Pension Change Hurts Workers, Audit Finds

Early retirees covered by so-called cash balance pension plans may be shortchanged by as much as $199 million annually, according to a recent government audit, providing ammunition to critics of the controversial retirement plans.

Since the early 1980s, 300 to 700 traditional corporate benefit plans--known as defined benefit pensions--have been converted into cash balance plans. Cash balance plans are supposed to be more portable and attractive to younger workers, but critics have long charged that the plans short-change older workers and endanger generous subsidies to those who choose to retire early.

The Department of Labor’s Office of Inspector General examined 60 pensions that had converted to cash balance plans and found that in about 20% of them--13 plans--the amount owed to early retirees was miscalculated, sometimes underpaying workers by more than $50,000.

The reason for the miscalculation is complex. Using the rules set down in law, early retirees should get more than the cash balance reported in their accounts. But some companies either gave the retiree only the amount shown to be accumulated, or used the wrong interest rate to determine their benefits, the report said.

The retirees in the sample group were underpaid by about $17 million annually, the report said. That led the inspector general to conclude that thousands of workers affected by unaudited plans may be underpaid by $85 million to $199million per year.

“This report proves that a number of companies are illegally slashing the pension benefits of their employees by hundreds of millions of dollars every single year by shifting to cash balance plans,” Rep. Bernard Sanders (I-Vt.), said Tuesday. “Even worse, the federal government is giving these companies the green light to illegally reduce the pension of their employees because the feds are simply ignoring the laws that are on the books.”

The inspector general recommended that the Department of Labor devote more resources to auditing plan payouts.

It also suggested that the department initiate enforcement against the 13 plans that underpaid workers. Neither the 60 plans audited, nor the 13 plans that had miscalculated benefits were named in the report.

Assistant Secretary of Labor Ann L. Combs questioned the audit’s findings, saying it was unclear whether the sample group was representative enough to draw such broad conclusions.

Moreover, Combs contended that the Department of Labor doesn’t have jurisdiction over the plans, saying the Internal Revenue Service was responsible for ensuring that companies properly calculated pension benefits.

If Combs is right, the IRS has a big stick to wield against companies that underpay workers. The agency can disqualify a corporation’s pension plan, requiring the company to pay tax on all the assets accumulated in the system.

The agency has rarely, if ever, used this authority. However, labor attorneys maintain the IRS has occasionally threatened to disqualify plans that fail to right past wrongs.

Still, it was unclear Tuesday whether the retirees who had been underpaid would be made whole. Some of the plans that were examined had been converted to cash balance status more than a decade ago, beyond the statute of limitations in some states.

However, pension experts maintained that the report made it clear that regulators--the IRS and the Department of Labor--need to keep a closer eye on benefits paid to retirees involved in cash balance plans in the future.

“When there’s this much smoke, you’d have to assume that there’s a fire,” said University of Alabama law professor Norman Stein, a member of the Department of Labor’s pension advisory counsel.

“These kinds of errors ... strike me as an issue of fiduciary responsibility on which the Department of Labor does have authority.”