By Older workers at Bell Atlantic, AT&T, Duke Energy and other big companies have followed angry IBM personnel, who took action against the company last spring, in flooding the Equal Employment Opportunity Commission (eeoc) with complaints charging their employers engaged in age discrimination by switching to a new form of pension plan that favors younger workers and penalizes older ones.

The eeoc has received "slightly over 100" charges of discrimination, chairwoman Ida Castro said in an interview. The federal agency, showing a sympathetic view toward the workers' grievances, has waived its strict enforcement of a policy rule that individuals must file a discrimination complaint with the agency within six months of the event.

These are not the "who-punched-who kind of questions," Castro said. "We don't know when people were told or when they found out" about the changes in the pensions, she said. Castro would not discuss charges against individual companies, citing the eeoc confidentiality rules.

eeoc has accepted complaints filed by workers at Duke Energy, where a new pension plan was put in place in 1997 by the Charlotte, N.C.­based electric power company. In Philadelphia, some of the Bell Atlantic workers who were placed in a new pension plan as far back as 1996 have recently filed charges with the eeoc, which enforces federal laws against discrimination on the basis of age. Workers 40 or older are protected.

ANGER ON THE WEB

In addition to employees who have filed with the eeoc, many others are voicing their anger on the Internet, often using websites or chat rooms organized with the help of computer experts from the ranks of the IBM protestors. The sites, all launched since last fall, have recorded thousands of visitors with messages from people with such screen names as "Angry Spouse," "Pension Victim," "Ripped Off," and "I've Been Mugged." Internet forums have been established to discuss pension issues at SmithKline Beecham, SBC Communications (parent of Pacific Bell, Southwestern Bell and Ameritech), and other large companies, in addition to those for Duke, IBM and Bell Atlantic. (For links to these sites, visit www.cash pensions.org.)

The common element in the wave of protests is an anguished sense of betrayal from veteran workers who feel their companies have been disloyal by changing the pension expectations late in the workers' careers. They feel they can't go anywhere else to work. "We are what you would call career-locked people," said Janice Winston, a 26-year Bell Atlantic veteran, who calculates that she will lose $169,000 in lifetime benefits under her firm's revised pension plan. "I have been loyal to the company. If it fails, I fail. I don't want to bad-mouth the company, but wrong is wrong," she said, adding that she reluctantly went to the eeoc.

Workers might not realize they could be suffering discrimination "until they actually retire or when they hear about the IBM workers making a fuss," said Laurie McCain, a staff attorney for the litigation unit of aarp (formerly the American Association of Retired Persons), Washington, D.C. She noted that many companies have not explained what is happening. "We believe companies should operate in complete honesty, and tell workers there may be a period when they make no progress at all in building up their pensions," she said. Firms are required to notify workers when they change a pension plan, but the complex technical nature of pension calculations often makes the explanations incomprehensible to most people.

In recent years, more than 300 companies have switched to cash-balance pensions, in which the firm makes annual contributions and the money builds up at a specified interest rate. Companies argue that cash-balance plans are needed to attract young workers in an era of mobility. They can leave the company and take the cash out of the account, rather than have it remain untouched until they turn 65.

Older workers, by contrast, enjoy the benefits of the traditional pension, which has its rapid build-up in the last 10 years of a career. Many of the affected workers had expected to retire in their 50s with full pension benefits after a 30-year career. Instead, the switch to a cash-balance program often freezes the build-up of benefits for these older workers. They may never catch up to what they would have gotten under the old plan.

IBM first imposed its new cash balance plan in May, declaring that workers 50 and older, those within five years of retirement, could stay in the old plan. After a round of protests, the company offered a choice between the new and the old plan to employees ages 40­49 with at least 10 years at the company.

IBM workers created a website and developed ways to calculate the impact of changes on an employee after the corporation stopped providing individual estimates. They held press conferences, lobbied in Washington and prompted Congressional hearings. The publicity generated by the IBM controversy caused an upsurge of interest among workers who had paid little attention when their own employers changed plans.

Meanwhile, the controversy prompted the Internal Revenue Service (IRS) to freeze any new approvals of cash-balance plans. The IRS has jurisdiction over the finances of such plans because company contributions are tax deductible.

The eeoc, in addition to handling individual complaints, also is studying whether to issue a general policy statement giving guidance to employers on the issue, Castro said.

