Is Your Pension Leaking?
AARP Bulletin, July-August 1999
Long-tenured workers see losses from new cash-balance pensions.
Many corporations are ditching their traditional pensions for hybrid "cash-balance" plans, but the conversions often leave veteran employees with greatly reduced retirement benefits, critics say.
The controversial plans have spawned lawsuits, age discrimination complaints and proposals in Congress to require companies to tell workers how much they might lose-or if they are younger, how much they might gain-when their pensions are switched.
What started as a trickle in the 1980s has turned into a torrent of cash-balance conversions-costing untold thousands of midcareer employees as much as one-half of their expected pensions.
Latest to make the switch is IBM, which installed a cash-balance plan July 1 for its 140,000 workers. IBM says the changeover will save $200 million a year. Fortunately for veteran employees, IBM will permit those within five years of retirement to stay in the older, more generous plan.
"Cash-balance pensions can be good for young, mobile workers," says Michele Varnhagen, policy director of the Pension Rights Center, based in Washington. "But they can deprive long-term employees in their 40s, 50s and 60s of retirement benefits they had counted on. We're pretty troubled by what's going on."
Companies can save money in cash-balance conversions in the way the formulas are restructured. By the same token, older workers can lose benefits because the formulas redirect money to younger employees.
The new plans combine features of traditional "defined-benefit" pensions with the popular 401(k) savings plans. Employers contribute a portion of pay, typically 4 percent of 5 percent, to hypothetical "accounts" that let workers track their balances.
But the account are not the same as 401(k)s, which require contributions-and investment decisions-from employees. With hybrid plans, employers treat the accounts as a single pool of money and call the investment shots. These pensions are federally insured in case the employer goes bankrupt.
The most striking difference between the two types of pensions, however, is in how benefits are calculated. With cash-balance plans, the percentage of pay set aside for workers' pensions basically stays the same year after year.
With traditional pensions, accruals typically are lower at first and build up over time as an employee's wages rise. Since these pensions are usually based on the average of a worker's wages in the last few years on the job, plus years of service, older career employees come out much better.
"Just when you're getting to the most valuable part of the plan, it's not there anymore," says AARP lobbyist David Certner, pointing out the dilemma facing long-tenured workers shifted into cash-balance plans.
James Bruggeman, 50, of Tulsa, Okla., knows how this works. A senior engineering consultant with Central and South West Corp., Bruggeman says he lost more than 30 percent of his pension-some $400,000 expressed as a lump sum-when his firm switched to a cash-balance plan.
The Dallas-based electric utility grandfathered employees 50 and older with 10 years service into the old plan. Bruggeman has been with the company 24 years, but he missed the age cutoff by 14 months. Charging age discrimination, he filed a complaint with the U.S. Equal Employment Opportunity Commission.
Cash-balance conversions were concentrated originally in the banking and telecommunications industries.
Now the plans are spreading to other sectors, including such stalwarts as Aetna, CBS, Colgate-Palmolive, Cummins Engine, Eastman Kodak, Owens Corning, RJR Nabisco, Safeway, Times Mirror and Xerox.
Probably 500 plans covering 2 million to 3 million workers have made the switch, says Lawrence Sher of PricewaterhouseCoopers, a benefits consulting firm that has spearheaded the cash-balance movement.
Proponents of the new pensions say companies make the switch to attract the young, mobile worker who stays with one employer only a few years and then leaves with little or no pension accumulation. Departing workers with five or more years on the job can usually move their cash-balance pensions to an IRA or 401(k).
We're changing because our employees are not interested in a pension that pays benefits at the end of a career," says Rita Metras, director of total compensation for Eastman Kodak. "They want to know what you're going to do for me now."
However, in its conversion, which takes effect Jan. 1, Kodak recognized that not all workers feel this way. It is giving employees of all ages the option of remaining in the old plan.
James Delaplane, vice president of retirement policy for the Association of Private Pension and Welfare Plans, which represents major corporations says, "Individual accounts are easier to understand and are an added recruitment tool."
But Claude Poulin of Linden, Va., an actuary who represents employees, says it's clear companies make the switch primarily to save money. And the idea that workers change jobs much more frequently than in the past is partly a myth, he adds.
Studies by the U.S. Bureau of Labor Statistics show that median job tenure for men dropped only a little between 1963 and 1998-and actually rose for women. For example, median tenure for men age 45-54 fell to 9.4 years from 11.4 years in this period. But for women it rose to 7.2 years from 6.1 years.
Among several lawsuits challenging cash-balance conversions, one that is being closely watched is a class action case alleging age discrimination by the Onan Corp., a Minnesota subsidiary of Cummins Engine. Older workers charge that drastic pension cuts they incurred in the switch violated the Age Discrimination in Employment Act.
"It's the amazing disappearing pension," said Stephen Langlie, 65, a 37-year employee who saw his benefit plunge to $424 a month from the $1,100 he expected under the old plan. A lower court ruled against the workers, but with AARP Foundation Litigation as co-counsel, workers are appealing to the 8th Circuit Court of Appeals in St. Louis.
No law requires companies to offer pensions, and Congress is not likely to outlaw all cash-balance conversions. But there is support on Capitol Hill for a proposal by Sen. Daniel Patrick Moynihan, D-N.Y., and others to require plan sponsors to provide workers with detailed benefit estimates under the old and new plans.
Alert: Cash-balance plan disclosure The U.S. House and Senate tax committees are expected to consider pension legislation as part of tax bills later in July.
Now is the time to contact your senator and House member, at (202) 225-3121, and urge them to protect older workers in cash-balance plans. Urge them to require clear, individual statements to workers, comparing any changes in plan benefits and to prevent any age discrimination.