NEW YORK -- A controversial paper by Edward A. Zelinsky, claiming cash balance plans violate age discrimination laws, has come under renewed attack, this time in a paper from the Minneapolis law firm of Faegre & Benson. The lawyers claim Mr. Zelinsky's interpretation of age discrimination laws is flawed.
Mr. Zelinsky, professor of law at Yeshva University, New York, argues that converting traditional defined benefit plans to cash balance plans reduces the wealth of older workers while favoring younger employees. Older workers normally would do better under conventional defined benefit plans, he claimed.
A third paper by a team of lawyers from the Washington law firm of Covington & Burling also claimed Mr. Zelinsky's findings are flawed; they argue that converting to a cash balance plan does not violate age discrimination laws (Pensions & Investments, June 26).
The Faegre & Benson paper, principally written by Hubert V. Forcier, partner and head of the employee benefits practice, also argues that cash balance plans are well within the law. It criticizes Mr. Zelinsky's interpretation of the law, particularly as it pertains to the wearaway provisions.
A wearaway, or "benefit plateau," is the period of time when a participant in a newly converted cash balance plan does not obtain the full benefit of post-conversion pay credits to his account until the new benefit formula catches up with the frozen benefit.
Much of the criticism against cash balance conversion is aimed at the practice of creating a wearaway by using a relatively high rate of interest to establish a starting balance. Mr. Forcier's paper points out that this produces a longer wearaway for an older worker than for an otherwise identically situated younger worker. He wrote that this practice does not violate age discrimination laws because even after it is applied, an older participant "always" receives a larger lump sum than the younger worker.
The Forcier paper also notes that not many plans use a relatively high rate of interest to establish the starting balance under a cash balance plan -- such as Mr. Zelinsky used in his examples.
"This is because Professor Zelinsky's view (if correct) would have very costly consequences for all plan conversions -- whether or not a wearaway is imposed," said the Forcier paper. "There are probably very few plans where the spread between the interest rate used to establish the opening balance (8%) and the 30-year Treasury rate (5%) would be so large. We used 8% and 5% because Professor Zelinsky used those rates," said Mr. Forcier's paper.
Mr. Forcier's paper pointed out that Mr. Zelinsky compared the benefit accrual rates for the period after the conversion with the rates for the period before conversion, when the employee was under the traditional defined benefit plan formula.
In one example, two employees have the same job description; and at the time of the conversion, one is 33 years old and the other is 53. The rate of benefit accrual decreases for both participants after the conversion, even if there is no wearaway. The younger participant's rate of benefit accrual would drop to 3% from 4.4%, while the older participant's rate would drop to 3% from 11.8%. In his paper, Mr. Zelinsky concludes the difference is due to age.
"If Professor Zelinsky were correct, the only way to correct the `violation' is to eliminate the decreases," said Mr. Forcier. "The younger participant would be entitled to cash balance pay credits of 4.4% indefinitely into the future; the older participant would be entitled to cash balance pay credits of 11.8% indefinitely into the future. The remedy would result in a huge windfall to the participants -- and a huge cost burden for the employer."
Mr. Forcier's paper said one of the primary reasons Mr. Zelinsky's analysis is incorrect is that the years prior to the conversion "are not to be included in the range of years that are examined" when testing for age discrimination. "As a result, the rates of benefit accrual simply do not decrease. If there is no decrease, there is no violation" of age discrimination statutes.
"Professor Zelinsky's analysis of (age discrimination laws) focuses on post-conversion rates of benefit accrual, which (when compared with the pre-conversion rates of benefit accrual) drop more for older workers than for younger workers," noted the Forcier paper.
"Professor Zelinsky's design of the starting balance under the cash balance plan is unusual, to say the least: He assumes that the starting balance was established by simply applying the cash balance formula retroactively. In fact, extremely few plans apply the cash balance formula retroactively," Mr. Forcier wrote. "We are quite sure the starting balance design that Professor Zelinsky posits has never been used in the real world."
An age discrimination claim doesn't exist, he said, unless the older worker is treated less favorably than the younger worker. In fact, he said, the opposite is usually true.
Lump-sum payouts, an important function of cash balance plans, are higher for older employees, Mr. Forcier claimed in his paper.
When age discrimination statutes are properly applied, said Mr. Forcier, "the first period tested is the period after the conversion is implemented. . . . There simply is not a violation of (the Age Discrimination in Employment Act) when it is applied to a cash balance conversion as it should be: By looking only to rates of benefit accrual after the conversion."