Free Proposed Findings of Fact and Conclusions of Law - District Court of Connecticut - Connecticut

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UNITED STATES DISTRICT COURT DISTRICT OF CONNECTICUT JANICE C. AMARA, GISELA R. BRODERICK, ANNETTE S. GLANZ, individually and on behalf of all others similarly situated, : : : : : Plaintiffs, : : : : : : : Defendants. :

vs. CIGNA Corp. and CIGNA Pension Plan,

Civil No. 3:01-CV-2361 (MRK)

PLAINTIFFS' PROPOSED POST-TRIAL FINDINGS OF FACT

Stephen R. Bruce Ct23534 Allison C. Caalim 805 15th St., NW, Suite 210 Washington, DC 20005 (202) 371-8013 Thomas Moukawsher Ct08940 Moukawsher & Walsh, LLC 21 Oak St. Hartford, CT 06106 (860) 278-7000 Attorneys for Named Plaintiffs and Plaintiff Class

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Table of Contents I. Characteristics of Defined Benefit, Defined Contribution and Cash Balance Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 CIGNA's Conversion to a Cash Balance Formula Mimicked Some Features of a Savings Plan, But Left Employees with No Actual Accounts, Annual Contributions, or Investment Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 CIGNA's Use of a "Greater of" Transition Formula in Combination With Reductions in Future Benefits Produces "Wear-Aways", i.e., Years with No Further Benefit Accruals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 A. The Experts Agree on What Caused the Wear-Aways and that the Wear-Aways Were Predictable . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 B. The Periods of Wear-Away Are Not an Inherent or Natural Part of a Cash Balance Conversion; an "A+B" Formula Would Have Avoided Wear-Aways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 C. CIGNA Admits that There Are Years in Which "Employees Accrue No Additional Benefits" and that It Anticipated That Result. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 D. CIGNA's Actuarial Expert Maintains that the Wear-Aways Are "Beneficial" to Employees and a "Good Thing".. . . . . . . . . . . . . . 34 E. The Plan Years With No Additional Benefits Are Followed by Plan Years in Which the Accrual Rate Is More Than 133a% Higher . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 F. CIGNA Has Conditioned Future Cash Balance Accruals on Participants Giving Up Statutory Rights to Previously-Earned Annuities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 The Rate at Which Employees Earn Retirement Benefits Under CIGNA's Cash Balance Formula Decreases with Age . . . . . . . . . . . . . . . . . . . . . . . 44 A. Internally CIGNA Recognized that "Older" Employees Lose Benefits with Cash Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 B. CIGNA's Board Was Told of CIGNA's "Vulnerability" to the Age Discrimination Claim. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Cash Balance Conversions "Mask" Benefit Reductions Because Participants Cannot Compare Cash Balance Formulas with the Prior
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II.

III.

IV.

V.

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Benefit Formulas Without Converting Credits to Annuity Form . . . . . . . 55 A. CIGNA's Cash Balance Conversion Substantially Reduced Future Benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 B. Internally CIGNA Was Aware that the Cash Balance Conversion Reduced Future Benefits.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 C. CIGNA's SPD, SMM and Purported Section 204(h) Notice Do Not Disclose the Reductions in Future Benefits. . . . . . . . . . . . . . . 69 1. Professor Stratman found no disclosures of reductions or other disadvantages in CIGNA's communications with its employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 2. CIGNA offered no expert report or evidence to rebut Professor Stratman's analysis.. . . . . . . . . . . . . . . . . . . . . . . . . 89 D. CIGNA's 30(b)(6) Witness Agreed that the SPD, SMM and Purported Section 204(h) Notice Do Not Disclose Benefit Reductions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 E. Although It Has Disclosed Potential Reductions in Other Instances, CIGNA Did Not Disclose these Reductions. . . . . . . . . . 93 F. CIGNA's Inadequate Disclosures Affected the Ability of Its Employees to Make Well-Informed Employment and Retirement Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 1. CIGNA repeatedly recognized that employees have to plan for retirement with the information that CIGNA provides.. . 98 2. Employees requested additional information in managers meetings, focus groups and individual communications. . . 100 3. CIGNA had a policy of "NOT" providing benefit comparisons or information about "negative impacts" from the cash balance changes. . . . . . . . . . . . . . . . . . . . . . . 103 4. CIGNA's objective was to "quickly dispel any perceptions of take-aways" and avoid "significant negative reaction from employees" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 5. The individual testimony offers additional circumstantial evidence that employees were "likely to have been harmed as a result" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 (a) Janice Amara . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 (b) Gisela Broderick . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 (c) Patricia Flannery . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118 (d) Annette Glanz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 (e) Bruce Charette . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
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(f) (g) VI.

Robert Upton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124 Barbara Hogan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126

CIGNA Did Not Disclose the Amendment of Its "Rehire Rule" to Former Employees in a Section 204(h) Notice or a Summary of Material Modification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129

VII. Participants and Spouses Have Not Been Notified When Annuity Options Have Greater "Relative Value" than the Cash Balance Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A. CIGNA Has Not Notified Participants When "Old Plan Benefits" Are Greater as the SPD Promises. . . . . . . . . . . . . . . . . . . . . . . . . . B. CIGNA Has Not Notified Participants or Spouses When the Annuity Form of Benefit Has a Higher "Relative Value" . . . . . . . C. CIGNA's Actuarial Expert Admits that CIGNA's Notices Do Not Explain the "Relative Value" of Benefit Options. . . . . . . D. CIGNA Continues to Withhold Information About the "Relative Value" of Benefit Options from Class Members in the Depenbrock v. CIGNA Group. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

135 135 138 144

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Appendix I (Comparison of CIGNA's 1998/1999 and 2006 Summary Plan Descriptions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1 Appendix II (Identification List of Key Employees and Witnesses) . . . . . . . . . A-4

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I.

Characteristics of Defined Benefit, Defined Contribution and Cash Balance Plans. 1. Defined benefit plans typically offer to pay employees an annuity

based on a percentage of the employee's highest salary multiplied by years of service. Edward Zelinsky, The Cash Balance Controversy, 19 VA. TAX REV. 683, 687 (2000). As an employee draws closer to retirement age and enjoys a higher salary, the plan's benefits increase. Id. at 688. 2. Defined contribution plans do not offer fixed assurances about the

benefits that employees will receive at retirement. Employees bear the risk of what happens to the money after the funds are contributed. Id. at 691-2. But employees have an unconditional right to the money allocated to their separate individual accounts, plus the upside risk of favorable investment returns. 3. The employer's contributions to a defined contribution plan are

typically level (e.g., 10% of each year's salary). Zelinsky, supra, at 692. 4. Cash balance plans "imitate some features" of savings plans by

referring to individual accounts and allocations, Esden v. Bank of Boston, 229 F.3d 154, 158 (2d Cir. 2000), but the accounts and allocations are "hypothetical" rather than actual: "the employee has no actual account, the employer makes no contributions to an employee account, and ... there is no account to which interest might be added." Berger v. Xerox, 338 F.3d 755, 758 (7th Cir. 2003).
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5.