Robert A. Rosenblatt, who co-chairs the Aging Today Editorial Board, is a Washington correspondent for the Los Angeles Times.

The fate of older workers under the new pensions called cash-balance plans is getting lots of scrutiny these days. Federal officials are trying to figure out whether the plans violate age-discrimination laws. Employers, while denying that, increasingly acknowledge that switching to the new plans does reduce benefits for many veteran employees.

But compensating for this, they say, is that the plans are better for a younger, more-mobile work force. "Cash-balance designs offer significant advantages" to those "who move in and out of the work force," says the Erisa Industry Committee, a group of employers, law firms and actuarial consultants. Such employees "are more likely to accrue a significant and secure retirement benefit under cash-balance plans than under many other plan designs," its legislative bulletin says.

At one company that has changed its pension to the new format, Casual Corner Group, a spokesman says: "With a young work force with high turnover, the cash-balance plan provides a significantly bigger benefit for younger associates."

There's just one problem with this pitch. Many younger workers are no more likely to collect a benefit from these new-fangled plans than they are from traditional pensions. And when they do collect, they often fare only a little better under a cash-balance system.

How It Works

Under traditional pensions, employees' salaries in their final years on the job, when they are earning the most, determine the size of their benefits. With cash-balance plans, by contrast, each employee has a theoretical account that steadily grows throughout his or her career, as the company annually contributes to it and posts a credit for interest earned.

A company's switch to a cash-balance pension plan from a regular one deprives older workers of the high-octane boost their benefits get in their last years under traditional formulas -- hence the suggestion of age bias. But companies note approvingly that such a switch allows younger workers to accumulate pension benefits at a quicker pace. And, they add, those benefits are portable if employees leave long before retirement age.

Kenneth Gilroy did that. At age 30, he recently left a job as a tax-compliance officer for NationsBank after three years. Midway through those years, his employer switched to a cash-balance plan. But when Mr. Gilroy left for a new job in October, he didn't get a penny of the pension money set aside for him.

Not Locked In

The reason was simple: He wasn't vested. For all their supposed advantages for the young and mobile, cash-balance plans don't vest any sooner than traditional pension plans. That's five years. "They say it's good for young, mobile people," Mr. Gilroy notes, "but if you're there four years, 364 days, you get nothing."

For younger employees, even that long would show staying power. The median job tenure for workers aged 25 to 34 is just 2.7 years, Labor Department data show. Another factoid from the Labor Department: By age 32, the average U.S. worker has had nine full- or part-time jobs.

A review of hundreds of pension documents filed with the Internal Revenue Service for 1997, the latest year available, shows how this rapid turnover combines with five-year vesting to prevent countless younger employees from gaining any benefit at all from cash-balance plans.

At SBC Corp.'s Southern New England Telephone unit, 54% of unionized employees who were in cash-balance plans -- but hadn't yet vested -- left the company in 1997. At MCI Communications (now part of MCI WorldCom Inc.), 57% of those who were in the plan but hadn't vested left in 1997. All of these mobile, mostly youthful employees forfeited whatever benefits they had accumulated. The companies decline to comment.

Skimpy Balances

Then again, what they forfeit may not be much. Calculations by The Wall Street Journal based on the cash-balance formula at NationsBank suggest that a 22-year-old who starts at the bank's typical salary for that age, $15,682, accumulates only $157 in two years. After five years, when the employee has vested and can take along the balance upon leaving, it still will amount to less than $700. NationsBank, now merged with Bank of America Corp., declines to comment on the calculations, which assume the employee gets 3% annual raises and 6.5% annual interest credits in the cash-balance plan.

Why are these totals so small? It is commonly supposed that under cash-balance plans, employers contribute about the same percentage of all workers' pay to their accounts each year, maybe 4%. In fact, though, many companies take age or years of service into account and start the contribution level much lower. The starting level for young, newly hired employees is just 1% of salary at NationsBank, increasing over time. At Aetna Inc., a 21-year-old starts at a 1.3% annual company contribution.

Some plans peg contributions to salary levels, too, kicking in a smaller percentage for the lower-paid. EDS Corp. and Tektronix Inc. are in this camp.

