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mwyatt

IBM Adverse Decision on Cash Balance Plans

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Any comments out there on IBM losing the cash balance suit? Looks like this could make an already unsettled situation even more dicey.

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The judge (this is only a district court) never even did a trial. He did a summary judgement on a complete misapplication of areas of law that weren't even put before him. The summary judgement has a 99.9999999% chance of being reversed on appeal, and then there will be a real trial. Under the reasoning the judge used, all amendments and plans (not just cash balance) would fail. The ruling is the most absurd court ruling in pensions in the entire time I've been in this business.

No one should do anything as a result of this ruling.

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Guest blaum8

While one may disagree with the rulings made by the court, the legal reasoning is not nearly as flawed as MGB would have you believe. ERISA would, in fact, require amendment to permit the type of plan IBM adopted. The judge correctly noted that IBM could have avoided this entire issue by terminating the plan and going to a defined contribution plan, instead of trying to make their DB plan function like a DC plan. Consider cash balance plans wounded at this time and tread cautiously in implementing them until this winds its way up to the Supreme Court.

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According to a NY Times article it appears that the Judge (who is a former NYC police commissoner) held that the CB and pension equity formulas discriminated against older employees because they would have less time for their benefit accruals to increase by retirement age. Under this analysis a retirement plan must provide a larger benefit to older workers because a pension is function of senority. This would seem to ignore the that the increase in benefits for younger employees is due to the time value of money. According to the Times article, converting a plan to a CB type formula discriminates against older employees who will not have as much time to earn a pension benefit before retirement as younger employees. If the cts analysis holds up then all CB benefit formulas that adjust benefit accruals by an interest rate factor would be suspect unless the interest rate increased actuarily as age increased.

Q Why wouldn't replacement of a DB plan with a MP plan be discriminatory against the older employees?

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Actually, what I recall reading was that the judge's "reasoning" as to why a MP plan wouldn't be discriminatory is because the employees "get what they get for investment return"; under a CB plan they only get a hypothetical fixed rate of return (which BTW doesn't look too bad right now). Not sure how that reasoning works as to how that would make the CB plan discriminatory, but that's what I saw in the AP write up.

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The problem with the decision is the judge's weird interweaving of "accrual" and "accrued" and misapplying various ERISA requirements about one on the other.

Rather than trying to read between the lines of what the press said (none of them focused on the merits of the statements of the judge), here is his actual rulilng:

http://www.americanbenefitscouncil.org/doc...ibmdecision.pdf

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Blinky the 3-eyed Fish,

What is the relevance of the credentials of blaum8 or any other poster??

Are you saying that credentials determine competence, knowledge of the subject or intelligence?

Or, are you saying that only persons with certain credentials are allowed to have and freely express their opinions?

What have been the IRS or other court positions? Are you also questioning the credentials of the various IRS and Treasury Dept persons who have expressed opinions?

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The IBM case should not cause anyone to run out and change anything in their plans (note that the Onan v. Eaton case a couple years ago found that cash balance plans are not age discriminatory).

However, the Xerox cash balance case (7th Circuit Appeals Court decision on Friday) is a completely different matter. It was not about age discrimination, but instead was about whipsaw and lump sum calculations involving a floor-offset plan. Even though the Treasury (Pam Olson, Assistant Secretary) recently wrote to Congress proclaiming that they no longer uphold the principles of Notice 96-8, nor are they enforcing it, and are about to issue proposed regulations reversing the whole idea of whipsaw, the Appeals Court still upheld the whipsaw argument (the judge was presented a copy of Olson's letter a few weeks ago).

Note, too, that both cases come from the same District Court of Southern Illinois. Plaintiff lawyers have come to rely on the court in Eastern St. Louis to be very anti-business/pro-worker and will continue to file cases there if they can find one person in that area affected by a case.

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Guest Harry O

No, I don't think anyone ought to change their plans as a result of IBM but it is a looming black cloud on the horizon. This decision will obviously embolden the ambulance chasing ERISA lawyers out there. There will be a marked increase in cookie cutter lawsuits against pension equity and cash balance plans. There will now be even more pressure on the IRS to come down hard on these plans since certain members of Congress will now have a court decision to waive around. In short, I think this case will really muck up the waters for some time.

That said, the case hit at the soft underbelly of these plans - the appropriate definition of "accrued benefit". As long as we are stuck with using the age 65 annuity, it will be tough to cleanly pass the various DB compliance rules without some imagination and courage on the part of regulators and the courts. Plan sponsors adopting these plans should have done so with their eyes open to the possible risks. Most thought that since everyone else was adopting these plans, they must be o.k. (or if they weren't, they would be saved by the regulators). At least the cash balance plan sponsors had the preamble to the nondiscrimination regulations to give them comfort. Pension equity plan sponsors didn't really have anything comparable. (BTW, most of the IBM decision focused on the pension equity component of the plan.)

