Cash Balance Plan Conversions Cause Illegal Age Discrimination?

[Guest kp]

Can anyone comment on the reporting of cash balance plans in the Wall Street Journal (12/4/98 and 12/18/98). The articles seem to have caused some uproars by employees who have read them.

[mwyatt]

The cash balance plan concept really is just another way of expressing the old career average unit credit formula (i.e., each year you earn an accrued benefit unit equal to x% of your pay for the plan year). New wrapper, same old plan. A switch to a career average plan for an existing older employee in a traditional "high 5" year plan should probably cause alarm on their part as they would most likely be stuck at their grandfathered accrued benefit for quite some time.

Younger employees probably think that these plans are a better deal, but one thing is that everyone gets older. I'd like to see their thoughts on these plans 20 years from now.

Any other thoughts?

[Guest RARogers]

I think the uproar is coming from a few older, long-service employees who were assured that the new plan would not result in the loss of any benefits, but when they actually projected their retirement benefits, they learned they had lost a lot.

For long service employees who work with a company until retirement, a traditional db plan is a fantastic deal. For everyone else, as a rule of thumb, probably not a very good deal at all.

[david rigby]

There is some similaity to the situation where ER terminates a DB plan (or merely freezes it) and all future benefits are earned in a DC plan. The younger EEs probably like this because they have more years to take advantage of compounding (in addition to the concept of the individual account), but older EEs get very little value from only a few years of compounding.

In fact, the above situation is probably better for older EEs because they get something, but in a cash balance conversion, they may get no additional accrual.

The comment by MWyatt above is correct: cash balance plan is a career average plan. From ER perspective, it may be more manageable / predicatable cost than a traditional DB plan based on Final Average Comp. But the cash balance plan has less flexibility: harder to deal with early retirement subsidies or windows. Also, it usually gives a larger death benefit than a traditional DB plan.

[This message has been edited by pax (edited 12-31-98).]

[richard]

The comments in this thread on the Wall Street Journal's recent articles on cash balance plans are accurate.

However, the Journal's articles (including a new one on December 31) are not a balanced presentation of cash balance plans, as most practitioners can easily see.

Can employees be hurt by a switch from a traditional DB plan to a cash balance plan? Yes. Can they be helped? Also, yes. Can employees be hurt by a switch to a 401k plan? Yes. Can they be hurt by a switch to a 401k plan? Also, yes.

While I've expected negative employee reactions to the articles, companies can view these articles as, "Hmmm, these can be an interesting way to reduce our employee costs." Shortsighted? Perhaps, but it is done.

Why is the Wall Street Journal not presenting a balanced approach? Perhaps they don't fully understand these plans. Perhaps they think 401(k) plans are the answer to every problem in the world and are trying to discredit every other type of plan (they already don't like "dinosaurs" like traditional DB plans despite the fact that DB plans still cover a majority of workers in large companies).

Cash balance plans can be a good alternative or a good complement to either 401(k), profit sharing or traditional DB plans. They should be included in the types of plans considered by plan sponsors. While they can be used to help certain types of employees, as well as to "hurt" other types of employees, the same can be said about 401(k) plans, profit sharing plans and traditional DB plans as well.

[Guest cebrooks]

As one of the older (52) employees affected by the cash balance plan, I can relate to the 1)smaller componding window, 2)inferior initial funding, and 3)frozen traditional plan benefits associated with these plans. To add insult to injury the interest rate paid to the plan decreases with age and service credit. Basically the older employee has his/her retirement benefit diminished with credited service. Not much of a motivator, huh!

[Guest samgilbert]

Cash balance plans tend to have one major advantage in comparisons with other defined benefit plans - the employee can put a price tag on the benefits. Cash balance plans with a salary inflation protection are called "pension equity plans" with their own risks and rewards.

Compared to defined contribution plans, cash balance plans offer a guaranteed investment return, although there are some clever ideas for rewarding employees when investments do well in the plan. In other words, cash balance plans look like dc plans with no possible loss on a down market.

Cash balance plans work very well for employees who are not trained in investment theory, as with many industries and job classes dominated by charity workers, blue collar jobs, and immigrant labor.

Every plan is a tradeoff between rewards of pay, service, age, investment risk, and reward for thrifty behavior. Cash balance plans just add another way to provide pensions in an understandable manner.

[MWeddell]

I'm responding to Richard's comment wondering why the Wall Street Journal doesn't present a balanced view.

The writer of the Dec. 4 and Dec. 31 cash balance plan articles, Ellen Schultz, has not been a friend of 401(k) plan sponsors either, so it's not that she prefers 401(k) plans. The writer seems to intentionally choose to write provocative anti-employer articles and isn't aiming for a balanced presentation.

Examples of the author's prior work concerning 401(k) plans are a 5/1/98 article critiquing matching contributions, a 12/4/97 article scutinizing the increase of the cashout amount from $3,500 to $5,000, and a 10/17/97 article criticizing 401(k) loans despite a government study saying that offering loans increases contributions by 35%. All of the above articles are interesting and provocative and may help sell newspapers, but don't expect a balanced presentation including a pro-employer viewpoint from this particular writer.

[richard]

To MWeddell:

Thank you for your observations on Ms. Schultz bias. Much appreciated.

[Guest jwooten]

As I have read the Wall Street Journal's series on cash balance plans, I've wondered how the Age Discrimination in Employment Act applies to the wearaway period when an older, longer service employee in effect earns no accruals. ADEA includes a specific exception that allows benefit plans to provide lower benefits to older employees if the payment made or cost incurred "is not less than that made or incurred on behalf of a younger worker." How does one square wearaway with this language? Older workers can't be costing an employer as much as younger employees during the wearaway period. Do you rely somehow on the Supreme Court's holding in Biggins v. Hazen Paper or am I missing something?

[Dave Baker]

Important new article from the Association of Private Pension and Welfare Plans:

http://www.benefitslink.com/links/20000724...24-006308.shtml

(Link to PDF article published online by APPWP)

[david rigby]

There is also a publication by the American Academy of Actuaries.

Try this http://www.actuary.org/pub/actuary.org/sta...00/cashbook.pdf

[Guest cbvictim]

I think one must question how objective APPWP and ERIC

are on this subject. Both are essentially lobbying

organizations paid for by employers, probably a large

percentage that have implemented cash balance plans. Do

you think they would say anything bad about cash balance

plans? Current laws allow too much flexibility by

companies in establishing opening cash balances. How would

you feel having your pension essentially frozen for say

10 years as in the case of AT&T's cash balance conversion

in 1997?