DukeEmployees.com - Duke Energy Employee Advocate
Pensions - Page 8 - 2002
Cash-Balance Plans Hit Older WorkersUnion-Tribune – by Craig D. Rose – December 31, 2002
(12/29/02) - To say that Jim D'Aoust was baffled by changes in his pension plan is saying a lot.
D'Aoust was trained as a nuclear engineer and works as a project manager at the San Diego Supercomputer Center. But those credentials left him ill-equipped to figure out what he was owed when his former employer, General Atomics, converted his pension program to a cash-balance plan.
The new plan included many features employees have come to expect from 401(k) investment programs, particularly its benefits expressed as a lump sum total. But like traditional pension plans – and unlike 401(k)s – these accumulated benefits can never be reduced.
Converting from a traditional to cash-balance pension program, however, is complex and has led to charges of shortchanging some workers.
Five years after leaving the company – and receiving a check claiming to correct past errors – D'Aoust remains unsure whether he was treated fairly by the conversion of his plan.
But he's drawn one conclusion.
"I realize how much the new plan was designed for the company and not in the interest of employees," said D'Aoust.
Others are more critical, alleging that cash-balance pension plan conversions violate the law. Around the country, these conversions have sparked more than 900 complaints of age discrimination at the Equal Opportunity Commission. Critics say the plans are little more than a smoke screen for cutting benefits to older workers.
In 1999, the large volume of complaints prompted the Internal Revenue Service to withhold approval of new conversions. But this month, the Department of the Treasury proposed new rules that could reopen the door to the creation of more cash-balance plans.
The new regulations are subject to a 90-day comment period, followed by a hearing in April.
"We expect the rules to become effective more or less as written," said Jim Jaffe, a spokesman for the Employee Benefits Rights Institute.
"We expect a big, quick shift to cash-balance pension plans when that happens. There's enormous pent-up demand among employers who have been holding back because of a lack of clarity."
While pension advocacy groups continue to study the new regulations, many say they've already concluded that the proposals fall short of offering adequate protection to older workers.
Business groups, meanwhile, insist that cash-balance accounts are simpler to understand and more beneficial for job-hopping younger workers.
The companies concede that converting to the new plans can save them money at a time when many would otherwise face obligations to fund their traditional programs. In fact, retirement plans for Standard & Poor's 500 companies are underfunded by more than $240 billion, according to a recent Credit Suisse First Boston report.
"If one or more of the motivations of going to cash balance is to save money, which it undoubtedly is in some circumstances, there's nothing wrong with that," said James Klein, president of the American Benefits Council, an advocacy group for the nation's largest businesses.
But Klein insisted that money isn't the most frequent motivating factor. He and others say these cash-balance programs are more attractive to job-changing younger workers.
With features like 401(k) savings accounts, cash-balance plans share the key protection of traditional pensions: Both are defined benefit programs and therefore provide a guaranteed retirement payment.
Conventional retirement plans and cash-balance accounts provide that benefits earned after a vesting period – typically five years – cannot be forfeited or lost.
This contrasts with 401(k) accounts, which only guarantee an employer's contribution and can suffer losses – a lesson many investors have learned as the stock market tumbled in recent years.
But while traditional pension plans state benefits in terms of monthly income upon retirement, cash-balance plans express benefits in lump-sum terms.
Cash-balance plans also differ in the way in which benefits grow.
Unlike older defined benefit programs, which award far larger annual benefit increases in the years at the end of employee's career, cash-balance plans increases tend to grow more evenly across a person's working years.
Consider a 25-year-old beginning his career at an annual salary of $36,000, with 4 percent annual raises.
After 20 years, the employee would accumulate a lump sum retirement benefit of about $91,000 under a typical cash-balance program. Under many traditional pension plans, that same worker would accumulate a benefit of $85,000.
But at age 55, the employee would earn a lump sum of $225,000 under a cash-balance plan, lower than the $347,000 from a typical traditional program.
When the employee reaches age 65, the cash-balance plan would yield $494,000, or less than 40 percent of the $1.3 million retirement benefit from a traditional plan.
Many traditional plans also provide subsidies for employees who retire before their scheduled retirement date, while cash-balance plans tend to eliminate these bonuses.
When a plan is converted from traditional to cash balance, older workers find themselves caught midstream: They haven't received the higher level of benefits early in their careers that would have been provided by a cash-balance program – and they won't get the big boost expected at the end from a traditional program.
Even worse, veteran workers caught in plan conversions sometimes learn that the benefits they already earned – which federal law says can't be reduced – are higher than they would receive in a cash-balance plan.
Some companies in these cases make no annual pension contributions to the employee's account until the benefit under the new plan "catches up" with the benefit the worker has already earned.
These years without pension contributions have become known as "wear away" periods and are cited as a prime abuse of plan conversions. The prospect of "wear aways" helped spark an employee revolt when IBM first considered a conversion to cash balance.
Joseph Andrew Maher, a customer engineer at IBM for 23 years, said the planned conversion would have cut his projected pension from $24,000 annually to $16,000.
Faced with the revolt and a union organizing drive, IBM agreed to allow older workers to keep their traditional pension programs.
Critics say the Treasury Department's proposed regulations also fail to eliminate questions about the interest rates that employers assign to the new breed of pension plans. These can be thought of as guaranteed growth rates; the higher the rate, the faster and larger the projected pension benefit will be.
The proposed regulations require that such assigned rates be "reasonable."
"That is far too open-ended and will lead to problems," said David Certner, director of federal affairs for the AARP, a national association for older people.
Norman Stein, a pension expert and professor of law at the University of Alabama, says the proposed regulations could legitimize cash-balance plans that he believes are inherently age-discriminatory.
