based on Participant's Age and Years of Credited Service
Percentage of Plan Year Compensation Credited to Participant's Account
Participant's AgeLess than 6 years of Credited ServiceAt Least 6 But Less than 11 Years of Credited ServiceAt Least 11 But Less Than 15 Years of Credited service15 Years of Credited Service or More
Up to Age 242.0%2.0%n/an/a
Age 25 to 292.5%2.5%2.5%n/a
Age 30 to 343.0%3.0%3.0%3.0%
Age 35 to 394.0%4.0%4.0%4.0%
Age 40 to 444.0%4.0%4.0%4.0%
Age 45 to 494.0%5.0%6.0%6.0%
Age 50 and Over4.0%5.0%6.0%7.0%
(a)Minimum Benefit Credit. [T]he minimum Benefit Credit each Plan Year . . . for any Participant who is a Full-Time Employee shall be $500 . . . .
(b)Interest Credits. The Account of a Participant shall be credited with an Interest Credit as of the last day of each of the Plan Years in the period beginning with the Plan Year next following the date on which a Benefit Credit is first made to a Participant's Account and ending with the
Plan Year in which the Participant's Benefit Commencement Date occurs . . . .*fn18
Article 4.1(e) establishes the fractional rule as the Plan's mechanism for complying with ERISA's minimum accrual standards:
(e) Minimum Account. Notwithstanding the benefit described in § 4.1(a) above, if the Account at the date a Participant ceases to be eligible to earn Benefit Credits ("Determination Date") has accrued so that the accrual does not meet the requirements of § 411(b)(1) of the Code and the Treasury regulations issued thereunder, there shall be added to the Account the amount described in paragraph (4) below calculated as follows:
(1)The projected value ("Projected Value") of a Participant's Account is calculated by projecting the Account at the Determination Date to the Participant's Normal Retirement date (using the average Compensation for the Participant, as determined in accordance with § 411(b)(1)(A) of the Code and the Treasury regulations issued thereunder, and the same rate used to calculate Interest Credit ("Interest Rate") as in the year of the Determination Date) assuming for these purposes that the Participant continued to earn Benefits Credits through the Normal Retirement Date.
(2)Determine the minimum account ("Minimum Account") by multiplying the Projected value by a fraction, the numerator of which is the Participant's Years of Vesting Service and the denominator of which is the Years of Vesting Service plus the number of years and months from the Participant's Determination Date to the Participant's Normal Retirement Date.
(3)Calculate the excess, if any, of the Minimum Account, over the Account at Determination Date future valued to the Normal Retirement Age of the Participant using the Interest Rate.
(4) Calculate the quotient of the amount determined in paragraph (3) above divided by a present value factor (equal to 1 plus the Interest Rate, the sum of which is raised to a power equal to the number of months divided by 12 from Determination Date to Normal Retirement Date).*fn19
2. January 1, 2002 CBA
The 2002 CBA incorporated the same cash balance regime adopted in 2000, but recalibrated the range of benefit credits that would be allotted annually to employees' hypothetical accounts. It lowered the floor from 2% to 1.5% of compensation for participants under age twenty-nine in their first five years of credited service. It also lowered the ceiling from 7% to 6% of compensation for participants fifty-five years or older with fifteen or more years of credited service ("2002-Present Benefit Credits").*fn20 The application of the fractional rule under Article 4.1 (e) remained unchanged.