And some adjust their contribution for both salary and age, or for both salary and years of service. At Colgate-Palmolive Inc., for instance, employees with fewer than 10 years of service are credited with 2.5% of pay on their first $18,150 of salary, and 3.75% of earnings above that amount.

The disparity is even wider at KeyCorp: 3% of pay up to $36,300 and 6% of pay above that amount. But both figures are higher for those who've been there two decades or more. KeyCorp says the formula helps make up for the fact that Social Security replaces a smaller percentage of a higher-paid worker's salary.

This isn't to suggest that the older workers are on a gravy train. Though their pay credits are larger, the money has fewer years to earn a return. Most older workers still don't come out as well under the cash-balance system as they did before their employers switched out of their traditional pension plans, which is why the Equal Employment Opportunity Commission, the IRS and a Senate committee are scrutinizing cash-balance plans' fairness.

Also keeping a lid on how much young workers accumulate in such plans are the participation rules. Like traditional pensions, cash-balance plans require workers to be on the job a year before they can participate. So even if they stick around for five years and become vested, they receive just four years of company contributions for that period.

Better for Some

While such features make most cash-balance plans no better than traditional pension plans for the shortest-term employees, the cash-balance plans do have the potential of providing a better benefit to workers who stay from five to 15 years or so, and then move on. The higher the annual contribution, the more likely these people are to do better under cash-balance plans than under a traditional pension plan.

Take a 25-year-old who starts at $25,000 a year and gets 3% annual raises. A cash-balance plan with a 2% annual employer contribution and a 6.5% annual interest credit will produce $2,299 in this person's cash-balance plan after five years. That compares with $1,576 for a typical traditional pension plan, if the employee leaves and gets a lump sum.

It looks different if the 25-year-old starts at a $65,000 salary, gets a 3% company contribution instead of 2%, and stays 10 years instead of five. Then the gap is wider: $25,506 in the cash-balance plan vs. $14,648 in the traditional pension plan.

There don't appear to be any independent studies of how various groups of workers fare under cash-balance plans, despite the impression given to a Senate hearing this fall. Representatives of employer and actuarial groups, including the Erisa Industry Committee and the Association for Private Pension and Welfare Plans, or APPWP, repeatedly said that a study done for the Society of Actuaries shows cash-balance plans are better for most workers, especially the young and the mobile. A bulletin released by the Erisa Industry Committee says: "According to the Society of Actuaries, two-thirds of workers fare better under cash-balance plans than under traditional programs."

But the Society of Actuaries itself doesn't endorse those conclusions, saying the study was never intended to compare how workers fare in the different plans. "The study certainly doesn't say the workers are better off," says the Society's senior research actuary, Thomas Edwalds.

The Erisa Industry Committee and APPWP say they stick to their conclusions even if the Society of Actuaries interprets its study differently.

Recruitment Support

Employers often say they are switching to cash-balance plans partly to be better able to attract young talent. John Woyke, an attorney for Towers Perrin, an advocate of cash-balance plans, told the Senate hearing that employers adopt the plans in part "to support recruitment of employees with hot skills ... particularly among work-force segments that are in high demand and expected to be more mobile."

Technology companies have been active in adopting cash-balance plans, ostensibly to help attract younger workers. But Sherman Min, 29, is a pretty good example of how much weight would-be Silicon Sultans give to cash-balance plans, or any other retirement programs. "With the kinds of salaries people in this field are getting, you don't even think about the retirement plan," Mr. Min says. He left Sandia National Laboratories, which has a traditional pension, just six months shy of vesting.

Would having a cash-balance plan have made a difference? No, he says. He takes jobs for "the opportunity ... the salary, and the stock options."

Easy to Carry

Ultimately, say some employers, the real appeal of cash-balance plans for job switchers is their portability: If employees stay at least five years, they can take the benefits along when they go.

Yet for most younger workers, the traditional pension benefit is actually just as portable. Most employers with traditional plans cash out the pensions of departing employees if the value is $5,000 or less, to avoid administrative costs. The employee then can roll the money over into an individual retirement account.

Or not. Portability doesn't seem to do much for younger workers' retirement security. At an actuarial conference in October 1998, an audience member asked a panelist from consulting firm William M. Mercer if offering lump sums in cash-balance plans was a good idea. Wouldn't most employees who get this portable retirement benefit just spend it rather than roll it into an IRA?