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Consider the following "traditional" DB plan:

Each year you are credited with a specified percentage of your salary paid during the year; the specified percentage decreases by 1+i from the prior year' percentage. A lump sum feature is allowed as an optional form of payment. Clearly IRC 417 applies to this plan.

Once could also arithmetically express this formula, using the actuarial equivalence assumptions specified in the plan, as a fixed percentage of salary accruing to the account of the participant. Here you have a "cash balance" plan. It is now argued that IRC 417 shouldn't apply in this situation since you are expressing the value to the participant as an account balance, rather than an annuity payment. Why is this a compelling reason that IRC 417 shouldn't apply?

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Without reviewing the merits of the Xerox and IBM cases which will be decided ultimately by the Sup Ct., it appears that the cost of accrued benefit obligations under defined benefit plans and retiree health care in former monoply industries such as airlines, telephone and auto/rubber companies will result their ultimate bankruptcy because they cannot pass the increasing costs off to their customers. This has already occurred in the steel industry where virtually every steel maker has gone thorugh at least one bankruptcy. There is no way that GM can remain solvent if $1200 of each car sold is allocated to health care benefits of its workers and retirees. (There is a joke in the investment community that that the auto companies are really health care delivery systems that finance themselves by selling cars.) Lucent ($1.70) has 35,000 workers, 126,000 retirees collecting heath care and has had 14 consecutive losing quarters. If employers are prevented from reducing the cost of pension plan obligations by using CB plans and reducing the cost for retiree health care then more jobs will be moved outside the US to pay for the cost of maintaining an inefficient benefit system. In short the regulatory model created under ERISA to insure the financial solvency of pension plans will bring down the companies that sponsor such benefit programs.

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Guest mikeak

MGB, a clarification on first sentence in your last post: do you mean Lyons v. Georgia-Pacific or Onan v. Eaton?

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Sorry, it was Onan v. Eaton (these cases are all starting to run together from overload on the brain). They said that cash balance plans are not inherently age discriminatory.

The Georgia-Pacific case is primarily a whipsaw case and is still being litigated.

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Guest ircreader

We are trying to decide how to respond to participant's questions regarding the IBM Case since we have a cash balance plan. Any ideas?

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I suggest that you put together a collection of the more in-depth articles, both pro and con the various decisions (such as Xerox etc), and then decide what side of the fence you are on regarding the chances of successful appeals by IBM etc and after that you could rationalize with the client how and when to proceed. I personally suggest a "wait and see how it turns out" position.

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As previously noted there are at least 9 cases involving cb plans currently in various stages of litigation. There are two distinct issues: 1. whether the value of a lump sum benefit must be the greater of the participant's account under the plan or the present value as computed under IRC 417(e) (Xerox and Esden) 2. Whether cb benefit accrual formulas discriminate against older employees under ERISA 204(b)(1)(G) -IBM. The articles will only provide contradictory answers of issues that will be decided ultimatey by a majority of the US Supreme Ct (just as claims of age discrimination and sex discrimination in benefit plans were decided- the ct held in favor of participants on sex discrimination and against them on age discrimination). You should discuss the participant's questions with counsel to avoid saying anything that could be used against the plan.

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Guest pension222

I agree with Harry O that the problem comes from the definition of the accrued benefit as an annuity at age 65.

As long as this is the benchmark against which age discrimination in benefits is based, the typical cash balance plan is going to have a problem demonstrating that it does not in fact decrease the rate of accrual (of this age 65 annuity) as the employee ages.

What I found most interesting about the IBM decision is that it is mostly about the PEP plan and deals very briefly with the cash balance plan.

I encourage everyone to read the actual decision and make up their own mind as to the validity of the decision.

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Guest IKWUM

I would like to comment on MGB's 8/4 note that said "Note, too, that both cases come from the same District Court of Southern Illinois. Plaintiff lawyers have come to rely on the court in Eastern St. Louis to be very anti-business/pro-worker and will continue to file cases there if they can find one person in that area affected by a case." What we have in Judge Murphy's court (sic) is a true "plaintiff's court" situation and these two cases (IBM & Xerox) are only 2 of numerous anti-pension decisions from this particular court. If I can recall, there were two other recent pension cases (Kmart & Ameritech) from this District that cost the plans several hundred millions of dollars. There was also a Delta case filed in this District within the past year or two but I think they got extremely lucky and had it successfully moved to a Georgia District. If anyone wants the exact case cites, please let me know.

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Regardless of the court in which the case were filed, the Xerox case was affirmed by the 7th circuit ct of appeals and is consistent with the decision in the Esden case in the first Circuit. The lump sum value of the participant's account at distribution is defined in IRC 417(e) as the amount computed under the applicable interest rate that can be greater than the participant's account in the cb plan. Since 417(e) was added to the IRC in 1984 before CB plans were created and has always been an issue in CB design I dont see how the Xerox case can be regarded as proof of anti employer bias in a district ct.

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