On July 7, the House Education and the Workforce Committee held the eighth in a series of hearings on defined benefit pension plans. Noting that “cash balance plans have received a lot of attention recently, producing rhetoric that has often been misleading if not false,” Chair John Boehner (R-OH) pointed out how the plans work: “Under cash balance plans, workers earn portable benefits through monthly pay and interest credits, and benefits are earned more evenly over a career span, not just at the end of a worker’s career. This can result in greater retirement savings for workers who do not remain with the same employer for their entire career. As a result, a broader group of employees—including lower-income workers and women—earn greater benefits with shorter service under cash balance plans than traditional plans.”
Recent controversy over cash balance plans has come about as a result of litigation alleging that such plans are age discriminatory. In one such case, a court ruled that IBM’s conversion to a cash balance plan was age discriminatory because younger workers have a longer period of time to earn interest and accrue benefits than older workers. However, other courts have ruled that the plans are not discriminatory.
Ranking Member George Miller (D-CA) expressed his concern about the recent rulings and the need to protect workers when companies decide to convert from traditional pension plans to cash balance plans. “For hard working middle class families, our nation’s pension system is in crisis,” he said. “People who work hard every day, year after year, have dreams about their retirement. They plan for it. But then, with little warning, their employers tear up those retirement plans.” Rep. Miller said that he believed there was a future for cash balance plans “only if we can find a fair balance between the interests of employers in having flexibility to design their benefit packages and the interests of workers, and particularly older workers, in being able to count on the benefits they worked a lifetime to earn.”
Most witnesses expressed their support for hybrid, or cash balance, plans, saying that they offered employees more choice and better long-term savings. Witnesses also called upon Congress to provide legislative clarity with respect to current concerns regarding age discrimination in hybrid plans in order to prevent the demise of the plans. Noting that surveys show workers prefer their retirement benefits to be portable and guaranteed, James Delaplane, special counsel to the American Benefits Council, explained that “traditional defined benefit plans typically do not provide for portability, and benefits in 401(k) and other defined contribution plans are not guaranteed.” He continued, “Studies show that nearly 80% of participants build higher retirement benefits under a hybrid plan than a traditional plan of equal cost…The advantage of hybrid plans for most workers is confirmed by a recent study that shows if an employee changes jobs just three times in the course of his career, she or he can expect to receive in excess of 17% more in retirement benefits from participating in cash balance plans than had his or her employers provided traditional plans instead.”
Testifying on behalf of the Coalition to Preserve the Defined Benefit System, Eaton Corporation Director of Benefits Ellen Collier described her company’s experience with converting from a traditional plan to a cash balance plan. “We knew the resulting design would need to be attractive to high-skills talent, easy to understand, and suitable to a mobile workforce. This attention to mobility was important—not only in the labor marketplace, but also within Eaton, as we do have employees that transfer between business groups with different pension plans.” After examining a variety of alternative plans, Ms. Collier said, “In the end, the simplicity, visibility, portability, and ease with which an acquired company could be integrated led us to choose a cash balance design.” Ultimately, the company gave all current non-union employees the option of choosing to remain in their existing traditional plan or switching to the cash balance plan, and all new hires entered the cash balance plan. “Across the board, employee reaction was very positive regarding the pension choice process. The vast majority of employees said that the material provided helped them make an informed decision…We received no letters of complaint,” she said, adding that about one-third of eligible employees chose the cash balance plan.
The only witness to speak in opposition to cash balance plans, Robert Hill, an attorney with Hill & Robbins, P.C., said that “even cash balance supporters acknowledge that ‘it is not unusual in some cash balance conversions for the 40 and 50 year old employee to lose one-third to as much as one-half of his expected pension.’” Mr. Hill cited a 2002 General Accounting Office (GAO) report that found “a 45-year old worker at the time of conversion receives an annual annuity of about $18,500 at retirement from the cash balance plan instead of the $39,800 annuity the worker could have received from the defined benefit plan with a final average pay formula.” Mr. Hill also said that older workers experience “wearaway, which means that even though they continue working they earn no additional pension benefits until the amount in their cash balance plan reaches the amount they had already earned under their traditional defined benefit plan.” Again, he cited the GAO study: “For example, a typical conversion scenario ‘generated a 2-year lump sum wearaway for a 35-year old worker, a 4-year wearaway for a 45-year old worker, and an 11-year wearaway for a 55-year old worker at conversion.’ In such an instance, shockingly, the 55-year old would earn no additional pension benefit before reaching normal retirement age.”
Independent Women’s Forum President Nancy Pfotenhauer said that cash balance plans are particularly important for women, citing a 1998 study by the Society of Actuaries that “found an amazing 77% of women do better under a cash balance approach. They are better off under a cash balance system because they move in and out of the workforce in order to balance family needs and because they cannot afford to take early retirement.” Pointing out that “women are achieving educational and professional goals only dreamed of in other countries,” Ms. Pfotenhauer said, “The challenge from a retirement security standpoint, however, is that we refuse to compromise our roles as mothers and caregivers on the altar of professional accolades. Specifically, women still tend to take time out of the workforce in much greater numbers than men in order to care for young children.”
Ms. Pfotenhauer gave several reasons why there was a discrepancy between the retirement benefits of men and women in their later years: 1) women live longer than men; 2) women tend to have more chronic health problems, resulting in higher health care costs; and 3) women change jobs more often then men. “We average 4.8 years with each employer, and therefore, may not stay at a job long enough to be vested in traditional retirement plans,” she said, continuing, “Because women are more likely to leave the job market to handle family responsibilities, we average 11.5 years out of the workforce compared to 1.3 years for men.” Additionally, Ms. Pfotenhauer pointed to the current trend, called sequencing, where mothers are taking time out of the workforce when their children become teenagers, in addition to taking time when their children are newborns. She concluded by urging Congress “to act in a manner that recognizes the attributes of new approaches like the cash balance and other hybrid plans, and keeps in mind that the one law that cannot be amended is the law of unintended consequences.”
Picking up on the issue of unintended consequences during the question and answer period, Rep. Lynn Woolsey (D-CA) said she believed that employers are lucky to find a woman who is a long-term, loyal employee, rather than the other way around. “So, we’re looking at this woman who’s working long-term…The unintended consequence is to even think of changing her benefit and pulling the rug out from under her.”
In responding to several witnesses’ pleas for Congress to take action, Rep. Boehner said, “Congress will act. It’s our responsibility as legislators…to make clear what the law is and what it isn’t…I believe that the Congress has sat back far too long on this cash balance plan and it’s time to act.”
