IN THE UNITED STATES DISTRICT COURT FOR THE …durandpensionclassaction.com/PDFs/72.pdfDistrict. The second sentence of paragraph 5 contains legal conclusions to which no response

IN THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF KENTUCKY

_______________________________________ JENNIFER A. DURAND, et al., On behalf of herself and on behalf of all others similarly situated, Plaintiffs, v. THE HANOVER INSURANCE GROUP, INC., THE ALLMERICA FINANCIAL CASH BALANCE PENSION PLAN, Defendants. _______________________________________

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No. 07-CV-130-S

DEFENDANTS THE HANOVER INSURANCE GROUP, INC. AND

THE ALLMERICA FINANCIAL CASH BALANCE PENSION PLAN’S ANSWER AND ADDITIONAL DEFENSES TO PLAINTIFFS’

FIRST AMENDED CLASS ACTION COMPLAINT

Defendants The Hanover Insurance Group, Inc. (“Hanover”) and The Allmerica

Financial Cash Balance Pension Plan (“Plan”) (collectively “Defendants”) hereby respond to

Plaintiffs Jennifer A. Durand’s and Walter Wharton’s (“Plaintiffs”)1 First Amended Class Action

Complaint as follows:

NATURE OF THE ACTION

1. This is a proposed class action under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), 29 U.S.C. § 1001, et seq.

Answer: Defendants admit that Plaintiffs purport to bring this action as a class action under

ERISA, and deny the remaining allegations of paragraph 1.

1 The claims of the additional named plaintiff, Michael Tedesco, were dismissed in the Court’s Memorandum Opinion (Doc. 71), Mar. 31, 2011.

Case 3:07-cv-00130-JDM Document 72 Filed 04/14/11 Page 1 of 30 PageID #: 1255

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SUBJECT MATTER JURISDICTION

2. This Court has subject matter jurisdiction over this action by virtue of 28 U.S.C. § 1331 because this is a civil action arising under the laws of the United States. Specifically, this action is brought under ERISA § 502(a), 29 U.S.C. § 1132(a).

Answer: Defendants admit that this Court has subject matter jurisdiction pursuant to 28 U.S.C.

§ 1331 and that Plaintiffs bring this action under 29 U.S.C. § 1332(a).

PERSONAL JURISDICTION

3. This Court has personal jurisdiction over Defendants because they transact business in, and have significant contacts with, this District, and because ERISA provides for nationwide service of process. See ERISA § 502(e)(2), 29 U.S.C. § 1132(e)(2).

Answer: Defendants admit this Court has personal jurisdiction over them pursuant to 29 U.S.C.

§ 1332(e)(2).

VENUE

4. Under ERISA § 502(e), 29 U.S.C. § 1132(e), an action “may be brought in the district where the plan is administered, where the breach took place, or where a defendant resides or may be found.” Venue here is proper for both Defendants on three of the four bases provided by the statute.

Answer: Defendants do not contest venue.

5. First, this is the District where one or more of the breaches occurred because benefits due as a matter of law under the Plan were not paid to Plaintiff Durand, a resident of this District, that should have been paid in this District. Where a participant claims that a violation of ERISA resulted in a failure to pay a benefit due under an ERISA plan, the alleged breach is deemed, for purposes of venue under § 1132(e)(2), to have occurred in the place where the participant receives (or should have received) his or her benefits. It was in this District that Plan benefits that should have been paid to Plaintiff Durand were not paid because Defendants unlawfully calculated her benefit, as set forth below. This District, where performance was due, is thus one place “where the breach took place.”

Answer: Defendants deny the first sentence of paragraph 5, except lack knowledge or

information sufficient to form a belief as to whether Plaintiff Durand is a resident of this

District. The second sentence of paragraph 5 contains legal conclusions to which no

response is required. Defendants deny the remaining allegations of paragraph 5, but do not

contest that venue is proper in this District.


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6. Second, the Plan and the Company “may be found” here because either or both Defendants transact business in, and have significant contacts with, this District and thus have continuous and systematic general business contacts with this District.

Answer: Without admitting the allegations of paragraph 6, Defendants do not contest venue.

7. Third, Defendants each “reside[]” here within the meaning of ERISA § 502(e)(2), 29 U.S.C. § 1132(e)(2).

Answer: Defendants deny the allegations of paragraph 7.

THE PARTIES

8. Plaintiff Jennifer A. Durand is a former employee of the Company who resides in Louisville, Kentucky. Plaintiff Durand participated in the Plan during her period of employment with the Company (1995-2003) and remains a Plan participant, as defined in ERISA § 3(7), because although she received benefits from the Plan, it owes her additional benefits that it has not yet paid her, as set forth herein. Ms. Durand is a member of the Class and the Pre-2004 Distribution Subclass.

Answer: Defendants admit that Plaintiff Durand is a former employee of The Hanover

Insurance Group, Inc., or one or more of its affiliates or former affiliates, and at various

times was a participant in the Allmerica Financial Cash Balance Pension Plan. Defendants

lack knowledge or information sufficient to form a belief as to whether Plaintiff Durand

resides in Louisville, Kentucky. Defendants admit that Plaintiff Durand is a member of the

putative Class as defined, and deny the remaining allegations of paragraph 8.

9. Plaintiff Walter J. Wharton is a former employee of the Company who resides in Grayson, Georgia. Plaintiff Wharton participated in the Allmerica Plan during his period of employment with the Company (2001-2005) and remains a Plan participant, as defined in ERISA § 3(7), because although he received benefits from the Plan, it owes him additional benefits that it has not yet paid him, as set forth herein. Mr. Wharton is a member of the Class and the 2004-2006 Distribution Subclass.

Answer: Defendants admit that Plaintiff Wharton is a former employee of The Hanover

Insurance Group, Inc., or one or more of its affiliates or former affiliates, and at various

times was a participant in the Allmerica Financial Cash Balance Pension Plan. Defendants

lack knowledge or information sufficient to form a belief as to whether Plaintiff Wharton


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resides in Grayson, Georgia. Defendants admit that Plaintiff Wharton is a member of the

putative Class as defined, and deny the remaining allegations of paragraph 9.

10. Plaintiff Michael A. Tedesco is a former employee of the Company who resides in Wilmington, Massachusetts. Plaintiff Tedesco participated in the Plan during his period of employment with the Company (1993-1999) and remains a Plan participant, as defined in ERISA § 3(7), because he has an accrued benefit under the Plan which has yet to be distributed. Mr. Tedesco is a member of the Class and the Post-2006 Distribution Subclass.

Answer: The claims of Michael Tedesco were dismissed in the Court’s Memorandum Opinion

(Doc. 71), Mar. 31, 2011, and therefore no response is required. To the extent a response is

required, Defendants deny the allegations of paragraph 10.

11. Defendant The Hanover Insurance Group, Inc. (NYSE: THG), formerly known as First Allmerica Financial Life Insurance Company and State Mutual Life Assurance Company of America and referred to herein (along with its affiliates and former affiliates, including but not limited to The Hanover Insurance Company and Citizens Insurance Company of America) as “Allmerica” or the “Company,” is the sponsor of the Plan, the Plan Administrator and a named fiduciary of the Plan, within the meaning of ERISA §§ 3(16)(A)-(B), 3(21), and 402(a). The Company is sued in all of these capacities.