In a cash balance conversion, a hypothetical opening account is

established. Many companies have established the opening accounts by calculating the present value of the participant's normal retirement benefit, without including any subsidized early retirement benefits to which the participant may be eligible. A variety of other methods have been used, including assigning a value to all of the employee's previously-earned benefits or setting the opening account at zero with the previous benefits treated as a dual benefit. Ex. 12 at P 2094; Ex. 13 at MER 01798; Ex. 14 at 20. 6. The employee's hypothetical account typically receives a benefit

credit (also called a pay credit) equal to a percentage of an employee's salary. Hypothetical interest credits are also assigned to the account at a specified rate, e.g., 4.5%, or a variable rate under a specified standard, e.g., the interest crediting rate tracks rates for short- or mid-term Treasury bills. Zelinsky, supra, at 693-4. The hypothetical interest credits are not related to the employer's return on investments, as required for defined contribution plans. 7. In what was dubbed the "first generation," cash balance formulas

offered all participants a flat percentage pay credit, such as 5%, along with interest credits, which resulted in "accrual patterns that strongly favored short-service employees." Ex. 15 at 3.

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8.

The "second generation" of cash balance designs offered graded pay

credits based on age or a combination of age and service. Ex. 16. According to a 2004 survey by Mellon, 74% of cash balance formulas have graded pay credits. Ex. 17 at 12; see also Ex. 18 (U.S. Bureau of Labor Statistics Compensation Survey). 9. The employee's cash balance "account" is the total of any opening

account balance and the hypothetical pay and interest credits. The account may or may not be fully-funded. See, e.g., Burstein v. Allegheny Fdn. Ret. Account Plan, 334 F.3d 365 (3d Cir. 2003) (cash balance plan terminated without funds to pay the amounts credited to the accounts). 10. In July 1996, the William Mercer Company ("Mercer"), which

advised CIGNA about its cash balance conversion, prepared a discussion of legal issues for cash balance plans for its clients. Mercer's discussion recognized that ERISA's vesting, accrual and benefit option rules "all key off" the deferred annuity at normal retirement age. Mercer observes, however, that cash balance designs do not "inherently" offer a deferred annuity commencing at normal retirement age: "The plan design operates quite well merely defining the account balance and the method for determining an immediate annuity at any point in time." "Many employers continue to simply treat the plan like a lump-sum account plan without regard to making a deferred annuity
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calculation. It's not clear whether the IRS will approve this." Ex. 19 at EPTO 4166-67. 11. In November 2005, the GAO issued a report finding that older

workers have borne the brunt of reductions in benefits from cash balance conversions. The report found that the median benefit decrease for an older worker was $238 per month compared with $59 per month for a younger worker (a difference of 300%). Private Pensions: Information on Cash Balance Pension Plans (GAO-06-42), available at http://www.gao.gov/new.items/d0642.pdf. 12. In a March 2006 "Issue Brief," the Employee Benefit Research

Institute ("EBRI") analyzed the 401k contributions that would need to be made to make-up for lost benefit accruals if final-average pay plans or cash balance plans were frozen. EBRI found that the median contribution rate for a final-average pay plan is from 8% to 13.5% of pay, compared with about 3% to 4.6% of pay for a cash balance plan. Ex. 20 at 9. 13. CIGNA's actuarial expert, Mr. Sher, testified that cost reduction has

not been a "primary motivation" for employers converting to cash balance formulas, but then admitted that "Is costs a consideration? It always is. Is cost reduction one of the things that companies study when deciding what to do? Yes, certainly it is." Tr. 1178, line 11 - 1179, line 13.

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14.

A 2004 Mellon survey on which Mr. Sher was the "lead researcher"

(Tr. 983, line 10 - 984, line 5) found that the long-term costs of plans converted to cash balance formulas were expected to decrease for 64% of plans. Ex. 232 at 30. See also Tr. 1185, line 6 - 1188, line 12. Long-term costs were expected to increase for only 8% of such plans. Ex. 232 at 30; Tr. 1188, lines 1 - 12. 15. A June 1985 Newsletter by Kwasha Lipton entitled "Exciting New

Retirement Concept: The Cash Balance Pension Plan," states that "likely candidates" for cash balance plans include "Companies seeking to reduce or modify their pension plan obligations." Ex. 236, at fifth page. The Newsletter further states that "For all of these companies, a major stumbling block has been the potential for negative employee reaction, resulting in large part from the lack of an acceptable replacement for their present pension plan. A Cash Balance plan may be just the popular alternative they have been seeking." Id. II. CIGNA's Conversion to a Cash Balance Formula Mimicked Some Features of a Savings Plan, But Left Employees With No Actual Accounts, Annual Contributions, or Investment Earnings. 16. Before 1998, CIGNA plan participants enjoyed a traditional defined

benefit formula consisting of an annuity calculated at 1.67% or 2% of an average of highest pay times years of credited service. The two-tiered benefit structure (1.67% or 2%) depended on the employee's date of hire: Individuals hired after

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December 31, 1988 were called "New Formula Participants" and placed under the lower 1.67% formula. Ex. 2 at 11 and 34. 17. According to a CIGNA newsletter, CIGNA's traditional defined

benefit plan "provide[d] a fixed monthly pension benefit for the employee's lifetime based on ... years of service with a participating CIGNA company and earnings closest to the date an employee leaves CIGNA." Ex. 23. "[S]ince current wages generally reflect the retiree's current standard of living, retirement income levels ... more closely reflect current economic needs." Id. 18. The Tier 1 (2%) formula offered "subsidized" early retirement

benefits under which benefits for employees eligible for early retirement were only reduced to 76 or 79% for retirement at age 55. The early retirement benefits included a valuable Social Security supplement payable between ages 55 and 65. Ex. 2 at 36-37. A "Free 30%" survivor's benefit, also called a Preserved Spouse's Benefit, was also provided. Id. at 56-57, 67-73. 19. CIGNA's Tier 2 (1.67%) formula offered early retirement benefits

with longer service requirements and larger reductions for early retirement, with a Social Security supplement payable between ages 55 and 62. Ex. 2 at 36-39. It did not offer a Free 30% survivor's benefit. 20. In 1998, CIGNA converted its traditional defined benefit pension