The first and only communication to Plan participants in 2001 of an amendment pursuant to ERISA § 204(h) was an information package dated December 2001.*fn21 Although different versions of the packages were prepared, they all contained: (i) a cover letter dated December 5, 2001, from Tyrrell Erbes, Citigroup's Director of Retirement Benefits; (ii) a document entitled "Notices to Interested Parties;" and (iii) a document entitled "Citigroup Pension Plan 204(h) Notice."*fn22 As with the December 1999 § 204(h) notice, there is no mention of the Plan's application of the fractional rule.*fn23 The named plaintiffs do not recall receiving these packages, nor do they recall being aware in December 2001 that the 2002 CBA "might substantially reduce benefit accruals for themselves or others."*fn24
III. APPLICABLE LAW
A. Standard of Review
Summary judgment is appropriate if the record "show[s] that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law."*fn25 An issue of fact is genuine if "the evidence is such
that a jury could return a verdict for the nonmoving party."*fn26 A fact is material when it '"might affect the outcome of the suit under the governing law. "*fn27 The movant has the burden of demonstrating that no genuine issue of material fact exists.*fn28
In turn, to defeat a motion for summary judgment, the non-moving party must raise a genuine issue of material fact that does '"not rely on conclusory allegations or unsubstantiated speculation."*fn29 To do so, it must do more than show that there is '"metaphysical doubt as to the material facts.'"*fn30 In determining whether a genuine issue of material fact exists, the court must construe the evidence in the light most favorable to the non-moving party and draw all justifiable inferences in that party's favor.*fn31 Statute of Limitations
Although ERISA does not prescribe a statute of limitations for civil actions, where parties seek to recover higher benefits from a pension plan, the appropriate statute of limitations is six years - the limitations period specified in the most analogous state statute.*fn32 The Second Circuit has held that the six-year statute of limitations does not begin to run until "there has been a repudiation by the fiduciary which is clear and made known to the beneficiaries."*fn33 Typically, the statute of limitations period begins when a participant's formal application for benefits is denied.*fn34 In some circumstances, however, the time period may begin earlier.*fn35
A.ERISA's Minimum Accrual Rules
Although cash balance plans mimic some of the same features of defined contribution plans, in this Circuit they are treated as defined benefit plans.*fn36 "The regulatory consequences of this [defined benefit plan] classification are wide-reaching."*fn37 One critical consequence is that the term "accrued benefit" under a cash balance plan means "a participant's accrued benefit determined under the plan . . . expressed in the form of an annual benefit commencing at normal retirement age."*fn38
Although ERISA does not require pension plans to pay out a specific dollar amount, it does regulate the rate at which benefits accrue.*fn39 A paramount reason for this is to prevent "backloading," a term of art describing a plan's use of a benefit accrual formula that postpones the bulk of an employee's accrual to her later years of service. Given the time value of money, it is not surprising that plan sponsors are often tempted to backload pension benefits.
To combat backloading, ERISA requires plans to accrue benefits relatively evenly over the course of an employee's career.*fn40 ERISA sets forth three alternative tests for monitoring accrual rates; in order to be lawful a plan must satisfy at least one of these formulas.*fn41 These formulas are construed as "minimum accrual standards" to the extent that they tether plans to a controlled, steady baseline of benefit accrual.*fn42 The first alternative is the "3 percent rule."*fn43 The second alternative, set forth in ERISA section 204(b)(1)(B), is known as the "133 1/3 percent rule" and provides that:
A defined benefit plan satisfies the requirements of this paragraph of a particular plan year if under the plan the accrued benefit payable at the normal retirement age is equal to the normal retirement benefit and the annual rate at which any individual who is or could be a participant can accrue the retirement benefits payable at normal retirement age under the plan for any later plan year is not more than 133 1/3 percent of the annual rate at which he can accrue benefits for any plan year beginning on or after such particular plan year and before such later plan year. For purposes of this subparagraph--
(i)any amendment to the plan which is in effect for the current year shall be treated as in effect for all other plan years;
(ii) any change in an accrual rate which does not apply to any individual who is or could be a participant in the current year shall be disregarded [;]
(iii) the fact that benefits under the plan may be payable to certain employees before normal retirement age shall be disregarded; and
(iv) social security benefits and all other relevant factors used to compute benefits shall be treated as remaining constant as of the current year for all years after the current year.*fn44
Thus the 133 1/3 percent rule prevents backloading by constricting the fluctuation of accrual rates from year to year.