12. Defendant The Allmerica Financial Cash Balance Pension Plan is and was at all relevant times an “employee pension benefit plan,” and more specifically a “defined benefit plan,” within the meaning of ERISA §§ 3(2)(A) and 3(35). References to “The Allmerica Financial Cash Balance Pension Plan,” the “Allmerica Plan,” and the “Plan” include a reference to The Allmerica Financial Cash Balance Pension Plan, EIN 04-1867050, Plan No. 333; The Allmerica Financial Cash Balance Pension Plan as Adopted by The Hanover Insurance Company, EIN 13-5129825, Plan No. 003; and any other versions of the Plan adopted or maintained by the Company. All version [sic] of the Plan and the Plan’s Summary Plan Descriptions (“SPDs”) and/or Statement of Material Modifications (“SMMs”) are incorporated by reference, as are all other documents referenced herein and/or attached hereto. See Fed. R. Civ. P. 10(c).

Answer: Defendants admit the first sentence of paragraph 12, and admit that Plaintiffs purport

to refer to the documents set forth in the second sentence of paragraph 12. Defendants deny that

“all versions” and “all other documents” relating to the referenced documents are incorporated in

Plaintiffs’ First Amended Class Action Complaint by reference, because it is vague and

ambiguous as to which documents and/or versions Plaintiffs refer.


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CLASS ACTION ALLEGATIONS

1. Plaintiffs bring suit on behalf of themselves and on behalf of all other participants and beneficiaries similarly situated under the provisions of Rule 23 of the Federal Rules of Civil Procedure with respect to violations alleged herein. Plaintiffs propose one Class and three Subclasses as follows:

Answer: Defendants admit that Plaintiffs purport to bring this action as a class action, and deny

the remaining allegations of paragraph 1.

2. The proposed Class is defined as follows:

All persons who had an accrued benefit under the cash balance formula of the Allmerica Cash Balance Pension Plan as of December 31, 2003 (including participants who received their first Allocation on or about March 1, 2004, for the 2003 plan year) which was vested or later became vested, and the beneficiaries and estates of such persons.

Answer: Defendants admit that Plaintiffs purport to bring this action as a class action on behalf

of the described individuals, and deny the remaining allegations of paragraph 2.

3. The proposed Pre-2004 Distribution Subclass is defined as follows:

All Class Members who received a lump sum or other distribution of a participant’s cash balance benefit with an annuity starting date on or before December 31, 2003, and the beneficiaries and estates of such persons.



4. The proposed 2004-2006 Distribution Subclass is defined as follows:

All Class Members who received a lump sum or other distribution of a participant’s cash balance benefit with an annuity starting date between January 1, 2004 and August 17, 2006, and the beneficiaries and estates of such persons.



5. The proposed post-2006 Distribution Subclass is defined as follows:


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All Class members who have received or will receive a lump sum or other distribution of a participant’s cash balance benefit with an annuity starting date after August 17, 2006, and the beneficiaries and estates of such persons.



6. The requirements for maintaining this action as a class action under Fed. R. Civ. P. 23(a)(1) are satisfied in that there are too many Class and Subclass members for joinder of all of them to be practicable. There are thousands of members of the proposed Class and Subclasses dispersed among many states.

Answer: The first sentence of paragraph 6 contains legal conclusions requiring no response. To

the extent a response is required, Defendants deny the first sentence of paragraph 6. Defendants

admit the second sentence of paragraph 6.

7. The claims of the Class and Subclass members raise numerous common questions of fact and law, thereby satisfying the requirements of Fed. R. Civ. P. 23(a)(2). There are several issues of fact and law concerning liability and/or relief common to all Class and Subclass members.

Answer: The allegations of paragraph 7 contain legal conclusions requiring no response. To the

extent a response is required, Defendants deny the allegations of paragraph 7.

8. Plaintiffs’ claims are typical of the claims of Class or Subclass members, and therefore satisfy the requirements of Fed. R. Civ. P. 23(a)(3). They do not assert any claims relating to the Plan in addition to or different than those of the Class or applicable Subclass.

Answer: Defendants lack knowledge or information sufficient to form a belief as to the truth of

the second sentence of paragraph 8. The remaining allegations of paragraph 8 contain legal

conclusions requiring no response. To the extent a response is required, Defendants deny the

remaining allegations of paragraph 8.

9. Plaintiffs are adequate representatives of the proposed Class and Subclasses, and therefore satisfy the requirements of Fed. R. Civ. P. 23(a)(4). Plaintiffs’ interests are identical to those of the proposed Class and applicable Subclasses. Defendants have no unique defenses against them that would interfere with their representation of the Class or applicable Subclasses. Plaintiffs have engaged competent counsel with both ERISA and class action litigation experience.


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Answer: Defendants deny the second and third sentences of paragraph 9. Defendants lack

knowledge or information sufficient to form a belief as to the truth of the fourth sentence of

paragraph 9. The remaining allegations of paragraph 9 contain legal conclusions requiring no

response. To the extent a response is required, Defendants deny the remaining allegations of

paragraph 9.

10. Additionally, all of the requirements of Fed. R. Civ. P. 23(b)(1) are satisfied in that the prosecution of separate actions by individual members of the Class and each of the proposed Subclasses would create a risk of inconsistent or varying adjudications establishing incompatible standards of conduct for defendants and individual adjudications present a risk of adjudications which, as a practical matter, would be dispositive of the interests of other members who are not parties.

Answer: The allegations of paragraph 10 contain legal conclusions requiring no response. To

the extent a response is required, Defendants deny the allegations of paragraph 10.

11. All of the requirements of Fed. R. Civ. P. 23(b)(2) also are satisfied in that the Plan’s actions affected all members in the Class and each proposed Subclass the same manner, making appropriate final declaratory and injunctive relief with respect to the Class and each such Subclass as a whole.


the extent a response is required, Defendants deny the allegations of paragraph 11.

BACKGROUND

12. Jennifer Durand worked for Allmerica between October 17, 1995 and April 30, 2003. During those 7-1/2 years, she was a participant in the Plan, under which she accrued pension benefits.

Answer: Defendants admit the allegations of paragraph 12.

13. Michael Tedesco worked for Allmerica between October 25, 1993 and March 24, 1999. During those 5-1/2 years, he was a participant in the Plan, under which he accrued pension benefits.

Answer: The claims of Michael Tedesco were dismissed in the Court’s Memorandum Opinion

(Doc. 71), Mar. 31, 2011, and therefore no response is required. To the extent a response is

required, Defendants deny the allegations of paragraph 13.


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14. Walter Wharton worked for Allmerica between July 30, 2001 and February 25, 2005. During those 3-1/2 years, he was a participant in the Plan, under which he accrued pension benefits.


15. Allmerica converted its traditional defined benefit pension plan to a cash balance plan effective January 1, 1995. Under the terms of the amended Plan, a hypothetical or notional “account” was established for Plaintiffs and all other participants who were participants in the Plan at the time or who joined the Plan at a later date. Benefits under the amended Plan’s cash balance formula were and are calculated by reference to each participant’s notional account balance.

Answer: Defendants admit that effective January 1, 1995, its defined benefit pension plan was

converted to a cash balance plan, that hypothetical accounts were set up for Plaintiffs Durand and

Wharton and other Plan participants, and that certain Plan benefits were calculated by reference

to participants’ account balances. Defendants deny the remaining allegations of paragraph 15.