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plan (sometimes called "Part A") to a cash balance pension plan (sometimes called "Part B"). See, e.g., Ex. 8, Tab 2 at AMARA-00441. 21. Participants under the Tier 1 (2%) formula who were active

employees on January 1, 1998 with 45 or more age and service points were grandfathered and therefore remained under CIGNA's traditional defined benefit formula. Other active participants were moved to the cash balance formula. Ex. 1 at 6 and Ex. 24 at 6-8. 22. Section 1.55 of the Plan document specifically provides that the cash

balance account of a participant "is a bookkeeping account ...; it is not an actual account, and no Plan assets are allocated to it." Ex. 1 at 14. The Plan also provides that CIGNA does not guarantee "that the assets of this Plan will be sufficient to provide any or all of the benefits payable under this Plan." Id. at 74. 23. CIGNA's Annual Report for 2005 shows that its Pension Plan is less

than 75% funded. Ex. 25 at 65. 24. In August 1997, the Mercer company advised CIGNA that "There are

no legal requirements whatsoever in terms of how you determine an employee's opening account balance": "As you know, the typical method is to set it equal to the present value of the accrued benefit. However, in theory, a company could take other plausible approaches such as a retroactive application of the cash balance formula or a special contribution applied to past
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service or really anything else. It could even be zero if you wanted." Ex. 13 at MER 01798. 25. CIGNA decided to establish opening accounts, which it called "initial

retirement accounts," by calculating the participant's current annual benefits at normal retirement age, computing an actuarial value for that benefit based on a 6.05% interest rate and using the "GATT" mortality table. See Ex. 1 at 9-10; Ex. 26 at DO3925. A lower 5.05% interest rate was applied to the accrued benefit at age 62 for participants under the Tier 2 (1.67%) formula who were active employees on January 1, 1998 and whose age and service were 55 points or greater. Id. 26. The value of early retirement benefits and other favorable features

under the prior plan were not included in the opening balances. Ex. 3 (Poulin Rpt) ¶25; Tr. 211, line 16 - 213, line 6 (Poulin testimony explaining that early retirement benefits, surviving spouse benefit, and Social Security supplement were "various benefits that were not included in the opening account balance"); see also Ex. 239, at 95, line 3 - 96, line 5 (Arko deposition confirming that "there wasn't a concept of early retirement subsidies in the new plan"); Ex. 241, at 171, line 24 174, line 13 (Hodges deposition that opening balances did not include early retirement benefits).

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27.

The GATT mortality table was applied in a manner that took a

discount for "pre-retirement mortality," i.e., the likelihood that a participant would die between his or her current age and age 65. Ex. 3 (Poulin Rpt) ¶32 and Ex. 4 (Poulin Suppl Rpt) ¶15; see also Ex. 10 (Sher Rpt) at 8 (mortality was "assumed at all ages"); Ex. 27 (Answer to Int. No. 4 in the First Set of Interrogatories); Tr. 211, lines 6-22 (Poulin testimony explaining that this discount would be approximately ten percent for a 40-year-old employee). CIGNA's Rule 30(b)(6) witness, John Arko, testified that CIGNA applied the pre-retirement mortality discount "per the terms of the plan." Ex. 239, at 90, line 20 - 92, line 14. 28. CIGNA's hypothetical pay credits followed a "second generation"

design by using a graded schedule based on age and service. Specifically, CIGNA's cash balance formula used the following schedule to calculate benefit credits (also called "pay credits"): AGE + SERVICE POINTS Under 35 35 to 44 45 to 54 55 to 64 65 or more BENEFIT CREDITS: On Earnings Below Integration Level 3% 4% 5% 6% 7%

On Earnings Above Integration Level 4.5% 5.5% 6.5% 7.5% 8.5%

Ex. 1 at 22. The "Integration Level" is defined as one-half of the Social Security taxable wage limit in each year. Ex. 1 at 10-11.
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29.

Interest credits were added to the hypothetical accounts by using the

yield on 5-year Treasury bills plus 25 basis points as an index, with a Floor Interest Rate of 4.5%. Ex. 1 at 24. 30. CIGNA expected to earn more on the plan's actual investments than

the interest crediting rates: "A cash balance approach allows us to ... reduce overall cost by earning more on our investments than we pay in the declared rate." Ex. 28 at D12287 (1/6/1997). 31. Through its cash balance formula, CIGNA offers to pay the

accumulated benefit credits and interest credits, but it does not project a definite level of benefits at retirement. Section 1.1 of CIGNA's Plan document defines the "accrued benefit" as the balance of a participant's Retirement Account on the date of determination (with an exception for (1) distributions during years when the floor interest rate applies, and (2) distributions where the "minimum benefit" rule applies). Ex. 1 at 1. The indefinite level of future benefits makes the plan's promise of future benefits comparable to that of a variable annuity. The risk of lower future interest rates is placed on the participant. Ex. 3 (Poulin Rpt) at ¶35; Tr. 445, line 2 - 446, line 24 (Poulin testimony explaining how cash balance plans are "analogous" to a variable annuity). 32. In response to a question from the Court, Mr. Sher agreed that it is

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"true" that "in terms of annuities" employees take the "risk of interest rate fluctuations." Tr. 1001, line 13 - 1003, line 4. 33. Mr. Sher also testified that falling interest rates can have a "dramatic

impact"on benefits. Tr. 1014, lines 6-17; p. 1032, line 13 - 1033, line 9; p. 1119, line 18 - 1120, line 2. 34. When a participant separates from service before age 55, CIGNA

only offers the participant a lump sum distribution or an "immediate" annuity based on the participant's current age, even if the participant is young, e.g., age 30. Ex. 29 (Answer to Int. No. 4 in Second Set). CIGNA assumes that 100% of participants select the lump sum. ¶420 below. As a result, "the benefit is effectively a lump sum delivered at termination." Ex. 30. 35. By converting to the cash balance formula, CIGNA expected to

reduce both the ultimate benefits paid and its pension liability. Gerald Meyn, CIGNA's Vice President for Employee Benefits, observed in January 1997 that "A cash balance approach allows us to provide the competitive benefit level of a defined contribution plan but reduce overall cost by earning more on our investments than we pay in the declared rate." Ex. 28 at D12287. In June of that same year, David Durham, CIGNA's Assistant Vice President of Global Benefits, estimated "pension expense reductions of 12 to 15% over the next 20 years," even

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though most of the Tier 1 (2%) formula employees were being grand-fathered under the prior plan. Ex. 77. In 2002, Mr. Meyn again observed "A conversion to a cash balance plan clearly reduces the ultimate benefits paid, and, of course, lowers the net pension liability." Ex. 31 at 29113. 36. In discovery, the Plaintiff class requested additional documents

related to CIGNA's cost savings from its conversion to a cash balance plan. Ex. 34 (Request Nos. 21, 22, 27, and 29). CIGNA resisted producing documents responsive to these requests. On September 15, 2006, the Court ordered CIGNA to produce documents "that bear on this cost savings issue from `97 to `98." Tr. 928, line 15 - 930, line 5. CIGNA produced the documents that have been introduced as Defendants Ex. 739 in October 2006. Those documents only cover 1997; Defendants' counsel contend that they understood the Court's Order to be limited to that time period. 37. A June 1997 document entitled "FAS expense projections" compares

future expenses for the current program and four alternatives. Ex. 739 at SUPPD 25709. Alternative "6A", which was closest to the cash balance plan that CIGNA ultimately adopted, shows an approximately 13% reduction in expenses for the "whole plan." Mr. Poulin testified that because benefits for grandfathered participants were not being reduced at all, this translated to a 25% reduction in