"I think the law is pretty clear that almost every cash balance is structurally defective," said Stein. "If the proposed regulations had not blessed the plans, Congress would have had to think what type of cash-balance programs should be permitted."
Some are companies say they've compensated for potential problems with plan conversions.
Sempra Energy, which converted its pension program in 1998, crafted its new plan with unionized employees. Sempra, parent company of San Diego Gas & Electric, gave older workers the option of keeping their traditional plans for five years and added subsidies in cases where the conversion would have penalized employees.
"There are no 'wear aways' and you will never be worse off," said Joyce Rowland, senior vice president of human resources at Sempra. "There might be one person who was so unique who we didn't catch them, but for the majority of workers, 99.9 percent, this works very well."
Added Dave Moore, president of the International Brotherhood of Electrical Workers Local 465, which represents some SDG&E workers: "We did not make the mistake that IBM made. We made adjustments, and they had to negotiate with us."
Sempra insists it's not saving money as a result of the pension conversion.
And some business consultants say cash-balance programs could halt a decline in the percentage of workers covered by any type of defined benefit program, which guaranteed retirment payments.
But critics say there is no evidence that cash-balance conversions halt the slide in defined benefit coverage.
"The evidence is overwhelming that this is a method to cut costs," said Lynn O'Shaughnessy, author of "The Retirement Bible."
"I'm not aware of any companies who have embraced cash balance to start a new plan. It's always to change their old plans."
The Pension Rights Center, a Washington, D.C.-based consumer group, also argues that cash-balance conversions are cost-cutting measures and talk of helping anyone with the changeover is a smoke screen.
"This is not being done to help younger workers," said Karen Friedman of the pension center. "This is being done to hurt older workers.
AARP, the national advocacy group for retired people, is also skeptical of claims that cash-balance accounts make retirement plans more understandable.
"During hearings on cash-balance plans a few years ago, tapes were played of consultants saying one of the benefits is that employees would not know what their benefit would be, that they'd not understand their benefits were being reduced," said Certner.
But Klein, of the American Benefits Council, which supports the conversions, cited Delta Air Lines and others that added cash-balance plans while allowing workers to retain their old plan, depending on which provided the greater benefit.
"These companies are not saving any money," said Klein. "The ultimate way to save money is to do what the vast majority of companies are doing and terminate the defined benefit plan. Companies converting to cash balance ought to be applauded for staying with a defined benefit system – with guaranteed benefits."
With frequent job changes, younger workers prefer 401(k) plans and the portability of cash-balance pension plans, he said.
But Judi Apfel of the California Pension Rights project is skeptical that portability is useful to many younger workers.
"You still have to vest," said Apfel. "I seem to recall that the average young worker is leaving before five years (required for vesting) anyway, so the portability feature does not help that much."
And despite claims that new plans are simpler, companies seem to have difficulty calculating benefits.
In a spot check of 60 cash-balance plans earlier this year, the Labor Department found 13 underpaying benefits when workers left before normal retirement age.
All told, the Labor Department says cash-balance accounts may be shortchanging retirement benefits by $200 million annually.
General Atomics was one of the companies.
Jack Laufer, a Hewitt Associates consultant who advises General Atomics on its pension program, said the problems in the company's plan had nothing to do with age discrimination, but instead resulted from the complex formulas used to project benefits and then recalculate backward to arrive at lump sums.
He did not know how many employees had been shortchanged, but said that the problem has been solved.
Congress May Need to InterveneNew York Times – December 27, 2002
(12/26/02) - Middle-aged employee, beware. The Treasury Department has proposed new rules on how companies can convert traditional pension plans — which benefit those who stay at one company all their working lives — into more portable ones. It's a good idea, but as now written, the rules could dramatically cut older employees' retirement income.
Fewer people entering today's nomadic work force will spend their entire careers at one company. That is why 401(k)'s, which are managed by the employee and carried from company to company, are so popular today.
The new Treasury proposals are for "cash balance" plans, hybrids that fall between a traditional pension and 401(k)'s and I.R.A.'s. Employers contribute a percentage of an individual's salary into a retirement account, plus interest. Benefits accrue more steadily over time than under a traditional pension, and employees who leave a company can take their cash-balance accounts and roll them into individual retirement accounts.
Trouble is, converting old-style pension plans for current employees is horrendously complicated. In 1999, I.B.M. employees alleged that the company was using a conversion to effectively strip them of many of their benefits. As a result, the government imposed a moratorium on all conversions pending these new rules. The proposed rules, however, are too weighted toward corporate interests and insufficiently toward the needs of employees. For example, the fact that companies can avoid age discrimination claims by contributing the same percentage of salary to all employees will not sit well with older workers. They are shortchanged because the value of benefits under traditional plans spikes toward the end of one's working years, after hardly rising early on.
Equally troubling, the rules require companies to use only "reasonable" interest-rate assumptions in calculating the present value of future benefits. Yet the slightest adjustments in assumptions dramatically alter the benefits owed. By not providing a concrete formula, the government is inviting companies to save themselves a bundle at employees' expense. Such lax vigilance of loyal employees' pensions is particularly unacceptable at a time when top executives at too many companies seem willing to manipulate pension plans to benefit themselves.
The Treasury should address concerns that its proposed rules could allow companies to deprive longer-serving employees of retirement benefits they have already earned. Granting employees over a certain age an absolute right to keep their old pension plan would be a sensible adjustment. If necessary, Congress should intervene to protect these older workers from an arithmetic sleight of hand.
Opening the Cash-Balance DoorL. A. Times – by Kathy M. Kristof – December 25, 2002
Proposal would end moratorium on conversions to the plans, which many say hurt older workers.