16. The opening balance of each participant’s notional account was zero, and thereafter was increased by “compensation credits” and “interest credits” allocated to the account for years of service beginning on or after January 1, 1995.


17. Until compensation credits were discontinued effective for Plan years beginning on and after January 1, 2005, the Plan provided for compensation credits to be allocated to participant accounts as of March 1 of the year following each Plan year (the calendar year) equal to 0.5% of each participant’s compensation for that Plan year. See Plan §§ 4.02, 2.05. The Company also provided additional compensation credits for each Plan year between 1995 and 2004 via actual or de facto amendments adopted after the end of each year, ranging between 2.5% and 6.5% of compensation.

Answer: Defendants admit that while the Plan provided for compensation credits, for Plan years

beginning January 1, 1995 through December 31, 2004, compensation credits were allocated to

participant accounts as of March 1 or the first business day of March following the year to which

the credit related and further refer to the Plan (effective January 1, 1995 and revised effective

January 1, 1997) for its full and complete contents. Defendants admit that from time to time the

Plan provided additional compensation credits, and deny the remaining allegations of paragraph

17.


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18. These compensation credits were the Plan’s method of denoting a portion of the benefit accrued by participants for each year of service with the Company. As a matter of law, because the Plan is a defined benefit plan, not a defined contribution plan, participants did not accrue “compensation credits” each year. Rather, for each year of service, participants accrued a “benefit” payable at normal retirement age (age 65) attributable to – i.e., derived from – the compensation credits credited to their accounts for that year.

Answer: Defendants admit that compensation credits were used by the Plan (effective January

1, 1995 and revised effective January 1, 1997) to denote each year of service, that the Plan was a

defined benefit plan, and that age 65 was the Plan’s normal retirement age. Defendants deny the


19. At the same time that each annual compensation credit was credited to their accounts, Plaintiffs and other participants also accrued a related benefit attributable to promised “interest credits” allocable to their accounts with respect to each compensation credit allocation. See Plan § 4.03. This benefit was equal to the stream of future interest credits promised with respect to each compensation credit, payable through at least age 65 at the rate determined pursuant to the Plan’s interest crediting rate formula in place as of the date the underlying compensation credit was credited to the participant’s account (or any higher rate determined under an amended interest crediting formula).

Answer: Defendants admit that at the same time each annual compensation credit was credited

to Plaintiffs’ and other participants’ accounts under the Plan (effective January 1, 1995 and

revised effective January 1, 1997), they also were credited with interest credits allocable to their

accounts as provided in the Plan. Defendants deny the second sentence of paragraph 19.

20. The stream of interest credits promised under the Plan with respect to each compensation credit accrued at the same time that the benefits attributable to each compensation credit accrued. The stream of interest credits promised under the Plan with respect to each compensation credit was not conditioned on a participant’s continued service with the Company. The interest credits under the Plan were and are “frontloaded” within the meaning of Section III.A of IRS Notice 96-8, 1996-1 C.B. 359, 1996 WL 17901 (Feb. 5, 1996).

Answer: Defendants deny the first and second sentences of paragraph 20. The third sentence of

paragraph 20 contains legal conclusions requiring no response. Defendants further refer to the

referenced Notice for its full and complete contents and deny any allegations or characterizations

inconsistent therewith.


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21. In the case of a frontloaded interest credit plan, the benefits attributable to future interest credits with respect to a hypothetical allocation accrue at the same time that the benefits attributable to the hypothetical allocation accrue. The frontloading of the interest credits was and is necessary in the case of the Plan because otherwise the Plan would have been unlawfully “backloaded” in violation of ERISA and Internal Revenue Code (“IRC” or “Code”) benefit accrual standards. (If Defendants argue, and the Court agrees, that any portion of the interest credits provided under the Plan were and/or are not frontloaded, Plaintiffs allege that the Plan was and is unlawfully backloaded within the meaning of ERISA § 204(b)(1)(A)-(C) and IRC § 411(b)(1)(A)-(C).)


the extent a response is required, Defendants refer to the referenced statutes for their full and

complete contents and deny any allegations or characterizations inconsistent therewith.

Defendants deny the remaining allegations of paragraph 21.

22. Under the Plan and ERISA, Plaintiffs and each of the other participants in the Plan accrued a benefit with two related parts for each year of service with the Company: (1) a benefit attributable to the “compensation credits” allocated to the participant’s account for each year equal to a stated percentage of the participant’s compensation during the year, plus (2) a benefit attributable to the stream of future “interest credits” corresponding to each such compensation credit payable through normal retirement age at the rate determined under the interest crediting formula in place at the time each compensation credit accrued (or any higher rate determined under an amended interest crediting formula).

Answer: Defendants admit that for each year from January 1, 1995 through December 31, 2004,

Plaintiffs Durand and Wharton and certain other Plan participants received compensation credits

and interest credits, and deny the remaining allegations of paragraph 22.

23. From January 1, 1995 through February 29, 1997, the interest crediting rate promised under the SPD with respect to compensation credits allocated for 1995 and 1996 was the rate payable under the Fixed Interest Fund. The rate payable under the Fixed Interest Fund for 1996 and 1997 was 6%.

Answer: Defendants deny the first sentence of paragraph 23. Defendants admit the second

sentence of paragraph 23.

24. Thereafter, the interest crediting rate promised under the terms of the Plan and the SPD, applicable to each participant’s entire Account Balance and each new compensation credit, was based on the rate of return generated from the investment allocation selected by each participant for his or her own account. The investment allocation participants could select was based on a broadly-diversified menu of hypothetical investment options described in the SPD. This menu of hypothetical investment options included an Allmerica stock fund and a wide


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variety of domestic and international equity funds, corporate and United States government bond funds, and a fixed interest fund and money market fund.

Answer: Defendants admit that from January 1, 1997 through December 31, 2003, the interest

crediting rate under the terms of the Plan (effective January 1, 1997) was the rate of return

generated from the investment allocations selected by each participant for his or her own

account. Defendants admit the second and third sentences of paragraph 24. Defendants further

refer to the Plan for its full and complete contents. Defendants deny the remaining allegations of

paragraph 24.

25. Accordingly, for years after 1996, the interest crediting rate formula (sometimes referred to herein and in IRS guidance as the interest crediting “rate”) in place with respect to each participant’s Account Balance as of February 29, 2007, and as of the date of each compensation credit allocated thereafter was and is: the rate of return generated from the investment allocation selected by each participant from among a broadly-diversified menu of hypothetical investment options no less favorable to participants than the menu in place at the time each compensation credit was allocated. Under ERISA and the Code, this formula could not be reduced, by amendment or through the exercise of discretion, with respect to any compensation credit that had already been allocated to a participant’s notional account as of the date of a purported reduction. See, e.g., ERISA §§ 203(a) and 204(g); IRC §§ 411(a) and 411(d)(6); Treasury Regulation § 1.411(d)-4, Q&A-4 (regarding impermissible employer discretion); § 1.411(d)-4, Q&A-1(c)(1) (regarding a pattern of repeated plan amendments).

Answer: The allegations of paragraph 25 relate solely to claims that were dismissed in the

Court’s Memorandum Opinion (Doc. 71) Mar. 31, 2011, and therefore no response is required.

To the extent a response is required, Defendants deny the allegations of paragraph 25.