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benefits for employees who were moved to the cash balance plan. Tr. 1503, line 12 - 1506, line 6. Mr. Poulin concluded that this was "generally consistent with the fact that there were expected cost savings." Tr. 1506, line 7 - 21. III. CIGNA's Use of a "Greater of" Transition Formula in Combination With Reductions in Future Benefits Produces "Wear-Aways", i.e., Years with No Further Benefit Accruals. 38. In certifying the class, Judge Squatrito found that the Plaintiff

contends "that the conversion of the pension plan necessarily conditioned receipt of further benefits under the provisions of Part B upon [Ms. Amara's] acceptance of CIGNA's valuation of her accrued benefit under the prior plan .... [Under this methodology] plaintiff's annuity benefit would remain constant for a certain period of time even though she is technically accruing additional benefits under Part B." Slip Op. filed Dec. 20, 2002, at 2-3. 39. Judge Squatrito detailed the related processes:

"Upon conversion, plaintiff's annuity benefit was no longer based upon the formula set forth in Part A, but rather was transformed into a hypothetical individual account, with a particular "balance." This "initial retirement account" was based upon the present actuarial value of the annuity benefit due plaintiff at her normal retirement age, which is sixty-five years of age, under Part A. Part B provides that when plaintiff elects to receive her benefit, she would receive the greater of the account balance, or the "minimum benefit" as that term is defined under Part B. "[A]s a result of these calculations plaintiff experienced a period where benefits "constructively" accrued in her cash balance account.
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This is so because the minimum benefit payable to plaintiff was greater than her hypothetical account balance, which means that plaintiff would not begin to realize the accrual of benefits under Plan B until her hypothetical account balance exceeded the amount of the minimum benefit." Slip Op. at 3 - 4. 40. The Class' actuarial expert, Claude Poulin, prepared a report in April

2003 showing how CIGNA's opening accounts were established below actual value, beginning with CIGNA's exclusion of valuable rights to subsidized early retirement benefits in establishing the opening balances. Ex. 3 (Poulin Rpt) ¶¶ 2429; see also Tr. at 206, line 20 - 208, line 23 (testifying on what he was asked to opine and adopting his reports/declarations as testimony). 41. At trial, Mr. Poulin testified that for "an employee who is entitled to a

subsidized retirement benefit at age 55, the present value of that benefit in some cases might be nearly close to twice the present value of the benefit at age 65. So there is a wearaway in the fact that this early retirement subsidy is not included in the opening account balance." Tr. 211, line 23 - 212, line 13. 42. Mr. Poulin also found that CIGNA had taken a "pre-retirement

mortality" discount when it converted their Part A benefits to cash balance, which caused participants to lose another part of the value of their previous benefits. Ex. 3 (Poulin Rpt) ¶32 and Ex. 4 (Poulin Suppl Rpt) ¶15; see also Tr. 211, lines 6 22.

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43.

A discount for pre-retirement mortality is as much as 10% at age 30.

Ex. 4 (Poulin Suppl Rpt) ¶15. CIGNA offered no mechanism under which participants could recoup this mortality discount as they grew older and the risk of pre-retirement mortality shrank. Ex. 3 (Poulin Rpt) ¶32 and Ex. 4 (Poulin SupplRpt) ¶15. Mr. Poulin testified, "this discount is lost forever ... it is never recredited back." Tr. 217, lines 8-16. 44. Mr. Poulin's report explains how participants lost still another part of

their previous benefit accruals when interest rates fell below the 6.05% interest rate generally used to establish the opening account balance, and remained below that level for all but one of the years from 1999 to date. Under these conditions, the opening balances that CIGNA established are unable to "re-purchase" the annuity entitlements that participants already possessed. Ex. 3 (Poulin Rpt) ¶34 and Ex. 4 (Poulin Suppl Rpt) ¶12-14; Tr. 210, line 16- 211, line 5 ("If the interest rate that is used later or if the prevailing interest rates decrease after the conversion, then it will be difficult for the opening account balance to recreate the benefit that was converted"). 45. To illustrate, if an employee age 40 earned a $1,000 per month

annuity before 1998 and the annuity was converted to an opening account balance of approximately $27,900 with a 6% interest rate, the opening account balance

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converts back to an annuity of only $640 per month based on current interest rates of around 4.5%. Ex. 3 (Poulin Rpt) ¶¶33-34; Ex. 4 (Poulin Suppl Rpt) ¶¶12-14; Tr. 278, line 5 - 279, line 6. 46. In Ms. Amara's case, CIGNA's exclusion of the value of her early

retirement benefits, its pre-retirement mortality discount and its use of a 6+% interest rate to establish the opening account balances created a "wear-away" period that made her participation in the cash balance plan's accruals illusory for more than 7 years. Ex. 32 at 28174 and 28629; Ex. 3 (Poulin Rpt) ¶¶25-27. 47. Under the "Part A"/Tier 1 formula, Ms. Amara earned benefits of

$1,833.65 a month starting at age 55 before the 1998 cash balance conversion. Ex. 3 (Poulin Rpt) ¶¶ 24-26. 48. However, Ms. Amara's opening account balance under the "Part B"

cash balance provisions was just $91,124.88, which converts to an age 55 annuity of only $900 per month. This is less than 50% of her Part A benefit of $1,833 per month. Id. 49. Under CIGNA's formula, Ms. Amara accrued no actual cash balance

benefits until the $900 Part B annuity combined with years of benefit credits and interest progresses to the point where it exceeds the $1,833.65 age 55 benefit to which she was entitled before Part B was established. Id. at ¶ 30.

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50.

At the approximately $7,000-8,500 per year rate at which she was

earning pay credits under the cash balance formula, the difference of $93,000 would not be made up for over ten years. Ex. 4 (Poulin Suppl Rpt) ¶¶21-22. 51. Ms. Amara testified that she only learned about the "wear-away"

when she attended a going-away party for two of her colleagues in September 2000. CIGNA's chief actuary, Mark Lynch, told her at that event that "you would be really sick if you knew the wearaway factors they were using with your benefit." Tr. 34, lines 6-17. 52. Ms. Amara also experienced a wear-away of her normal retirement

benefits. In his testimony, Mr. Poulin determined that Ms. Amara's accrued benefit at normal retirement was worth approximately $261,600 in 2003, while her cash balance account at the end of 2003 was $165,213, which included approximately $40,000 in benefit and interest credits since she returned to CIGNA in 1998. Tr. 431, line 5 - 436, line 1. He determined that this wear-away period, without consideration of her early retirement benefits, was approximately five years. Once that period is over, "[t]he $40,000 that was not credited will never be credited back. She will only get future benefit credits." Tr. 436, line 2 437, line 7. 53. When Ms. Broderick separated from service in 2004 after 3½ years