(12/11/02) - The Treasury Department proposed rules Tuesday that would end a three-year moratorium on conversions to a complicated and controversial type of pension that has been criticized for depriving older workers of promised benefits.
The new rules are aimed at clarifying whether converting traditional pensions to so-called cash-balance plans discriminates against older workers. As proposed, the rules would slightly modify though largely allow many practices that have made the plans controversial, pension experts and others said.
"The immediate impact of these rules, if they go into effect, will be to substantially slash the pensions of older workers throughout the country," said Rep. Bernie Sanders (I-Vt.). "Millions of workers will see a reduction in the pensions that they anticipated. This will be a disaster for them and their families."
Meanwhile, employer groups heralded the proposed rules, which must be approved by the Internal Revenue Service after a public comment period. Companies maintain that the rules would make pensions less costly and more widely available.
What are cash-balance plans? What do the new rules allow? Whom would they cover? Here are some answers.
Question: What's a cash-balance pension?
Answer: It's a type of defined-benefit pension plan -- that's the traditional pension, which promises a set monthly benefit for life. Under traditional formulas, pension benefits are calculated as a percentage of wages multiplied by years of service. A typical formula might provide 1.5% of final monthly wages, times years of service, for example. Consequently, a 20-year employee would get 30% of his final salary in monthly benefits at age 65. All the money contributed to the plan comes from the employer.
With a cash-balance plan, the employer also makes all pension contributions. But the worker's pension benefit, which can be paid in a lump sum or a monthly stipend, depends on how much the employer contributes every year and the rate of return earned on the account -- much like a 401(k). Such a plan also is portable, allowing workers to cart their pensions from one employer to another.
Q: What makes the plan so controversial?
A: About 700 major corporations "converted" their traditional pensions to cash-balance plans over the last decade. Experts maintain that the bulk of these conversions drastically reduced future benefits for millions of workers. Rep. George Miller (D-Martinez), estimates that about 8 million current and retired workers have lost $334 billion in promised benefits as a result of conversions.
Hardest hit are usually the oldest employees, who can no longer count on receiving their promised benefits and are too old to save enough on their own to make up the difference, said Karen Ferguson, director of the Pension Rights Center in Washington.
Federal law bars firms from taking away pension benefits that workers already have earned. However, cash-balance plan conversions often would stop the continued accrual of pension benefits for older workers. In other words, a worker would get a benefit equal to the present value of his or her future pension at age 50 but then work 15 more years without any additional pension benefit. Younger workers, meanwhile, would continue to accrue benefits.
Dozens of workers have sued, claiming the conversions are discriminatory. The IRS, which determines whether pensions qualify for tax-favored treatment, stopped approving cash-balance plan conversions in late 1999 because of the possible conflict with federal prohibitions on age discrimination.
The proposed rules clarify the Bush administration's take on the law and would end the moratorium.
Q: What would the proposed rules do?
A: They would interpret pension law in such a way that cash-balance plan conversions would not be in violation of age discrimination rules, as long as they met certain requirements.
Specifically, a plan must give each participant the fair present value of the existing pension benefit at the time of conversion or the cash-balance amount, whichever is greater. However, if at the time of conversion the value of the old defined-benefit plan is greater than the amount the worker would be due under the cash-balance formula, the employee could go a period of time, in some cases years, without earning any new benefits. This so-called wearaway period is not age discriminatory on its face, according to the proposed rules.
Q: When would these rules go into effect?
A: They are subject to a 90-day comment period, during which any interested party can write the IRS, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044, to express an opinion about the proposal. There also will be a public hearing in early April. After that, the IRS will determine whether to finalize the existing proposal or submit a revision.
Concerns About Retirement PlansScripps Howard News Service – by Mary Deibel – December 25, 2002
(12/18/02) - President Bush's call to create private Social Security accounts isn't the only plan to fall victim to the bear stock market. Older workers have pushed off retirement plans, retirees are returning to work and bosses are considering the administration's offer to switch from traditional pensions to cheaper alternatives that can cost older workers:
- Twenty percent of Americans 50 to 70 years old who own stock have seen the value of their holdings plunge so much that they have postponed retirement, while 3 percent of retirees have returned to work because of investment losses, reports AARP, an advocacy group for older Americans.
More troubling: Older workers and retirees may not recognize that their depressed retirement savings plans won't last 20 years but will be exhausted in 10. By then, frets AARP research director Jeff Love, "they may have trouble re-entering the work force."
- Individual Retirement Accounts. These are the most popular retirement savings plans, accounting for 22 percent of the $10 trillion now in pension and other retirement assets. IRAs scored the steepest drop last year since Congress created them two decades ago, the Employee Benefit Research Institute calculates.
But institute president Dallas Salisbury says IRA owners still heavily invest in stocks and "haven't changed their behavior in response to falling stock prices."
- White House officials, buoyed by the Republican takeover of the Senate and the stronger grip on the House, have mulled whether to push for private Social Security investment accounts next year even though party candidates distanced themselves from "privatization." But they got bad news in a new Los Angeles Times poll, which finds that just 38 percent of respondents support the idea - down sharply from August - while 55 percent oppose it.
- The 60,000 employers that still provide traditional pension plans, largely invested in stocks, have seen their assets fall 19 percent since 2000 while projected obligations jumped 49 percent, Ryan Labs estimates.
The upshot is that 23 million workers covered by traditional pensions could find their employers eager to sign on to the Bush Treasury Department's plan to end the three-year moratorium on converting traditional pensions to so-called cash-balance programs.
Unlike traditional pensions, which pay benefits based on a worker's years of service and final income, cash-balance plans pay according to what the employer contributes and the rate of return the money earns over time.
