End of the line for cash balance plans

[mbozek]

Todays NY times (page C1) carries an article on IBM closing its cash balance plan to new participants after 04 and substituting a 401k plan. According to the article fixing up CB plans to eliminate the age discrimination aspects is very costly. It may be that CB plans will be a speciality type of plan like 412(i) plans for small employers not subject to ERISA.

[Blinky the 3-eyed Fish]

I will caveat this by saying I haven't read the article, but even if I did, I have found that articles in general, especially critical articles, regarding pension plans written by major publications are often WAY off base in facts and logic. IMHO of course.

I like your title though. BTW, the sky is falling.

[GBurns]

Now comes the "verdict" in CIGNA:

http://www.erisapensionclaims.com/CIGNA/cignawallstjrnl.pdf

[david rigby]

Oh well, a Wall Street Journal article, written by Ellen Schultz. That's always reliable.

[SoCalActuary]

mbozek, you do take such delight in smacking cash balance plans. Maybe you could be one of Ellen Schultz' tech advisors.

Seriously, this article simply addresses the timing of an amendment that happens to reduce plan costs for some employees, a right still preserved for plan sponsors. Did the sponsor communicate and timely amend their document? That is the key to the problem.

In addition, the article noted that $800,000 would be lost by age 55. This must have been a very rich plan, since the 415 limit at age 55 is barely over $1m. Of course, the article might have been talking about the future benefit payments over the plaintiff's entire lifetime. This is equivalent to saying you won $10m in a lottery, only to have actual cash of $4m, since the payments are over 25+ years.

Of course, this article also feeds my distrust of journalists, but that's nothing new.

[mbozek]

Yo SoCal- You talkin' to me? I did not mention the WSJ article on the CIGNA case or include the link. I noted the NYTimes article on IBM closing participation in its CB plan because of the liability risk for age discrimination. The CIGNA case has no signficiance because it applies to only one person who had split service under the plan.

[GBurns]

Why should it matter whether the CIGNA issue applies to only one person? It is not the number that counts its the principle. The IBM case started with 1 person, maybe other will come out of the woodwork in CIGNA too. Who knows?

The principle of CIGNA and IBM etc is that some changes and plan designs will not be allowed. Will these restrictions be sufficient to assist in getting to the End of the line? Maybe.

[Guest Harry O]

I hope Ellen Schultz is happy with the result at IBM -- no DB plan for future employees. Talk about a Pyrrhic victory! Unfortunately this is the place that half-educated shrills like her have driven employers. Doesn't take a rocket scientist to figure out that employers will simply throw up their hands and exit the DB system entirely rather than be tied up with ambulance chasing lawsuits for the next 20 years. Treasury ought to be embarrassed that they let this happen. There is no reason why they couldn't have issued some helpful guidance for hybrid plans before all this controversy really got started. They chickened out and now the inexorable decline of the DB system begins to pick up steam . . .

P.S. GBurns -

The Cigna decision has nothing to do with the bona fides of cash balance plans.

[flosfur]

Doesn't all this controversy concerns "Conversion" of a DB plan to a "Cash Bal Plan" and has nothing to do with setting up a brand new Cash bal Plan - right!?

So not all Cash Bal Plans dead - just the converted ones, if that.

[david rigby]

Doesn't all this controversy concerns "Conversion" of a DB plan to a "Cash Bal Plan" and has nothing to do with setting up a brand new Cash bal Plan...

Disagree. To oversimplify, the structure if the IRC does not accomodate cash balance plans.

Treasury ought to be embarrassed that they let this happen.

Put the blame where it belongs, on Congress.

[Guest Harry O]

Pax -

Congress would have been nice but we didn't need them. Treasury could have issued regulations interpreting existing law to permit hybrid plans. After all, that is what those courts did that dismissed employee lawsuits attacking hybrids (Onan, et. al). Those courts read the same statute that you say doesn't permit hybrid plans and reached a different conclusion. The Treasury could have broken the tie! It would be a much harder mountain to climb for plaintiffs lawyers with the Treasury lined up behind hybrid plans. So I put the fault on Treasury.