"Absolutely -- 95% to 98%," replied the consultant. "Younger people, almost all," will do so.

Enhancing the 401(k)

Some employers, when such shortcomings are pointed out, say that the real safety net for super-short-time workers is the company 401(k) plan. And for that reason, employers converting to a cash-balance plan often enhance the 401(k). For instance, when American Express Co. converted in 1995, it started contributing 1% of employees' pay to their 401(k) plans each year. "The philosophy is that retirement plans include multiple components so employees can begin getting a benefit after a year of service," says an American Express spokesman.

But many job switchers are still left unprotected. Not only do some employers adjust their 401(k) contributions for age, service or salary -- just as with cash-balance plans -- but 401(k) plans also usually exclude workers during their first year and then take several years to vest fully.

At American Express, Dani Houchin didn't stay long enough to benefit from either the 401(k) or the cash-balance plan. When she left, Ms. Houchin, a Princeton graduate and computer-training consultant, begged her new employer to let her into its 401(k) plan without making her wait a year. It wouldn't. The upshot: At age 30, and after eight years in the work force, Ms. Houchin has accumulated almost nothing from her employers' various retirement plans.

The Wall Street Journal via Dow Jones

by Ellen E. Schultz

In August 1991, the Internal Revenue Service issued a long-awaited set of proposed pension regulations. In it was a single sentence, not present in a draft copy just 11 days before, that seemed to protect companies that were changing their pension plans to an ingenious new system.

"I sleep better at night" knowing the sentence is there, said an attorney with benefits consultants William M. Mercer at a conference for actuaries the following March.

And so, apparently, did clients. In the eight years since, hundreds of companies have converted their conventional pensions to "cash balance plans," which save them money by reducing the pensions accrued by older workers. Specifically, the sentence said that the new kind of pension didn't violate age-discrimination laws.

Employers are sleeping less soundly these days. In 1999, as millions of older workers realized exactly how cash-balance pensions work, they complained loudly enough that four federal agencies and Congress began looking into whether the plans do, in fact, illegally discriminate. Besides the IRS, the agencies are the Equal Employment Opportunity Commission, the Labor Department and the General Accounting Office.

While few Americans pay much heed to how pension law is developed, the story of the 49-word sentence and its paternity is pertinent to the lives of millions of baby boomers as they move closer to retirement. A review of government documents shows that the promoters of cash-balance pensions had some early fans at the Treasury Department. Among them was Richard Shea, then the associate benefits tax counsel, who became convinced early on that this new form of pension was a good idea and urged others at Treasury and the IRS to include the "safe harbor" sentence.

A month after The Sentence made its appearance, Mr. Shea left government to join Covington & Burling, a law firm that advised many large employers on pension matters and that later helped corporate clients such as Eastman Kodak Co. and International Business Machines Corp. with their pension plans.

The big difference between old-fashioned pensions and cash-balance ones is how benefits accrue. Under the old method, benefits build up mainly in one's later years on the job, when pay is usually highest. Under a cash-balance plan, the accrual of benefits is fairly flat throughout a career, growing through an annual contribution and interest credit to each employee's account, or "cash balance."

In Mr. Shea's view, the old-fashioned pension system is flawed in that it provides lucrative benefits to only a few employees. "I firmly believe cash-balance plans provide a far better benefit to the vast majority of the work force," Mr. Shea says. Should the current flap over the plans deter employers from converting to them, he warns, the losers will be the vast numbers of workers who don't stick around long enough to benefit fully from traditional pensions, including many employees who are lower-paid and female.
Not since some companies and corporate raiders killed off pension plans for their assets during the leveraged-buyout era of the 1980s has there been so much focus by government on pensions. And not coincidentally, the roots of the current controversy lie in the 1980s.

Back in 1981, Kwasha Lipton, a benefits-consulting firm in Fort Lee, N.J., helped Great Atlantic & Pacific Tea Co. implement one of the first big pension-plan terminations. This triggered a wave of terminations, as some companies with overfunded plans pulled the plug on them to pluck out surplus assets. Congress soon began drafting legislation to stop this practice.

But even as it did so, Kwasha Lipton was developing a still-more-innovative way for companies to tap surplus pension assets: By converting their pensions to a cash-balance type, they could immediately reduce retirement obligations and put the surplus to work, without terminating the pension plan. The conversion rendered the plans even more overfunded than before, and the surplus could be used to pay various benefits costs that the company would otherwise have to pay some other way.