Longtime senior employees who accrued benefits under the traditional plan can see their pension checks cut - sometimes by as much as six figures.
Treasury started approving switches to cash-balance plans in 1985, clearing hundreds of company conversions quietly until IBM tried to change in 1999. Older IBM workers figured out halfway through how much worse off they stood to be, prompting picketing, congressional hearings and age-discrimination suits against Big Blue.
At the same time, Treasury's Internal Revenue Service stopped issuing approvals for new cash-balance plans until the age-bias issue could be studied.
Now Treasury has proposed a rule that says converting a traditional pension plan to a cash-balance program doesn't inherently discriminate against older workers, although employers must take steps such as adopting a "reasonable rate" of investment return in designing the new plan to shield themselves from discrimination claims. What's "reasonable," however, is left to the employer.
The promise of renewed approval of cash-balance plan conversions has been cheered by employers and their trade groups. Delta Air Lines, caught in the air industry downdraft, plans to switch to a cash-balance retirement system that would save it $500 million over five years, for instance.
James Klein of the American Benefits Council, the Fortune 500 companies' employee benefits lobby, says the cost savings make cash-balance plans "the only bright spot." The corporate alternative, he says, is to kill traditional pensions entirely when traditional coverage already has shrunk to fewer than 60,000 plans from 175,000 in 1983.
But pension advocates are already mounting the barricades to battle against reopening cash-balance plan approvals they fought back before.
"We're going down the wrong track on retirement policy if everything from cash-balance plans and 401(k) accounts to Social Security rise and fall with the stock market," says Karen Friedman of the Pension Rights Center.
"It's one thing to have cash-balance plans for new hires, but it's quite another to tell a 50- or 60-year-old after years of loyal service that you won't make good on your pension promises when workers don't have time to make up the financial loss."
Ask Kathi Cooper how tough it is to face a pension-plan conversion: The name plaintiff in the IBM employees' suit that's still pending in court, Cooper, 52, is "a magna cum laude accounting graduate of University of Texas with 24 years at IBM in finance and planning who spent weeks figuring out that the switch to a cash-balance plan would cost me $400,000 when I eventually retire. ...
"Those pretty pamphlets telling you how lucky you and spell out details in little tiny print that takes a math degree to decipher," she says. "If Treasury really wants to help workers, it would make employers disclose accurately and in eighth-grade language what they have done to you and what it does to your retirement."
On the Net: www.irs.gov/regs is taking cash-balance proposal comments online. Written comments should be mailed to CC:ITA:RU (REG-209500-86), Room 5226, Internal Revenue Service, P.O. Box 7604 Ben Franklin Station, Washington, D.C. 20044. Comments must be received by March 13, 2003.
Pension Switch Will Cost Older WorkersThe Baltimore Sun - by Eileen Ambrose – December 25, 2002
(12/22/02) - WITH the Bush administration throwing support behind "cash balance" pension plans, more companies may convert traditional pensions to this option, which can significantly reduce older workers' projected retirement benefits.
This month, the Treasury Department proposed guidelines under which employers could change traditional pensions to cash balance plans without fear of age discrimination charges. The department is accepting public comment and plans a hearing in April. The rules could become final in the summer.
Cash balance supporters say the plan is more suited for today's mobile work force and helps younger workers build benefits more quickly. A third of Fortune 100 companies have a cash balance or similar plan; in 1985, there was just one, according to Watson Wyatt Worldwide, a human resources consulting firm based in Washington.
Opponents say companies convert to a cash balance plan to save money at the expense of longtime employees.
By converting, companies can save money because benefits are no longer tied to what workers earned in the last few years of their career, when wages are usually highest, experts said. During conversions, too, employers often drop expensive early-retirement subsidies.
"Overall, if I'm an older employee, I prefer the traditional pension. If I'm a younger employee, I prefer the cash balance plan," said Kien Liew, president of PensionBenefits Inc. in Plano, Texas.
A traditional pension's benefits build slowly over many years and then accelerate, with payouts usually tied to average pay during the last few years of employment multiplied by years of service.
In a cash balance plan, benefits accrue more evenly throughout employment. Workers are credited with a certain percentage of pay, usually 5 percent a year, and the balance is increased annually by an interest rate of, say, 5 percent to 6 percent.
As with a traditional pension, the employer pools the plan's money and assumes the investment risk. Workers receive regular statements on the lump-sum value of their benefits.
Like a 401(k) account, cash balance plans allow workers leaving a company after being vested, usually in five years, to roll their accrued benefits into an individual retirement account or new employer's plan, if that plan permits. At retirement, workers typically take benefits in a lump sum, although they can get an annuity that pays them a monthly check for life.
'Harmed a lot'
Under the Treasury proposal, cash balance plans would not be deemed discriminatory if older workers receive at least the same percentage of pay in their accounts as younger workers.
When companies switch to a cash balance, employees don't lose benefits they have already accrued, but can take a hit on projected benefits they have yet to earn.
"The big issue is conversion. The way it's been done previously has harmed a lot of employees," said Thomas Lowman, an actuary at Bolton Partners in Baltimore.
Generally, longtime workers lose about 30 percent of their projected benefits when employers switch to a cash balance plan, Lowman said.
Jane Banfield, 54, said her projected benefits of $30,000 a year were cut in half after AT&T Corp. converted from a traditional pension to a cash balance plan in 1998. An employee lawsuit against AT&T is pending.
"You're changing the rules in midstream without offering us the opportunity to change our investment strategy," said Banfield, who worked 20 years for AT&T in New Jersey before being laid off in November.
Cash balance plans have their pluses and the impact of conversions can be ameliorated, some experts said.