[SoCalActuary]

Said another way, IBM finally decided they don't need DB plans to attract and keep employees. Another case of dirty bathwater, so eliminate the baby!

For those of us disappointed by this action (not counting IBM employees of course), this is one of the biggest drops in pension coverage. Don't forget that IBM is also getting out of the personal computer field and moving it to China.

PBGC should have stuck up for IBM in the lawsuit also, since they are also big losers in future premium volume.

mbozek, your posts do look as if you want IBM to lose, keeping the IRS' old age-discrimination position (of pre-cash balance regulations). Maybe I'm wrong, but the circumstantial evidence supports me.

[mbozek]

Harry: The problem with CB plans is structural as defined by the Fed ct in the IBM case which considers the interest component of the CB plan accrual to discriminate against participants on age disrimination grounds. Treasury regs would have no effect on the fed cts interpretation of ERISA's age discrimination provision. Onan is not a good example because the plan sponsor agreed to pay 20M to settle the case even after the dist. ct ruled against the employees. This tells me that the plan sponsor had little confidence of the decision being upheld on appeal. Only Congress can resolve the problem by amending ERISA to exempt the interest component from being considered to discriminate against older employees because of the time value of money. But Congress is not inclined to amend ERISA in a way that will offend this constitutency which is part of the political process. Also Congress has exercised veto power over treasury regs by refusing to provide appropriations for the issue of cash balance regulations.

SoCal: IBM will still be paying pbgc premiums for current participants so there will be no reduction in premiums because of the closing of the CB plan to new participants. The PC computer business is a very small part of IBMs operations and will have no effect on its revenue. IBM will continue to attract employees with a competitive salary and stock options, not a retirement plan.

[Blinky the 3-eyed Fish]

SoCal, you are not wrong.

[Guest Harry O]

mbozek -

Treasury has been delegated the authority to issue regulations under this provision of Title I of ERISA. The Treasury's regulations would not have been dispositive but would have been highly influential. I am familar with the Onan dispute and it involved issues in addition to the cash balance age discrimination controversy. The settlement was largely directed at these other issues. I disagree that there is only one way to read 411(b)(1)(H). The statute is ambiguous. Courts interpret ambiguous statutes every day without the help of Congress. The statute is obviously ambiguous or you wouldn't have this split in the district courts. Treasury regulations are tremendously influential when courts are trying to interpret ambiguous statutes . . .

[SoCalActuary]

To quote from the IBM release on China and PC's:

"About 10,000 IBM staff will move to the new enterprise - about 2,300 in design, marketing and sales in the US and the rest in manufacturing in China."

In addition, all IBM's new entrants will skip PBGC coverage.

So PBGC will lose more premium base.

By the way, it is OK with me if mbozek wants to own the anti-cash balance position, but it still bothers me that IRS & PBGC don't step up to their responsibilities.

[mbozek]

The treasury will not issue cash balance regs without guidance from Congress. See Annoucement 2004-57 withdrawing proposed CB regs which were DOA because Congress has prohibited the treasury from issuing CB regs. There is nothing in the legislative history of ERISA that would allow the treasury to interpret IRC 411(b)(1)(G) to define the interest credit portion of the accrued benefit as not being part of the accrued benefit which will provide a lower benefit accrual for an older ee at NRA. Under the Mead case there needs to be some basis in the law or legislative history for a regulatory interpretation to be given deference by the courts. Note: IRC 411(b)(1)(H) which was added in 1986, only applies to accruals after NRA.

Whatever the reason, Onan chose to pay after it won in lower ct. Also IBM agreed to pay 350M to settle the PEP plan liability rather than appeal and Xerox agreed to pay 238M to settle its liability for determing the pv of the CB benefits instead of appealing to the Sup Ct. The track record for employers who sponsor CB plans in litigation is quite dismal. Publicly held co do not want footnotes on their securites filings showing potential exposure for CB plans.

[Guest Harry O]

411(b)(1)(G) is *not* the problem here. The real problem is 411(b)(1)(H). The 411(b)(1)(G) is easily solved -- you just put in a provision that prohibits the accrued benefit from being any less than it was in any prior year. Q.E.D. It is the "rate of accrual" problem in (b)(1)(H) that is the Achilles Heel for hybrid plans. Of course the age discrimination regs were D.O.A. -- the Treasury navel-gazed for years while the problem got worse. My position is that the Treasury should have issued regs years ago before the hyberbole got out of hand. Of course it's too late now . . .