26. During the relevant period, the Plan also provided that a participant who terminated employment and requested a distribution of benefits before normal retirement age was entitled to a payment no less valuable than the present value of the participant’s vested “Normal Retirement Accrued Benefit.” Plan §§ 2.02 and 7.06(v). The “Normal Retirement Accrued Benefit” was defined under the Plan as the participant’s Account Balance at the time of distribution projected to age 65 at the 30-year Treasury rate. Plan § 2.29. These provisions of the Plan reflected a commitment by the Plan to calculate benefits attributable to future interest credits at a rate equal to the 30-year Treasury rate. The right to receive benefits attributable to future interest credits calculated at a rate equal to the 30-year Treasury rate commitment was, like the right to receive credited interest at a rate equal to that generated from the participant’s hypothetical investment allocation selection, “frontloaded” for the same reason that the right to receive credited interest at a rate equal to that generated from the participant’s hypothetical investment allocation selection was frontloaded.


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Answer: Defendants admit only that for Plan participants who elected a single lump sum

payment, the Plan (effective January 1, 1997) provided that such lump sum “shall not be less

than the present value of the Normal Retirement Accrued Benefit using the Code Section 417

Mortality Table and Code Section 417 Interest Rate.” Defendants admit the second sentence of

paragraph 26, and further refer to the Plan (effective January 1, 1997) for its full and complete

contents. The remaining sentences of paragraph 26 relate solely to claims that were dismissed in

the Court’s Memorandum Opinion (Doc. 71) March 31, 2011, and therefore no response is

required. To the extent a response is required, Defendants deny the remaining allegations of

paragraph 26.

27. Under ERISA, the benefit to which a pension plan participant is entitled to, once vested, is his or her “accrued benefit” under the plan, which ERISA defines as the benefit the participant would be entitled to under the plan, if the participant waits until normal retirement age to receive the benefit, and elects to receive the benefit in the form of a lifetime annuity. ERISA § 3(23); IRC § 411(a)(7). Under ERISA, if an employee’s benefit is to be paid at a time or in a form other than an annual benefit commencing at normal retirement age, the benefit must be the actuarial equivalent of the accrued benefit payable at normal retirement age. ERISA § 204(c)(3); accord IRC § 411(c)(3).


the extent a response is required, Defendants refer to the referenced statutes for their full and

complete contents and deny any allegations or characterizations inconsistent therewith.

28. IRS Notice 96-8 explains how these principles apply in the context of frontloaded cash balance plans, such as Allmerica’s, under which future interest credits to an employee’s hypothetical account balance accrue at the same time as the pay credits to which they relate. According to the Notice, a participant’s “accrued benefit” under a frontloaded cash balance plan is equal to the participant’s current account balance plus the interest credits to which the participant is entitled under the Plan through normal retirement age, with the resulting balance converted into the form of a lifetime annuity commencing at normal retirement age. The Notice provides specific instructions about how a cash balance plan is required to calculate this ERISA accrued benefit when the plan’s interest crediting rate is variable, as under the Allmerica Plan.

Answer: Defendants deny Plaintiffs’ characterization of IRS Notice 96-8 set forth in paragraph

28. Defendants further refer to the referenced Notice for its full and complete contents and deny

any allegations or characterizations inconsistent therewith.


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29. As described above, the Plan committed to credit interest at two rates. Under Plan § 4.03 and the SPD, the Plan committed to credit interest on Account Balances based on the returns generated by the investment allocated [sic] selected by participants. See ¶ 24, supra. According to Notice 96-8, then, a participant’s accrued benefit under the Plan was equal to the participant’s current Account Balance (lawfully-calculated) plus future interest credits calculated using the return generated by the participant-selected investment allocation through normal retirement age.

Answer: Defendants deny the first sentence of paragraph 29. Defendants admit that from

January 1, 1997 through December 31, 2003 the Plan (effective January 1, 1997) credited

Investment Experience Credits to participants’ accounts equaling the gains or losses that would

have resulted if the participants’ hypothetical accounts had actually been invested in the manner

participants elected, further refer to the Plan for its full and complete contents, and deny any

allegations or characterizations inconsistent therewith. Defendants refer to the Notice referenced

in the third sentence of paragraph 29 for its full and complete contents, and deny any allegations

or characterizations inconsistent therewith.

30. Under Plan § 7.06 and the SPD, the Plan committed to project interest at the 30-year Treasury rate. See 25, supra. This translated to an accrued benefit equal to the participant’s current Account Balance (lawfully-calculated) plus future interest credits at the 30-year Treasury rate through normal retirement age. Under ERISA and the Code, this Plan-defined accrued benefit could never be reduced as a result of continued service or the mere passage of time. See ERISA §§ 3(22), 203(a), 204(b)(1)(G); IRC §§ 411(a)(9), 411(a), 411(b)(1)(G). Nor could the Plan-defined accrued benefit increase at an impermissible rate based on continued service or the mere passage of time. See ERISA §§ 203(a), 204(b)(1)(A)- (C); IRC §§ 411(a), 411(b)(1)(A)-(C), 411(a); Treasury Regulation § 1.411(a)-4 and 4T. As a result, the Plan’s commitment to project interest at the 30-year Treasury rate also amounted to a commitment, under the terms of the Plan applied in a manner consistent with ERISA and the Code, to credit interest on Account Balances at the 30-year Treasury rate. See, e.g., Revenue Ruling 2008-7 at p.20 (paragraph preceding “Drafting Information”).




31. The Plan and SPD provisions described above mean that the annual interest crediting rate to which participants were and are entitled under the terms of the Plan and SPD, interpreted in a manner that complies with ERISA and the Code, is equal to the greater of (i) the rate of return generated by the investment allocation elected by each participant from the Plan’s


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401(k)-like hypothetical investment menu and (ii) the 30-year Treasury rate in effect for the year. Id. See also ERISA § 204(g) and IRC 411(d)(6). This is precisely the position taken by the IRS with respect to other cash balance plans with analogous interest crediting and projection formulas. See Ex. 1, July 14, 2009 IRS Ltr. to Danaher Corporation re Danaher Corporation & Subsidiaries Pension Plan at 2 ; Ex. 2, August 5, 2008 IRS Ltr. to Charles Stark Draper Laboratory, Inc. re Retirement Plan for Employees of Charles Stark Draper Laboratory, Inc. at 2; Ex. 3, Internal Revenue Service Employee Plans Technical Advice Memorandum at 4-5.




32. The Plan and SPD provisions described above, interpreted in a manner that complies with ERISA, the Code, and Notice 96-8, mean that the interest rate that is required to be credited for each year is the greater of the two interest crediting rates under the plan. That is, the notional account balance as of any year is equal to the prior notional account balance, increased by the compensation credit for that year and the interest credit determine using the greater of the 30-year Treasury rate applicable to that year and the interest credit determined based upon the participant’s elected interest crediting rate (or the fixed fund rate for years 1996 and 1997).




33. The Plan and SPD provisions described above, interpreted in a manner that complies with ERISA, the Code and Notice 96-8, also mean that the interest projection rate under the Plan is the greater of the two interest crediting rates promised under the Plan. Id. Under the methodology specified in Notice 96-8, each participant’s accrued benefit under the Plan is equal to the participant’s lawfully-calculated Account Balance projected to normal retirement age using a projection rate equal to the expected long-term rate of return on assets deemed to be invested through that age in an account with a promised annual interest rate equal to (i) the return generated by the investment allocation elected by the participant from the Plan’s pre-2004 hypothetical investment menu in that year or (ii) if greater, the applicable 30-year Treasury rate for that year.