A cash balance plan "tends to distribute the 'defined benefit' dollars more broadly among the plan population," said J. Mark Iwry, former benefits tax counsel with the Treasury Department during the Clinton administration. "It's not a type of plan that deserves to be demonized."
But Iwry added that, during conversions, longtime employees "deserve a soft landing. They deserve reasonable transition protections." Some companies, for example, allow those near retirement to remain under the old formula, give workers a choice of the old or new formula, or have sweetened benefits for older workers, Iwry said.
In a conversion, workers should ask how they will fare under each plan and request a financial remedy from their employer if they'll be hurt under the new plan, experts said.
Rep. Miller Blasts Bush on PensionsCongressman Miller – December 24, 2002
Miller Says Bush Administration Plans to Weaken Regulation of Pension Plans and Reduce Payments to Older Workers
Monday, December 9, 2002
WASHINGTON - The Bush Administration will announce Tuesday morning proposed changes to pension rules that bow to employer pressure to permit them to reduce employee pensions, charged Congressman George Miller (D-CA).
Miller, the senior Democrat on the Committee on Education and the Workforce, said the rules, when finalized after a 90-day comment period, would rescind a 1999 policy that prohibits government approval of the conversion of company pension programs to “cash balance plans” in which older retirees typically receive lower benefits. The proposed rules would permit companies to change to cash balance plans without any provisions requiring employers to protect the pensions promised to older workers. An older worker is defined as an employee over the age of 40.
"Once again, the Bush Administration has decided that what is good for the captain is not necessarily good for the sailor," said Miller. "This proposed change to pension rules will result in average employees losing ground in their pensions while top company executives will continue to receive lavish treatment."
Between 300 and 700 companies, involving 8 million workers and $334 billion in pension benefit plan assets, have converted heir defined benefit plans to cash balance plans. Over 800 claims of age discrimination have been filed with the EEOC in relation to the new plans. The independent investigatory wing of Congress, the General Accounting Office, in 2000 determined that cash balance plans could reduce pensions for older workers by up to 50%.
“Lifting the restriction on pension plan conversions is the latest in a stunning series of actions by an Administration that obviously has no compunctions against siding with corporate interests over employees and families every time,” said Miller. “They aren’t satisfied with refusing to raise the minimum wage, extend unemployment benefits, or grant a full cost of living raise for federal workers. Now they are going after pension security, too.”
The rules change would lift a ban imposed by President Clinton in 1999 that prevented the government from approving a shift from a defined benefit (company financed) pension plan to plans where most employees will receive a smaller pension. So-called cash balance pension plans were permitted initially by the first Bush Administration in 1991. Since that time, as many as 700 of America's largest companies have adopted them.
Under the proposed rules change, the Administration would allow companies to establish all the terms of the cash balance plan, include the rates of return on the new plan and the estimated rate of return used to estimate the value of an employee’s benefit under the old defined benefit plan.
"This is deregulation of pension plans, and it is going to cost employees dearly, especially employees over 40 years of age," said Miller. "With all of the tools available to the Administration to strengthen pension protection that do not need congressional authority, it is staggering that the one change the Administration intends to make will weaken pension security for millions of employees," Miller said.
“The Administration and the Republican congressional leadership pushed a pension bill through Congress this year that would have done next to nothing to address the pension scandals that have decimated the retirement security of millions of American workers,” said Miller. “Now, just in time for the holidays, they are quietly proposing to allow massive changes in pensions that will make the Enron collapse look minor in comparison.”
Miller said he will call for immediate hearings by the Committee on Education and the Workforce when Congress convenes in January if the Bush Administration goes through with the planned pension rule changes.
Regarding New Bush Pension PlanCongressman George Miller - December 23, 2002
Statement by the Honorable George Miller (D-CA)
December 10, 2002
This is the latest example of the tin ear President Bush and his Administration have for average employees. Workers who are playing by the rules and raising families and looking forward to a secure retirement are now having the rug pulled out from under them.
This is a devastating blow for employees who are in secure pension plans today at good companies and who still have another 5 or ten years left before retirement.
The Bush Administration is implementing the wish list of big business with a total disregard for the financial losses average employees are going to suffer from it.
Older workers, many with families, many with dreams of a secure retirement, should be very concerned about this change, because they are going to suffer big financial losses from it – thanks to the Bush Administration.
Employees have already seen huge losses in their 401k plans. Now they are going to see losses to their traditional pension benefit plans at top companies across the country. The defined benefit plan is the last pillar of private pension security and it has just taken a severe blow under this proposal.
The only way to stop this now is for employees to make their concerns know – to their employers, to the elected representatives and to the President. Congress could stop it, if it were not under the control of the Republicans who are unlikely to come to the rescue of average employees against the President’s wishes.
Altered Pension PlansNew York Times – by Richard A. Oppel Jr. - December 23, 2002
WASHINGTON, Dec. 9 — The Bush administration has proposed sweeping new pension rules that will encourage companies to adopt a type of retirement plan that has been under attack for three years for what critics call a tendency to strip benefits from older employees.
The proposed rules, which are to be released by the Treasury Department on Tuesday, describe the steps for companies to avoid age-discrimination challenges when they convert their traditional pension plans into what are called cash-balance pension plans. Cash-balance plans tend to benefit younger workers, often at the expense of older workers, and are less costly for companies.
Getting clearance for these pension plans was near the top of businesses' wish list, but the rules were being attacked by Democrats in Congress even before their release.
Employers are cheering the new proposals, which could become final in 90 days, as a cost saver. Some big companies have trimmed more than $100 million a year from their expenses by switching plans. Employers say that the rules are good for workers, too, because the rules will spur more companies to provide pension plans.
