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Opinions Mixed on the Future of Cash-balance plans

Rep. John Boehner's bill would make the plans legal.

August 9, 2005
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Related Topics: Retirement/Pensions
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John McCambridge, director of human resources at Voith Siemens Hydro Power Generation, could wait no longer for clarity on the legal status of cash-balance plans. The German supplier of power equipment had joined the cash-balance rush in 1998 and had seen 93 percent of the company’s employees participate. But after years of volatile markets and increasing costs, Voith dropped the program last year in favor of a 401(k).

    The legal uncertainty surrounding the plans had nothing to do with the decision, McCambridge says. "With the big market swings and health care costs going crazy, we had to reduce the risk of the unknown associated with these plans," he says. "With cash-balance plans, you can’t predict what’s going to happen to your books. With a defined-contribution plan we can budget for it."

    After two years, there may be an end in sight to the legal limbo. In June, Rep. John Boehner, R-Ohio, proposed the Pension Protection Act, which, if passed, would make cash-balance pension plans legal.

    Employers have been waiting for such guidance on the issue, but some like Voith say that even if the courts or the federal government decide the plans are legal, companies will not be rushing back into them.

    Cash-balance plans, a cross between defined-benefit and defined-contribution plans, were once viewed as an answer for employers who wanted to limit their financial liability and provide a more portable solution to employees. Thirty-three percent of the Fortune 100 companies offered a cash-balance plan in 2002, up from 1 percent in 1999.

    But a 2003 U.S. District Court ruling that said IBM’s cash-balance plan violated age-discrimination laws changed all of that. In that decision, the judge sided with employees who claimed that the calculations the plan used to pay benefits discriminated against older workers. The case, which is on appeal, has caused many companies to freeze their cash-balance plans and offer defined-contribution plans instead.

"No employer in their right mind would establish this type of plan now," says Andrea Robertson, senior vice president and treasurer at MasterCard International, which converted its traditional defined-benefit plan to a cash-balance plan in 2000 and has stuck with it despite the controversy. Speaking at a pension conference in New York in April, Robertson said that the IBM case was about how the company transitioned its employees to the cash-balance plan, not about the design of the plan itself.

    MasterCard says it has conducted its due diligence and believes that its plan is equitable for all employees and is a good option for retirement savings.

    Many employers were disappointed when the Bush administration’s pension reform plan did not clarify the legal status of cash-balance plans, but the Boehner bill renewed hope.

    "I think if the legal problem is resolved, there will be a rejuvenation in cash-balance plans," says Gregory Braden, a partner in the Atlanta office of Alston & Bird. Braden says that given the recent market volatility, more employers realize that 401(k)s are not going to cover employees’ retirement income and that an alternative is needed.

    Robertson also is optimistic that Congress eventually will establish that cash-balance plans are legal and that employers will turn to them again as a way of providing a portable defined-benefit plan.

    McCambridge disagrees, saying that more companies will do as his did and drop cash-balance plans, even if the legal uncertainties disappear. "If we knew seven years ago what we knew today, we would have skipped cash-balance plans altogether," he says.

Workforce Management, August 2005, p. 51 --Subscribe Now!

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