Like the contentious battle over how to fix Social Security, the cash balance war seems to have age as its dividing line. And, as usual, Congress is getting into the act.
For example, The Third Millennium, a New York think tank that studies issues of concern to Generation Xers, favors cash balance plans, while the American Association of Retired Persons is studying whether these dressed-up defined benefit plans discriminate against older workers.
Looking for discrimination
The Equal Employment Opportunity Commission, Washington, is examining conversions of traditional pension plans to cash balance plans for possible violations of the Age Discrimination in Employment Act, said Dianna Johnston, the EEOC's assistant legal counsel in charge of age and other discrimination issues.
And, several companies that have converted to cash balance plans are facing allegations of age discrimination, with more lawsuits in the offing.
"How can there not be? In my opinion, every single cash balance plan . . . violates the age-discrimination law," said William K. Carr, a Denver pension lawyer representing participants in several lawsuits against companies that have switched to cash balance plans.
The EEOC and AARP might consider joining age discrimination lawsuits filed by workers or retirees, or filing supporting court papers in those lawsuits.
Meanwhile, a growing number of lawmakers on Capitol Hill are proposing legislation that would require companies to tell their employees how they might stand to lose benefits when employers convert their traditional plans into cash balance plans.
Requiring more information
Rep. Earl Pomeroy, D-N.D., is planning to introduce legislation that would require companies to give workers that type of information. Already, Sen. Daniel Patrick Moynihan, D-N.Y., has introduced a bill that would require companies to tell employees how the changeover to a cash balance plan would affect them, and give each employee a personal statement comparing benefits under the old and new plans. Pension plan sponsors that fail to comply could lose their tax-favored status under the bill. The bill, which has picked up six co-sponsors, has a good shot at being included in the big tax bill lawmakers are planning to craft in a few months.
Rep. Jerry Weller, R-Ill., has introduced identical legislation in the House.
Earlier, Reps. Rob Portman, R-Ohio, and Benjamin L. Cardin, D-Md., included a disclosure provision as part of a comprehensive pension bill that would require employers to tell workers how their future benefits might be cut through examples, software or individual counseling. This provision would not be limited to cash balance plan conversions.
But conflicting government policies and regulations might make it tough for employers to ensure their plans don't discriminate against -- or, for that matter, favor -- older workers.
Because cash balance pension plans distribute retirement benefits more evenly over a career, they eliminate the "backloading" problem faced by many traditional pension plans, which could cause them to trip on the non-discrimination tests that check to see companies don't give disproportionate benefits to higher-paid employees.
By the same token, because cash balance plan conversions can result in benefit cuts for older workers, employers could be viewed as violating age discrimination laws.
The key to ensuring older workers are protected in such conversions is in how companies make the shift.
Frequently, problems arise when companies eliminate generous early retirement programs as part of the conversions.
But several large corporations hope to eliminate that problem by giving some or all of their workers the choice of staying in the old plans and retaining their existing benefits.
IBM Corp., Armonk, N.Y. -- which could save $200 million a year in pension expenses when it switches to a cash balance plan July 1 -- is giving all employees within five years of eligibility for early retirement (based on a combination of age and tenure) the option to stay in the old plan.
Moreover, during the first decade of the new plan, IBM will credit account balances of workers older than 40 with 5% to 9% of pay, with older workers getting the higher percentages, said Don Sauvigne, program director in charge of IBM's capital accumulation programs.
After that, all employees will get just the 5% in addition to the interest credit of the one-year Treasury bill plus one percentage point.
CIGNA Corp., Philadelphia, extends a similar choice to workers nearing retirement; and Aetna Inc., Hartford, Conn., which created a cash balance plan at the beginning of this year, gave workers within seven years of retirement a choice. As a further protection, Aetna employees get the larger of the two benefits at retirement.
But apart from these plans that "grandfather" workers in the old plan, what transition credits do is "appear to soften the blow, but not make you whole from what you would be," according to David Certner, senior coordinator for economic issues at the AARP, Washington.
Time is on their side
On the other hand, the apparent inequity of cash balance plans is no different from what happens when companies drop defined benefit plans for 401(k) plans.
Very simply, younger employees benefit because they have more time to accumulate retirement savings.
But Michael Gulotta, president and chief executive of ASA Inc., the Somerset, N.J., benefits consulting firm, warns cash balance plans are not a good fit for companies with large numbers of older workers and those with employees in physically demanding jobs, who often retire earlier than the norm.
Ultimately, demographics might determine whether the movement toward cash balance plans will be a lasting trend, said Eric Lofgren, director of Watson Wyatt Worldwide's benefits consulting group in New York.
Because of the sharp drop in the birth rate after the post-World War II baby boom, many companies might be forced to think about retaining their older workers, rather than showing them the door, Mr. Lofgren said. That includes sticking to their traditional pension plans, which favor older and career employees.
"That makes you wonder how long the cash balance fad will last," he said.