But worker-rights advocates are criticizing the proposals, saying they permit reductions in the value of employees' benefits. Under the new rules, companies will be able to reduce or wear away benefits if they use "reasonable" interest rates and mortality projections in calculating the value of pensions when they convert to a cash-balance plan.
Unlike 401(k) and similar savings plans, traditional defined-benefit plans deliver a fixed amount based on the employee's salary and years of service. In the cash-balance version, workers accrue benefits evenly over the course of their careers. The older plans allow workers to accrue disproportionately large benefits in their final years.
The government is endorsing cash-balance plans, critics say, meaning that older workers at companies that now convert will lose out on the large benefits that had been projected for them.
Cash-balance plans were popular until September 1999, when the Internal Revenue Service, facing criticism from workers at some companies, decided to halt approvals of the plans to study whether they unfairly discriminate against older workers. At some big companies, workers staged rallies to attack executives for making the switch, forcing some companies, most notably I.B.M., to back down or offer employees a choice of keeping their old pension benefits.
Since then, some companies have converted to cash-balance plans, but they have done so without the certainty that comes from obtaining a determination letter from the I.R.S. that effectively blesses the structure of the plan and certifies its tax-exempt status.
The rules to be unveiled Tuesday are the first step toward lifting the I.R.S. moratorium on approving cash-balance plans, according to Treasury officials. After a 90-day comment period, the proposed rules will be put in final form, and the I.R.S. is expected to begin approving pension plans soon afterward, Treasury officials say — offering employers greater legal certainty that their conversions will not be attacked as discriminatory.
Traditional pension plans have been heavily supplemented in recent years by employee-managed 401(k) and similar plans. Under traditional pensions, companies calculate a retiree's benefit based on length of service and the amount of the annual paycheck in the last few years before retiring. Thus, the company manages the money and most of the value accrues late in the employee's career.
Under the newer plan, employers contribute a percentage of each worker's paycheck to a cash-balance account every year, and then guarantee that money will grow at a certain interest rate. Younger workers tend to benefit from this arrangement since they have more years for interest to accrue.
About one-third of the nation's largest public companies have cash-balance plans or their equivalent. According to Congressional critics, more than 800 claims of age discrimination have been filed over conversions to cash-balance plans.
As described by a Treasury Department official, the new rules will stipulate that cash-balance plans will not be considered discriminatory if the "pay credit" — the percentage of employee paychecks contributed by the employer — is no less for older workers than for younger workers. Conversions will also pass the discrimination test if the value of employee benefits is not reduced at the time of the switch.
Furthermore, the official added, conversions will still avoid discrimination even if the benefits are reduced as long as the employer uses "reasonable" interest rate and mortality assumptions in determining the beginning value of an employee's new cash-balance account. The regulations give no guidance about what constitutes a reasonable interest rate.
Employers will find that using the rate on 30-year Treasury bonds will be a safe assumption, he said, while using a substantially different rate could mean difficulties when companies seek determination letters from the I.R.S.
"It's reasonable to look at the market rate of interest," the Treasury official said. He said that the new rules would safeguard the interests of employees and that other provisions to be unveiled Tuesday would be aimed at protecting workers' nest eggs.
Employer groups also said the new rules would help workers by prompting many companies that otherwise would not offer pension plans to do so.
"This takes an important step toward putting cash-balance plans on a firmer legal footing," said James Delaplane Jr., a partner at Davis & Harman in Washington who lobbies on pension issues for large employers.
Mr. Delaplane noted that almost one-third of the companies in the S.& P. 500 do not have defined-benefit pension plans. The new rules, he said, will encourage more companies to offer pensions at a time when many employees are concerned about the future of Social Security benefits and their own 401(k) plans.
But employee-rights advocates and some Democrats in Congress sharply criticized the proposals.
"This proposed change to pension rules will result in average employees losing ground in their pensions, while top company executives will continue to receive lavish treatment," said Representative George Miller of California, the ranking Democrat on the House Education and Workforce Committee.
David Certner, the director of federal affairs for AARP, said, "The Treasury could have done a lot more to protect older workers."
Employees who are just reaching the point where the accrual of benefits begins to accelerate rapidly in the years before retirement will suffer if their companies convert, Mr. Certner said.
"You've put in many years at a lower rate, and you're just about to reap the higher rate, and you change to a different benefit structure," said Mr. Certner, who was briefed on the new rules by Treasury officials. "You wind up getting much less than you were anticipating."
Converting Pension PlansWashington Post – by Albert B. Crenshaw - December 23, 2002
(12/10/02) - The Treasury Department plans to propose new rules today that would allow employers to resume converting traditional pension plans to new "cash balance" plans that can lower benefits to long-serving workers.
Such conversions are highly controversial. Critics contend that they discriminate against older workers in violation of federal law. The Treasury Department and the Internal Revenue Service stopped approving employers' requests to convert their pension plans three years ago amid complaints from workers and some members of Congress.
That moratorium will remain in place until the regulations become final, probably next year.
The new regulations conclude that cash-balance plans are not inherently age-discriminatory, as long as pay credits earned by older workers are the same as or better than those earned by younger workers. But the rules would require that benefits earned by workers under the previous plan be protected.
There will be a 90-day comment period and an IRS hearing on the proposals.
In traditional "defined benefit" pension plans, workers' pensions are determined by a formula in which years of service are multiplied by average pay in the worker's last few years of employment and by a percentage, typically 1 to 2 percent. In such an arrangement workers earn benefits slowly at first, but the curve gets steeper as their tenure grows longer. Thus those who work many years at a company can earn substantial pensions, while those who work fewer years earn disproportionately less.
