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1999
Pensions

Conversions of traditional pension benefit plans to cash balance pensions (CBP) in the recent past have resulted in the slashing of expected pension benefits for many tens of thousands of mid-career and late career employees, as well as recent retirees, by 20-66%.

I was employeed by Onan Corporation, Fridley, Minnesota for 37 years. (I am now a 67-year-old). Onan converted its traditional defined benefit pension plan to a CBP plan in 1989. In that conversion, I lost approximately 66% of the pension benefit that the Corporation had promised me in 1979.

When a mid-career employee is subjected to a CBP conversion, he or she can never take advantage of the interest compounding of the early contributions to the CBP plan. Also, the mid-career and older worker is deprived of the very significant build-up of pension benefits in the traditional pension plan in the last three to five years of employment.

One of the greatest problems encountered by the mid-career and older employee is the conversion process practiced at most companies converting to a CBP plan. In many cases, starting balances for the CBP plan have been established at values significantly lower than the benefits they had already accrued in the old plan.

A second problem is the use of a conversion process called "wear away." It means the employee does not build up any new benefits under the CBP plan for up to as many as 10 years. The benefits consultants and actuaries justify this, by making the new, less-generous benefits in the CBP plan retroactive to an employee's beginning date of employment.

The other great injustice related to CBP conversions is deception. Many actuaries and consultants favoring CBP conversions have been recorded in sessions where they joke and boast about deceiving the pension plan beneficiaries (i.e., the workers).

The "Wall Street Journal"carried an article (May 5, 1999), entitled "Actuaries Become Red-Faced Over Recorded Pension Talk." Here's a sample of what was actually said: "Converting to a cash-balance plan does have an advantage as it masks a lot of the changes ... You switch to a cash-balance plan where the people are probably getting smaller benefits, at least the older-longer-service people, but they are really happy, and they think you are great for doing it ... It is not until they are ready to retire that they understand how little they are actually getting ... Disclosure laws don't require you to say, 'We're significantly lowering your benefit."

After seeing these comments Senator Tom Harkin of Iowa has been quoted as saying that this CBP conversion movement is "a scam of immense proportions".

Pension consultants and actuaries have good reason for favoring these conversions. They are selling cash balance pensions as a huge cost savings. They describe cash balance pensions as new "profit centers" for the Corporation. Instead of being an annual business expense obligation, the future pension benefit obligations are cut back extensively, and the pension plan automatically becomes overfunded, sometimes with huge surpluses. An overfunded pension plan and a booming stock market creates a huge, even larger surplus in the pension plan. Financial accounting standards allow Corporate America to move the pension plan surplus to the bottom line of the corporation, and allow the misappropriated pension funds to inflate company earnings and stock value.

Another reason given by benefits consultants for converting to cash balance pensions, is to redistribute pension benefits to new hires, as a recruiting tool. In fact, this argument is only partly true, and for a rather small category of people. New hires who work for an employer for less than five years will see no benefit from cash balance plans; normal vesting takes five years. New hires working for an employer for 5-10 years will ordinarily see an advantage in a CBP plan. However, after 11 years of employment, employees at IBM Corporation reported a 20% loss of pension benefits compared to the traditional plan.

The Onan Corporation in Fridley, Minnesota, is only one example of such victimization. Another is IBM Corporation in Rochester, Minnesota. IBM Rochester, with 5,500 employees, converted to a CBP plan in July, 1999. The employees, led by Janet Krueger of Rochester, made national news by fighting back.

What's the answer? Clearly it is remedial federal legislation. The Pension Benefits Protection and Preservation Act of 1999 (H.R.2902/S.1640) has been introduced in Congress. Sponsors include Representative Bernard Sanders and Senator Paul Wellstone. H.R.2902 is co-sponsored by Minnesota Representatives Minge, Vento, Sabo, Luther, and Oberstar.

This is what the legislation would require: (1) There must be full disclosure and notice to workers at conversion time. (2) Employers significantly reducing benefits must provide each participant the option to remain in the old pension plan. (3) If companies do not provide employees with a pension plan choice option at conversion, there will be a 50 % excise tax on the pension plan surplus after conversion. (4) The legislation prohibits "wear away" at conversion, which would prevent mid-career and older employees from earning new benefits for many years.

