Written by Gregory Crawford, with reports from Cecily O'Connor, Vineeta Anand, Phyllis Feinberg and Joel Chernoff
ARMONK, N.Y. — IBM's decision to close its cash balance plan and offer new employees only a 401(k) plan sends a strong signal that defined benefit plans in general — and cash balance plans in particular — are in danger of becoming extinct.
"Companies are looking at a lot of alternatives similar to what IBM" has done, said William F. Quinn, president of AMR Investment Services Inc., Fort Worth, Texas, which oversees the $14.7 billion American Airlines Inc. pension fund.
Said the director of a Fortune 500 pension plan, who asked not to be named: "As a plan sponsor, I think it's an unfortunate event. I think cash balance is a good design, and I'd go so far as to say cash balance plans are the last great hope for keeping defined benefit plans alive."
Officials at International Business Machines Corp. said last week that new employees would be offered a 401(k) plan beginning Jan. 1, rather than a defined benefit plan. IBM first converted its traditional defined benefit plan to a pension equity plan in 1995. In 1999, it converted the PEP to a cash balance plan — a DB plan with characteristics of a defined contribution plan.
IBM has $41.4 billion in defined benefit assets and $23.4 billion in defined contribution assets.
The conversions led a group of employees to sue the company, claiming age discrimination. Last year, a federal district court judge in Illinois ruled in favor of the employees. The company is appealing the ruling. It reached a partial settlement in September, agreeing to give former employees a combined additional one-time pension benefit of $320 million.
More than 1,000 U.S. companies have converted to or started cash balance plans over the past 20 years, including Xerox Corp., Bowater Inc., AT&T Corp., CIGNA Corp., Lucent Technologies Inc., Bank of America, Georgia-Pacific Corp. and Verizon Communications Inc.
Verizon, New York, offers both a $15.8 billion cash balance plan and a $15.3 billion 401(k) option. Gwen Sparks, a Verizon spokeswoman, said the company has no plan to change its offerings. "We want to make sure that our benefits are competitive so we can attract the best and brightest work force," she said.
Charlotte, N.C.-based Bank of America, the first to convert its traditional plan to a cash balance plan, was sued in U.S. District Court in Illinois by a group of employees earlier this year over its $8.6 billion cash balance plan, alleging it violates ERISA.
"Bank of America has offered cash balance plan benefits as an integral part of its retirement program for many years," spokeswoman Eloise Hale wrote in an e-mail response to questions. "These plans offer many advantages to our associates, and we believe they meet the needs of today's diverse and mobile work force." She said the bank plans to file its response to the lawsuit in January.
Mark J. Ugoretz, president of the ERISA Industry Committee, Washington, said IBM's decision likely reflected the company's frustration with the uncertainty surrounding cash balance plans.
"Because of the prominence that IBM has held in this debate over hybrid plans, this will be one more element that plan sponsors will take into account in deciding whether to remain in the defined benefit system," added James M. Delaplane Jr., a partner in the Washington law firm of Davis & Harman LLP and a lobbyist for large plan sponsors.
"Clearly it would have helped to have relieved some of the pressure on defined benefit sponsors, which is coming from all quarters, if we had had legal certainty over hybrid plans," he said. "In the absence of that, they are not the attractive, modernized pension plan that they could otherwise be."
Gary Glynn is president of the $7 billion U.S. Steel & Carnegie Pension Fund, New York, and chairman of the Committee on Investment of Employee Benefit Assets, Washington. "To me, the only message is that what goes on in Washington really affects behavior and really has the potential for eliminating defined benefit plans," said Mr. Glynn. "We have been concerned, based on surveys of our members, that if the regulatory environment gets worse, you could see a lot more" companies ending the use of defined benefit plans.
A June report from the American Benefits Council, a Washington-employer representative group, found that between 1999 and 2002, more than 7,000 defined benefit plans were shut down. That does not include plans that were frozen by employers.
Michael Johnston, retirement practice director at Hewitt Associates, Lincolnshire, Ill., said that while the implications of IBM's decision on the defined benefit industry cannot be underestimated, a bigger impact will be seen if large employers in other major industries follow suit.
One company that continues to staunchly support its pension plan is Northrop Grumman Corp., Los Angeles. "We went through a major rationalization of our benefit program, which was effective in July 2003," explained Maria Norman, corporate director of benefit strategy and design at the defense contractor. "At that time, we looked at what we wanted to do with new hires. With acquisitions, we had picked up 16 or 17 different benefit plans. We came up with a program that focused on a cash balance structure.
"We're in an industry that has long-tenured employees," Ms. Norman said. "We really have people coming here for their entire career, where a DB approach is still viable; whereas in other industries, there is higher turnover. That's why it still makes sense in our industry."
Pension executives and other industry officials pointed out that IBM's decision to close its cash balance plan was not based on the plan's structure but the company's struggles to deal with the uncertain legal and regulatory environment surrounding it.
"I don't think (the decision) is somehow an indictment of defined benefit plans, but it is problematic for people that were looking for shelter in numbers on the cash balance side," said Andrew Oringer, a partner at Clifford Chance U.S. LLP, New York.
"There continues to be a home for defined benefit plans among smaller organizations and professional organizations looking to explore ways in which to increase tax-qualified deferred compensation," Mr. Oringer said, but "the writing may well be on the wall for cash balance and defined benefit plans for Fortune 500 companies."