The third alternative, set forth in ERISA section 204(b)(1)(C), is called the "fractional rule" because it prorates the projected normal retirement benefit over the years of plan participation.*fn45 A plan satisfies the fractional rule
if the accrued benefit to which any participant is entitled upon his separation from the service is not less than a fraction of the annual benefit commencing at normal retirement age to which he would be entitled under the plan as in effect on the date of his separation if he continued to earn annually until normal retirement age the same rate of compensation upon which his normal retirement benefit would be computed under the plan, determined as if he had attained normal retirement age on the date on which any such determination is made (but taking into account no more than the 10 years of service immediately preceding his separation from service). Such fraction shall be a fraction, not exceeding 1, the numerator of which is the total number of his years of participation in the plan (as of the date of his separation from the service) and the denominator of which is the total number of years he would have participated in the plan if he separated from the service at the normal retirement age.*fn46
In simpler terms, under the fractional rule, in any given year, benefit accrual is "based upon the assumption that the participant will continue, until normal retirement age, to earn the same rate of compensation that would have been taken into account under the plan had the employee retired in that year."*fn47
D. Unlawful Whipsaws
The "whipsaw" phenomenon is "widely recognized in the practice literature."*fn48 Whipsaws occur because in order for cash balance plans to satisfy the interest rate requirements of ERISA and the I.R.C., participants' accrued benefits must not fall below the actuarial equivalents of such benefits.
[T]his means that: (1) the accrued benefit under a defined benefit plan must be valued in terms of the annuity that it will yield at normal retirement age; and (2) if the benefit is paid at any other time (e.g., on termination rather than retirement) or in any other form (e.g., a lump sum distribution, instead of annuity) it must be worth at least as much as that annuity.*fn49
The actuarial equivalent is determined by projecting the account balance forward to normal retirement age using a plan's prescribed "projection interest rate"*fn50 and then discounting it back to present value using the applicable statutory interest rate ("discount rate").*fn51 "If the plan's projection rate exceeds the [ ] discount rate, then the present value of the accrued benefit will exceed the participant's account balance."*fn52 A "whipsaw" has occurred. If the larger amount is not paid out, an "impermissible forfeiture has occurred in violation of ERISA § 203(a) and I.R.C. § 411(a)(2)."*fn53
E. Adequate § 204(h) Notice
In order "to safeguard benefits that have been promised to employees," Congress enacted notice requirements that forbid plan sponsors to amend "a plan in a way that reduces future benefit accrual without notice to plan participants."*fn54 Congress predicated the legitimacy of plan amendments on two critically important ERISA provisions.*fn55 "First, ERISA's anti-cutback rule protects employees' expectations in their accrued benefits" by prohibiting amendments that would decrease '"the accrued benefit of a participant under a plan."'*fn56 Second, ERISA § 204(h) forbids plan sponsors to amend "a plan in a way that reduces future benefit accrual without notice to plan participants."*fn57 Providing adequate notice is a precondition to the effectiveness of plan amendments.*fn58 As the Second Circuit recently held, an ERISA amendment "tak[es] place at the moment when employees are properly informed of a change . . . in the text of the plan."*fn59 At all times relevant to the 2000 and 2002 CBAs, § 204(h) stated:
(h) Notice of significant reduction in benefit accruals
(1) A [pension] plan . . . may not be amended so as to provide for a significant reduction in the rate of future benefit accrual, unless, after adoption of the plan amendment and not less than fifteen days before the effective date of the plan amendment, the plan administrator provides a written notice, setting forth the plan amendment and its effective date, to
(A) each participant in the plan . . . .*fn60
Guidelines promulgated by the IRS*fn61 clarify that § 204(h) notice is required where an amendment is "reasonably expected to change the amount of the future annual benefit commencing at normal retirement age."*fn62 Specifically, whether an amendment provides for a "significant reduction" in accrual rates under § 204(h) is determined "based on reasonable expectations taking account the relevant facts and circumstances at the time the amendment is adopted."*fn63 In order to comply, notices may contain "a summary of the amendment, rather than the text of the amendment, if the summary is written in a manner calculated to be understood by the average plan participant."*fn64
F. ERISA's Age-Based Accrual Rules
ERISA's anti-age discrimination provision for defined benefit plans states that "[a] defined-benefit plan shall be treated as not satisfying the requirements of this paragraph if, under the plan, an employee's benefit accrual is ceased, or the rate of an employee's benefit accrual is reduced, because of the attainment of any age"*fn65 Presently, there is a split within this Circuit as to whether cash balance plans violate this provision. Two district courts have held that cash balance plans are age discriminatory,*fn66 and two have held they are not.*fn67 For reasons set forth in Part IV.D below, I join in finding that cash balance plans unlawfully discriminate on the basis of age.