You may ask, "why should I help the victims, since my employer did not do this to me"? Some answers follow: (1) If this CBP plan conversion activity is not ended, competitive pressure will force other employers to follow suit. (2) If remedial legislation is not enacted soon, the controversy will have to be resolved in the Courts. According to published documents, the law firms working for Corporate Management feel they can "beat the rap". The Corporations, the benefits consultants, and the lobbyists have unlimited resources; they can drag this out in the Courts for many years. By that time, many pension conversion victims will be dead or incapacitated, and they will never see their benefits restored. (3) Please have compassion on your brothers and sisters who were victimized; they need your help! Collectively, you can make a huge difference; please do not let them down!

My request for help is as follows: (1) Please contact Representatives Collin Peterson, Gil Gutknecht, and Jim Ramstad, and request that they co-sponsor h.r.2902, the comprehensive legislative remedy. (2) Please contact Senator Rod Grams and request that he become a co-sponsor of s.1640. (It is extremely important that we have at least some bipartisan support for this legislation; there is no way that the legislative remedy will pass unless there is at least a minimum level of Republican support.)

If you wish to help, please use the following telephone numbers and addresses:

Sen. Rod Grams -- phone (612) 427-5921; e-mail: mail_grams@grams.senate.gov

Rep. Gil Gutknecht -- phone (800) 862-8632; e-mail: gil.gutknecht@mail.house.gov

Rep. Jim Ramstad -- phone (612) 881-4600; e-mail: mn03@mail.house.gov

Rep. Collin Peterson -- phone (320) 259-0559; e-mail: collin.peterson@mail.house.gov

Since the Metro Lutheran readership includes the entire Lutheran Community, I must make one clarification for my LCMS friends. I do understand that the LCMS has created a new cash balance pension plan, which is a supplement to the traditional defined benefit of the Concordia Retirement Plan; in other words, the new CBP plan is not a plan conversion. Since the LCMS plan is not a conversion, I want to make sure that the readers know that my comments do not, in any way, cast any aspersions on the LCMS Supplemental Retirement Account, or SRA.

In closing, I wish to acknowledge the source of the title of this article, "Vanishing Pensions, the Cruelest Betrayal". It came from President Morton Bahr, of the Communications Workers of America, in an October 1999 article on cash balance pension conversions. Mr. Bahr graciously gave me permission to use the title, which I felt was most appropriate and most descriptive. If you, the readers of this article, wish to learn more about this CBP issue, you may contact the author at the following e-mail address: slanglie@gte.net.

WASHINGTON (Reuters) - The approach of retirement sends workers flocking to financial advisers like nothing else, and with good reason.

The decisions that new retirees must make are complex, and any errors they make could cost them many thousands of dollars at an age when they're not able to simply work harder to recapture their losses.

In fact, the five years leading up to and the five years following retirement are so laden with choices that Delaware Investments, a Philadelphia money management firm, has identified it as the "decision decade."

Folks approaching retirement have to figure out what they will do for health insurance, how to pick their best retirement dates, how they should take their pension, and more.

After retirement, people still need to determine the best way to use the money in their individual retirement accounts, and analyze what types of insurance products still meet their needs.

To answer all of these questions, it's best to get some professional advice, but you probably can't get it all in the same place. Workers may start with their company's own benefits department, but they may not find all of the answers they need. The Treasury Department reportedly is investigating whether companies don't give employees all necessary information to make smart choices about whether to take lump sums or annuities.

This decision may best be made with the help of an actuary. Specialists in how to calculate the present value of future payments, actuaries are used by pension departments to figure out how much of a lump sum would be required to generate a particular payment stream, and vice versa.

But not all companies offer employees equivalent amounts when they hold out lump sum versus annuity choices. Often, the lump sums are worth less. Sometimes, the annuity is worth less. An actuary -- listed in most yellow pages -- can help you figure out how much your lump sum and annuity offers are actually worth in today's dollars.

The U.S Department of Labor (DOL) is suing an employer association, its health plan administrator and four trustees for allegedly causing the plan to overpay $906,621 for administrative services, in a lawsuit filed March 31 (Herman v. McQuatters, N.D.N.Y.).

The New York Equipment Dealers Association in Liverpool, N.Y., plan administrator Richard McQuatters and the trustees are being charged with several ERISA violations, including breach of fiduciary duty and engaging in prohibited transactions.