In a cash-balance plan, the employer sets up a hypothetical account for each worker and credits a percentage of pay to it every year. Under this formula, benefits accrue in a more linear pattern, so short-tenured workers end up with a better pension than they would under a traditional plan. At retirement, the worker can take the account balance as a lump sum or convert it into an annuity.
In past conversions, some companies have calculated benefits earned by workers under the old plan, and if they were higher than the worker would have earned under the new plan, the worker earned no new benefits until the new formula caught up.
The new rules would require employers to preserve the present value of any benefits earned under the old plan and require the crediting of interest in a way that would make this temporary pause in earning benefits less likely, though not impossible, Treasury officials and other experts said.
Rep. Bernard Sanders (I-Vt.), whose constituents include many IBM workers embittered over the computer giant's switch to a cash-balance plan in the late 1990s, called the new rules "a radical anti-worker action."
"Companies favor these plans because they can slash a worker's pension benefit by 20 to 50 percent in one fell swoop," Sanders said.
Defenders of cash-balance plans point to their better treatment of workers who do not have long careers at one company, a common situation today. They concede that some companies convert to save money, but in many cases they do not.
"When you establish a [pension] plan you allocate a limited number of dollars to people," said Kevin Wagner of benefits consultant Watson Wyatt Worldwide. "A lot of companies are saying 'We cannot have a reward pattern that just pays career employees.' "
Today, according to a Watson Wyatt survey, 33 percent of the companies in the Fortune 100 offer cash-balance pension plans, up from just one company in 1985.
A Torn Pension CheckSan Fransisco Chronicle - December 23, 2002
(12/12/02) – The longer you work, the bigger your pension. That's the retirement math that workers use for sticking with one company.
But a White House policy wants to shred this promise to let businesses save money on pension costs. It's a bad idea that should be stopped.
A Treasury Department plan, released this week for a 90-day comment period, would allow companies to dump conventional defined-benefit plans that customarily pay more for longtime workers. As a substitute, the Bush plans allows freer use of cash-balance plans, which pay less for long-termers and a little bit more for newer workers.
It sounds like a good bargain, especially in a job-hopping workforce. Also, many companies, small and large, are dumping the old 30-years-and-gold-watch pension structure for retirement packages that mix 401(k) savings and other rewards.
But the Treasury plan isn't about new workforce habits. It's designed to break pension promises to reward business. It's no accident that the idea surfaces after sweeping GOP victories last month emboldened the White House to push ahead.
Future retirees are more worried than ever about what lies ahead. Stock market declines, higher drug costs and health-plan cutbacks are a worrisome mix. The sunset years are anything but sunny these days.
Also, many workers are waking up to the fact that future pensions, in many cases, are promised, not guaranteed. A company can't cut a pension earned by a worker. But it may cancel increases, even if these amounts were once dangled before a worker during a hiring interview.
Washington should pause before bulling ahead with a bad plan. There could be a reasonable compromise for a range of pension options.
Let younger workers opt out of defined-benefit plans that reward older employees. But let these longtime workers stick with pension benefits they counted on. It's only fair.
The Cash Balance ShortchangeKiplinger Magazine – by Mary Beth Franklin – December 22, 2002
(January 2003 Issue) - Did you get a lump-sum payout from your pension plan? Check the numbers. The Xerox Corp. may have shortchanged thousands of its retirees and former employees by miscalculating their lump-sum retirement benefits. And their plight may be the tip of an iceberg of stunted retirement payouts to employees of other firms.
A federal judge has ordered Xerox to pay $300 million in back benefits and interest to about 13,000 former employees to compensate for its error. Xerox has appealed the ruling, which stems from a class-action lawsuit against the company's retirement plan. But if it is upheld, employees who left or retired from Xerox since January 1, 1990 -- and who took their pension in a lump sum rather than in monthly payments -- may be eligible for additional payments ranging from less than $1,000 to more than $100,000. Those estimates are from Steven Katz, of Carr Korein Tillery, LLC, in Belleville, Ill., one of the lead attorneys in the class-action suit. (If you think you might be affected, contact Katz at email@example.com.)
Although the suit concerns only Xerox, the issue of how payouts from cash-balance retirement plans are calculated could affect millions of Americans. Since the mid 1980s, hundreds of companies have switched from traditional pension plans (which generally provide a lifetime of monthly payments based on your work history) to cash-balance plans (which offer departing employees a cash payment, similar to a payout from a 401(k) plan). When workers leave their jobs before normal retirement age and take a lump-sum payout from their plan, complicated and controversial actuarial calculations kick in to determine exactly how big the plan payout should be.
Last year, the U.S. Department of Labor audited a sampling of 60 cash-balance plans and discovered that in 13 cases -- or 22% -- workers who left before normal retirement age did not receive all the benefits to which they were entitled. If that same percentage applies to all cash-balance plans, the government estimates that workers may have been shorted between $85 million and $199 million annually.
"Anyone who has participated in a traditional defined-benefit pension plan or a cash-balance plan and has taken a lump-sum distribution within the past ten to 15 years should be suspicious," says Katz. But what can you do about it?
First, check your pension documents to make sure that the underlying information -- such as your date of birth, years of service and salary -- is correct, advises Mary Ellen Signorille, a lawyer with AARP who specializes in pension issues. "If you have been receiving documents over the years that estimate your retirement benefits and your lump sum is significantly different, that should be a red flag."
If you suspect a problem, you'll need the help of an actuary to sort things out. Actuaries normally charge $200 an hour or more, but volunteers from the American Academy of Actuaries will review your documents and offer up to four hours of free consulting services. For information, visit www.actuary.org and click on "Pension Assistance List," or call 202-223-8196. You can also contact one of the 11 nonprofit Pension Information and Counseling Projects around the country for help determining if your payout was accurate. To find one in your area, visit www.pensionrights.org and select "Pension Help," or call the Pension Rights Center, in Washington, D.C., at 202-296-3776.