Kwasha Lipton -- now the Kwasha HR Solutions unit of PricewaterhouseCoopers -- began promoting the advantages of cash-balance conversions to employers. At a benefits conference in 1984, a partner at the firm stated that converting will, in general, "immediately reduce pension costs about 25% to 40%."

A 1986 report by Kwasha Lipton for clients said that cash-balance plans were good for, among other corporations, "companies seeking to reduce or modify" their pension costs and "companies considering termination of a pension plan in order to recapture overfunded assets." It noted that a cash-balance plan reduced the potential for negative employee reaction, compared with a pension termination, because employees still had a pension plan.

Kwasha HR Solutions' chief actuary, Lawrence Sher, says that "in almost all cases, retirement program cost reduction is not a primary motive for making the plan changes."

He adds that the partner who said converting could cut pension costs also advised the companies that they could, if they chose, pass these savings on to employees. "I believe that the availability of the cash-balance design has resulted in fewer plan terminations, and that should be viewed as good for employees and the economy," Mr. Sher says.

The first cash-balance plan Kwasha Lipton devised was for Bank of America. At the time, 1985, the bank was in financial straits because of soured Latin American loans. Converting to a cash-balance plan immediately reduced its future pension liabilities, which saved it $75 million in the first year following the change, Bank of America's senior vice president of compensation and benefits told employers at a 1993 Conference Board meeting.

The savings unlocked by this step, while substantial, resulted from arcane pension accounting and weren't readily detectable by nonspecialists, including most investors and regulators. Neither were the effects on many older employees. The pension switch drew no flak from either employees or regulators. Bank of America, since merged with NationsBank, declines to comment.
Initially, other consulting firms were skeptical of this radical design. But as Kwasha Lipton converted more pension plans, including those of Hershey Corp., Dana Corp. and Cabot Corp., other consultants got aboard. Soon, Mercer, Towers Perrin and Watson Wyatt developed their own versions of cash-balance plans.

Employers' interest in them surged in 1991 after the federal government slammed the door on the practice of killing pension plans for their assets. Congress enacted a steep excise tax on such assets.

The problem for employers was that the plans appeared likely to be in violation of age-discrimination law, which forbids reducing the rate of pension-benefits accrual as a person ages. Cash-balance plans have that effect -- despite a more-or-less level annual rate of company contribution -- because contributions in the later years have so much shorter a time to grow by investment.

But many professionals working on the plans figured they could convince the IRS that the age-bias-in-pensions law didn't apply to cash-balance plans. Their reasoning: The novel plans were intended to mimic savings plans such as 401(k)s, which aren't subject to rules on pension accrual.

Others fretted. Hugh Forcier, a lawyer at the firm of Faegre & Benson, warned in an October 1990 memo to practitioners at consulting firms that he didn't think the IRS would agree -- nor that they could achieve "a legislative fix." He feared that cash-balance plans would be found to violate the law and that the subsequent costs to employers could be "truly staggering."

To make their case, benefits consultants and lawyers formed a sort of cash-balance practitioners' lunch and slide-show brigade for officials at the IRS, the Treasury, the Pension Benefit Guaranty Corp. and Capitol Hill.

The IRS had been skeptical for quite a while. In 1988 it told field offices to send in a copy of every cash-balance plan in existence -- then fewer than 50 -- so agency officials could dissect them. As a result of this review, some key IRS personnel publicly stated that they believed the plans violated age-discrimination law.

The consultants, however, found a receptive ear in Treasury officials such as Mr. Shea. Kwasha Lipton's Mr. Sher wrote to Mr. Shea in February 1991: "Since you are considering providing some guidance on cash-balance plans in the final nondiscrimination regulation package, including the possibility of a safe harbor, a meeting in the very near future would seem to be timely." Such meetings are routine between practitioners and government officials when regulations are being developed, and there is nothing improper about them.

Many meetings did take place between pension-plan practitioners and officials of the Treasury and IRS. And while a core IRS group remained skeptical, and blocked a stronger statement that practitioners and some at the Treasury sought, the IRS people compromised. They allowed a "safe harbor" sentence to be inserted in the proposed regulations' final draft -- but it went into the preamble, where it would have less weight.

