Now You See It, Now You Don't
By: Russell Wild; Source: AARP Bulletin Date Posted: 2005-11-18 08:44:00-05:00
To many workers who have spent a lifetime awaiting a pension upon retirement, it doesn't seem fair to have the rules change late in the game, especially if it means they won't get the money they'd counted on. That's what happened to Larry Cutrone, a 31-year veteran employee with AT&T whose pension was cut in half when the company switched from a traditional defined benefit pension plan to a cash-balance plan. "I feel my retirement dreams are fading away," he says.
Cutrone is not alone. As more and more companies change from one plan to another, countless older workers have seen their pension benefits, or at least their expected pension benefits, decimated in the conversion process.
The reason rests with how the benefits are calculated. With a traditional pension, final salary and years of service factor heavily into the pension formula, with the bulk of benefits accruing in the final years of employment. With cash-balance plans, employees generally get a yearly sum that grows by a certain percent. The plans are often considered more favorable to younger workers because benefits can accrue more rapidly in the early years of employment.
Cash-balance conversions became popular in the 1990s, when many employers decided to switch to a cash-balance plan—often called a "hybrid" plan because it combines some features of a traditional pension with those of a 401(k).
The conversions have prompted class action lawsuits involving thousands of people nationwide. In 2003, a federal district court in Illinois found that IBM's cash-balance conversion was age-discriminatory and ordered restitution to those who saw their expected pension benefits cut. The decision is currently under appeal. Other cases, against companies including AT&T, Equitable Resources and Citibank, are pending.
Congress is expected to pass a comprehensive pension bill this fall. Among the provisions, the Senate bill would legalize the status of cash-balance plans and provide additional protections for older, long-service workers involved in cash-balance plan conversions. The bill also would provide a five-year transition period during which workers covered by traditional pensions could choose to keep them instead of moving to a cash-balance plan.
Says Rep. George Miller, D-Calif., "Workers at the end of their careers should be able to count on the benefits they worked a lifetime to earn. Congress should ensure that those workers be provided a choice between the old and new pension plans when their employers convert from one to the other."
A number of companies—including FedEx, 3M, CSX and Kodak—have offered their long-term workers a choice between plans. Advocates for older employees, including AARP, have been pushing for legislation that would make choice mandatory.
David Certner, director of federal affairs for AARP, says that cash-balance conversions have deprived older workers—especially those with many years of service—of the benefit of their increased years of service and their peak earning years. "In essence," he says, "the companies have pulled the rug out from under their older workers by eliminating promised late-career benefits just as those workers were about to obtain them."
Karen Ferguson, director of the Pension Rights Center, a nonprofit consumer advocacy group in Washington, agrees. Furthermore, she sees cash-balance conversions "as part of a larger trend in which companies have broken all sorts of promises to longtime employees. What these companies have been doing is unconscionable, and it needs to be stopped," she says.
Employers, on the other hand, are saying that what they want to do is their own business. "Pensions are voluntary," says Janice Gregory, senior vice president of the ERISA Industry Committee, a trade association of major employer benefit plans. "Some people may have expected to earn more benefits in the future under a certain plan formula, but companies have a right to change their plans, and this is made clear to employees."
Janet Krueger, 52, a former IBM employee who saw her projected pension benefits shrink dramatically when the company converted to a cash-balance pension, says that people at the top made things very clear—not that her pension plan would change, but that she could depend on it to fund her retirement.
"For years, they told us, in pictures and in words, how much our pensions would be. The employee website had a calculator where we could figure it out to the very dollar," she says. "After they announced the conversion, the calculator suddenly disappeared from the website."
Whether employees in the future will be dealt the same hand as Krueger will depend largely on the decisions of Congress over the next few months. "Older employees need to be treated fairly, and the law should reflect that," says Krueger.
Additonal Related Links
Interactive Retirement Calculator From AARP Bulletin Online
Pension Roulette—How Secure Is Your Future? (July-August 2005)
The Do-It-Yourself Pension (September 2005)
Black Eye for Big Blue (November 2004)
Pension Benefit Guaranty Corporation (PBGC)
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