RV4:
I was not referring to the US AIrways pension. I was referring to the government beginning the process of switching traditional pension plans to a cash balance plan which will affect older workers. The legislation which will be introduced in February will also protect corporations from age discrimination lawsuits.
Originally published December 22, 2002
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.
Lawsuit pending
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.
To suggest a topic, contact Eileen Ambrose at 410-332-6984 or
[email protected].
Copyright © 2002, The Baltimore Sun
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