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of participation under the cash balance formula, her retirement benefits, like Ms. Amara's, were still based on the benefits that she had earned before 1998. The cash balance formula had added nothing to those benefits. Ex. 4 (Poulin Suppl Rpt) ¶23. Mr. Poulin explained, "at that time when she terminated in December of 2004, not only did she lose in terms of the age 60 benefit, lose in the sense that she did not gain any additional benefit in these four years, but she also did not accrue any benefit, any normal retirement benefit. So that these four years, she did not accrue any pension at all." Tr. 229, line 19 - 234, line 18. 54. CIGNA's system printouts show the wear-away for Gisela

Broderick. They show $218,944 as the value of her minimum benefit from her service under the old plan prior to 1998 compared with $208,764 in her cash balance account when her benefits commenced. Ex. 33 at SuppD1936 and SuppD1940. Mr. Poulin testified that "[t]he pay credits and the interest credits that were shown in these benefit statements ... will never be credited and in fact, will be lost forever." Tr. 237, line 6 - 237, line 13. 55. Ms. Broderick's 1998 benefit statement stated that her age 65

benefit was $2,010 per month, which did not include the free 30% survivor's benefit. Ex. 4, Tab 8 at P1217. Her 2004 benefit statement showed an age 60 benefit of $2,026. Id. at P1270. Mr. Poulin calculated that her age 60 benefit

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before the conversion, including the free 30% benefit, was $2,191. Ex. 4, ¶23. Mr. Poulin determined that Ms. Broderick, like Ms. Amara, experienced "a wearaway both in the early retirement benefit and the normal retirement benefit." Tr. 229, line 5 - 232, line 24. He testified, "[W]hen I convert the $218,000, which we now know was the value of the age 65 benefit, when we convert this amount to an age 60 benefit, then we arrive at an amount of approximately $1400 [per month]. And that $1400 was less than what she was entitled to under the prior plan at age 60." Tr. 231, lines 6-14. 56. Mr. Sher testified that if early retirement benefits were ignored and

interest rates were counter-factually assumed to have remained constant, Ms. Broderick's wear-away would have ended "by the end of 2001." The Court clarified that "she would have worked with no additional retirement benefit" for "about a year-and-a-half" and Mr. Sher responded "certainly by the end of 2001, based on my calculations, [the wearaway] would have disappeared." Tr. 1015, line 21 - 1016, line 21. 57. Like Ms. Amara, Ms. Broderick "did not find out what wearaway

was," or that "I had not earned anything from the time that I went back to CIGNA to the time that I retired," until after she became a Plaintiff in this litigation. Tr. 113, lines 8-21.

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58.

The same applied to Patricia Flannery. After nearly six years of

service under the cash balance formula from October 2000 to the present, Patricia Flannery has zero additional accruals because of CIGNA's wear-away. Her cash balance account at the end of 2005 only converts to an annuity benefit of $756 per month, Ex. 7 (Poulin IndivCalcs), compared with the annuity of $813 per month ($9,762 annually) that she had earned with her service before 1998. Ex. 156 at P 1588. 59. During Ms. Flannery's testimony, the Court inquired about the

print-outs in Ex. 230 indicating that Ms. Flannery "had worked from 2000 to 2006, and during that period received no increase" from her minimum benefit. CIGNA's counsel promised to "put somebody on who could explain that." Tr. 921, line 20 - 922, line 25. CIGNA did not present any testimony to address Ms. Flannery's circumstances. 60. Even if a participant's cash balance account ultimately exceeds the

value of the previously-earned benefits by the time the participant separates from service, the value of the cash balance accruals in the first few years after the conversion may still be zero. Mr. Poulin prepared a spreadsheet showing how Annette Glanz's benefits did not increase for 3 years after the cash balance conversion. Ex. 4 (Poulin Suppl Rpt) ¶25 and Ex. 6. Her cash balance accruals in

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the first three years after January 1, 1998 of over $254 per month went to "catch up" with the value of the benefits that she had already had earned for her service before 1998. Id. The lost accruals in those years are never recouped. Tr. 226, line 16 - 228, line 15. 61. Mr. Poulin testified that Ms. Glanz's wear-away period was

attributable to the "mortality discount" and the "interest rate differential." Ms. Glanz was not eligible for an early retirement benefit. Tr. 227, line 9 - 229, line 4. 62. Mr. Sher testified that, even if interest rates remained the same, Ms.

Glanz would still experience a year of wear-away attributable to "this preretirement mortality issue." Tr. 1033, line 14 - 1034, line 22. He called this a "minor" effect. Tr. 1022, line 13 - 1023, line 3. 63. Ms. Glanz testified that "until I heard about this lawsuit" she

"wasn't aware" that her cash balance benefits were not growing for any period. Tr. 169, line 24 - 170, line 12. 64. For any employee whose "old plan benefit" or "minimum benefit,"

i.e., the benefit they had earned before 1998, is greater than their cash balance account at separation, the additional accruals from the cash balance formula were zero. Ex. 4 (Poulin Suppl Rpt) ¶31.

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65.

Mr. Poulin testified that "the overwhelming majority" of CIGNA's

employees "experienced wearaway." "[T]he exception would be for a very short service employee who would have had a very small accrued benefit so that the initial pay credit would nullify this impact immediately." Tr. at 218, line 15 219, line 9. 66. The Plaintiff class requested electronic data in discovery that would

show how many participants continued to have protected benefits in excess of the cash balance accounts in each year. Ex. 34 (Request No. 4). CIGNA has not produced the requested data, despite the Plaintiffs' Motion to Compel and two Rule 30(b)(6) depositions. 67. The only group of class members who did not experience significant

wear-aways were those under the Tier 2 (1.67%) formula like Barbara Hogan and Stephen Curlee who had more than 55 age and service points. CIGNA used a lower 5.05% interest rate to convert their benefits to account balances which generally meant that their benefits were not subject to a significant wear-away. Tr. at 219, line 11 - 220, line 19. Mr. Poulin prepared a table which shows that while Ms. Hogan did not experience a wear-away, her future benefits were still substantially reduced compared with the benefits she would have under the Tier 2 (1.67%) formula. Ex. 4 (Poulin Suppl Rpt) ¶28 and Ex. 7 (Poulin Indiv Calcs);

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Tr. 220, line 23 - 221, line 19. A. The Experts Agree on What Caused the Wear-Aways and that the Wear-Aways Were Predictable. In general, Mr. Sher agreed with Mr. Poulin that the reasons for the

68.

