Witnesses Tell Congress About the Need For Cash Balance Reform

“If employers are pushed to abandon hybrid plans, we will lose a retirement vehicle that delivers higher benefits to the vast majority of employees and meets workers’ key retirement plan needs – for portability and benefit guarantees – all while utilizing transition methods that protect older workers,” said the American Benefits Council’s (ABC) special counsel James Delaplane.  “How, exactly, is this good for employees and their families?”

In his testimony before the Congressional committee yesterday, Delaplane pointed to research that showed more employers are freezing their cash balances plans in the face of regulatory uncertainty.    “[Forty-one] percent of hybrid plan sponsors said they would freeze their plans if the legal uncertainty was not resolved within a year,” Delaplane said, creating a “hostile climate for hybrid plans.”  

ABC has pushed hard for the preservation of cash balance plans in recent months.   Speaking about the need for reform earlier, ABC President James Klein called these plans “the one shining star left in the defined benefit system.”   But in order to ensure their continued availability, Klein said, “These plans need Congress to make a legislative statement verifying the legitimacy of these retirement vehicles.”

To further its point, ABC releasedPensions at the Precipice: The Multiple Threats Facing our Nation’s Defined Benefit Pension System in May, which highlighted an assault on hybrid plans as one of the major factors threatening to fling employers into “the culvert where defined benefit plans simply are no more” (See  ABC Points to Significant Threats Endangering the DB System ).

More Support

Providing further support for the need to maintain cash balance plans wasresearcher Robert Clark, a professor at North Carolina State University, and Nancy Pfotenhauer, president of the Independent Women’s Forum (IWF).   Clark said his evaluation of numerous pension studies led to the conclusion that ” most workers will have higher lifetime pension benefits in a world of cash balance plans compared to traditional defined benefit plans.”  He also noted “studies have shown that many senior workers also will gain from a transition to a cash balance.”

Pfotenhauer found reason to support cash balance plans for the assistance they provide female workers.   Because women tend to change jobs more often than men, are more likely to leave the job market to handle family responsibilities, and often do not stay at a job long enough to be vested in a traditional plan, cash balance plans provide a more equitable and generous pension benefit for women, stressed Pfotenhauer in her testimony.

“We believe the emergence of hybrid plans is encouraging news for many and a cause for particular hope among women,”Pfotenhauer said, pointing to a 1998 study done by theSociety of Actuaries that found, “an amazing 77% of women do better under a cash balance approach.  They are better off under a cash balance system because they move in and out of the workforce in order to balance family needs and because they cannot afford to take early retirement.”

To ensure the continued availability of cash balance plans, the witnesses made recommendations to Congress, saying it is important to:

• clarify that the cash balance and pension equity designs satisfy current age discrimination rules
• provide legal certainty for the hybrid plan conversions that have already taken place
• establish rules to govern future transitions and conversions to hybrid plans
• reject benefit mandates that prevent employers from modifying benefit programs or force employers to leave the defined benefit system altogether.

>Congress has suddenly found the yoke of cash balance reform balanced squarely on their legislative shoulders.   O n June 15, theTreasury Department and the Internal Revenue Service (IRS) put out a release to say they were deferring to the US Congress for regulations on cash balance plans, withdrawing their proposed regulation on the plans and plan conversions.   In the release, the agencies said the regulations were being withdrawn to "provide Congress an opportunity to review and consider a legislative proposal on cash balance plans that was included in the Administration's Budget for Fiscal Year 2005" (See  Cash Balance Regulations Off Again....Again ).

"We have proposed legislation that requires companies to deal fairly with their older workers when they convert to cash balance plans," Greg Jenner, Acting Assistant Secretary for Tax Policy said at the time.  "We want to work with Congress to enact these employee protections and remove legal uncertainty about cash balance plans."

Congressional cash balance proponents will not allow hopes for reform to go weakly into the night.   Immediately following the Treasury Department's announcement that cash balance reform would no longer be pursued by that department, US House of Representatives Education & the Workforce Committee Chairman John Boehner (R-Ohio) offered a shot in the arm to the legislative efforts.   Citing the importance of cash balance plans to protect the retirement accounts of American workers, Boehner promised to pick up and carry the torch for cash balance reform by announcing plans to look at solutions to ensure cash balance pension plans remain "a viable retirement security option for workers and employers."

"American workers deserve retirement security, and cash balance pension plans are an important tool in the defined benefit system for ensuring they have this security in a changing economy," Boehner said. "Unfortunately, the ongoing uncertainty about cash balance plan conversions is undermining the retirement security of American workers and jeopardizing employers' willingness to continue offering defined benefit plans to their employees."

