Bush Proposal Protects Firms From Age Bias in Pension Plans

The Bush administration plans to propose new regulations today that would protect employers from age discrimination liability when a company converts its traditional retirement pension benefit to a different arrangement called a “cash balance plan.”

Such conversions typically mean less money for workers closer to retirement age. Currently there is a moratorium on government approval of conversions. But that would be lifted if the regulations are approved after a public comment period and an April meeting of the Internal Revenue Service.

Cash balance plans usually consist of a percentage of pay by a worker plus interest that can be paid out as a lump sum if the worker leaves the company after working there for a certain period. Unlike a 401(k) plan, employees neither own the accounts nor make investment decisions. Unlike a traditional pension plan, the worker isn’t guaranteed annual benefits after retiring.

Critics say the proposed rules favor employers by allowing them to establish all the terms of the plan, including the return rates paid and the value of a worker’s current benefit in the old plan.

“This is deregulation of pension plans and it is going to cost employees dearly, especially employees over 40 years of age,” said Rep. George Miller of Martinez, ranking Democrat on the House Education and Workforce Committee.

Companies increasingly converted their costlier traditional pension plans to cash balance plans starting early last decade. The plans are cheaper to administer and attract younger workers because of their portability. Pension laws prohibit companies from reducing benefits that already have been accrued. But they can cut or eliminate future benefits.

Firms that eliminate their traditional pension plans are subject to an excise tax of up to half of any surplus assets in their pension trusts. But to avoid the tax and still do away with a costly pension plan, many companies are choosing to convert to cash balance plans.

About 19% of all Fortune 1000 companies offered them in 2000, according to a General Accounting Office study. The GAO is the investigative arm of Congress.

But more than 800 claims of age discrimination have been filed with the Equal Employment Opportunity Commission over conversions to cash balance plans.

That’s because older workers don’t get the future benefits promised under traditional plans -- only what they have earned -- when their plans are converted. Under cash balance plans, companies pay a fixed percentage of a worker’s annual salary toward retirement. Older workers have less time to accrue those new benefits, and end up with less than the promised benefits under the traditional plan.

For example, James Bruggeman, a worker in Tulsa, Okla., told Congress two years ago that the benefits he expected under the old plan would have been 30% higher than under the new plan.

Often older workers go several years without earning any benefits after the transition. Called a “wearaway” period, that happens when the balance of an old pension account being converted is higher than what would be earned in the new plan.

The proposal being issued by the Treasury Department says that wearaway periods are not forms of age discrimination, a Treasury official said Monday night.

Also, no age discrimination exists if older workers are offered the same percentage of salary benefit or more in their cash balance plans. The interest earned on the account also must be at a “reasonable rate” determined by the employer.