Pension matters rarely are the stuff of mysteries, but suddenly we have a benefits "whodunit" in Washington. It seems Congress wants to know whether any government officials profited by adding a single sentence to a provision in reference to the now-controversial cash balance plans. Inserted in the preamble of some proposed pension regulations in 1991, the prose at issue has been regarded by many employers as a safe harbor protecting them from charges that cash balance plans violate anti-discrimination laws.
Now, nine years later, Congress wants to know not only whether the sentence was legal, but also if any government officials benefited from it when they left for jobs in the private sector.
If some bureaucrat was paid, directly or indirectly, to insert the safe harbor wording, perhaps some guilt was involved. But what we do know is this:
Cash balance plans have been in existence for nearly two decades.
To my knowledge, no one covered for the best part of that time has claimed publicly that these plans have operated to discriminate against older workers.
This might come as a surprise to some people, and perhaps to Sen. Tom Harkin, D-Iowa, who initiated an inquiry into the controversial wording. But it's a fact that Bank of America adopted a cash balance plan 15 or more years ago. When we learned of this at that time, we looked into the matter and were amazed the bank had changed its retirement plan so dramatically. It appeared revolutionary and, as such, we thought it would attract a lot of attention. But it didn't, and it has been only during the past few years that such plans began coming in for criticism.
But that's not the only factor that weighs against finding fault with the government officials who drafted that safe harbor in 1991. Plans that have worked almost exactly like cash balance plans have been around for at least 50 years.
Such plans have been known as money purchase plans, and there are a couple of technical differences between money purchase plans and cash balance plans. One is the way they are presented and promoted. The other difference is that the employer retains the investment risk under a cash balance plan, while it is transferred to an insurance company under a money purchase plan.
The emphasis in a money purchase plan is the amount of employee pension "purchased" by the employer every year by the specific contributions. The basic interest rate credited to net contributions and the annuity conversion rate at retirement were guaranteed. In cash balance plans, account balances are calculated in a manner analogous to money purchase plans.
In spite of the relatively novel description of the cash balance plan, I can see how technicians within the Internal Revenue Service or some other government agency concerned with pensions have looked at a cash balance plan and said, "Sure, we understand that it's very much like an insured money purchase plan, and that type of plan has been around forever."
What's causing the current uproar over cash balance plans is that many large companies abruptly have converted their traditional defined benefit plans into cash balance plans. Unfortunately, it appears that with a few notable exceptions, such as IBM Corp., most companies adopting cash balance plans haven't grandfathered the prior plan benefit levels for their older workers. They haven't done that because a major goal of converting to cash balance plans appears to be saving money -- millions of dollars a year for large employers. Reduced contributions flow through to the corporate bottom lines, making executives look far smarter than they really are.
This might, of course, be more of an ethical rather than a legal issue. As far as I know, no civilization has ever been able to legislate ethics or morality, and I doubt that Mr. Harkin's inquiry will do anything to achieve that objective.
So skip the sleuthing and concentrate on deterring companies from shortchanging older employees on their pension benefits. The problem could be resolved without investigations but with reasonable regulation: in a conversion, mandate that the employer give older employees the option of switching or staying.
In spite of lower pension values earned by employees age 40 and older, these employees still might opt for the cash balance plan. Why? Because they would receive their account balances in a lump-sum distribution when they sever employment. They might invest the funds in a rollover individual retirement account or a successor employer's defined contribution plan.
As long as people are adequately informed of the pluses and minuses of their options, reasonable regulations should allow cash balance plans, and other hybrid plans, to thrive.