34. Notice 96-8 confirms that, under ERISA and the Code, if a participant’s cash balance pension benefit is to be paid at a time or in a form other than an annual benefit


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commencing at normal retirement age, the benefit must be the actuarial equivalent of his or her lawfully-calculated accrued benefit. In the case of a lump sum cash-out, the Notice confirms that actuarial equivalence must not be less than the actuarial equivalent calculated using actuarial assumptions set forth in the statute. See ERISA § 205(g)(3) and IRC § 417(e)(3). Under the terms of the Plan, actuarial equivalence for purpose of calculating annuities is determined using the same assumptions. Plan § 2.02.


the extent a response is required, Defendants refer to the referenced Notice, statutes and Plan for

their full and complete contents and deny any allegations or characterizations inconsistent

therewith. Defendants admit that from January 1, 1997 through December 31, 2003 actuarial

equivalence was determined using the assumptions in Plan (effective January 1, 1997) § 2.02.

35. Notwithstanding all of the above, the Plan Administrator, both before and after the publication of Notice 96-8, calculated participants’ benefits under the Plan as equal to the actuarial equivalent of each participant’s “Normal Retirement Accrued Benefit.” “Normal Retirement Accrued Benefit” is a Plan-defined term that identifies an amount that is not a participant’s ERISA “accrued benefit” under the Plan. A participant’s “Normal Retirement Accrued Benefit” is defined as the participant’s Account Balance projected to age 65 using an assumed interest rate equal to the 30-year Treasury rate. This amount is necessarily less than the participant’s actual ERISA-defined “accrued benefit” which is the participant’s Account Balance projected to age 65 using the interest crediting rate to which the participant is entitled under the terms of the Plan and SPD, because, if the interest crediting rate actually used by the plan is less than the 30-year Treasury rate, then the notional account balance was understated, and if the interest crediting rate actually used by the plan exceeds the 30-year Treasury rate, then the projection to retirement was understated.

Answer: Defendants deny the first sentence of paragraph 35. Defendants admit that under the

terms of the Plan (effective January 1, 1995 and revised effective January 1, 1997), “Normal

Retirement Accrued Benefit,” “means a benefit, projected at any time, of a Participant’s Account

Balance using the Code Section 417 Mortality Table and Code Section 417 Interest Rate,”

further refer to the referenced documents for their full and complete contents and deny any

allegations or characterizations inconsistent therewith. Defendants deny the remaining

allegations of paragraph 35.

36. As interpreted and applied by Defendants, “Normal Retirement Accrued Benefit” became a definitional contrivance and supposed basis upon which to calculate benefits based on each participant’s Account Balance rather then the ERISA-defined accrued benefit. This


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contrived interpretation and application was possible because the “Actuarial Equivalent” (using the assumptions mandated by ERISA and set forth in the Plan) of a participant’s Normal Retirement Accrued Benefit under the literal terms of the Plan is always equal to a participant’s current Account Balance. Defendants interpreted and applied the Plan such that the net effect was that participants were provided a benefit that was always equal in value to a participant’s notional Account Balance.

Answer: Defendants admit that lump sum benefits were paid to participants in amounts that

equaled the value of the participant’s notional account balance at the distribution date, and deny

the remaining allegations of paragraph 36.

37. Defendants were aware from the beginning that their interpretation and application of the Plan’s cash balance benefit calculation provisions were inconsistent with the IRS’s interpretation of ERISA and the Code, an awareness they failed to disclose and in fact hid from Plan participants. This pattern of behavior continued even in the face of mounting evidence that Defendant’s interpretation and application of the Plan’s provisions were unlawful.


38. IRS Notice 96-8, described above, was issued on January 5, 1996 and formally published on February 5, 1996. This was prior to the date of the first compensation credit Allocation made under the Plan on or about March 1, 1996. The Notice states specifically that “in determining the amount of an employee’s accrued benefit [under a cash balance plan], a forfeiture . . . will result if the value of future interest credits is projected using a rate that understates the value of those credits or if the plan by its terms reduces the interest rate or rate of return used for projecting future interest credits.” Id., Sec. III.B.1.

Answer: Defendants refer to the referenced Notice for its full and complete contents and deny

any allegations or characterizations inconsistent therewith. Defendants admit the first

compensation credit under the Plan (effective January 1, 1995) was made on or about March 1,

1996.

39. Defendants considered Notice 96-8 shortly after it was issued and recognized that it did not allow for their interpretation and application of the Plan terms in the determination and/or calculation of participants’ benefits.


40. The Plan was designed by Ira Cohen of PricewaterhouseCoopers’ Benefit Consulting Group. In 1999, Mr. Cohen sent a letter to the United States Treasury Department and IRS that acknowledges that the IRS requires that cash balance plans that credit interest by reference to market rates of return pay benefits that are larger than merely each participant’s current account balance, absent a definition of normal retirement age that the Allmerica Plan did


- 17 -

not adopt. Ex. 4, Letter from Ira Cohen, PricewaterhouseCoopers LLP, to IRS Commissioner Charles O. Rossotti and Deputy Assistant Secretary for Tax Policy Jonathan Talisman, dated Sept. 30, 1999, reprinted in Tax Notes Today, Nov. 18, 1999.

Answer: Defendants admit only that the Plan (effective January 1, 1995) was designed by

PricewaterhouseCoopers’ Benefit Consulting Group. Defendants lack knowledge or information

sufficient to form a belief as to the second sentence of paragraph 40, and therefore deny the

sentence.

41. The Allmerica Plan is a cash balance plan that credits interest by reference to market rates of return.

Answer: Defendants admit that from January 1, 1997 through December 31, 2003 the Plan

(effective January 1, 1997) was a cash balance plan that credited interest by reference to rates of

return on investment selections made by participants in their hypothetical accounts, and deny the


42. In 2000, the Eleventh Circuit decided Lyons v. Georgia-Pacific Corp., 221 F.3d 1235, 1237-38 (11th Cir. 2000), and the Second Circuit decided Esden v. Bank of Boston, 229 F.3d 154, 164-173 (2d Cir. 2000). Esden and Lyons both concluded IRS Notice 96-8 accurately reflects how cash balance plan benefits must be calculated. Although they did not involve plans with an Allmerica-style participant direction feature, Esden and Lyons both involved plans employing variable outside index crediting rates like the Allmerica Plan. In both cases, the courts held that the plans failed to pay the present value of participants’ lawfully-calculated account balances projected to normal retirement age at a rate reflecting the future interest credits participants would have received had they left their benefit in the plan until retirement age.


the extent a response is required, Defendants admit that the plans at issue in the referenced

decisions differed from the Allmerica Plan in that the Allmerica Plan allowed each participant to

choose his or her hypothetical investment portfolio from a number of alternatives, each of which

had a rate of return that varied, up and down and from day to day. Defendants further refer to the

referenced decisions, for their full and complete contents, and deny any allegations or

characterizations inconsistent therewith.