Specifically, the sentence stated that a pension plan's accrual features "will not cause a cash balance plan to fail to satisfy the requirement of section 411(b)(1)(H)." In other words, even though the rate at which benefits build up in cash-balance plans declines with age, employers don't have to worry that they are violating age-discrimination law.

A congressional staffer who was developing additional age-discrimination legislation at the time recalls being livid at the sudden appearance of the sentence. The EEOC wasn't consulted either, a top official there says.

The day after the proposed regulations were published, on Sept. 12, 1991, Mr. Shea told members of the Erisa Industry Committee, an employer group, that the proposals "provide a clear road map" for companies seeking to establish or change to a cash-balance system. It was his last public appearance as a Treasury official. Later that month, he joined Covington & Burling.

As the years passed, the IRS never took the next step and converted into a final regulation the sentiment expressed in the sentence about cash-balance plans and age bias. But more and more companies adopted cash-balance plans, taking comfort in the sentence, and the IRS continued to grant them tax-exempt status.

Then in 1999, following several articles in The Wall Street Journal, older employees at several companies discovered that they fared less well under the cash-balance plans. Some complained to members of Congress, and a number of bills have been introduced to address perceived abuses. Other employees protested to their employers, such as IBM, which, after converting its plan in July, backtracked in September and allowed an additional 35,000 older employees to stay in its old pension program.

Here, Mr. Shea re-enters the picture. Along with Kwasha Lipton's Mr. Sher, he has made numerous appearances on the Hill, becoming one of the most visible and ardent defenders of cash-balance plans in Washington. Mr. Shea has appeared on numerous panels at legal, actuarial and benefits conferences, provided testimony before the Erisa Advisory Council and spoken to women's pension groups and at the White House, plugging cash-balance plans' good points and strongly maintaining that they don't violate age-bias law.

His firm, Covington & Burling, has written articles for the Erisa Industry Committee to distribute in Congress and to the media, countering criticism of cash-balance plans. The law firm, besides defending clients in age-discrimination and pension suits, is helping clients squelch nascent litigation brought by employees who contend the new-style plans discriminate against aging workers.

In October, Covington & Burling began representing Onan Corp., a Cummins Engine Co. subsidiary that is the subject of a civil suit in federal court in Indianapolis alleging age bias in its cash-balance plan. The law firm also is helping Onan defend a Tax Court case brought by workers seeking elimination of the cash-balance plan's tax-favored status.

The case has brought an unexpected twist to the cash-balance debate: The IRS said it agreed that Onan's pension plan should be disqualified.

This prompted Onan's lawyers to ask the court to disregard the IRS's opinion, on the ground that the tax agency hadn't thought the issues through. Onan's statement came in a motion for summary judgment that called the employee suit an "all-out assault on cash balance plans" and said the plaintiffs "seem determined to destroy cash balance plans."

IRS officials, in urging the Tax Court to move forward with the suit, said that "the issues involved in this case are ripe for decision." In other words, the IRS is challenging Onan's attorneys, including Covington & Burling, to prove the case for cash-balance pension plans.

As IRS officials revisit cash-balance plans, an issue they face is whether to insist that all plans comply with age-bias law -- or whether to endorse the 1991 sentence saying they are safe from this law. "We'll feel very put out if they don't agree after nine years," says Mr. Forcier, the Faegre & Benson lawyer who warned early on that the IRS might not agree with employers. He adds that cash-balance plans were all installed "in perfectly good faith, and the IRS never followed through with regulations."

Should the IRS come down hard on cash-balance plans, employers hold out hope that Congress will take action to change the law to ensure that cash-balance plans are legal.

Supporting their optimism is a historical parallel, involving insurance companies that manage pension money. In a dispute that reached the Supreme Court, the insurers argued that for 20 years, they relied on a sentence in a Labor Department bulletin that seemed to exempt them from fiduciary requirements under pension law. In 1993, the Supreme Court said, essentially, tough luck -- the sentence didn't have the force of law. Insurers and employer groups then sought a legislative rescue, and Congress provided one. It in effect overturned the high-court decision and insulated pension sponsors retroactively from employee lawsuits.

Whether Congress would do that for cash-balance plans, a considerably higher-profile issue, is anybody's guess.