Benefits February 28, 2007

Goodyear Goes DC Route after DB Pension Freeze

February 28, 2007 (PLANSPONSOR.com) - Tire manufacturing giant Goodyear Tire & Rubber has joined the ranks of U.S. employers turning away from their traditional pension plans in favor of a 401(k) program.
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The Akron, Ohio-based company announced in a press release Wednesday that it would freeze its salaried pension plan as of December 31, 2008 and replace it with 401(k) plans with varying levels of company matching contributions for current employees starting January 1, 2009.

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For example, the company said the match for the salaried 401(k) plan would be 50% of the first 4% of pay starting January 1, 2009.

Goodyear also announced a variety of benefit plan changes effective January 1, 2008, including:

  • increasing the amounts that current and future salaried retirees contribute toward their medical benefits;
  • redesigning retiree medical benefit plans to minimize cost impact on premiums;
  • closing the company’s Medicare supplement plan to new workers; and
  • discontinuing company-paid life insurance for salaried retirees.

“These changes allow us to continue to provide the kind of compensation packages that are competitive and will attract and retain talented associates,” said Kathleen Geier, senior vice president of human resources, in the news release. “They are also consistent with our goal of reducing costs in excess of $1 billion by the end of 2008.”

The company plans to record a first-quarter charge of $65 million for those actions, which it expects to reduce the pension obligation by about $100 million and other post-retirement benefits by $525 million, according to the announcement.

Details of the plan changes will be directly communicated to the affected salaried associates and retirees over the next several weeks, the company said. Goodyear employees will be able to access online retirement modeling tools and investment education sessions to help with pension and benefit decisions and to plan for the impact of these changes.

About 14,000 active salaried workers will be affected by the pension and health care changes and 17,000 retirees by the changes to the health programs, Goodyear said.

Goodyear’s announcement came one day after FedEx Corp. said it would cap its traditional pension plan at the end of May 2008 in favor of offering employees what it calls a portable pension account (See PPA and Accounting Regulations Prompt FedEx Retirement Plan Changes ).

Compliance February 27, 2007

Latest Cash Balance Ruling Backs Plan Design

February 27, 2007 (PLANSPONSOR.com) - Case law supporting the legality of cash balance plans continues to grow with the most recent addition of a ruling by a federal judge in St. Louis rejecting claims that such plans are age discriminatory.
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The decision by U.S. District Judge Richard Webber of the U.S. District Court of the Eastern District of Missouri came in a challenge to the U.S. Bank Pension Plan by plaintiffs Edward Sunder III and Louis Jarodsky, who claimed the cash balance design discriminated against older workers.

The plan was set up in 1998 by Mercantile Bank ofSt. Louis, which was later acquired by Firstar Corp. Firstar later bought the majority of stock of U.S. Bancorp and started using the U.S. Bancorp name for the surviving corporation.

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As has been the case in numerous other cash balance legal challenges, the U.S. Bancorp case revolved around a prohibition by the Employee Retirement Income Security Act (ERISA) against the stopping of an employee’s benefit accrual or “the rate of an employee’s benefits accrual (being) reduced because of the attainment of any age.”

The issue repeatedly raised in the courts is whether the phrase rate of benefit accrual refers to the employer’s contributions to the plan or the employee’s retirement benefit.

“This Court agrees with Defendants, that the term rate of benefit accrual, as applied to cash balance plans, is best read as referring to the employer’s contribution to the plan, and not the benefit the employee receives upon retirement,” Webber wrote.

So, Webber asserted, if an older employee gets a smaller retirement annuity from a cash balance plan than a younger counterpart, it’s because of the “time value of money, a characteristic correlated with age, but not age itself.”

The ruling is the first since a second circuit court – the 3rd U.S. Circuit Court of Appeals – ruled last month that the plans are not age discriminatory (See  Cash Balance Proponents Get Two Legal Victories ). The 7th U.S. Circuit Court of Appeals, in a widely publicized decision, ruled last year that cash balance plans in general and IBM Corp.’s in particular (See Murphy’s Law: IBM Loses Cash Balance Ruling ), are not age discriminatory (See IBM Cash Balance Discrimination Ruling Reversed ).  

Of the seven lower court rulings since the IBM decision, five have rejected age discrimination charges, while two courts have said the plans were age discriminatory.

The latest case is Edward W. Sunder III, et al., vs. U.S. Bank Pension Plan, Case No. 4:05CV01153 ERW, February 16, 2007.

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