G. Remedial Measures
ERISA provides for the civil enforcement of its provisions. Under section 502(a)(1)(B), a participant or beneficiary may bring an action "to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan."*fn68 The statute further provides that plaintiffs may seek "to enjoin any act or practice which violates any provision of this subchapter or the terms of the plan, or (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of this subchapter or the terms of the plan."*fn69
A. Statute of Limitations
As a preliminary matter, I find that plaintiffs' claims are timely.*fn70 For even assuming, arguendo, that the clock began at the earliest plausible moment - upon plaintiffs' receipt of the December 1999 § 204(h) notice*fn71 - this action would still be timely because it was commenced on February 3, 2005, less than six years from that date.
B. The Plan's Accrual Formula (Counts I, II, III)
1. Application of the Fractional Rule and Impermissible Backloading
The Plan's cash balance formula misapplies the fractional rule in a way that not only fails to guard against backloading - it enables backloading. The Plan's use of the fractional rule violates section 204(b)(1) because as a career average plan, the only applicable accrual test is the 133 '/3 rule.*fn72 By its very terms,
the fractional rule may only be applied to participants with ten or fewer years of service.*fn73 Defendants argue that the Citigroup cash balance formula does not violate this limitation because "for purpose of applying the fractional test, average compensation is calculated based only on the last ten" years of an employee's service.*fn74 Under Plan Article 4.1(e), if this calculation reveals that an individual's hypothetical account balance is less than the minimum amount required by section 204(b)(1)(C) of ERISA, Citigroup credits the participant the difference.*fn75 Defendants assert that this supplementary contribution brings accrued pensions into compliance with the minimum benefit required by the fractional rule.*fn76 However, this lump-sum contribution, made on the eve of the benefit payout, is inadequate precisely because it permits the backloading that the fractional rule was designed to prevent.*fn77
The Plan's unorthodox application of the fractional test only upon a participant's separation from service, rather than on a year-by-year basis, ignores the statutory scheme requiring pension plans to be able to test compliance with accrual rules "in any given year," or even any given moment.*fn78 The Citigroup formula also contravenes the well-acknowledged purpose of the mandatory accrual tests, which is to prevent the backloading of benefits.*fn79 In applying the fractional rule only once, at the end of an employee's Plan participation, Article 4.1(e) strips the rule of its functionality because it can no longer "regulate the rate at which benefits may accrue."*fn80 Without its consistent application, the fractional test is powerless to "prevent [the Plan] from designing accrual schedules that circumvent the vesting rules by providing that the great preponderance of benefits accrues only in the last years of employment."*fn81 If such applications of the fractional rule were permissible, plans would be free to adopt formulas providing a mere pittance of benefit accrual over, say, the first twenty years of employment, and thereafter have benefits accrue rapidly by tacking on an additional amount, much like the Citigroup Plan does.
To the Court's dismay, plaintiffs' characterization of Article 4.1(e) as a novel end-run around ERISA's minimum accrual standards is accurate.*fn82 Defendants downplay their gutting of the fractional rule as a harmless modification that is permissible because it is not expressly prohibited by statutory text.*fn83 More accurately, it is a bold and exploitative contortion of the rule. While defendants "do not (and cannot) dispute" that they are bound to comply with ERISA's accrual rules, they have nonetheless "resist[ed] - and ha[ve] tried to draft around - [their] consequences."*fn84 The Court takes Congress' efforts to prevent the backloading of pension benefits quite seriously. The Plan's accrual formula is unlawfully structured to allow for impermissible backloading. Accordingly, summary judgment is granted in plaintiffs' favor on Counts I and 111.*fn85
2. Reformation of the Plan to Comply with the 133 1/3 Percent Rule and Avert Whipsaw
Having found Article 4.1(e)'s use of the fractional rule impermissible, I turn to the Plan's mandatory compliance with the 133 1/3 percent rule. Defendants have stipulated that since January 1, 2002, the accrual formula has not satisfied the 133 1/3 percent rule.*fn86 In arguing for a reformation of the Plan, plaintiffs request the imposition of an interest credit floor that will compensate for the backloaded pay credits while averting whipsaw.*fn87 The Court declines to direct defendants to adopt plaintiffs' reformation proposals, but hereby orders defendants to reform the Plan consistent with the requirements of ERISA, retroactive to January 1, 2000.