"Court"ing Help

Congress has received a wave of support recently from the court system in their quest for more solid cash balance guidance.   Out of the US District Court for the District of Maryland came Tootle v. ARINCInc in which US District Judge Catherine Blake interpreted the Employee Retirement Income Security Act's (ERISA) age discrimination provisions applicable only to employees who have reached normal retirement age.    Thus, ERISA's age discrimination provision "do not bar all cash balance plans."

In the case of Tootle, court found the company's cash balance plan appeared to favor older employees.  "The potential claim of age discrimination arises only by applying a definition for accrued benefits which does not fit with the way cash balance plans are structured," Blake said, instead pointing to ERISA statues as they apply to defined contribution plans.  "The more sensible approach is to measure benefit accrual under cash balance plans by examining the rate at which amounts are allocated and the changes over time in an individual's account balance, as the ERISA provisions designed for traditional defined contribution plans would direct." 

The favorable ruling was only half of a dose of sunshine in a bottle, as Blake went on to draw deep lines of derision between her ruling and the ruling made byUS District Judge G. Patrick Murphy in Cooper v. IBM - the monumental ruling out of the US District Court of Southern Illinois where Murphy found IBM's cash balance plan in violation of ERISA's age discrimination provisions.   To support her decision, Blake turned to another cash balance court controversy, Eaton v.Onan Corp , where US District Judge David Hamilton of the US District Court of the Southern District of Indiana found no age discrimination in a plan conversion. 

Citing Eaton , Blake said the "the legislative history and statutory language provide strong evidence that this aspect of ERISA is not intended to protect workers until after they have attained normal retirement age." 

Providing further support for the court's decision in Eaton was Ellen Collier's, director of benefits for the Eaton Corporation, testimony before the committee during the latest hearings.

"Like the majority of other employers who switch to a cash balance design, Eaton made every effort to act in 'good faith' during this conversion," Collier said.   "As opposed to adopting a less costly, less secure, and less controversial defined contribution design, Eaton incurred additional cost through the conversion process, provided a variety of communications materials and tools, and used a fair conversion method."   Eaton voluntarily made higher pay credits to the cash balance accounts of older workers and those with longer service to ease the transition.

And in turn, ""the employee reaction to Eaton's decision to implement a cash balance plan and provide an informed choice was overwhelmingly positive," added Collier.  "This, along with similar data from numerous surveys, indicates that employees understand and appreciate the need for companies to have flexible retirement programs that fit the needs of today's workforce."

Support for the continued use of cash balance plans is far from uniform.   "There are many in Congress and the pension community who argue that hybrid pension plans, like cash balance plans, can be the future of the retirement system, said Representative George Miller (D-California), the senior Democrat on the House Education and the Workforce Committee.   "Well, Congress needs to have that debate.   That debate must be fact-based and honest and we should begin by acknowledging that there is a lot we know and a lot we do not know about cash balance pension plans."

>To offer a few counter points, Miller said, "During the 1990's, hundreds of large companies amended their traditional defined benefit pension plans and adopted cash balance pension plans instead. We know that over eight million workers and retirees were affected. And we know that many workers lost pension benefits that they had every reason to expect to receive."

>Providing further support to his claim, Miller points to a study conducted by the General Accounting Office (GAO) that found, "without transition protections, older workers - workers over age 45 - can lose up to 50% of their expected pension benefits."

Cash balance opponents have done much to derail reform efforts recently.   Amplifying last summer's Cooper ruling, in September 2003 an assembly of Congressional cash balance critics, led by Senator Tom Harkin (D-Iowa) and Representatives Bernie Sanders (I-Vermont) and Miller, used an appropriations bill to cut off the Treasury Department's first attempt at cash balance reform at the knees - or more accurately, its pocketbook through an amendment to the Transportation/Treasury Appropriations bill (HR 2989) by Sanders required that government regulations affecting defined benefit plans comply with the Cooper ruling .

>Further, the measure also provided that, "... none of the funds made available in this Act may be used by the Secretary of the Treasury or his designee to issue any rule or regulation which implements the proposed amendments to IRS regulation set forth in Reg-209500 and Reg-164464-02, or any amendments reaching results similar to such proposed amendments."

>Miller though does not see this action as the end all to cash balance reform efforts.   "From my point of view, the answer is yes, but only if we can find a fair balance between the interests of employers in having flexibility to design their benefit packages and the interests of workers, and particularly older workers, in being able to count on the benefits they worked a lifetime to earn."

"We need to debate these issues.  There is a great deal at stake, especially in these uncertain economic times," said Miller.