A company may have violated the anti-cutback rule of IRC Sec. 411(d)(6) when it switched the interest rates it used in calculating lump sum pension distributions from the Pension Benefit Guaranty Corporation's rates to the interest rates required by the Retirement Protection Act of 1994 (RPA-94). This was the ruling of the Fifth Circuit U.S. Court of Appeals in Myers-Garrison v. Johnson & Johnson, et al. (No. 99-40520).

The lawsuit arose out of an amendment to Johnson & Johnson's defined benefit plan that the company adopted in 1995. Prior to the amendment, the plan provided for a mandatory lump sum distribution to vested employees whose total benefits were equal to or less than $3,500 and whose annual payment would be less than $80. Johnson & Johnson calculated the present value of benefits using the PBGC interest rate in effect for the month of distribution. Employees whose benefits were greater than the specified limits received an annuity.

Effective Jan. 1, 1995, the RPA-94 amended ERISA and the Internal Revenue Code to specify that an employer must calculate a lump sum payment using an applicable mortality table and an "applicable interest rate," which the law defined as the rate of interest on 30-year Treasury securities (referred to as the "GATT rates"). In 1995, Johnson & Johnson took advantage of the change by amending its plan. On a one-time basis, the company offered lump sum distributions to vested employees who had terminated their employment before Jan. 1, 1995, were younger than 55 upon termination, and whose total benefits would be equal to or less than $50,000. Those employees whose benefits totaled between $3,500 and $50,000 could choose between a lump sum and an annuity; those whose benefits were less than $3,500 were subject to a mandatory lump sum benefit.

We have long been of the opinion that unethical, as well as illegal activity, is widespread. In fact, we expressly state this belief in the section of the Benchmark website entitled, "Consulting Services and Special Investigations."

The National Association of Securities Dealers, Inc., in its review of the Benchmarkalert.com website, objected to our opinion. The NASD wrote in a letter to the firm that our statements, "Pension funds and their money managers become involved in unethical and even illegal activity far more frequently than the general public is aware" and "federal and state securities regulators all too often fail to detect violations and enforce the law" were "exaggerated and unwarranted." The NASD instructed us to delete these claims, as their inclusion, the NASD said, violated the standards set forth in the NASD Conduct Rules. Of course, the NASD regulates brokerages, not money managers or pension funds and so one might ask how much they really know about the illegalities to which we referred. A copy of our response letter to the NASD defending our statements is provided below.

On June 15, 2000, in a case that federal authorities called one of organized crime's most aggressive forays into the stock market in recent years, involving brokers, union pension funds and money managers, prosecutors charged dozens of people with using stock manipulation, outright fraud and violence to steal from thousands of investors across the U.S. It is said to be the largest criminal securities case ever brought. Are our statements still "unwarranted and exaggerated?" Are we vindicated by these revelations? Yes and no.

Unethical and criminal activity involving pension funds, money managers and yes, brokerages, occurs daily. As we said to the NASD, we know it because we've seen it happen time and again. The case referred to above is the easiest and most obvious. It allegedly involves well-known organized crime families operating through brokerages and money managers that are hardly household names. But that's only the tip of the iceberg. The greatest threat to investors and far more commonplace, is wrongdoing by pensions and money managers that appear credible only because they have the resources to conceal their crimes. Don't waste your time worrying about organized crime operating in bucket shops. Business-as-usual - the conflicts of interest and self-dealing practices the industry accepts, yet conceals from the public and which regulators choose to ignore - that's where the real money's being stolen.

Letter to the National Association of Securities Dealers (NASD) Regarding Illegal Activity In the Pension Fund and Money Management Industry.

Robert S. Sondheim
NASD Regulation, Inc.
1800 K Street, NW
Suite 800
Washington, D.C. 20006-1500

June 7, 2000

Dear Mr. Sondheim:

Recently you and I discussed on the telephone the contents of your May 16, 2000 letter to me, in which you reviewed the proposed language for this firm's website, benchmarkalert.com, for compliance with the applicable standards of the National Association of Securities Dealers. Specifically, in your letter you objected to certain language in the section of the website entitled, "Consulting Services and Special Investigations." As you noted, this section states that "Pension funds and their money managers become involved in unethical and even illegal activity far more frequently than the general public is aware" and "…federal and state securities regulators all too often fail to detect violations and enforce the law." In your letter you state that unless the basis for these statements can be disclosed, these claims must be deleted, as their inclusion is "exaggerated and unwarranted" pursuant to the standards set forth in the NASD Conduct Rules.

