Rep. Bernie Sanders, I-Vt., should desist. His anti-cash balance plan (anti-IBM) legislation is, to put it nicely, naive, and not so nicely, dumb.
The legislation probably would not help IBM employees. The company, faced with excise taxes of up to $4 billion because of the legislation, in the unlikely event it should be passed by Congress, could simply terminate its cash balance plan and leave the employees covered only by a 401(k) plan.
Yes, it would still have to pay the excise tax, but it would no longer have the annual expense of a defined benefit plan to worry about, and it could recapture some of the remaining pension surplus.
Would those employees complaining they were hurt by IBM's conversion of its defined benefit plan to a cash balance be better off if the cash balance plan were terminated than if it continued? Extremely doubtful.
They would be entitled only to an annuity equal to their accrued vested benefits, calculated on the day the plan was terminated. For most, that would be a small annuity payable sometime in the future. Inflation, even at today's rates, would erode it.
At least with the cash balance plan they will accrue additional benefits (for some employees, after a wearaway period). In addition, the cash balance plan gives them a lump-sum option they did not have in the defined benefit plan.
The legislation is dumb for another reason. It sends a terrible message to employers who wish to maintain a defined benefit plan -- with its guaranteed benefits -- but want to make it more flexible and appealing to younger employees by converting to a cash balance plan. That message is: Forget it.
Employers might as well drop their defined benefit plans and simply offer what many employees are clamoring for -- 401(k) plans.
Some of these employers already will have 401(k) plans, so the termination of the defined benefit plan will be a net loss for the employees.
It sends another equally worrying message: Once you offer a benefit, some in Congress will seek to prevent you from ever changing it, no matter how the business climate changes.
The next target could be 401(k) plans. Will companies be prohibited from reducing their corporate match in times of poor profits? Will a certain level of company contribution be mandated? Companies must begin to wonder.
Rep. Sanders has rushed to judgment on this issue. Others in Congress must consider all sides of the cash balance issue.