wear-aways after CIGNA's cash balance conversion were: (a) the application of a "greater of" transition design to a participant's prior benefits rather than an "A+B" design, (b) the exclusion of early retirement subsidies from the opening balances, (c) the application of a pre-retirement mortality discount in determining opening balances, (d) the effect of falling interest rates after 1997 on the annuities to which the accounts can be converted, and (e) the rate at which the new cash balance benefits are growing compared with the plan's previous rate of accruals. Tr. 1344, line 2 - 1346, line 6. 69. Mr. Sher agrees with Mr. Poulin that a "new employee" would not

experience any wear-away because a sine qua non for a wear-away is a "prior benefit." Tr. 1300, lines 8-24 and Tr. 1345, lines 20-22. 70. Because younger, shorter-service employees do not have substantial

early retirement benefits from their service before the cash balance conversion, they experience shorter wear-away periods than employees who have such benefits. See Ex. 3 (Poulin Rpt) ¶27. 71. Mr. Poulin testified that, in 1997, it would have been possible to
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predict that there would be periods of wear-away for "substantial" portion of the CIGNA employees. "The mere fact ... that the benefits were converted in the opening account balance that were the normal retirement benefits payable at age 65 with the early retirement subsidy, the fact that the free 30 percent, the fact that the Social Security supplement, that these benefits were not part of the opening account balance created ipso facto a wearaway." Tr. 1517, line 24 - 1518, line 25. 72. In response to the Court's questions, Mr. Sher admitted that the wear-

aways could be predicted: "THE COURT: Would it be typical to expect, for a decent-sized portion of an employee population, that they might go as long as five or six years before they would actually cross and get into the positive on the conversion?" Tr. 1008, lines 15-22. MR. SHER: I think you have to, first we have to, look at each individual situation ... what are the causes of this phenomenon?..I would characterize the early retirement as sort of a byproduct,... that what we talked about is a natural thing for the early retirement to have that impact." Tr. 1008, line 23 - 1009, line 22. "THE COURT: But going into a plan like this, would you expect there to be ... [a] reasonably significant portion of your employee population who could expect to not add to their minimum benefit for periods of between three and five years? MR. SHER: I think it depends. I mean, the early retirement is one factor ... One approach is to do this grandfathering which is suggesting that CIGNA did it for a large group of people, not for everyone. So there are some people who are getting that early
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retirement, who could have that early retirement wearaway and that could last several years, the early retirement wearaway." Tr. 1009, line 23 - 1010, line 19. THE COURT: In 1998, was it predictable and known to CIGNA, because of the various things we talked about­probably not with respect to interest rates so much but the early retirement subsidy sort of bringing that out and the preretirement mortality, in fact people's opening balances ... would be lower than their minimum protected benefit? MR SHER: I think certainly benefit projections, you know, could have been done to get at your question ... The problem is it's hard to disregard [interest rate changes] but yes, absent that, yes. THE COURT: Listen, we all have to predict things. Taking normal old regular old interest rate assumptions as you are standing in 1998, you still would have known that the opening balances for some sizeable group of employees, not obviously all, would be less than their protected benefit under the old plan? You would know that because you know mathematically that you are eliminating the early retirement subsidy. MR. SHER: Yes." Tr. 1029, line 20 - 1030, line 22. THE COURT: [O]ne could ... have some prediction of whether there was going to be no wearaway; that the wearaway was minimal, you know, two months for most employees; or on average, depending on where you fell in the spectrum, it could be two to three years. That would be some quantity that might prove to be wrong but would have been at least knowable at the time, right? MR SHER: Yes, I think at least my experience, that's often done ... Tr. 1031, line 13 - 1033, line 10.
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73.

The Court also asked, "[I]n designing these plans, would it be typical

that you or the consultants in the company would try to make some estimates of wearaway for the employee population and then discuss potential mitigative solutions or not?" Mr. Sher answered, "Yes." Tr. 1019, lines 7-12; see also Tr. 1031, lines 8-18 ("people do various kinds of analyses including projections using various assumptions as to what might happen in the future ... That's how they design the transition provisions essentially, by looking at the potential impact"). B. Periods of Wear-Away Are Not an Inherent or Natural Part of a Cash Balance Conversion; an "A+B" Formula Would Have Avoided Wear-Aways . CIGNA could have avoided wear-aways by using what is called a

74.

"sum of" or "A+B" approach, "where A is the protected benefit earned before the cash balance conversion and B is the benefit under the cash balance formula." Ex. 35 at 74 (Jt. Comm. on Taxation report). Many companies with cash balance formulas use this approach. Ex. 17 at 5 (2004 Mellon survey). 75. Mr. Poulin testified that "[i]t is possible to design an A plus B

situation." He also testified that he has seen cash balance plans that include the value of early retirement benefits in the opening account as well as plans with fixed interest rates which prevent wear-aways based on declining interest. Tr. 215, line 9 - 217, line 7.

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76.

A July 2000 survey by PriceWaterhouseCoopers, which employed

Mr. Sher at the time, stated that "We may see more employers adopting the noopening-balance approach due to the negative media and Congressional attention recently directed at the so called "wear-away" effect that can occur under the opening balance approach­i.e., when employees' pensions do not grow for a period of time after the conversion." Ex. 12 at P 2095. 77. CIGNA adopted an A+B formula for Tier 1 (2%) formula participants

who were rehired after 2000 so that they "keep their already-earned old plan benefits." Ex. 132 at D05532 and 5534. 78. Section 701(a) of the Pension Protection Act effectively requires an

A+B formula for all cash balance conversions after June 29, 2005. P.L. 109-280. 79. Mr. Sher prepared spreadsheets illustrating an "A+B Age 65

Benefit" and the wear-away effect for the named Plaintiffs, the testifying class members (except Patricia Flannery) and Stephen Curlee a former employee who was deposed by CIGNA. Ex. 235. His spreadsheets purported to show that an "A+B Age 65 Benefit" would be less beneficial for Barbara Hogan and Mr. Curlee than the Plan's greater of approach. Tr. 1123, line 7 - 1125, line 22 (concluding that "the plan approach is superior"); Tr. 1328, line 19 - 1329, line 21; Tr. 1333 lines 17 - 25 (Mr. Sher: "Even if there's a cut in the formula, it

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doesn't follow that the A plus B is always going to be better." The Court: "We saw that with Curly and with Hogan, right? They were protected with a higher rate." Mr. Sher: "Right."). 80. CIGNA did not produce the electronic spreadsheet for these

calculations on the grounds that it included "proprietary" information. Tr. 1099, line 2 - 1100, line 3. However, cross-examination showed that Mr. Sher miscalculated the "A+B" benefits for Mr. Curlee and Mrs. Hogan. Mr. Sher used Mr. Curlee's and Mrs. Hogan's age 62 benefits in the calculations, rather than their higher age 65 benefit amounts. Tr. 1349, line 6 - 1355, line 8. The class list also shows that Mr. Curlee's accrued benefit at the conversion was $1,285.72, not the $1,076.07 that Mr. Sher used in his calculations. Ex. 238. The class list further shows that Ms. Hogan's accrued benefit at the conversion was $229.44, compared with the $216.98 that Mr. Sher used. Id. If the correct numbers were used, the "A+B" annuity amounts for Mr. Curlee and Ms. Hogan in Mr. Sher's spreadsheet would have been better than their age 65 annuities under the Plan's greater of approach. Tr. 1355, line 9 - p. 1357, line 7 (agreeing that the "A plus B number is greater than the plan number").

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C.

