Pensions
AARP Letter Regarding House Hearing on Cash Balance Pension Plans
News Release
July 7, 2004
The Honorable John A. Boehner
House Education and the Workforce Committee
2181 Rayburn House Office Building
Washington, DC 20515
Dear Mr. Chairman:
AARP commends you for holding today's hearing today on cash balance pension plans. We hope the hearing will serve as a catalyst to bring together the Administration, Congress and other interested parties to forge legislation that will strengthen defined benefit pension plans, protect older workers, and address the legal uncertainty surrounding cash benefit pension plans.
AARP has long been concerned with the legal basis for the hybrid cash balance formula itself, and with the significant age discriminatory issues that arise when employers convert defined benefit pension plans to a cash balance formula. We believe that a careful review of the legal distinction between defined benefit and defined contribution plans makes clear that the most common designs for hybrid cash balance plans do not fit within the current legal framework of the Internal Revenue Code (IRC), the Age Discrimination In Employment Act (ADEA), and the Employee Retirement Income Security Act (ERISA). We urge the Committee to address the legal framework for cash balance plans and provide strong and effective protections for older workers involved in cash balance pension plan conversions.
Millions of older employees have given up wages in exchange for traditional defined benefit pension plans. These plans typically provide only small benefits early in a worker's career under a plan design that provides those who devote all or most of their working lives to a company with larger benefits at the end. It is therefore unfair for employers that have sponsored this type of plan for years to pull the rug out from under older workers by taking away these larger, late-career benefits just when long-serving workers are about to earn them. Yet that is precisely the damage caused by conversions of traditional pensions to cash balance plans - unless older workers are given appropriate transition relief to address the impact of the "pension pay cut" brought about by these conversions.
Older, longer-service workers are the most vulnerable in a conversion: they generally have less time to accumulate benefits under a new cash balance formula, have a harder time leaving their current job if compensation and benefits are cut because they have fewer prospects of finding a new job, and are less able to adjust to the changes that may dramatically reduce their retirement security (for example, they have less time to adjust by increasing their saving for retirement).
A conversion to a cash balance plan from a traditional defined benefit plan can often include a so-called wear-away period - a period of time when no benefits are earned. We believe that any age-based wear-away is an illegal and impermissible reduction or cessation in benefit accruals based on age. We were pleased that the recent legislative proposal from the Treasury recognized the problem with wear-away and the unfair treatment of older workers and recommended a ban on any wear-away of benefits at any time after a cash balance plan 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. While the proposal is a step in the right direction, it simply does not reflect ongoing trends in the marketplace. In the face of adverse publicity and litigation, more recent conversions have tended to afford more protection to older workers. In most cases, the older and longer-service workers were provided more generous transition relief, including a choice to remain in the old plan or move to the new cash balance plan. This is further confirmation that business can and should do the right thing for their older, longer-term employees. Congress now needs to hold all companies that voluntarily choose to convert to a standard that many have been willing to meet voluntarily.
AARP applauds this Committee's continuing review of defined benefit plans as well as the issues raised by cash balance plans and the conversion to these plans. We look forward to assisting this Committee and others to ensure that cash balance plans fully comply with the requirements of current law, and in particular the prohibitions against benefit reductions based on age.
Sincerely,
Michael W. Naylor
Director of Advocacy