C. Adequate § 204(h) Notice (Count VII)
Both the December 1999 § 204(h) and December 2000 § 204(h) notices omitted any mention of the benefit formula's unorthodox approach to calculating benefits and monitoring accrual rates. Because it was ultimately revealed that the formula included an unlawful application of the fractional rule, which had the effect of keeping accrual rates below the minimum rate prescribed by statute, defendants' failure to either include or summarize Article 4.1(e) in the notices violated § 204(h).*fn88
Adequate notice is critical to ensure the "meeting of expectations in the context of ERISA."*fn89 Plaintiffs had every reason to expect that under the new cash balance plan, their pensions would continue to accrue at a rate approved by Congress. It therefore is immaterial that the December 1999 § 204(h) notice stated in bolded font that the 2000 CBA could result in a reduction of their benefits. Given the material omissions, it remained "insufficiently 'accurate and comprehensive to reasonably apprise [Plan] participants and beneficiaries of their rights.'"*fn90 Nor can it be said that the notices "allow[ed] applicable individuals to understand the effect of the plan amendment" because plaintiffs were without fair warning that the formula endangered their right to a minimum rate of benefit accrual.*fn91
Defendants submit that the notice claims should be dismissed for plaintiffs' failure to show that they suffered any prejudice as a result of the allegedly deficient § 204(h) notices, as required by Frommert.*fn92 Defendants argue that the "only consequence" here was plaintiffs' failure to commence this litigation sooner, which "hardly constitutes prejudice."*fn93 This argument is unavailing for two reasons. First, in Frommert, the prejudice issue arose in the context of tardy notice, not substantively inadequate notice.*fn94 Here, because both the December 1999 and December 2000 § 204(h) notices failed to mention the formula's fractional rule application, which kept accrual rates below the statutory minimum, the amendments never took legal effect. Second, in Frommert, the Second Circuit explicitly rejected the notion that beneficiaries must demonstrate the type of prejudice urged by defendants:
Contrary to defendants' arguments and the district court's conclusion, the fact that the plaintiffs remained at Xerox's employ does not demonstrate that they suffered no prejudice. Imposing such a requirement that plan participants must show actual prejudice . . . by terminating their employment imposes an unduly harsh burden on dissatisfied plan participants.*fn95
Like the plaintiffs in Frommert, the plaintiffs here "were deprived of the opportunity to take timely action in response to the purported `amendment.'"*fn96
"Such action might have included seeking injunctive relief, altering their retirement investment strategies, or perhaps considering other employment."*fn97 Accordingly, summary judgment for plaintiffs is granted with respect to Count VII.
D. Age Discrimination (Count IV and V)*fn98
Plaintiffs allege that even after the Plan is reformed to cure the ERISA violations alleged in Counts I through III, the overall accrual formula violates ERISA's prohibition on age discrimination because rates of benefit accrual diminish each year based on increasing age.*fn99 I agree, for very much the same reasons explained by this Court in J.P. Morgan.*fn100
1. ERISA Age-Based Accrual Provisions Are Applicable Before Normal Retirement Age
Although neither party raised it here, courts are divided on the threshold issue of whether ERISA's age-based accrual provisions apply to all workers, including those younger than sixty-five.*fn101 ERISA section 204(b)(1)(H)(i) prohibits the reduction of an employee's benefit accrual "because of the attainment of any age."*fn102 Despite this broad terminology, some courts have held that the provision does not apply to individuals before they reach normal retirement age.*fn103 However, because the statutory language "any age" is unambiguous, I respectfully disagree with those courts.*fn104 As the Supreme Court has directed, "[t]he preeminent canon of statutory interpretation requires us to presume that [the] legislature says in a statute what it means and means in a statute what it says there."*fn105 By its own terms, the ERISA age provision protects individuals of all ages.