CIGNA Admits that There Are Years in Which "Employees Accrue No Additional Benefits" and that It Anticipated That Result. CIGNA's Answer to Interrogatory No. 8 admits that there were wear-

81.

away periods after CIGNA's cash balance conversion: "certain participants can have a `wear-away period' .... During the wear-away period, a participant continues to accrue additional benefits under the cash balance formula, but because the benefits under the cash balance formula are less than the participant's `Minimum Benefit' (a defined term under Part B), the participant is entitled to the (greater) Minimum Benefit. Whether a participant has a wear-away period, and the length of that period, depends on a number of factors, including work history and interest rates, both at the time of retirement and the time an Initial Retirement Account is established." Ex. 17. See also id. (Answer to Interrogatory No. 10) ("the length of a participant's `wear-away period' ... depends on a participant's individual facts and circumstances and cannot be computed in advance, because it can depend on future changes in interest rates and changes in an employee's salary"). 82. Andrew Hodges, CIGNA's chief actuary for projects, was deposed in

June 2003. Mr. Hodges testified that he became aware that CIGNA's cash balance conversion led to wear-aways upon his "inspection" of "what was being proposed." He found a "myriad of factors" causing wear-aways, including "[e]arly retirement utilization, compensation patterns subsequent to the conversion event, and continued employment at CIGNA Corporation." The rate of interest used in
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annuitization was also "clearly ... a factor ... The purchasing power of a cash balance account goes down as interest rate go down ... It could give rise to a wearaway period." Ex. 241, at 93, line 25 - 97, line 8. Mr. Hodges also agreed that the pre-retirement mortality discount creates a wear-away effect. Id. at 97, line 9 - 100, line 19; and p. 102, lines 6-8. 83. Mr. Hodges was aware that wear-away periods could last up to six

years. Ex. 241, at 105, lines 8-21. 84. Mr. Hodges understood that wear-away could be avoided by using an

A + B formula. He "did not know why Benefits Management did not go A plus B, if you will, from the initial creation of the cash balance plan." Ex. 241, at 103, lines 6-16. 85. Mr. Hodges heard informal complaints about wear-away from rehires

who he characterized as "[s]urprised out of their own ignorance." He said that the rehires "often kicked themselves, if you will, for not reading SPDs, not asking the right questions in the re-interview process, et cetera, but certainly people caught my attention and said is this right, and I would say mechanically under the terms of the plan that's what the plan appears to call for." Ex. 241, at 103, line 18 - 105, line 21. 86. A January 2002 memorandum by CIGNA's Vice-President for

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Employee Benefits acknowledges: "Using the present value of normal retirement age benefits results in a significant "wear-away" period during which time employees accrue no additional benefits with future service." Ex. 40 at 28635. 87. Another memo by CIGNA's Assistant Vice President of Global

Benefits in November 2001 explains how under "the concept of "wear-away" ... long service employees earn little or no benefit in the first years after a pension change while early retirement benefits are "worn-away" by the passage of time." Ex. 41 at 28655. 88. CIGNA recorded notes of conversations in December 2000 with

Michele Bergman, another rehired participant like Ms. Amara. The notes show that CIGNA advised Ms. Bergman that the "wearaway" ends "at age 62"­ten years after she was rehired­and that "if you fly by age 55-56, you'll actually wind up with more." CIGNA concluded, "hope you didn't come back just for pension." Ex. 42 at 20518-21. 89. An October 2002 letter from CIGNA to another participant states:

"Mr. Lamb's pension has not decreased each year from 1998 to 2002; however, it has not increased" over those five years. Ex. 43 at 4. 90. Papers related to Peter Andruszkiewicz refer to a "wearaway until ?

[sic]" Ex. 44 at 20527. 91. In January 2002, about a month after Janice Amara filed this
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lawsuit, John Arko, CIGNA's Director of Retirement Benefits, prepared an example of "wear-away" for CIGNA officials, using Ms. Amara's age, service, benefit amounts, and initial termination and rehire dates. Compare Ex. 32 with Ex. 45 and Ex. 46. 92. The spreadsheet shows that Ms. Amara earns no additional benefits

for more than 7 years after 1998. At age 55, the annuity value of her account balance is only projected to reach $1,340 per month, compared with the $1,830 per month that she already had before the cash balance conversion. Ex. 32 at 28174 and 28629. Thus, Ms. Amara "accrue[s] no additional benefits" for her service from 1998 to retirement. Ex. 40 at 28635. 93. However, in a January 1, 1999 memo to CIGNA's head of Human

Resources responding to criticisms in the Wall Street Journal that some employers were "deliberately establishing opening balances below the real value of each employee's pension," Gerry Meyn denied that this occurred in CIGNA's conversion: "we didn't do that and would have disclosed it if we had. So there's no exposure for us on that point." Ex. 48 at D10837. 94. In a September 1999 communication with CIGNA's Board of

Directors, Mr. Meyn also recognized that wear-aways occur after some cash balance conversions, but denied that any took place after CIGNA's conversion: Some companies' "opening cash balances are established below actual value,
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resulting in multiple years without additions to an individual's pension accrual ... No [CIGNA] employee will experience any period without standard additions to his pension account." Ex. 47, third page. In an earlier July 15, 1997 memo to the People Resources Committee of CIGNA's Board, the Committee was also assured that there would be "no reduction in benefit value" for Tier 1 employees who were transferred. Ex. 49 at D00606. 95. John Arko, who was designated under Rule 30(b)(6) to offer the

corporation's testimony about compliance with the rules in ERISA section 204(b)(1)(B), see Ex. 21, testified that he was unaware of any analysis about whether the plan's wear-away complies with the 133a% accrual rule ­ other than some material in a "binder" that Mercer prepared. Ex. 239, at 17, line 12 19, line 20; see also id. at 190, line 4 - 191, line 23. 96. In response to a subpoena duces tecum, Mercer produced the

"binder" material. The binder and a November 1997 memorandum discuss the benefit accrual tests, but do not analyze any compliance issues related to wearaways. See Ex. 50 at MER 90-94 and Ex. 51. 97. An April 27, 1997 Mercer memo indicates that Mercer believed that

the actual rate at which benefits accrue did not matter and that CIGNA simply had to ensure that the final benefit was "no less than" the frozen minimum: "The important legal requirement is to ensure that when a final
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benefit is determined for an employee, it is no less than the present value of the accrued benefit payable at normal retirement age that the participant had earned up through the effective date of the change to cash balance, in other words a preservation of the minimum benefit under Section 411(d)(6) of the Code." Ex. 13 at MER 1798. D. CIGNA's Actuarial Expert Maintains that the Wear-Aways Are "Beneficial" to Employees and a "Good Thing." Mr. Sher acknowledged that opening balances and "greater of"

98.

transitions promote "rapid wear-away." Tr. 1338, line 18 - 1339, line 6; see also Tr. 1332, lines 4-13 (greater of approach allows "quicker transition") and Tr. 1334, lines 2 -9 (it gets rid of the old formula "more quickly"). 99. Mr. Sher views the wear-aways as stemming from the statutory

protection of the minimum benefit. He believes "it's a good thing" when wearaways occur. He testified that the minimum benefit is protected "from the effect of the reduction in interest rates on the cash value, related to the cash balance account. It's a good thing. Anybody else that has an account balance that doesn't have that protection, new employee that has the same balance, would get [the cash balance amount]." The participant "is getting the protected benefit. That's a good thing." Tr. 1299, line 24 - 1303, line 4; see also p. 1117, line 19 1118, line 11 ("So reducing interest rates, while it might be portrayed as well, there's this wearaway effect ... I don't see how it's terrible. I see it being

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beneficial"). 100. Without prompting, Mr. Sher offered an extended discussion about how he could explain to Ms. Broderick that "it's a good thing" that she did not earn any additional retirement benefits after she was rehired by viewing falling interest rates as having increased the value of her protected annuity benefits. Tr. 1300, line 7 - 1303, line 4. E. The Plan Years With No Additional Benefits Are Followed by Plan Years in Which the Accrual Rate Is More Than 133a% Higher.