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43. In 2001, the district court in Berger v. Nazametz, 157 F.Supp.2d 998 (S.D. Ill. 2001) – relying on Lyons and Esden – also found that IRS Notice 96-8 accurately reflects how cash balance plan benefits must be calculated. The district court’s opinion was later affirmed by the Seventh Circuit in 2003. Berger also involved a plan that, although it did not have an Allmerica-style participant direction feature, employed a variable outside index crediting rate like the Allmerica Plan. The court held that Xerox plan failed to pay the present value of participants’ lawfully-calculated account balances projected to normal retirement age at a rate reflecting the future interest credits participants would have received had they left their benefit in the plan until retirement age.


the extent a response is required, Defendants refer to the referenced decision and Notice for their

full and complete contents, and deny any allegations or characterizations inconsistent therewith.

44. In March 2002, following a random audit of some 60 cash balance plans, the Inspector General of the United States Department of Labor (“DOL”) issued a report (attached to Plaintiff’s Original Complaint as Exhibit 2), calling for increased enforcement actions by DOL, having found that a significant percentage of the plans it investigated were computing lump sums in violation of the law’s requirements. In explaining how one plan, later identified in press reports as the Allmerica Plan, was unlawfully calculating benefits, the report said:

In another plan, the sponsor [Allmerica] allowed participants to select hypothetical investments and then set each participant’s interest credit rate at the rate of return of the hypothetical investments. The interest credit rate for the participants in our sample varied from 9.01 percent to 16.5 percent. This interest credit rate is not one of the “safe harbor” rates of [IRS] Notice 96-8 and, thus, would require a projection and discount to arrive at a present value of the accrued benefit. The plan would not be able to pay the cash balance account as the lump sum benefit. The plan administrator told us that the plan used the ERISA § 205 rate [the 30-year Treasury rate] for projection purposes and this made the account balance the actuarial equivalent of the normal retirement benefit. However, Notice 96-8 specifically states this would violate ERISA.

Notice 96-8 states:

... in determining the amount of an employee’s accrued benefit, a forfeiture .... will result if the value of future interest credits is projected using a rate that understates the value of those credits or if the plan by its terms reduces the interest rate or rate of return used for projecting future interest credits.

In discussing plans when the interest credit rate is higher than the ERISA §205 rate, Notice 96-8 states:


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If such a plan provided that the rate used for projecting the amount of future interest credit rates were no greater than the interest rate under 417(e)(3), the projection would result in forfeiture.

This is exactly what this plan accomplished. While actually accruing benefits at higher rates, the administrator reduced the projection of future interest credits to no greater than the 417(e) rate and paid the account balance as the benefit. The administrator’s reasoning was that the plan stated the balance represented the accrued benefit and this allowed the payment as full benefit. The plan also stated that it had a qualification letter from the IRS, which provided IRS approval of the payment method.

We do not agree with either argument. A plan provision that violates ERISA is invalid, as legal requirements take precedence over plan provisions. Also, the courts have held that an IRS qualification letter does not protect a plan as to participant benefits. In one case, Esden v. Bank of Boston, the plan sponsor raised this defense and the court concluded that the qualification letter protects the plan from tax disqualification, but does not protect the plan as to participant benefits that may be improperly paid.

Orig. Compl. (Doc. 1), Ex. 2, DOL IG Report at 12-13 (emphasis added). [Footnote 2]: The Plan’s identity as one of the 13 plans the DOL IG found to have violated ERISA was disclosed by a member of Congress shortly after the DOL IG Report was issued, and was later confirmed by Allmerica itself. See, e.g., Ex. 3, “Penalties Sought in Pension Violations 13 Firms Underpaid Workers, Audit Finds,” Boston Globe, May 21, 2002; Ex. 4, “First Allmerica Financial Accused of Short-Changing Employee Pension Plans,” Bestwire Service, May 24, 2002 (quoting company spokesman).

Answer: Defendants refer to the referenced report and documents cited for their full and

complete contents, and deny any allegations or characterizations inconsistent therewith.

Defendants deny the remaining allegations of paragraph 44.

45. Each of the statements DOL IG Report attributes to the “plan administrator” were in fact made by one or more persons acting on behalf of Allmerica or the Allmerica Plan Administrator to the DOL IG or DOL IG personnel. Specifically, Defendants (or one or more persons acting on one or both Defendants’ behalf) told the DOL IG that the Plan used the 30- year Treasury rate for projection purposes. Defendants (or one or more persons acting on one or both Defendants’ behalf) told the DOL IG that use of the 30-year Treasury rate for projection purposes made the Account Balance the actuarial equivalent of the age-65 accrued benefit. Defendants (or one or more persons acting on one or both Defendants’ behalf) told the DOL IG that the Account Balance represented the accrued benefit. Defendants (or one or more persons acting on one or both Defendants’ behalf) told the DOL IG that because the Account Balance represented the accrued benefit, this allowed the payment of the vested Account Balance as a full payment of a participant’s benefit.


the allegations of paragraph 45, and therefore deny the allegations of paragraph 45.


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46. Shortly after the Inspector General’s report was made public, a member of Congress disclosed the Allmerica Plan’s identity as one of the plans discussed in the report as calculating benefits in violation of ERISA. See Orig. Compl. Ex. 3, “Penalties Sought in Pension Violations 13 Firms Underpaid Workers, Audit Finds,” Boston Globe, May 21, 2002, and Ex. 4, “First Allmerica Financial Accused of Short-Changing Employee Pension Plans,” Bestwire Service, May 24, 2002. It was in response to these reports that Defendants issued the following statement to the press:

We are very confident that we have been calculating benefits in accordance with the terms of the plan and in accordance with the law and applicable regulations. We have received two letters of determination from the Internal Revenue Service – the most recent in February – concluding that the plan was qualified under the applicable code in the regulation.

Orig. Compl. Ex. 4.

Answer: Defendants admit that the Inspector General’s Report was made public and a member

of the United States Congress disclosed that the Plan was discussed in the Inspector General’s

Report. Defendants admit that Allmerica Financial Group issued a statement containing the

language excerpted in paragraph 46. Defendants further refer to the referenced report and

documents for their full and complete contents, and deny any allegations or characterizations

inconsistent therewith.

47. Defendants did not provide Plan participants with a copy of this statement.


the allegations of paragraph 47, and therefore deny the allegations of paragraph 47.

48. Notwithstanding the DOL IG’s Report and all of the IRS guidance and case law described herein that preceded and followed it, the Plan Administrator continued to interpret and apply the terms of the Plan and SPD in the same manner as it had from the inception, i.e., without considering ERISA. In interpreting and applying the provisions of the Plan and SPD without considering ERISA, the Plan Administrator acted recklessly, failed to exercise its responsibilities honestly and/or in good faith, and/or failed to perform its duties with the requisite loyalty and prudence and regard for the legality of its actions required of an ERISA fiduciary. See ERISA §§ 404(a)(1)(A), (a)(1)(B), (a)(1)(D).



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49. Less than a year later, in April 2003, Ms. Durand terminated employment with Allmerica. Shortly thereafter, on forms supplied to her by the Plan, she requested that her vested accrued benefit under the Plan be distributed in a lump sum.

Answer: Defendants admit that in April 2003, Ms. Durand terminated employment with

Allmerica, and requested a lump sum distribution of Plan (effective January 1, 1997) benefits,

and deny the remaining allegations of paragraph 49.

