Groups find no common ground on rules for cash balance plans

By Jerry Geisel

WASHINGTON — An effort by a U.S. senator to develop a consensus between employers and participant groups on cash balance plan rules has so far not produced any tangible result, with one major employer group already pulling out of the talks.

Washington pension observers have written off this year as providing any chance for Congress to act on cash balance plan legislation, as legislators focus on other issues in the remaining few weeks of the session.

"It is virtually certain there will be nothing this year," said Ron Gebhardtsbauer, senior pension fellow at the American Academy of Actuaries in Washington.

In March, Sen. Tom Harkin, D-Iowa, invited employer and participant groups to meet to try to find a common ground and end the legal uncertainty that has enveloped cash balance plan conversions.

Mr. Harkin said the debate over cash balance plans had reached a "critical point," adding that he wanted ideas from a variety of interest groups, "so that we might seize this moment together" and resolve apparent conflicts.

The failure to adopt sensible policy requirements for plan conversions would increase the likelihood that employers would freeze or terminate defined benefit plans and offer only defined contribution plans, he said.

To date, several meetings have occurred, with each attracting roughly 25 to 30 individuals representing business groups such as the ERISA Industry Committee and the National Association of Manufacturers, as well as participant groups including the Pension Rights Center and the AARP. In addition, groups representing benefit service providers, such as the American Society of Pension Actuaries and the American Academy of Actuaries, have attended, as have a number of employee benefit consultants.

While a diverse group has participated in the meetings, which are continuing, no one can point yet to any concrete results.

"Not only hasn't a common ground been reached, there hasn't been even a glimpse of a common ground," said a benefit consultant who asked not to be identified. "One side says one thing, the other side says something else, and nothing changes."

Others, while acknowledging that nothing concrete has been accomplished to date, say the meetings could have positive long-term results.

"I think people have learned from each other. When parties understand each other, that could be helpful in the future," said Mr. Gebhardtsbauer.

But one major employer group, the Washington-based American Benefits Council, has stopped attending the meetings.

"This struck us as not the right forum to try to strike a deal. That is what congressional committees are for," said ABC President James Klein.

"`We have a good working relationship with members on both sides of the aisle. This is an issue where you can go directly to committee members" and not outside the committee, Mr. Klein said.

"An issue of this political sensitivity has to go through the committee process," agreed Kyle Brown, an attorney with Watson Wyatt Worldwide in Washington.

Meanwhile, the likelihood that Congress will act this year on any cash balance plan proposal is virtually nil.

"There just isn't enough time, with legislators having to address so many other issues," said Stuart Brahs, vice president, federal government relations, in the Washington office of The Principal Financial Group.

Still, some are more hopeful that legislators in the next congressional session could, amid the steady erosion of the employer-sponsored defined benefit plan system, craft new cash balance plan rules.

"The committees of jurisdiction are deeply steeped in this issue, and it is an issue they know they will have to confront," said Janice Gregory, senior vice president with The ERISA Industry Committee, Washington.

"Congress is becoming increasingly aware of the importance of the issue and the need to resolve it," Mr. Brown said.

Employers with cash balance plans, which have elements of both defined benefit and defined contribution plans but legally are the former, have been operating in a regulatory void ever since the first plan was established in the mid-1980s.

In late 2002, the Treasury Department tried to fill that void when it proposed rules that would make clear that the basic design of the cash balance plan — providing participants with pay-related credits and interest on their account balances — does not discriminate against older employees.

The Treasury later withdrew the proposal under congressional pressure but earlier this year came up with a new one affirming that the basic design of cash balance plans is not age discriminatory. However, the department also proposed a five-year "hold-harmless" period in situations involving the conversion of traditional plans to cash balance plans.

During that five-year period, benefits earned under the cash balance plan by any participant — regardless of age or length of service — would have to be at least equal to what that participant would have earned under the old plan if the conversion had not occurred.

As an alternative to this requirement, an employer could provide every current plan participant with a one-time opportunity to choose between the two plans.

No action has been taken on the latter proposal, which employers say would accelerate the move to defined contribution plans, which would be exempt from any benefit maintenance requirement.

As regulators and legislators have dawdled, courts have been active, creating yet more uncertainty with conflicting rulings. A year ago, for example, a federal judge in southern Illinois said IBM Corp.'s pension plan was age discriminatory because the same credit would buy a much bigger retirement annuity for a younger employee than for an older one. The court is now deciding how much in damages it will impose. IBM has said it will appeal the ruling.

But earlier this year, a federal judge in Baltimore said the design of the plans does not discriminate against older employees. A settlement conference on that suit, involving Annapolis, Md.-based ARINC Inc., a provider of transportation communications, is scheduled later this month.

Jerry Geisel is editor-at-large at Business Insurance, a sister publication of Pensions & Investments.