2. Definition of "Rate of Benefit Accrual"
The crux of the age discrimination issue is the definition of the "rate of an employee's benefit accrual" as it is used in section 204(b)(1)(H)(i) of ERISA. If the phrase refers to an employee's retirement benefit (output), as plaintiffs contend, then cash balance plans are discriminatory because they afford younger employees higher rates of benefit accrual than their similarly situated older counterparts*fn106 However, if the phrase refers to the employer's annual contributions to the hypothetical accounts (inputs), then there is no discrimination.*fn107 Plaintiffs argue that the relevant "benefit" is the overall benefit
an employee receives upon retirement (i.e., the annuity at normal retirement age). Under this interpretation, in order to avoid age discrimination, the rate at which a participant accumulates her retirement benefit cannot decrease as she ages. Defendants, however, contend that "the presence or absence of age discrimination should be measured based on the change in participant's cash balance account from year to year, rather than the total value of the annual contributions to the account at retirement age."*fn108 Under this view, using annual allocations of interest and pay credits as the relevant paradigm, as long as the employer makes ever-increasing contributions to accounts, there is no ERISA violation.*fn109 Under defendants' reading, the methodology used to detect age discrimination in a cash balance plan - which is a defined benefit plan - becomes, for all intents and purposes, the same as that which is prescribed for defined contribution plans.
I decline defendants' invitation to "seiz[e] on the obvious similarities" between the parallel anti-discrimination provisions governing defined contribution and defined benefit plans.*fn110 Although other courts, including the Seventh Circuit,*fn111 have treated cash balance plans as defined contribution plans for this purpose, doing so would ignore the plain language of the statute as well as the critical distinctions between the types of plans outlined by the Second Circuit in Esden.*fn112
Defendants ally themselves with the Seventh Circuit's position, which is that
[i]nterest is not treated as age discrimination for a defined-contribution plan, and the fact that [the respective] subsections are so close in both function and expression implies that it should not be treated as discriminatory for a defined-benefit plan either. The phrase "benefit accrual" reads most naturally as a reference to what the employer puts in (either in absolute terms or as a rate of change), while the defined phrase "accrued benefit" refers to outputs after compounding.*fn113
Underlying this interpretation is a presumption that Congress wrote "rate of benefit accrual" in one provision and "allocations to employee's account" in the other, but intended those phrases to say the same thing. Rules of construction preclude me from adopting this view. The simple fact is that 'accrual,' using its dictionary meaning and in line with the structure of defined benefit plans, refers to what the employee accumulates [ ], whereas 'allocation,' using its dictionary definition and in line with the structure of defined contribution plans, refers to what an employer puts into the account.*fn114
As the Second Circuit has instructed, "[w]hen Congress uses particular language in one section of a statute and different language in another, we presume its word choice was intentional."*fn115 If Congress had intended for "the rate of an employee's benefit accrual" to mean "the rate at which amounts are allocated to the employee's account," it would have copied those terms from the analogous provision.
