In a unanimous decision last week, the 9th U.S. Circuit Court of Appeals in San Francisco joined four other appeals courts in ruling that the plans do not discriminate against older employees.
While the wording in the decisions has varied a bit, all five courts rejected arguments by plaintiffs attorneys that the plans are age discriminatory because the benefits earned by younger employees are worth more—expressed as retirement annuities—than the same benefits earned by older retirees.
In the latest ruling, 9th Circuit Court Judge N. Randy Smith wrote that the reason a younger employee’s benefit is worth more is the result of time, not discrimination.
“Although a younger worker’s total accrued benefit at retirement age will be greater under the cash-balance formula than an older worker’s if both started at the same time, the difference is due to the time value of money rather than age discrimination,” Smith wrote in the case involving a cash-balance plan sponsored by Southern California Gas Co., a subsidiary of Sempra Energy in San Diego.
Concurring with a precedent-setting decision handed down in 2006 by the 7th U.S. Circuit Court of Appeals in Chicago, Smith said nothing in federal age discrimination law suggests that lawmakers were opposed to younger workers having more time left before retirement and thus a greater opportunity to earn interest on each year of retirement savings.
Legal experts say the impact of the ruling goes beyond a victory for Southern California Gas, which converted its traditional final-average-pay plan to a cash-balance plan in 1998. More than 1,000 other employers, including many of the nation’s largest corporations, have made such conversions.
The 9th Circuit is widely considered to have an anti-business slant. Because of the court’s latest ruling, litigation over the age discrimination issue and the possibility that employers could have to shell out huge damages is now almost certainly at an end, legal experts say.
“The fear of litigation should be over. The courts have spoken very clearly on the issue,” said Jeffrey Huvelle, a partner with Covington & Burling in Washington. He was lead counsel for IBM Corp. in its successful appeal to the 7th Circuit of a lower court’s 2003 ruling.
“Given the universal conclusion reached by all courts of appeal, notwithstanding their diverse political leanings, this challenge should be buried once and for all,” said Nancy Ross, a partner with McDermott, Will & Emery in Chicago.
“There is little doubt that the issue finally has been settled,” added Ethan Kra, chief actuary with Mercer in New York.
That will be of great comfort to employers, legal experts say.
“As a practical matter, this is the end of the line on this issue,” said Richard Shea, a Covington & Burling partner in Washington.
Cash-balance plans grew rapidly in the late 1980s and 1990s, typically as replacements for final-average-pay plans. Cash-balance plans provide richer benefits to shorter-service employees than traditional plans.
Employers adopting the plans, with their rapid accrual of benefits, believed they would be a better fit than traditional plans for an ever more mobile workforce.
Additionally, employers believed the plans’ account-based feature—in which benefits are expressed as a cash lump sum, enabling employees to instantly know the value of their benefits—would increase employee appreciation.
Still, the litigation, negative publicity and fears of adverse rulings have taken their toll. Many companies that were considering converting their traditional plans to cash-balance plans changed course and moved entirely to a defined-contribution approach, at least in part because of fears of being sued and being hit with big damage awards after the initial IBM decision triggered a wave of lawsuits.
“The damage has been done,” said Kevin Wagner, a senior retirement consultant with Watson Wyatt Worldwide in Atlanta.
Still, some believe cash-balance plans may rebound modestly now that the litigation likely is at an end and Congress, as part of a 2006 law on reform of pension plan funding, has protected new cash-balance plans from age discrimination suits.
In part, that rebound could be the result of pressure from employees, who have seen their 401(k) account balances hammered as equities markets have slumped, for a plan that promises a guaranteed benefit with no investment risk to them, Kra said.
A handful of big employers, including Dow Chemical Co. and SunTrust Banks Inc., have converted their final-average-pay plans to cash-balance designs.
Several other major employers are considering doing the same, consultants say.
Filed by Jerry Geisel of Business Insurance, a sister publication of Workforce Management. To comment, e-mail firstname.lastname@example.org.