Conversions to cash balance plans are nothing more than a plot by corporate top executives to further enrich themselves.
That's the latest conspiracy theory running around Washington and union circles.
Unfortunately, some poorly handled cash balance conversions have so poisoned the well that all such conversions now are suspect.
Executives who switch their companies' retirement plans to cash balance from defined benefit are suspected of not only trying to reduce corporate pension costs, but also trying to line their own pockets.
How? By using cash balance conversions to boost a company's earnings and thus its stock price. This, in turn, boosts the value of executive stock options.
In other words, top executives are perceived to be boosting their personal wealth at the expense of the employees.
Here's the way the critics see it working:
Company X has a final-pay defined benefit pension plan with surplus assets. The excutives of the company have stock options. If they can increase the pension surplus, they can increase the pension income that can be recognized in the company's financial statements. Increasing the pension income increases reported earnings, and that should boost the stock price, thus increasing the value of the executives' stock options. That's the theory, anyhow.
One way for Company X to increase the pension surplus is to convert to a cash balance plan based on career-average earnings rather than final salary.
The pension surplus may increase because only some of the employees, those with long tenure, will be grandfathered into the final-pay plan. The remainder will convert to the career-average formula, in which the employer's ultimate liability will be smaller.
But the link between the pension surplus, increased reported earnings and the stock price is tenuous at best. Most analysts factor out pension income from reported earnings, and some investors may even punish companies that inflate their earnings with pension income.
What we have here is the confluence of a number of developments that, independently, generally have been seen as positive for the economy, the companies and/or employees.
First, the Financial Accounting Standards Board revised pension accounting rules to require more disclosure of pension costs and liabilities, but allowed the recognition of pension income for companies with large surpluses and no pension contributions.
Second, Congress made it almost impossible for businesses to recapture surplus pension assets. Companies were required to take the risk of having to make up any shortage in a pension fund without being able to quickly recapture any surplus that accumulated through conservative funding or excellent investment experience.
The only way for a company to benefit from a pension surplus was to take a contribution holiday streching over many years.
Third, companies were urged to pay their top managers partly with stock options to align their interests more closely with those of the shareholders. Companies responded and gave top managers large option grants which, if they were successful and the stock prices rose, would make the executives rich.
Fourth, the cash balance plan was devised, initially as a way of giving employees some of the attractions of a 401(k) plan -- in particular the individual account, the lump-sum distribution and greater portability -- without setting up a 401(k).
Now these developments have become enmeshed in politics and with union efforts to boost membership in white-collar companies.
Employees and unions have drawn the lines connecting the dots of these developments and now see a suspicious connection: top executives switching to cash balance plans to boost the value of their stock options.
Even where the conversion did not reduce pension costs, the employees are suspicious.
The suspicions will be difficult, if not impossible, to erase.
That is unfortunate because, handled correctly, a cash balance plan is a good compromise between a traditional defined benefit plan and a 401(k) plan.
If the stock market should correct, as it did in 1973-'74, harming employees' 401(k) balances, the cash balance plan might be looked upon with more favor.
Until then, consultants and corporate executives will be hard-pressed to clear away the suspicion that it is yet another way for top corporate executives to rip off the employees.