And don't get me started on how Treasury dropped the ball on the "whipsaw" problem.

If you are busily giving out favorable determination letters on hybrid plans, it shouldn't have been too hard to find a few minutes to issue regs blessing them.

No one in the government had the courage and foresight to stop this disaster. The result is an acceleration in the decline of the DB system and a massive wealth transfer to the plaintiffs lawyers.

[david rigby]

a massive wealth transfer to the plaintiffs lawyers.

Refreshing to see an attorney use this phrase.

[mbozek]

Harry: The Treasury cannot issue a regulation that contradicts the law because under Sup Ct precedents there would be no deference by the courts to such a reg. There is nothing in 417(e) that exempts CB plans from the PV requirements that apply to all db plans. CB advocates ignore the fact that ERISA is a benevolent law intended to protect employee's pensions from employers. The political considerations will not allow a CB plan to pay a lower accrued benefits to older ees by excluding interest credits because then it would be a DC plan with no investment risk to the sponsor. As for a wealth transfer to lawyers, no one forced CB plans on corporations. Most employers avoided the temptation to adopt a CB plan in order to put some lipkstick on their financial statements.

IBM may have sealed the fate of the CB plan because it was reviewed by the ct in tandem with a PEP plan formula that clearly discriminated against older ees (used a formula that stopped giving benefit points for accrual for after an ee reached a certain age). The court had to use the same analysis in reviewing the CB formula for age discrimination that was used for the PEP formula. IBM settled its PEP liability rather than appeal to avod the comparision with the CB formula.

[Guest Harry O]

mbozek -

I enjoy your posts but let me try to say this one more time. The law is NOT clear. Thus any Treasury regulation would not "contradict the law." Your posts start from the proposition that the existing statutes clearly bar hybrid plans. This is simply not true. If the law so clearly prohibited hybrid plans, we wouldn't have this split of decisions at the district court level-- some courts finding for cash balance plans (Onan, AT&T, recent case in MD district court) and some finding against (IBM). Of course any court is free to determine on its own that the law is clear and that no deferrence is to be given to the regs. But my bet is that in a highly technical area like this, the courts would usually defer to any IRS regs blessing hybrid plans (unless you are in a notorious plaintiffs lawyer district like IBM was in the Southern District of Illinois).

[mbozek]

Gven the depth of congressional opposition to CB plans by both parties the IRS is not going to issue any regulations favoring CB plans and has withdrawn proposed regs pending hearings and review. I have a different view of the future of this issue if it gets to the Sup ct because of litigation over employer annuities. Twenty years ago the use of sex distinct annuities in 457 and 403(b) plans was defended against claims of sex discriminaton on the grounds that the lower benefits provided to women under the annuity contracts was the result of insurance company mortality tables which predicted longer life expectancy for women, not the result of employer action which would violate Title VII. The Sup ct held that the use of annuity contracts which provide a lower benefit to women violated Title VII because the employer chose the provider. In CB plans the employer selects a formula which determines benefit accrual on the basis of time value of money which will result in a lower benefit on account of age at NRA which is not permitted under ERISA. I think IBM will settle its case rather than run up legal expenses.

[GBurns]

The law is clear. It is what some companies think that they can do with the law that is not clear. That is why many of these cases have different issues.

mbozek,

That was an excellent reminder that the devil is in the details.

Too many people think that the restraints are caused by narrow sections of the IRC not realizing that very little stands alone and much is indirectly related.

[Kirk Maldonado]

While not to denigrate the importance of the issues raised in the prior posts, I think that there are a lot of "political" issues here that may very well be the driving force or forces. Unfortunately, those issues are generally not capable of being resolved by in-depth analysis of the applicable law. Unfortunately, that is simply how the real world operates.

Thus, taking a somewhat pessimistic but (I belive) realistic assessment of the situation, even if all of the experts were able to resolve the legal issues involved with cash balance plans, that unfortunately may have little or no effect on the ultimate resolution of the issue.