50. On August 1, 2003, the Seventh Circuit affirmed the district court’s decision in Berger. Writing for the Seventh Circuit, Judge Posner explained that Notice 96-8 “is an authoritative interpretation of the applicable statutes and regulations” and that cash balance plans are required to comply with the calculation methodology set forth therein. Berger v. Xerox Corp. Ret. Income Guar. Plan, 338 F.3d 755, 762 (7th Cir. 2003). The projection to age 65 must reflect the interest crediting rate promised under the plan, the court said – it is not enough to “go through the motions of first projecting future credits at the [statutory discount] rate and then discounting them at the same rate to present value,” since that would be no different than saying “that the employee’s entitlement is just to whatever his hypothetical cash balance is when he takes his retirement benefits.” Id. at 761.


the extent a response is required, Defendants refer to the referenced decision for its full and

complete contents, and deny the remaining allegations of paragraph 50.

51. In considering Ms. Durand’s request for benefits, the Plan Administrator interpreted and applied the terms of the Plan in the same manner as it had interpreted those terms when calculating the benefits payable to other participants before the DOL IG’s Report.

Answer: Defendants admit that in considering Ms. Durand’s request for benefits, the Plan

(effective January 1, 1997) interpreted and applied Plan terms, and deny the remaining

allegations of paragraph 51.

52. On August 15, 2003, two weeks after the Seventh Circuit’s decision in Berger, the Plan issued Ms. Durand a check in an amount $17,038.18, purportedly equal to the current balance of her hypothetical cash balance account at the time of payment.

Answer: Defendants admit that on August 15, 2003 the Plan (effective January 1, 1997) issued

a check payable to Ms. Durand’s individual retirement account, in the amount of $17,038.18, and

deny the remaining allegations of paragraph 52.


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53. Had Defendants calculated Ms. Durand’s Account Balance using the greater-of interest crediting rate required under the terms of the Plan and SPD, interpreted in a manner consistent with ERISA and the Code, her Account Balance on August 15, 2003 would have been larger than $17,038.18.




54. Furthermore, Defendants failed to properly calculate her benefit as equal to the present value of her lawfully-calculated accrued benefit expressed as an annuity commencing at normal retirement age. Defendants failed to provide Ms. Durand with a distribution in an amount equal to the actuarial equivalent value of her vested accrued benefit under the Plan.


55. Ms. Durand’s hypothetical investment portfolio as of her benefit distribution date was allocated 91.2% in equity funds and 8.8 % in a cash management fund. On and before March 3, 2003, her allocation had been 100% in equity funds.

Answer: Defendants deny the first sentence of paragraph 55. Answering further, Defendants

state that as of her benefit distribution date, Ms. Durand’s hypothetical investment in the Plan

(effective January 1, 1997) was 90% in equity funds and 10% in a cash fund. Defendants admit

that at various times on or before March 3, 2003, Durand’s hypothetical investment portfolio

allocation had been 100% in equity funds.

56. Historically, equity returns have exceeded the 30-year Treasury rate. Moreover, the expected long-range rate of return on equities exceeds the expected rate of return of 30-year Treasury bonds. Ms. Durand was age 32 at the time she received her lump sum. Had the Plan Administrator calculated her benefit in the manner required under the terms of the Plan and SPD as interpreted in a manner consistent with ERISA and IRS Notice 96-8, her benefit distribution would have been significantly larger than it was.


the first two sentences of paragraph 56, because these sentences are vague, ambiguous and use

undefined terms, and these allegations are thereby denied. Defendants admit the third sentence

of paragraph 56. Defendants deny the remaining allegations of paragraph 56.


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57. In December 2003, Allmerica purportedly amended the Plan to purportedly discontinue the 401(k)-style investment crediting feature and substitute in its place the 30-year Treasury rate, effective January 1, 2004. The amendment purportedly applied both with respect to (i) benefits accrued by Plaintiffs and other participants prior to January 1, 2004, and (ii) benefits accrued on or after that date.

Answer: Defendants admit that in December 2003 the Plan was amended, effective January 1,

2004, to discontinue the 401(k)-style investment crediting feature and substitute that crediting

rate with the 30-year Treasury rate, and that the amendment applied prospectively as of January

1, 2004. Defendants refer to the Plan (effective January 1, 2004) and referenced amendments for

their full and complete contents, and deny any allegations or characterizations inconsistent

therewith, and deny the remaining allegations of paragraph 57.

58. At the time the amendment was adopted, the expected future rate of return on 30-year Treasury bonds was not, under any reasonable assumptions, higher than the expected future rate of return under the investment crediting formula in place before the purported amendment. Acknowledging this fact, Defendants announced the purported amendment by distributing a notice to participants. This notice was issued purportedly pursuant to ERISA § 204(h). ERISA § 204(h) requires advance notice to participants of a plan amendments that “provides for a significant reduction in the rate of future benefit accrual.”




59. Because the amendment by its terms accordingly purported to reduce benefits already accrued by Plaintiffs and other participants, the amendment was invalid to the extent it purported to discontinue the investment crediting feature. See ERISA § 204(g); IRC § 411(d)(6). However, because the amendment promised to credit interest at an annual rate equal to the 30-year Treasury rate, it provided another basis in periods on and after January 1, 2004, for the “greater-of” interest crediting and projection rate described above to which participant’s were entitled under the Plan and SPD interpreted in a manner consistent with ERISA.




60. Plaintiff Walter Wharton received a lump sum payment of $10,297.45 on May 1, 2005, purportedly equal to the current balance of his hypothetical cash balance account at the


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time of payment. Like the payment made to Ms. Durand with respect to her benefit, this amount was less than the present value of Mr. Wharton’s vested ERISA accrued benefit under the Plan for the same reasons set forth above with respect to Ms. Durand.

Answer: Defendants admit that on or about April 22, 2005, the Plan (effective January 1, 2004)

made a lump sum distribution to Mr. Wharton in the amount of $10,297.45, and deny the


61. In 2004, Allmerica adopted an amendment purportedly discontinuing compensation credit Allocations effective January 1, 2005. Accordingly, the final compensation credits allocated to participants’ notional accounts occurred on or about March 1, 2005 (for the 2004 Plan year). The amendment did not purport to discontinue interest credits under the Plan.

Answer: Defendants admit that in 2004 the Plan was amended, effective January 1, 2005, to

discontinue compensation credits under the Plan, that the amendment did not terminate interest

credits under the Plan, and that the final compensation credit under the Plan was credited on or

about March 1, 2005 for the 2004 Plan year. Defendants further refer to the Plan (effective

January 1, 2005) and referenced amendments for their full and complete contents, and deny any

allegations or characterizations inconsistent therewith, and deny the remaining allegations of

paragraph 61.

62. Plaintiff Michael Tedesco still has a hypothetical account balance under the Plan, having yet to request a distribution of benefits under the Plan. For periods on and after January 1, 2004, Defendants have failed to credit his Account Balance with interest credits under the “greater-of” interest rate formula described above, i.e., the greater of (i) the rate of return generated by his investment allocation selected from the Plan’s hypothetical investment menu and (ii) the 30-year Treasury rate, instead crediting interest at merely the 30-year Treasury rate. Defendants also have paid members of the Post-2006 Distribution Class who already requested and received benefit distributions merely equal to the current vested Account Balances in their hypothetical accounts, based on Defendants’ unlawful application of a projection rate equal to the 30-year Treasury rate.




63. To the extent that the Plan did not continue to credit, and project, the notional account balance with interest at the rate prior to the purported January 1, 2004, Plan amendment,


- 25 -

the accrued benefit was impermissibly reduced due to the Plan amendment in violation of the anti-cut back provisions of ERISA.