The other persuasive argument favoring plaintiffs' interpretation of the statute is ERISA's binary regulatory framework for defined contribution plans and defined benefit plans. This duality exists because defined contribution plans and defined benefit plans make categorically different promises to employees.*fn116 As a result, the respective anti-discrimination provisions prescribe distinct metrics for detecting discrimination. Specifically, because employees with defined contribution plans are guaranteed employer contributions to retirement accounts but are not guaranteed a retirement benefit, discrimination is better discerned by looking at "the rate at which amounts are allocated to the employee's account."*fn117 By contrast, because employees with defined benefit plans are guaranteed a retirement benefit ("output"), the sheer "import of the statutory language" connotes that '"rate of benefit accrual' refers to the outputs from the Plan."*fn118
A binary regulatory approach was also required because by their very nature, '"[p]rojections' and 'guesswork' are at the heart of defined benefit plans."*fn119 Effective regulation of such plans necessarily involves monitoring the future value of the overall pension benefit that will be payable at normal retirement age. This focus on the value of accrued benefits is apparent throughout the statutory scheme. For example, for purposes of testing compliance with ERISA's three accrual rules, the rate at which participants earn their accrued benefit is examined. Similarly, "the rules governing distributions from defined benefit plans are framed in terms of the normal retirement benefit," which explains distributions in optional forms, such as lump-sum payments, are required to be equal or greater than the actuarial equivalent of such benefit.*fn120 Nevertheless, defendants insist that the proper test for age discrimination concerns the present value of the hypothetical accounts, rather than their value at the normal retirement age. If Congress wanted to divorce ERISA's age-based accrual standards from its otherwise consistent approach toward regulating defined benefit plans it could have done so by either using explicit language to that effect or using a single provision to apply to both types of plans. Congress did just this elsewhere in the statutory regime, "unsurprisingly" using one provision where they intended one standard to apply to both defined benefit and defined contribution plans.*fn121
Defendants also urge this Court to find that a "mere correlation" exists between reduced rates of accrual and older age, because any reduction in rates of benefit accrual is really a function of the time value of money. While this is a fair statement, it is inaccurate to the extent it assumes that the time value of money and age are mutually exclusive.*fn122 Under a cash balance plan, employees never receive the amount in their hypothetical accounts as their retirement benefit. Instead, the cash balance in the account must be converted to the age 65 annuity.*fn123 Because this actuarial conversion requires knowing an individual's age, cash balance plans are not age neutral.
The short of it is that because of this conversion to an age 65 annuity, younger workers are credited with more years to accumulate interest on their hypothetical accounts.*fn124 Therefore, as a matter of plain arithmetic, a greater value is added to a younger employee's account than to an older employee's account. In other words, "for similarly situated workers (same salary and work history), the older worker, by definition, will receive a smaller retirement benefit simply because he is older, and thus closer to age 65."*fn125 This problem is exacerbated further by the phenomenon of compound interest: as the same interest rate is applied to participants' ever-increasing principal balances, the rate at which older workers accrue benefits is slower than that of younger workers. In this light, the rate of contributions to an individual's account is dependent on age.
Defendants proffer several policy arguments that weigh against measuring the rate of benefit accrual as an annuity beginning at normal retirement age.*fn126 For instance, they argue that such a finding will "discourage employers from guaranteeing a level growth in the value of a pension over time," resulting in the widespread adoption of defined contribution plans, and also preclude plans like this one from using a variable interest credit rate.'*fn127 While these practical considerations may have merit, the language of section 204(b)(1)(H), this Circuit's holding in Esden, and the construction of ERISA itself compel the conclusion that such plans are age-discriminatory.*fn128
This "dispute is not over what a 'better' regulatory regime, more accommodating to the design objectives of cash balance plans might look like."*fn129 Esden fully acknowledged that "the governing statutes [including ERISA] and regulations were developed with traditional final-pay defined benefit plans in mind" and that "they do not always fit in a clear fashion with cash balance plans and they sometimes require outcomes that are in tension with the objectives of those plans."*fn130 Nevertheless, I must adhere to Esden's classification of cash balance plans as defined benefit plans. I am not "free to pursue [what may indeed be salutary objectives] at the expense of a textual interpretation . . . ."*fn131 Under these circumstances, I must '"apply the text, not  improve upon it.'"*fn132 Thus while this ruling will likely increase the difficulty of designing cash balance plans that comport with ERISA, the proper forum for redress is Congress.*fn133
For the reasons discussed above, summary judgment in plaintiffs' favor is granted on Count I for impermissible backloading, Count III for violations of ERISA's minimum accrual tests, Count V for age discrimination, and Count VII for failing to meet statutory notice requirements. Summary judgment for plaintiffs on Count II, alleging whipsaw, is denied without prejudice. Summary judgment for defendants is denied.
Defendants are ordered to reform the Plan to comply with ERISA. Other appropriate remedies have yet to be determined, in relation to the several claims for relief alleged in the Amended Complaint filed September 21, 2005. The parties, by their respective counsel, shall make written submissions by January 16, 2007, addressing the issue of a remedy not inconsistent with the rulings contained in this Opinion, and shall appear for a conference on January 2, 2007, at 4:30 p.m. The Clerk of Court is directed to close these motions [Nos. 31, 36 and 43 on the Docket Sheet].