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Hybrid (Cash Balance) Pension Plans

Testimony Before the Subcommittee On Retirement Security And Aging

The proposed regulations would have protected the cash balance design under the age discrimination and other statutory provisions without adequately protecting participants. The regulations had they become final would, in effect, have blessed conversions that are not protective--thus plan sponsors would have been less likely to offer their employees choice, grandfather employees in the old plan formula, or use other protective practices that many companies had already adopted. Worse yet, the regulations would have permitted age-based wearaway periods, a practice clearly contrary to the letter as well as the spirit of the age law, and simply bad retirement policy.

In 2003, many thousands of individual contacts regarding the proposed regulations were made to Treasury by workers concerned about the impact of conversions on their pension benefits. (Over 60,000 contacts were made to Treasury and elected officials through the AARP web site after the proposed regulations were issued.) In July 2003, while Treasury was considering comments on its regulatory proposal, a federal district court ruled that the basic common cash balance plan design impermissibly reduced the rate of benefit accrual on the basis of age and thus violated ERISA's age discrimination provisions (Cooper v. IBM Personal Pension Plan and IBM Corp., 274 F. Supp. 2d 1010 (S.D. Ill. 2003)). (See Appendix A.) IBM appealed the decision to the Seventh Circuit Court of Appeals, where the appeal is still pending.

Following the IBM decision, Congress responded to Treasury's proposed regulations by passing amendments to the Treasury appropriations legislation that, directed Treasury and IRS to stop work on the regulations and instead to put forward a legislative proposal providing transition relief for older and longer-service participants affected by cash balance conversions. In response, Treasury withdrew the proposed regulations and made a legislative proposal (included in the Administration's FY 2005 and FY 2006 budgets). We were pleased that Treasury's legislative proposal recognized the problem with wearaway and the unfair treatment of older workers and recommended a ban on any wearaway of benefits at any time after a cash balance conversion.

In recognition of the transition problem faced by workers, the Treasury proposal also included a five-year "hold harmless" period after each cash balance plan conversion. This would require that each participant's benefits under the cash balance plan for each of the five years after the conversion be at least as valuable as the benefits the participant would have earned under the traditional plan had the conversion not occurred. While the proposal is a step in the right direction, it is not sufficiently protective of older, longer-service workers, and it fails to reflect ongoing trends in the marketplace. In addition, because the transition problem is largely one that impacts older and longer service workers, any proposal can be tailored more narrowly to protect this more vulnerable class of workers. More recent conversions have afforded more protection to older workers. These trends, not adequately reflected in Treasury's proposal, are further confirmation that employers can and should do the right thing for their employees. Instead of lowering the bar, Congress now needs to hold all companies that voluntarily choose to convert to a cash balance plan to a standard that many companies have been willing and able to meet on their own.

One approach that AARP has supported was introduced by Senator Harkin in the 108th Congress. It would require employers that convert to cash balance plans to allow employees who are at least age 40 or have at least 10 years of service the choice to remain under their traditional pension formula until retirement instead of switching to cash balance. In addition, other approaches have been discussed, such as choice or grandfather treatment for employees whose combined age and service exceed a specified number of "points" (e.g., 55).

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