Congress Urged To Take Action On Cash Balance Plan Conversions

In a recent hearing on cash balance defined benefit pension plans before the House Committee on Education and the Workforce, supporters argued that, for most workers, cash balance plans are preferable to traditional defined benefit plans, and urged Congress to remove the legal uncertainties that have discouraged employers from converting from defined benefit to cash balance schemes.

A cash balance plan—sometimes referred to as hybrid plan, because it is a cross between a defined benefit and a defined contribution pension scheme—allows workers to earn portable benefits through monthly pay and interest credits. Generally, benefits are earned more evenly over the course of a career than with traditional pension schemes, in which most of the benefits accrue close to retirement. Critics of cash balance schemes argue that they are age discriminatory because the equal pay credits are more advantageous for younger workers, who have a longer time to earn interest and accrue benefits. Advocates stress that cash balance plans are better for workers who do not remain with the same employer for their entire career.

"A broader group of employees—including lower-income workers and women—earn greater benefits with shorter service under cash balance plans than traditional plans," said Rep. John Boehner, chairman of the committee, in a statement made at the hearing.

Boehner argued that traditional plans are best-suited to the small proportion of employees who work for the same employer for most of their career, and collect an early retirement subsidy when they leave the company in their mid-50s. "I'm concerned that cash balance critics are focused not on providing meaningful retirement benefits to our overall workforce, but solely on protecting a small fraction of employees who can afford to retire early," he said.

Boehner also warned that the "recent wave of litigation surrounding cash balance plans has raised significant concerns about the continued viability of this important retirement option, and if this issue is not addressed in a responsible manner, many employers will leave the voluntary pension system altogether and the defined benefit system will all but cease to exist."

Referring to a series of conflicting court decisions on cash balance plans, James Delaplane, special counsel for the American Benefits Council, told the committee that a recent survey showed that "41 percent of hybrid plan sponsors said they would freeze their plans if the legal uncertainty was not resolved within a year."

Ellen Collier, director of benefits for the Eaton Corporation, explained how her company successfully implemented a cash balance plan. Collier pointed out that if employers rule out offering hybrid plans because of the legal risks involved, their choices would be limited to staying with traditional pension designs, or moving to defined contribution plans. "Clearly, it is employees that lose out as a result of today's uncertainty surrounding hybrid plans," she said.

A number of witnesses called upon Congress to move forward on the issue of cash balance plans, clarifying which plan designs satisfy current age discrimination rules. They also asked that Congress provide legal certainty for existing hybrid plan conversions, set down rules to govern future transitions to hybrid plans, and reject benefit mandates that prevent employers from modifying benefit programs or force employers to leave the defined benefit system.