101. In an Application for Determination to the IRS, CIGNA maintains that the pay and interest credits that it assigns to participants' accounts provide benefit accruals in each plan year comply with ERISA's 133a% accrual rule. See Ex. 37 at DO1955. CIGNA's Plan cannot satisfy that test on the basis of the pay credits because 7% is more than 133a% of 3%. If it is to pass that test, the Plan must therefore satisfy it on the basis of the annuity commencing at normal retirement age. Tr. 467, lines 1-15; Ex. 19 (Mercer discussion of legal issues related to cash balance plans). 102. However, as discussed above, the pay and interest credits added to CIGNA's accounts actually provide no additional retirement income for many participants for several years following the cash balance conversion. For example, CIGNA maintains that it credited Ms. Broderick with annual benefit
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credits totaling over $29,500 for her employment from June 2000 to March 2004. Ex. 36, fourth page. But Ms. Broderick's retirement benefits did not actually increase as a result of the hypothetical credits. Her annuity benefits did not increase between 2000 and 2004. Even the $218,944 lump sum distribution that CIGNA offered Ms. Broderick in November 2004 was based entirely on the value of the benefits that she had earned before 1998. Ex. 33 at SuppD1940 and Ex. 38. The final amount of her cash balance account, which was to include accruals from 2000 to 2004, was only $208,764 ­ over $10,000 less. Ex. 33 at SuppD1931. 103. The same kind of benefit plateau applies to Patricia Flannery. Her cash balance account after six years under the cash balance formula remains less than the value of the benefits she earned before 1998. See ¶58 above. 104. Similarly, Annette Glanz did not receive any increase to her retirement benefits for her employment from 1998 through 2000. Mr. Poulin prepared a spreadsheet showing that her cash balance account at the end of 2000 translated to an annuity benefit of $566.88 per month which was only $2.88 more than the $564 benefit that she had at the end of 1997. Ex. 6; Tr. at 226, line 9 - 228, line 15. The benefit "credits" of $11,586 that CIGNA assigned to Ms. Glanz's "account" for the period from 1998 to 2000 did not add to her retirement benefits and therefore were not unconditionally payable to her. Id.
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105. Mr. Poulin testified that Glanz's wearaway was shorter because she was "not" "eligible for early retirement benefits" under the prior plan. The "two principal factors" contributing to her wear-away were the "mortality discount" and "lower rate of interest." Tr. at 228, line 21 - 229, line 4. 106. Mr. Sher admitted that Ms. Glanz experienced years without any benefit accruals. In handwritten notes and a separate spreadsheet, he applied the interest rates in effect each year from 1998 to 2005 to determine how much Ms. Glanz's accruals were. Ex. 234 and 235. He calculated that her accrued benefit under the cash balance plan was less than her minimum benefit of $564.00 under the prior plan for the first two years. He also found that her benefit dropped in 2002 from $879 to $677, so that there would have been no accrual in that year either. Tr. 1286, line 13 - 1288, line 24; see also Tr. 1304, lines 1 - 25 (confirming that the year-by-year numbers for Ms. Glanz in Ex. 235 correspond with the handwritten numbers in Ex. 234). 107. The rate of benefit accrual after the years with wear-away is "infinitely" greater than the zero accrual rate in effect during the wear-away period. Ex. 3 (Poulin Rpt) ¶ 30. Mr. Poulin testified, "Mathematically, if a person has no benefit accrual followed by a period where or followed by a year where there is a benefit accrual, albeit small, any quantity divided by zero exceeds 133 percent so that mathematically, a person who experiences wear-away for a certain
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period of time, then would, at the time that this person accrues a benefit following the period, they would have no benefit accrual during the wearaway period, then it is not in compliance with 133-1/3 percent." Tr. 240, line 22 - 241, line 21. 108. CIGNA's expert witness, Mr. Sher, did not discuss the requirements of the 133a% rule, except in the last paragraph of his report. Ex. 10 (Sher Rpt) at 35. Mr. Sher asserted that the 133a% test could be performed without regard to any benefits earned under a prior formula. Id; Tr. 1290, line 5 - 1293, line 1. 109. Mr. Sher also testified, "if that were the way the test were to be applied, there would be many, many situations in practice that would have a problem, that as far as I know have never been considered to be problematic or raised as problems by the government, at least with respect to this narrow situation we are looking at, which is the wearaway situation." Tr. 1045, lines 422. 110. The Treasury Department's Alert Guidelines on the vesting and accrual rules offer an example where a participant has a "minimum" benefit under one formula and a benefit computed under a different formula. In these instances, the Treasury Department examines the additional accrual in each year after the two formulas are aggregated to determine whether the Plan complies with the accrual rules. Ex. 39 at 12. 111. Three months after his first deposition in this action, and over three
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years before the trial, Mr. Sher attended a November 2003 meeting of the Conference of Consulting Actuaries which was recorded on tape. At the Conference, Mr. Sher asked a panel of IRS officials whether the Treasury regulation providing that benefit accruals under different formulas "must be aggregated" (see Treas. Reg. 1.411(b)-1(a)) applies to a frozen minimum benefit formula that has the effect of eliminating or reducing net accruals in future plan years. He was told that the aggregation rule applies: "You look at the net benefit and when you have ... a period of zero years and the other kicks in, it's an issue on a 133 and 1/3." See Ex. 52 at 12; Tr. 1405, line 10 - 1406, line 23. 112. In February 2004, only three months after the CCA meeting, Mr. Sher was asked about the IRS's approach to plans with more than one benefit formula in a deposition in the Engers v. AT&T litigation. Mr. Sher testified that "The transition issue ... when you are going from one formula to another, I'm not aware of that being questioned. I can recall having a discussion with an IRS official who indicated to me that he doesn't think that that's a problem, that it hadn't been and it isn't." See Tr. 1407, line 15 - 1408, line 22; Ex. 237 at 14647. 113. On April 16, 2007, the American Benefits Council sent comments to the IRS acknowledging that the IRS has been taking the position that "greater of" transition formulas violate the accrual rules and criticizing that position: "there is a
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problem with the way that the IRS has been interpreting the back