The closing of the International Business Machines Corp.'s defined benefit plan to new employees is the fruit of confrontational litigation, narrow-minded congressional hearings and vacillating Department of Treasury rule-making efforts to thwart the conversion of conventional defined benefit plans to cash balance alternatives.
Litigators, politicians and regulators professed concern about the purported discriminatory features of cash balance plans, whether at IBM or Xerox Corp. or any number of companies. Now, they have succeeded in erasing that problem at IBM and have helped engineer the creation of a plan for new participants without defined benefit problems.
The IBM move will likely lead other companies to reconsider their support for conventional defined benefit plans or cash balance plans.
The IBM case, as well as the controversy over cash-balance conversions in general, shows that there is a lack of understanding about the reason companies sponsor employee benefits and their expense, especially in Congress. Washington's post-ERISA pension legislation has, by the view of many in the pension industry, weakened defined benefit security, not strengthened it.
Corporations offer retirement plans as part of a package to attract and retain employees in a competitive environment. It is a dynamic work force where, for a variety of reasons, employees don't stay with a single employer through most of their careers. Defined benefit plans worked best when competitors offered similar programs. But when many don't offer pension plans, or have stopped offering them, companies that continue to offer them have to find a way to justify the cost. To the corporate bottom line, at least in the shorter run, defined benefit plans are more expensive. In the face of these marketplace pressures, IBM, like many corporate sponsors, sought to refine the defined benefit plan through a cash balance conversion.
IBM hurt its own situation by not being as candid as it could have been in initiating the plan and not addressing employee concerns immediately, seriously and publicly. Consultants share blame for the lack of candor about the new plan, and how in many cases it lowers employer costs and reduces pensions of longer-term employees.
The Treasury Department and other regulators, hesitant to issue rules on discrimination and other contentious issues about cash balance plans, have hurt the survival of such modified defined benefit plans. The Department of Labor, certainly in a better position to understand what is at stake than others in government, failed to take the lead in reconciling contending parties.
Companies that pioneered the cash balance approach, and those that followed despite increasing uncertainty with litigation, regulations and congressional action, deserve credit for trying to preserve some form of a traditional pension.
In the short term, at least, new employees at companies that closed their defined benefit plans to new entrants will be hurt, having only one DC plan instead of a DC and DB plan. The ramifications of the move by IBM, a widely followed company, cannot be underestimated.
And everyone will suffer if the majority of companies start following IBM's lead. Instead of a variety of approaches to benefit packages in a competitive workplace, companies have moved to just one model. Just as bad, the prejudice against cash balance will frustrate chances of other experiments to modify defined benefit plans to fit the global competitive marketplace.
The Labor Department and Congress ought to learn a lesson fast from the IBM pullout, and the missteps by Washington politicians and regulators. With the department's help, Congress ought to resolve uncertainty about the contentious issues involving cash balance plans by the end of 2005, giving them a new lease, despite one major company's frustration with a fruit that turned bitter.