CLAIMS FOR RELIEF

Pre-2004 Distribution Subclass: Unlawful Forfeiture of Accrued Benefits

64. The benefit distributed by the Plan to Plaintiff Durand was less than the actuarial equivalent present value of her accrued benefit under the Plan, in violation of ERISA and the Code, for two reasons.


65. First, the Plan failed to calculate hypothetical Account Balances in a lawful manner. The annual interest crediting rate under the Plan was and is, under the terms of the Plan interpreted in a manner consistent with ERISA and/or under terms implied by law, equal to the greater of (i) the rate of return generated by the investment allocation elected by each participant from the Plan’s 401(k)-like hypothetical investment menu and (ii) the 30-year Treasury rate in effect for the year. The Plan failed to calculate Ms. Durand’s Account Balance using this interest rate formula – instead using only the rate described in clause (i) – with the result that Ms. Durand’s benefit calculation was based on an Account Balance that was less than her lawfully-calculated Account Balance.




66. Second, the Plan failed to calculate accrued benefits in a lawful manner. The interest projection rate under the Plan was, under the terms of the Plan interpreted in a manner consistent with ERISA and/or under terms implied by law, equal to a rate not less than the expected long-term rate of return on assets deemed to be invested through normal retirement age in an account with a promised annual interest rate equal to (i) the return generated by the investment allocation elected by the participant from the Plan’s pre-2004 hypothetical investment menu in that year or (ii) if greater, the applicable 30-year Treasury rate for that year. Even without the annual 30-year Treasury rate floor, a projection rate equal to the expected long-term rate of return generated by the investment allocation elected by each participant from the Plan’s hypothetical investment menu is significantly higher than the 30- year Treasury rate, as even Defendants own internal projections reflected. But with the annual floor, the expected rate of return is even higher. The reason for this is that the projection rate pairs the unlimited upside of equity returns from an individually-selected investment portfolio with the downside protection


- 26 -

that the return for any year will never be below the applicable 30-year Treasury rate for that year. By failing to calculate Ms. Durand’s accrued benefit using the ERISA-mandated projection rate – instead projecting at merely the 30-year Treasury rate – Defendants calculated Ms. Durand’s benefit distribution based on an amount that was significantly smaller than her lawfully-calculated accrued benefit under the Plan.




67. These violations resulted in an impermissible forfeiture of accrued benefits prohibited by ERISA § 203(a) and IRC § 411(a).




68. Defendant’s application of the unlawful calculation methodology described above also resulted in an impermissible forfeiture of accrued benefits prohibited by ERISA § 203(a) and IRC § 411(a), as implemented by Treasury Regulation § 1.411(a)-4 and 4T, in that the Plan conditioned the receipt of already-accrued interest credits on the form and/or timing of distributions elected by Ms. Durand. Had Ms. Durand and other members of the Pre-2004 Distribution Class left their account balances in the Plan until age 65, they would have been entitled to interest credits calculated at an annual rate equal to the rate of return generated by the investment allocation elected by each participant from the Plan’s hypothetical investment menu, with a floor return in any year equal to the applicable 30-year Treasury rate for that year. When they instead elected to receive their benefits before age 65, Defendants failed to include the value of these future interest credits in their benefit distributions, resulting in an unlawful forfeiture of benefits.


Answer to paragraphs 69-91: The allegations of paragraphs 69 through 91 relate solely to

claims that were dismissed in the Court’s Memorandum Opinion (Doc. 71), Mar. 31, 2011, and

therefore no response is required. To the extent a response is required, Defendants deny the

allegations of paragraphs 69 through 91, including the headings therein.


- 27 -

GENERAL DENIAL

Except as otherwise expressly recognized above, Defendants deny each allegation

contained in paragraphs 1-91, including, without limitation, the footnotes and headings, and

specifically deny any liability to Plaintiffs or any members of the class(es) Plaintiffs purport

to represent. Pursuant to Federal Rule of Civil Procedure 8(b), averments in the Complaint

to which no responsive pleading is required shall be deemed denied. Defendants expressly

reserve the right to amend and/or supplement their Answer.

ADDITIONAL DEFENSES

The statement of any defense hereinafter does not assume the burden of proof for any

issue as to which applicable law places the burden on plaintiff. Defendants expressly

reserve the right to amend and/or supplement their defenses.

FIRST DEFENSE

Plaintiffs’ claims and/or the claims of members of the class(es) that Plaintiffs purport

to represent are barred, in whole or in part, because Plaintiffs fail to state a claim upon

which relief can be granted.

SECOND DEFENSE

Plaintiffs’ claims and/or the claims of members of the class(es) Plaintiffs purport to

represent are barred, in whole or in part, by the applicable statute(s) of limitation.

THIRD DEFENSE

Plaintiffs’ claims and/or the claims of members of the class(es) Plaintiffs purport to

represent are barred, in whole or in part, by the doctrine of laches.


- 28 -

FOURTH DEFENSE

Plaintiffs’ claims on behalf of putative class members who received lump sum

distributions after August 17, 2006 are barred by the Pension Protection Act of 2006, Pub.

L. No. 109-280, 120 Stat. 780 (2006).

FIFTH DEFENSE

Plaintiffs and/or the members of the class(es) that Plaintiffs purport to represent are

not entitled to relief beyond that which is authorized by ERISA.

SIXTH DEFENSE

To the extent Plaintiffs are permitted to proceed with any claim for relief under

ERISA § 502(a)(1)(B), Hanover is not an appropriate defendant.

SEVENTH DEFENSE

The claims of Plaintiff Walter Wharton, and of the class members Plaintiffs purport

to represent who received lump sum distributions after December 31, 2003, are barred due

to an amendment to the Plan which provided for interest crediting thereafter at the same rate

as the Internal Revenue Code Section 417(e) discount rate.

EIGHTH DEFENSE

All claims of Plaintiff Michael Tedesco were dismissed in the Court’s Memorandum

Opinion (Doc. 71), Mar. 31, 2011.


- 29 -

WHEREFORE, Defendants pray for judgment in their favor and against Plaintiffs on

all claims, an award of their costs and fees in this action, and such other and further relief

a1s the Court may deem appropriate.

Dated: April 14, 2011 Respectfully submitted,

/s/ Jeffery S. Davis Alan S. Gilbert Jeffery S. Davis SNR Denton US LLP 233 S. Wacker Drive Suite 7800 Chicago, IL 60606 (312) 876-8000 Stephen J. O’Brien SNR Denton US LLP One Metropolitan Square Suite 3000 St. Louis, MO 63102 (314) 259-5904 Richard H.C. Clay Angela Edwards Woodward, Hobson & Fulton, LLP 2500 National City Tower 101 South Fifth Street Louisville, KY 40202 (502) 581-8000


CERTIFICATE OF SERVICE

I hereby certify that on April 14, 2011, I electronically filed the preceding with the

Clerk of Court using the CM/ECF system which will send notification of such filing to the

following:

E. Douglas Richards - [email protected] Eli Gottesdiener - [email protected]

/s/ Jeffery S. Davis


Documents

IN THE UNITED STATES DISTRICT COURT FOR THE …durandpensionclassaction.com/PDFs/72.pdfDistrict. The second sentence of paragraph 5 contains legal conclusions to which no response