Retirees are typically given a choice of either a lump sum retirement payout or an annuity, paid over their lifetime. Annuities often have a cost-of-living adjustment that is made every year in the future, but lump sum payments do not. In this case, the plaintiff took the lump sum payout, then sued the pension plan administrator, claiming that a cost-of-living adjustment for those choosing an annuity is an "accrued benefit" and must be paid to all retirees, including those taking the lump sum.
The Seventh Circuit agreed, ruling that COLAs are accrued benefits for those taking both annuities and lump sum payments, even though the plan provides otherwise.
The NAM filed an amicus brief supporting review by the Supreme Court. We warned that mandatory inclusion of a cost-of-living adjustment in lump-sum payouts would have substantial negative impacts on other defined benefit plans, and would encourage lump sum withdrawals of pension funds. The courts should enforce clear language in pension plans that limits COLAs to those who choose annuities instead of lump sum payouts. Failing to do so would cause many plans to be rewritten or eliminated. The lower court decision interferes with the autonomy of the contracting parties to define their relationship, could lead to more prevalent underfunding of pension plans, and could encourage more retirees to choose lump sum payments, which is becoming a risky trend.
On March 17, 2008, the Supreme Court refused to hear this appeal.