Another option is to contact the National Center for Retirement Benefits (800-666-1000), in Northbrook, Ill. These "pension detectives" have helped thousands of people recover millions of dollars over the past decade. They work on a contingency basis, which means you pay only if they discover an error that puts money in your pocket when corrected. In such cases, the firm takes 20% of the amount recovered.
Reporter: Matt Popowsky
A Few Reporters Get it RightEmployee Advocate – DukeEmployees.com – December 21, 2002
In any profession there are a few that consistently stand out by getting everything right, while the majority just drift along. Why should journalism be any different? It is obvious that many reporters are only interested in filling a blank space with words as quickly as possible.
When one has a good handle on a subject, it is very easy to spot a reporter trying to fake it. If you read a few news articles on any subject that you know well, you are guaranteed some laughs. Reporters cannot very well spend years educating themselves about each subject that they write an article about. Their ignorance does not deter them, in the least, from “explaining everything to the masses.”
A reporter that knows absolutely nothing about a particular subject can call up source “pro” and ask questions. The pro source will naturally fill the reporter in on all his pro biases. Then the reporter calls up source “con.” The con source is delighted to unload all his completely opposite biases on the reporter.
Now the reporter, who knew nothing to begin with, has two extreme, highly conflicting views to draw a conclusion from. Now, factor in miscommunications, misunderstandings, the reporters own preconceived notions on the subject, the human tendency to “fill in the blanks,” and a rapidly approaching deadline for the story. It is no wonder that so many stories miss the boat entirely. And, these are the honest reporters, doing the best job that they can. Just imagine the people that are paid to promote a specific agenda!
One would have to look hard to find a subject more convoluted and arcane than that of pension law and actuarial science. It is not exactly intuitive stuff. Many of the laws were purposely designed to be as incomprehensible as possible, and to secretly circumvent other laws. And, there are always those who deliberately attempt to add even more confusion to the game. Lobbyist are paid handsomely to blast the press with propaganda designed to enrich a few at the expense of many.
It is so wearisome to see the same canards, distortions, and misrepresentations continue to pop up in pension articles year after year. But, the average reporter cannot really be blamed for missing the finer points of an occult subject. Someone, paid to promote an agenda, once passed these “facts” onto a reporter. The reporter did not know the difference and published them. They are now forever in the public domain.
A good tip off that a reporter is clueless is if the term “mobile workforce” is mentioned at all. This rather disingenuous term was hatched by the firms selling cash balance plans as a way to take money from pension plans. If this term is used, it shows that the reporter has already been brainwashed. Nothing but drivel can follow its use. If you were reading an astronomy article, and it started off explaining how the sun orbited the earth, you would know that reading further would be pointless.
It is truly refreshing when a reporter does get the pension issue right. And, there are even a few reporters that consistently get it right! No mention of those who understand the subject of pensions can leave out Ellen E. Schultz, reporter for The Wall Street Journal. Ms. Schultz has been relentlessly ferreting out pension corruption for years. She has been recognized for her outstanding work.
Someone else who grasps the essence of the matter is John Balzar, Los Angeles Times reporter. His latest article, “Pension Fund Is About to Go the Way of Your 401(k),” captures the sentiment of the latest round of the cash balance pension battle.
Mr. Balzar does not tiptoe around the matter. Early on, he uses the words “pickpockets” and “robbed” to describe what has happened to the pensions of many workers. He correctly places the blame on the “Bush administration and its pals in the corporate suites.”
He quotes two Congressmen who fully understand the issue: Bernard Sanders and George Miller. Mr. Balzar succinctly describes cash balance pensions: “They get the cash, and we get the balance.”
This is not the first great pension article the John Balzar has written. In July 2001, he wrote "Executives Get Rich, Workers Get Peanuts." From the title alone, you know that the article is not just another corporate snow job.
Finding an article by Ellen E. Schultz or John Balzar is like finding a gold nugget, after sifting through tons of dross.
Nominee Rakes in Huge PensionCongressman Sanders - http://bernie.house.gov - December 19, 2002
Secretary of Treasury Nominee Rakes in Huge Pension While Slashing Retirees Health Benefits
(12/17/02) - John Snow, CEO of CSX corporation and President Bush’s nominee for Secretary of Treasury, has created a pension for himself of $2.5 million a year at the same time that the Bush Administration is pushing a new regulation that could slash pensions for millions of workers. Rep. Bernie Sanders, a senior member of the Financial Services Committee, said that he would organize opposition to Snow’s confirmation if the nominee did not express opposition to the new IRS regulations that would make it easier for companies to convert their pensions programs to cash balance payment schemes.
Sanders said, “It is not acceptable that a nominee for Secretary of Treasury, the agency that oversees the pension plans of American workers, could negotiate a pension of $2.5 million a year, and yet remain silent about a Bush Administration proposal that could slash the pension benefits of 8 million American workers. I find it especially ironic that the CSX Corporation could manipulate a pension plan for Mr. Snow which gives him credit for years he didn’t work at the company, while the Bush Administration’s proposal would do the very opposite. Under the Bush proposal, the conversion to a cash balance plan for an older worker could result in a 20-50% reduction in the retirement benefits promised to older workers, wiping out the benefits that they had accrued through their longevity with the company."
Sanders concluded, “What’s good for a CEO like Mr. Snow who is earning $10 million a year, should be good for the average American worker. The pervasive culture of corporate greed in this country must be broken, and the Secretary of Treasury must use his position to defend the retirement benefits of ordinary Americans.”