As I indicated to you, the basis for these statements is my professional experience as a former Securities and Exchange Commission investment management attorney, former legal counsel to one of the largest international money management firms in the world, and as an owner/operator of institutional brokerage, investment banking and consulting services firms (all NASD members) for over a decade. In the almost twenty years I have been involved in the money management business, I have known of countless cases of illegal and unethical practices which were never fully and promptly disclosed to the public. On occasion, I have personally referred such cases to securities regulators and law enforcement.

As a nationally recognized expert in securities law matters, I believe that the statements in our website referred to above cannot be considered "exaggerated or unwarranted." Rather, the language plainly states what is commonly known. The language prudently warns investors that the regulatory scheme does not ensure full and timely disclosure of all violations, illegalities and unethical practices of money managers and pension funds. I find it remarkable that the NASD would take the position that a NASD member firm that warns the public of the prevalence of wrongdoing is in violation of NASD Conduct Rules. What is the "harm" investors are subjected to as a result of the warning? And what is the standard of conduct the NASD is seeking to uphold-insider silence?

In my professional opinion, the NASD and securities regulators may be misleading investors by suggesting that the regulatory scheme adequately protects investors from harm. If I am wrong with respect to the language in my firm's website, I challenge the NASD to prove that the statements I have made are, as you say, "exaggerated and unwarranted." Until such time, we will continue to warn investors of the prevalence of illegal and unethical conduct in the industry.

Very Truly Yours,
Edward A. H. Siedle, Esq.

A true story from the new economy: Man goes to Doctor for a checkup and battery of tests. Doctor gets results and sends them via e-mail: Man has a life-threatening disease.

Meanwhile, Man's company monitors his e-mail simply to ensure that he uses it only for work. Technology Officer reads Man's e-mail and blabs to coworkers about Man's diagnosis. Human Resources gets involved. CEO gets called in, sees very expensive lawsuit looming. Health Insurance Company finds out about Man's problem, considers dropping coverage. Big problems for Man. Big problems for Company.

"Yes, that's an absolutely true story," groans Michael Hoffman, executive director of the Center for Business Ethics at Bentley College in Waltham, Massachusetts. "Fifty percent, and probably more, of America's companies conduct random e-mail surveillance, and most don't warn employees they are going to do it. Yes, companies are at risk, but do we really want IT guys functioning as company policemen? It's a whole new world out there when it comes to business ethics and technology."

E-mail is just the beginning.

"So what's the amazing commonsense secret about ethics? It pays to be honest and fair.

"'It seems pretty simple,' says Frank Navran of the Washington, D.C.-based Ethics Resource Center, which is releasing new research this month comparing the financial performance of ethical companies with that of firms perceived as unethical. 'High standards in the way companies deal with their employees and consumers translate into better product quality and increased customer assurance.'

"Most people act unethically for two reasons: to make more money and to beat the competition. But as it turns out, according to the Ethics Resource Center study, the way to business success is to act ethically.

"Walker Research, which tests employees' perceptions about their workplace, also follows ethics in business. 'We've discovered an attitudinal link between perception of ethics and a company's ability to hold on to employees,' Walker's Jeff Marr says.

"According to a 1999 Walker report on employee loyalty and work practices, companies viewed as highly ethical by their employees were six times more likely to keep their staff members. On the other hand, 79 percent of employees who questioned their bosses' integrity said they felt trapped at work or uncommitted, or were likely to leave their jobs soon - sobering news in an economy where holding on to every good employee counts.

"So what does the future hold for ethics? Don't be surprised if smart CEOs and managers start to assess their business practices based on ethics, and test to see how their employees view management and how customers view the company."

Well, Duke Energy surveyed the employees perceptions of the ethics of senior management. Needless to say, they did not get the desired results!

"'Right now I think it's significant that you have managers even considering ethics,' Marr says. 'Because it wasn't that long ago that business ethics was considered an oxymoron.'"

In some companies, it is still an oxymoron.