VII. WHAT CONGRESS SHOULD DO NOW
AARP believes hybrid plans have a role to play in the private pension system if - and only if - they are designed and adopted in a manner that protects the millions of older workers who have given up wages in exchange for traditional defined benefit pensions. Provided that protections for older and longer-service workers can be adopted, AARP could support the enactment of a reasonable legislative solution that would provide legal certainty for cash balance plans. Legislative protections should codify the better practices that many employers have already chosen to follow when converting to cash balance, such as eliminating wearaway of early as well as normal retirement benefits and adequate grandfathering or hold-harmless protection for those workers who are vulnerable in conversions. Treasury's proposal is a step in the right direction. However, its five-year hold harmless period falls short of what would be adequate and of the better practices many employers have followed. At the same time, the more adequate protections could be crafted to preserve flexible options for plan sponsors. Among other things, the protections could appropriately be limited to a narrower class of employees than the Treasury proposal would cover - to those employees whose age and years of service exceed a specified level. In addition, we are open to considering other alternatives that adequately protect older, longer-service employees.
Of course, AARP would oppose legislation that would legitimize hybrid plans that are unfair and harmful to older, longer-service employees. The cash balance structure deserves protection from legal challenges only if it protects older workers from the harm caused by moving to that structure. Now that many employers have recognized the harm and have raised the bar by providing reasonable protections, Congress must not now lower the bar by enacting weakening legislation that invites the market to return to the lower standards of the 1990s. Instead, Congress now needs to hold all companies that voluntarily choose to convert to a cash balance or other hybrid plan to a standard that many companies have been willing and able to meet on their own.
We look forward to working with Congress, the Administration, employees and retirees, plan sponsors, and other stakeholders to forge legislation that will strengthen defined benefit pension plans, protect older workers, resume the IRS determination letter process, and address the legal uncertainty surrounding cash balance pension plans.
APPENDIX A CASH BALANCE PLANS VIOLATE THE AGE DISCRIMINATION LAWS BECAUSE THE RATE OF BENEFIT ACCRUAL DECREASES ON ACCOUNT OF AGE
Cash balance plans that incorporate a uniform allocation or interest credit rate formula - as they typically do - violate section 411(b)(1)(H) of the Code and the counterpart provisions of the ADEA and ERISA (ADEA section 4(i) and ERISA section 204(b)(1)(H)) because benefits accrue at a lower rate for older employees than they do for younger employees. See Cooper v. IBM Personal Pension Plan and IBM Corp., 274 F. Supp. 2d 1010 (S.D. Ill. 2003).
Cash balance plans reduce the rate of benefit accrual based on age in two ways. The first is the age-based reductions in benefit accrual rates inherent in the cash balance formula itself. This age-based decline in accrual rates affects all employees in a cash balance plan. The second is reductions in accrual rates suffered by older workers under the cash balance plan when compared to the old plan (due either to a wearaway or to the lower rate of accrual in the cash balance plan).
Because calculation of a wearaway following a conversion is based directly on age, it violates the pension accrual laws. While age is not the only element in determining wearaway, it is an essential element in determining the actuarial equivalence of the earned benefit.