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The Honolulu Advertiser
Posted on: Sunday, May 12, 2002

PERSONAL FINANCE
Cash-balance pensions raise concern

By Curt Anderson
Associated Press

WASHINGTON — Workers nationwide could be shortchanged by almost $200 million a year because hundreds of companies have switched from traditional pension plans to arrangements targeted at a younger and more mobile work force, the Labor Department says.

Almost a quarter of the companies converting to cash-balance plans were found to be underpaying people who left before normal retirement age. The Labor Department inspector general's office estimated that the amounts underpaid ranged up to $55,629.

The findings released last week provided fresh grist for critics of cash-balance plans, who contend they are unfair to older workers because retirement benefits are frequently less than promised under the traditional plans. The conversions have affected 8 million workers and involve $334 billion in pension assets.

"The time has come for the feds to step up to the plate and start enforcing the age discrimination laws to protect the pensions of American workers," said Rep. Bernie Sanders, I-Vt.

Under a traditional plan with defined benefits, workers accrue most of their benefits toward the end of their careers. Benefits are usually based on a worker's years with the company and on the employee's average salaries in later years — when the worker presumably makes the most money.

Cash-balance plans are more front-loaded: The company pays a fixed percentage of the employee's annual salary into retirement each year and workers build up money evenly throughout their careers. These plans are also easily moved from one job to another.

The new plans drew heavy criticism in 1999 and 2000 when several major companies, notably IBM Corp., converted. Companies, defending the move as crucial to retaining pensions, rejected claims of age discrimination. Congressional efforts failed to require disclosure of the impact that conversion has on every worker.

The Labor Department inspector general's analysis of 60 companies that converted to cash-balanced plans found that all of them adequately protected benefits from traditional plans. But in 13 cases, or 22 percent, workers who left before normal retirement age didn't get benefits to which they were legally entitled

Assuming that between 300 and 700 traditional plans have been converted, the analysis estimated that these workers are being underpaid between $85 million and $199 million each year — a violation of federal retirement laws.

"Under any sampling or targeting method, statistical or judgmental, this is a disturbing finding," the inspector general's analysis said.

These underpayments are occurring most often because cash-balance plan administrators make errors in projecting benefits — specifically, they fail to compute the present value of the retirement benefit at normal retirement age as required by the law. Others incorrectly figure cost-of-living allowances and wrongly calculate the opening amounts in the plans.

James Delaplane, vice president for retirement policy at the Association of Private Pension and Welfare Plans, said the issue of properly projecting benefits — known in the industry as "whipsaw" — has been the subject of federal court cases and probably eventually will require Congress to act.

The inspector general's analysis recommended that the Pension and Welfare Benefits Administration, the Labor Department agency in charge of enforcing pension law for 200 million participants, beef up its enforcement regarding cash-balance plans and take specific actions against the 13 companies faulted by the report but not publicly identified.

Ann Combs, the assistant labor secretary for pensions, said in a letter to the inspector general that her office would take "an appropriate course of enforcement action" against the 13 companies. But she raised questions about the methods used to arrive at the $199 million figure after analyzing only 60 cash-balance conversions.

Sanders said he will introduce legislation to require the government to do a better job of enforcing pension laws.